by John Nyaradi
We had a busy trading week in our Option Master Portfolio, opening a SPY put option trade on Monday and closing it Thursday for a 15.4% realized gain and then a second trade that opened and closed on Friday for a 14.9% realized gain in one trading day. Such is the power of options when they move in your favor.
The same kind of volatility will likely continue this week as the big news will be all about oil and the rolling "Facebook Revolutions" hop scotching across the Middle East.
The key day could come on Friday as a "Day of Rage" is rumored to be planned for Saudi Arabia, the world's largest oil producer whose government has already prohibited any such demonstration.
Libya, of course, seems to be in the grip of a civil war, protestors are demanding new freedoms in Bahrain, the Middle Eastern base of the U.S. Navy's 5th Fleet, and on Sunday, the Obama Administration announced they're considering opening the U.S. Strategic Petroleum Reserve, the more than 700 million barrel reserve stored in salt caverns along the Texas and Louisiana coasts.
West Texas Intermediate Crude oil has spiked to $140/bbl with Brent Crude reaching $115/bbl, a 2 1/2 year high. Interestingly, Brent Crude is generally associated with North Sea reserves and is the pricing marker for 2/3 of the world's oil supplies. The name comes from the Brent Goose which came from the UK exploration company's policy of naming its oil fields for birds. Seems this chicken wants to fly the coop.
On My Radar
Clearly world economies face potentially extreme danger if the violence spreads in the Middle East and if oil prices remain high for any sustained period of time.
On a technical basis, things look like this (click to enlarge):
Chart courtesy of stockcharts
On the Point and Figure chart of the S&P 500, you can see that the chart is still in a column of Xs which indicates that demand is in control and that a break below 1300 on the index would generate a "Double Bottom" break and a "sell signal.
After 1300, there is very little support until down to the 1220 level which would be a decline of some 6% (click to enlarge).
Chart courtesy of Stockcharts
On a conventional chart of the S&P 500, we see resistance at the recent highs of 1340 and major support at 1296 which is the 50 Day Moving Average and close to the 1300 we saw on the P&F chart.
So this will be an epic struggle totally dependent upon the week's activity in the Middle East and the all important flow of oil to the Western world.
The View From 35,000 Feet
As if revolution in the Middle East wasn't enough excitement, European Central Bank President Jean Claude Trichet this week started making noises about an interest rate hike in Europe as soon as April to combat rising inflation and commodity prices centered, guess where, in food and fuel.
The euro strengthened on the news while the U.S. central bank stuck to its June schedule to complete "QE2" with several big POMO operations planned for this week. So far nearly $400 Billion of the planned $600 Billion in purchases is complete and now there's more and more talk from the Fed about just going until June and then going "cold turkey" which could be an exciting event in its own right.
Clearly the US central bankers and Europeans are looking at the world through considerably different lenses.
The good news was that the economy generated 192,000 jobs last month and the unemployment rate dropped to 8.9%, although that number is a bit misleading since the labor force participation rate is at a quarter century low of 64%.
In contrast, a recent Gallup Poll puts US unemployment at 10.3% in February and underemployment at 19.9% which is considerably more pessimistic than comparable government figures. Gallup
So who you gonna trust?
But the news was still mostly mixed with personal income rising, car sales improving, the Chicago PMI showing improvement and big retailers JC Penny, Ross and Macy's all posting promising results. On the negative side of the ledger, personal spending declined, along with pending home sales and construction spending.
In Congress, the ongoing debate about budget cuts drones on, with Republicans insisting their plans won't slow the economy while Moody's and Goldman Sachs say the cuts will cost both jobs and a GDP decline of between -0.5%-2% and Chairman Bernanke says the $60 Billion cut could cost 200,000 jobs and a "couple of tenths" of GDP.
So who you gonna trust?
What It All Means
So here we have a fine kettle of fish, as the old idiom goes. The economy seems to be gaining some traction, finally, after trillions have been thrown at saving it, only to see it all put in jeopardy by a potential oil shock and revolution in the Middle East.
A rule of thumb quoted these days is that every $10/bbl rise in oil prices reduces GDP by 0.5% in two years and every penny increase in gas prices reduces consumer discretionary income by $1 billion. New York Times
Needless to say, the recent $17 price hike in West Texas crude could cut our fledgling GDP growth by 0.8% or so while the 20 cent rise in gas prices last week alone could be $20 billion we all have less to spend on for summer vacations, computers, iPhones, etc this year and that's assuming everything returns to normal in the desert this week.
The Week Ahead
While things promise to be exciting on the international front, it's a relatively quiet week for economic reports at home with the big reports on Friday surrounding retail sales and consumer sentiment.
Wednesday: MBAMortgage Index
Thursday: Initial Unemployment Claims, Continuing Unemployment Claims
Friday: February Retail Sales, March Michigan Sentiment, Jan Business Inventories
I was in Beijing last week with my #1 son and we had a great trip and saw little evidence of the slowing economy in China. The streets and restaurants were full; however, a vendor friend at the "Silk Market" said business hasn't been good, so maybe, there, too, higher prices are taking their bite on the vaunted Chinese growth machine.