Oh so close yesterday!
I predicted the exact top in the morning post, saying: "A real Free Money Day if the US markets try to catch up (that would take us to 8,750 on the Dow!)." One thing we know here is not to turn down money when they are giving it away, and our ONLY play of the day was grabbing the DIA $88 calls at $1 (which we exited just under my top call at $1.45, up 45% for the day) and we added the DIA $89 calls at .88, exiting those at $1.02 (up 16% for the day) which helped take the sting out of our USO puts, which we stuck with despite the run. Other than that, we added one hedge and just watched the fun from the sidelines, still loving our cash as the markets tested our 40% (off the top) targets.
The 40% levels I laid out yesterday were: Dow 8,413, Nasdaq 1,717, S&P 946, NYSE 6,232, Russell 514, SOX 329 and Transports 1,868. The Nasdaq and Dow were already over, so it was all about the Russell, NYSE and S&P which, as you can see from David Fry’s chart, made a brief spike up at 2pm, hitting 947 on the index and 950 on the SPX before pulling back to finish just under our 946 target. The NYSE fell just short of our mark, topping out at 6,202 at about the same time, but the Russell became our third index over the mark and held 521 into the close, their best level since we fell off a cliff in November. We are, of course, still waiting for the Transports, who made a huge 71-point effort (4%) yesterday and finished at 1,791 despite $68 oil. Note that the transports tried leading us in early May and were at 1,909 at the beginning of the month, so not all that impressive until they break that. The SOX, on the other hand, have broken over their May top with a 5.3% gain on the day (14 points) that took them to 285, still 15% off the mark but a very nice effort! Our big concern yesterday was the VIX went up (4%) with the markets and closed back at 30, indicating a lot of put buying into our rally.
Geithner is over in China and we are at a very critical inflection point on the dollar, which bounced off downside resistance at 78.50, which is just about our December spike low that lasted for one day (Dec 18th). Even with the dollar that weak, oil was $42.50 that day and, when the dollar bounced the next week (on the way to a 10% gain over 2 months), Oil crashed to $35.13 on Christmas eve - down 25% in less than a week despite already having sold off 68% off the $147 high in a hideous commodity crash that ran from July 1st to pretty much that day!
There is all kinds of currency posturing today and the dollar has been bouncing up and down like a yo-yo in overnight trading. China’s former central bank adviser Yu Yongding will meet Treasury Secretary Timothy Geithner today and tell him the U.S. shouldn’t be complacent about China continuing to buy Treasuries: "I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’,” Yu said in an interview yesterday. “The euro is an alternative. And there are lots of raw materials we can still buy.”
The U.S. should take China’s interests into consideration “so that your own interest can be protected,” Yu said. “You should not try to inflate away your debt burden.” China could still diversify some of its Treasury holdings into euros or commodities, Yu added. “Yes, some people say the euro is very weak,” Yu said. “Okay, weak is good, we’ll buy very cheap.” The best outcome for China would still be to negotiate with the U.S. and reach agreement on its Treasury holdings, Yu said. “The borrower should keep their promises,” he added. “The U.S. should be a responsible country.” This is very well-played by China as they have a "former" minister taking a very public hard line and they add weight to his words because Geithner does have a meeting with Yu today.
Even as I write this (7 am) the dollar has fallen from $1.41 to the Euro at 5am to $1.425, that’s almost 1% in 2 hours - a ridiculous move for currency and we’re retesting yesterday’s highs for the Euro on Yu’s comments. Despite the ongoing scandal that is now touching England’s Treasury Secretary Darling, the Pound is also heading back to yesterday’s high of $1.65 and we are, of course, losing ground to the Yen as well despite the fact that Japan’s gross national debt is close to 200% of their $4.3Tn GDP - something I learned on Friday when I was the "celebrity judge" for a debate on Japan on Canada’s Business News Network. That would be a $27Tn debt in the US - apparently investors think we’re heading that way fast enough to make Japan look stable by comparison!
Tim is on his way home and tomorrow it’s Ben’s turn to tap dance as he addresses Congress in what used to be called the Humphrey Hawkins Testimony since that came from the "Full Employment and Balanced Growth Act" of 1978. With almost 10% of our population out of work, no growth and certainly no balance, they have now decided to stop reminding people what a total failure the Fed has been in stabilizing our economy or our currency as Bernanke is practically sneaking in tomorrow with none of the fanfare that used to come ahead of a Greenspan performance. That means it’s almost time for my favorite reality TV show: "When Ron Paul Attacks!" Why is Ron so angry? Here’s what Bernanke, Geithner and the Administration are supposed to be doing per the Act:
- Explicitly states that the federal government will rely primarily on private enterprise to achieve the four goals.
- Instructs the government to take reasonable means to balance the budget.
- Instructs the government to establish a balance of trade, i.e. to avoid trade surpluses or deficits.
- Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability.
- Instructs the Board of Governors of the Federal Reserve to transmit a Monetary Policy Report to the Congress twice a year outlining its monetary policy.
- Requires the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals.
- Requires the Chairman of the Federal Reserve to connect the monetary policy with the Presidential economic policy.
