Options Trader Friday Outlook: Will We Finish the Week Over Target Levels?

Here is a great metaphor for the emptiness of the global recovery:

An entire city in China, tens of billions of dollars in construction, sits empty. They also built the world’s biggest shopping mall, also empty. As they say in the video, people can’t move in because there is no economy. Yet the building of the city of Ordos and the Utopia mall have allowed China to hit their 8% GDP growth target because it doesn’t matter whether you build something worthwhile - as long as you build SOMETHING, it’s going to count as part of your GDP. It’s ironic that this country still hasn’t bothered rebuilding New Orleans, which was once a healthy, vibrant city, and we are letting Detroit die a little more every day when it’s ideally situated to attract (comparatively) wealthy Canadian tourists, but China is willing to build entire cities from scratch.

Ironically, Louisiana is one of 8 U.S. states that export more than $2Bn worth of goods to China, which is, by far, our fastest growing trading partner. We get trade data later today and hopefully, at least one benefit of the weak dollar will be to help boost our balance of trade - but we’re a very, very long way away from balance and, as I pointed out last month, almost all of our gains are coming from lowered U.S. consumption, not a real increase in exports.

Speaking of lowered U.S. consumption, just as we predicted, crude oil fell to the lowest in a month yesterday as the inventory report showed inventories in the U.S., the world’s biggest energy consumer, climbed DESPITE a drop in processing runs. Oil extended Wednesday’s 3% decline after an Energy Department report showed crude stockpiles rose a more-than-expected 1.76 million barrels last week. Refinery operating rates fell to 79.9 percent of capacity, the lowest in more than a year. Gasoline inventories rose 2.56 million barrels to 210.8 million, much more than a forecast drop of 350,000 barrels.

“The U.S. numbers were incredibly bearish, especially the gasoline build,” said Clarence Chu, an options trader at Hudson Capital Energy in Singapore. The decline in U.S. processing runs is in line with low rates in other developed countries. Japan’s refiners operated at 71 percent of capacity last week, an industry report said on Nov. 11. The two nations were responsible for about 29 percent of global demand last year, according to data from BP Plc. “Demand is just so anemic and the crack is so bad,” said Anthony Nunan, an assistant general manager for risk management at Mitsubishi Corp in Tokyo. “It behooves refiners to keep runs low to try to support this market.” U.S. fuel consumption dropped 4.3 percent for the week to 18.3 million barrels a day, the lowest since June, according to the Energy Department report. Here is a nice link to Seven Common Bullish Myths About Oil.

Of course oil and mining stocks put pressure on the Asian markets this morning, as they did on ours yesterday. As I’ve been saying for weeks, the very obvious lack of true demand for commodities is nothing compared to the hell those markets will go through if the dollar stages a rally. Since, unfortunately, we are riding at the top of a stimulated commodity bubble market, things are not likely to go well for the markets if that happens. "Most sectors are down on profit-taking across the board, while defensives have held up better as investors question the U.S. economic outlook after the crude oil inventories data," said Macquarie Private Wealth Private Client Advisor Marcus Droga in Sydney. "The U.S. economy is not generating the demand for oil that people expected."

Even China is now planning new measures to close factories to curb overcapacity and pollution after this year rejecting requests to build industrial projects worth almost 200 billion yuan ($29 billion). The government will target the steel, aluminum, coke, cement, paper and utility industries, Zhu Xingxiang, director of the environment evaluation department at the Ministry of Environmental Protection, said today in Beijing. “The steel industry is the focus of our supervision,” Zhu said. “There is too much capacity being built without government approval.” The government’s 4 trillion yuan stimulus spending has spurred overproduction of steel, and rising inventories have led to lower prices, the China Iron & Steel Association said this month. The U.S. this year imposed antidumping charges on some Chinese steel products, which U.S. Commerce Secretary Gary Locke said today weren’t protectionist measures.

The Hang Seng managed to pull up after lunch and made it back to the just under the September high of 22,600, which is close but no cigar on our tracking chart, so no green box for them. Meanwhile, of more concern to global chart-watchers is the Nikkei falling another 34 points, heading back to test the Nov 5th lows which, like the Oct 5th lows, came at the bottom of Dow pullbacks. If we rally from here and pull Japan back with us, that will be fine, but if we fall from this level, then our 15% spread to the Nikkei over the past 60 days may come into question.

As I’ve been saying for quite some time, we are reaching the point at which the falling dollar (which has been the main driver for our rally) has the opposite effect on Japan, as well as our other trading partners other than China, who peg their currency to ours. “There are still skeptical investors out there who don’t think the global recovery will be sustained and this is tempering the advance in equities,” said Allan Yu, who helps manage $4.24 billion at Manila-based Metropolitan Bank & Trust Co. “The market is trying not to run ahead of itself.”

Europe is flat-lining ahead of our open. I said in yesterday’s post that either the Dax breaks over 5,750 and the global markets head up, or the FTSE fails 5,250 and the global markets go down, and they BOTH spiked towards those levels yesterday and today both are drifting along in between, so no commitment into their afternoon trading and we’ll need to watch closely. EU GDP came in at 0.4% vs 0.6% expected but CNBC is telling us that the EU GDP has gone back to expansion, somehow omiting the part where it is a generally disappointing number. That was of great help to the futures markets, which were up over half a point early this morning but now that real traders have come in (9am) it looks like we’ll be lucky to break even at the open.

As I pointed out to Members yesterday, our tracking chart has gotten redder this week and we’re just going to be happy to hold the LOWER of our September highs OR the 2.5% lines from Monday’s opening chart today on 3 of our 5 indices to keep us a little less bearish (we’re going to be bearish no matter what) into the weekend. Those levels will be Dow 10,119, S&P 1,095, Nasdaq 2,164, NYSE 7,131 and Russell 594. We’ve already blown them all except the Dow so let’s keep an eye on that as well as that 43.50 line on the Qs (QQQQ) (Nas 2,125ish) that MUST hold.

