We had a larger than expected decline in Consumer Confidence (99.6), which drove stocks down, along with a lame bond auction in the early afternoon. But the Fed minutes, along with tough talk on inflation by Dallas Prez Fisher, got the markets back on track at the end of the day.
Lucky for us we caught his comments as he made them and dumped out of our oil and gold puts, as it is clear the Fed, although on inflation watch, is also bending over backwards to keep the economy rolling along. Can they really have it both ways? Stay tuned!
Apparently Fisher is a reader, as he restated my advice from last week which Bernanke used to address the Governors:
"We need to continue to push the envelope in order to fully understand how to make monetary policy in the world that is and will be, rather than the world that was. Our tool kit needs to continue expanding to deal with today's rapidly changing manifestation of globalization."
If this column can help just one FOMC see the light, I'll feel as though I've done my job!
We never really tested our lows, which was nice, but we did get a nice bearish sell-off that burned some of the worry out of the markets. The recovery was pretty spectacular at the end of the day — on a fairly heavy uptick in volume.
We will still be looking for a test to the upside tomorrow, but the GDP data will determine the day. Look for 2.5%-3% to be the "goldilocks" range we need. Any less and the Fed may have overtightened, any more and the Fed may have to jump back in (also commodities will head back up on unabated demand).
Oil broke $70 and finished down at $69.71 despite the best efforts of the pumpers who put in a heroic effort to get oil back over $70 at noon (Europe's close), and again at 2pm. But the sellers would have none of it, and took advantage of the pumpers generosity by dumping everything they would buy near $70.
There are a lot of funds holding a lot of oil (remember that $40T number this morning) who are going to have some very hard decisions to make this week. With tomorrow's inventory report at 10:30, we are looking at 4 months worth of contracts bought above $70 — that's $13 trillion of oil contracts traded an average of 5% over the current price!
What percentage of a $1 billion would you be prepared to risk as we head to the 200 dma (displaced moving average) of $68? 5%? That's $50,000,000. 7%? 10%? Don't forget that, unlike homes, these are effectively option contracts, and these traders are facing a winter expiration or, worse, a forced delivery nobody wants. Last August oil peaked at $70.85 and T. Boone Pickens told us oil would be $100 in the spring. By November 15th, even after Katrina and Rita knocked 25% of US production off-line, oil was at $56! Now, how good do you feel about your $1 billion oil call?
Gold held up much better than oil did last fall, and I am leaning towards a bounce off $600. We stopped out of Newmont Mining (NYSE:NEM) in the nick of time today, getting .05 less than the max. I will be back on the oil puts tomorrow, but I may leave gold alone for now. Gold finished the day down $4.
On the whole, the markets proved themselves extremely resilient, much to the surprise of the bears who jumped all over this morning's drop. While I remain wary of scary GDP data, I do have my rally cap on!
We got out lucky on the Archer Daniels Midland (NYSE:ADM) calls yesterday after riding out the morning dip. The $40 puts are looking good at .50 (up 25%), but they were just insurance, so don't hold the 'policy' too long.
AnnTaylor Stores (NYSE:ANN) was exactly the kind of play I love — they went completely the wrong way in the morning, made a great bottom move, giving us an .80 entry on the $40s, and finishing the day at $1.05 (up 30%). See My Trading Policies, but this is a perfect example!
AXA (AXA) $35s were too cheap and quickly adjusted up to $1.95 (up 35%).
Caterpillar (NYSE:CAT) is an absolute disaster ( — I knew it was too pricey! kick, kick) on GDP worries! The Oct $70s dropped to $1.25 (down 15%).
Chesapeake Energy (NYSE:CHK) came back from the dead on a mistaken belief that the rollover on natural gas contracts was some sort of rally. The $30 puts are holding .25 (a nice play for tomorrow), while the $32.50 puts are still in good shape at $1.25 (up 65%).
CKE Restaurants (CKR) finally moved today with a 3% jump, giving us .60 on the $15s (up 33%).
E.I. DuPont (NYSE:DD) made a nice .15 entry on the Oct $42.50s in comments, but this thing is all over the place!
eBay (NASDAQ:EBAY) officially got away from us with a 5% gain
EnCana (NYSE:ECA) was much better behaved than CHK, and the $55 puts are way in the money at $2.05 (up 30%).
General Electric (NYSE:GE) is off to the races, and the Oct $35s are already .40 (up 33%).
Hewlett Packard (NYSE:HPQ) put in a solid day and the $35s finished at $1.25 (up 30%).
Intel (NASDAQ:INTC) put in another solid day with a huge finish and the $20s ran up a dime to .30.
The iShares Russell 2000 ETF (NYSEARCA:IWM) held up nicely all day, and the Oct $72s finished at $1.90 (up 35%).
Micron (NASDAQ:MU) had a great day today with the stock flying to $17.24 (up 4%) and the Jan $20s jumping to .70 (up 60%). Not bad for a first day!
Newmont Mining (NEM) was a nice day trade in comments, as the $50 puts went from .75 to $1.05 (up 40%) in just a few hours!
How long have we been waiting for the Royal Dutch Shell A (RDSA) $70 puts to move? Finally today they hit $1.05 (up 150%).
Restoration Hardware (RSTO) had the earnings we wanted and finished the day up 17% at $7.18. I know this was supposed to be a long-term play, but that's a lot of money to make on a straight stock in 3 days so be careful!
I got out of Tiffany & Co. (NYSE:TIF) Jan $35s at $1.70 today as a 70% profit was too much to gamble into earnings. I'm hoping for some panic so I can buy back in.
TINY (NASDAQ:TINY) was very, very good to us on our first day (makes me worry how many people take my advice!), with a 4% gain to $9.93. The March $10s traded up to $1.40 (up 20%). There was no particular news that caused this.
Williams-Sonoma (NYSE:WSM) $30s were a great repick, already at .50 (up 100%).
We lost faith in the ExxonMobil (NYSE:XOM) $67.50 puts just in time and called them out at the day's high of .55 (up 85%). The $70 puts finished at $1.40 (up 90%) but were much higher mid-day.