Unfortunately, Ron Paul is only given time to ask one question every 3-6 months. I would propose we put him in charge of a television show where policy makers are forced to set realistic goals and demonstrate tangible economic results before they are allowed to use the words "green shoots" and move on to the next level. Meanwhile, it’s 7:30 now and the dollar has dropped another half a point since 7 am and gold is rocketing back to $982 from $970 yesterday (1.25%).
How then, you may wonder, can we be short on oil at $68 (our upside target is $70 and we are scaling into shorts)? Well, weak dollar inflation is a great case for higher oil but the problem for oil, unlike gold, is that - when all is said and done - it’s still a consumable commodity and people have to buy it or a glut forms very quickly. We’ve already seen OPEC frantically scramble to cut 10% of their output since last year but, over that time, the US has still averaged a build in storage of 3 Million barrels a week. There has been a mild uptick in demand over the past few weeks, but how much of that was real consumer driving and how much was caused by retail gas stations topping off their tanks in anticipation of summer drivers showing up? We’ll get a better clue tomorrow, when we see how much gasoline was used the week AFTER the holiday (report runs 5/23-5/29). This will be the last holiday inventory and then we are back to "normal," whatever that is these days.
Unlike Gold, oil NEEDS to be CONSUMED. Unless they shut the wells, 86 Million barrels of it come out of the ground every day and there are dozens of economies where oil revenues make up over half of the GDP of the country, so they need our money more than we need their oil. At $68 a barrel, that money comes to $5.8Bn a day but that’s up from $3Bn a day when oil was $35, and if they want to take oil up to $100 a barrel, they are going to have to get consumers to come up with another $3Bn a day ($1.1Tn a year). That is, of course, BEFORE processing and mark-ups that actually cost the end-users double that ($2.2Tn a year).
So here is where the bullish oil premise runs into trouble - WE DON’T HAVE ANY MONEY! We had to borrow money last year to pay over $100 a barrel for much of 2008 and, since then, the global economy has collapsed, our 401Ks were chopped in half, 10% of us lost our jobs and can’t afford ANY oil at all, and those of us who are left have become a lot more concerned about going to a gas station and paying $60 to fill up a tank. You can bitch all you want that $60 with the dollar at 78 isn’t the same as $60 with the dollar at 84 but WE DON’T CARE. There has not been enough (any) wage inflation to put more dollars into the hands of the consumers. You cannot sustain inflation unless you inflate the money allocated to the consumers as well. Not only that, but the banks have stopped lending and our homes lost 25% of their value so we can no longer take out lines of credit to gas up the Hummer. In short - it’s not 2008 anymore and you can fantasize all you want about $100 oil but your customers just can’t afford it.
Now, I will point out that I made a similar argument last year in March, when I wrote "$200 Oil - Who’s Going to Pay For It?" when oil was "only" $100 and Goldman Sachs (GS) was busy pushing the price higher by issuing reports that oil would go to $200 (sound familiar?) due to "Chinese demand and the inelasticity of US demand." Well, both of Goldman’s premises proved false but it took 4 more months for oil to finally turn down at $147 but what a crash it was! My article was not just on oil, it was on all commodities, yet this year it is oil that is leading us higher with a 100% move in 3 months. Is it sustainable? Do global consumers have $3Bn a day more than they had in March when oil was $37? Since the US’s 100M households consume 20% of that oil, we can figure that, after refining mark-ups, we are on the hook for about $1Bn a day. Well, that’s only $10 a day each - no problem right?
THAT’S how much extra it costs us ($3,650 a year per family) to buy oil at $68 a barrel vs $35 a barrel. Oil at $100 will cost every American family another $3,650 a year - no wonder so many people are saying "no mas" - we simply can’t continue to pay for this! "Necessity" or not, the greed of the speculators (GS et al again) coupled with the irresponsible actions of the oil producers, who want their cut no matter how much it hurts you, are effectively destroying our recovery before it even has a chance to begin. Until investors realize that $60 oil is unaffordable long-term (global consumers went into massive debt to pay for it last time) we will continue to have an underperforming economy as 450 S&P 500 companies are held hostage by the 50 commodity pushers in the index, who seem more than happy to kill their clients. Perhaps the average GS analyst or oil speculator is too out of touch to realize that those 1,000 barrel lots they buy for $68,000 each are 50% more money than the average American family earns in an entire year.
I waited patiently this March as oil rose and we even took a bullish play on natural gas for our $100K Hedged Portfolio, which is VERY conservative - but I had to put my foot down at $65 last week after doing the math. We learned last year that the markets really can stay irrational longer than we can remain solvent so we have a more cautious attitude on the short oil play, but it really is the same ridiculous run we had last year under much harsher conditions and this time, there is no $168Bn worth of stimulus checks to help us gas up for the summer. And consumer confidence may be back to 52, but it was 120 last summer when people were taking third mortgages out (no docs of course) before heading to the gas station to pay as much as $5 a gallon. I may be early on this call but I do think that - the longer I’m wrong - the righter I’ll be in the end….
We’re still mainly in cash with oil as our big downside gamble - be very careful out there as we can run into BIG TROUBLE if we don’t break those 40% levels.