We had great fun playing the Dow yesterday in Member Chat as we opened the day with the $101 puts at .55 and we quit those at .82 (up 49%) at the day’s end. We also had great timing on the Dec $102 puts we sold to cover our longer DIA puts and hopefully we’ll get the opportunity for a repeat performance today. Our ERY and GLL plays paid off and, other than rolling some existing positions, we did very little yesterday as the action was exactly what we expected. Today we’d love to see the selling cycle complete so we can buy a few longs, but I think that, like Europe, we may flatline again and have to wait for Monday.

Have a great weekend,

- Phil

Comments

[Fibozachi:]

Great stuff, Phil. Thanks for sharing it with us!

Nov 13 10:03 AM

[Maxe Paul:]

Thanks Phill, a good read as usual.

Nov 13 10:11 AM

[Mad Hedge F...:]

cvi If I’ve told you once, I’ve told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It’s a win, win, win, lose pennies trade. I know that the pros that have done for a long time put these trades on without even thinking about it. It’s all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.

Nov 13 10:42 AM

[Spectre Gen...:]

Informative and insightful stuff, as always, Philip. Please keep it coming! Your opening paragraph served as one of your best examples of why this so-called recovery is a complete and utter fraud. A minor question, though: is your example a metaphor or is it more of a metonym? Or more of a synecdoche? YOU BE THE JUDGE.

Anyhow, keep up the great daily articles. Also, on behalf of your Canadian readership, I hope we get to see appearances from you on BNN! They're guzzling the recovery kool-aid like mad on that channel, and the viewership could definitely use more Phil perspective to balance things out.

Nov 13 11:20 AM

[ryanclarke:]

I agree with you Mr. Davis ... on this fact ... U.S. oil demand is down compared to last year in a BIG WAY. The latest EIA data is here www.eia.doe.gov/pub/oi... . BUT U.S. GASOLINE DEMAND IS NOT DOWN COMPARED TO LAST YEAR ... it's very stable at 9 million barrels per day. I believe you to be an "oil bear," but I remain an "oil bull" for the very reason that GASOLINE DEMAND is what drives oil prices in the U.S. I suspect if the dollar does not strengthen in the next month December drawdowns in U.S. oil stockpiles will be just as "dramatic" as what occurred in December 2007.

Nov 13 02:57 PM

[SteveK:]

Phil, hold on. New Orleans was a disaster waiting to happen and still is ... let N.O. and La rebuild it if they want to throw their own money away! As regards Detroit ... it's silly to think it would attract Canadian tourists ... let Michiganers throw their money away on Detroit!! Your comments on China show just how false their supposed boom really is ... what they really need is exports to the US and Europe not ghost-towns.

Nov 13 04:40 PM

[CLH:]

Yes China is doing the right thing. (Building during a depression) Wages are down and this is the time to move!

Nov 14 10:19 AM

[User 46594:]

China may have a newly built city that is empty for now. They certainly have enough people to fill it. We have an unfinished bridge to nowhere (somewhere in Sarah Palin's backyard). Don't underestimate China and India. Their government spending is a lot less wasteful than ours; quite the opposite is true. The US is still an important player in the world economy, but not THE dominant player it once was. Wake up, and play the game accordingly.

Nov 14 03:04 PM

[adan:]

adding a little to a great article from phil :

here's a really good article, regarding the problem with a weaker dollar - from marketwatch, excerpt :

"A close look at the September trade data shows most of that widening gap -- $20.5 billion -- stems from petroleum imports. This absolutely dwarfs any trade benefits a weaker dollar might afford via companies selling cosmetics in Asia or medical equipment in Europe...

"That's because during the dollar's slide since March, crude prices doubled...

"While the weak dollar gives Wall Street every reason to tout the stocks of individual exporters, the flood of petrodollars leaving the country continues to wash the foundation out from under the rest of the overall economy...." -

www.marketwatch.com/st...

Nov 14 11:24 PM

[Steve Soden:]

The Dollar, Oil and all the rest has nothing to do with our biggest fears.
Devaluation of the Dollar.
By the time this crises is over I believe our Dollar will be worth approx.
1/4 of what it was in 2000.
US Economy somewhat normal, 2025.
US Issues $1000, $5000 and $10,000 Bills.

Nov 15 02:48 AM

[Responsibility:]

As some one already commented, a good investment for China is building an empty city or mall when costs are low in difficult economic times; China is also investing big in energy efficient public transportation such as trains, subways, and high speed rail.

For U.S., good investments should be continuing new technology development and improving/re-building infrastructures, even in difficult economic times.

Unfortunately, many in U.S. still think that consumer type consumption is good for economy, regardless of much evidence that un-sustainable consumer goods consumption is bad for everything, from economy to ecology. Marketing gimmicks and Hollywood have been soft selling people to spend and spend, rather than build and build, and into believing that we want all those toys, big and fast cars, big homes, fancy vacation trips, and many wasteful consumer habits.

Let's cheer for the continuing lowering of oil and gas consumption, and of general non-industrial consumptions. We should eliminate the so-called consumer confidence index and replace it with a consumption efficiency index that measures infrastructure efficiency: energy consumption reduction, living costs reduction, and government costs reduction.

By the way, inspite of the all the urging to increase internal consumption by U.S. to stimulate the economy, responsible foreign governments have been smart to control internal consumption very carefully; many have learned hard lessons.

Nov 15 04:35 AM