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Well, the markets were quite blah today but they held up great considering the PPI showed wholesale prices rose at 1.3% last month, more than double the .6% forecast, and double the .2% forecast for the very silly ex-food and energy prices (silly because I know few people who go through their days without using either).

The premise of the ex-food and energy numbers is that food and energy prices are volatile and can go up and down from month to month, so we should ignore their effect on general pricing. For the past four years though, both food and energy have done nothing but go up - and up and up and up.

Tomorrow we’ll find out how quickly these wholesale price increases are creeping into the CPI, but it’s a no-win situation. If they are creeping in (and they are), then inflation is on the march and the Fed may have to tighten while we worry if the Consumer may finally run out of cash. If the CPI is benign, then the concern will be that margins are being squeezed and price increases can’t be passed on because the Consumer has already run out of cash.

It seems to be a little of both because both the Philadelphia and New York Feds reported sharp drops in manufacturing activity in March. The Philly Fed fell to .02 from .06 vs. an expected gain to 4.2 - and that was the good one! The NY Fed reported an activity level of 1.85, down from 24.35 in February and WAYYY below the 17 that was expected. The bank said Thursday in its Empire State Manufacturing Survey that "conditions for New York manufacturers were flat in March. Measures of new orders, shipments, unfilled orders and employment fell, while prices paid and the average employee workweek increased" (see also Stagflation).

Crumbling Tower

Meanwhile the WSJ survey of economists finds that sub-prime woes ARE likely to spread, BUT they think the U.S. will avoid a recession "and even a significant rise in unemployment." Well, aren’t they an optimistic lot? An interesting dissenting opinion comes from Jan Hatzius, chief U.S. economist at Goldman Sachs (NYSE:GS), who said: "Mortgage credit-quality problems go well beyond the subprime sector. The underlying problem is not the subprime market per se, but the reset of large quantities of adjustable-rate debt — some of which is classified as subprime, some as prime — to higher interest rates in an environment of flat or falling house prices in most of the United States."

Hmm, he’s a little off book with the rest of the firm, who’ve been running around telling everyone they love sub-prime so much they want to buy these troubled firms. Mr. Hatzius notes that the so-called teaser rate, or low initial rate on adjustable-rate mortgages, expires sooner for subprime mortgages. This implies that mortgage-holders with prime ARMs may come to experience the same woes currently making waves in the subprime sector.

The spin from the real estate apologists is that 33% of the nation’s homes are owned outright, 57% have traditional mortgages and "just 10%" of all homes have sub-prime mortgages. However, that’s still 10M homes and if 20% of them are getting foreclosed on, that’s 2M families (not just THE BORROWER, as they spin it) tossed out in the street. Then there’s the 30M "line-of-credit" loans that are out on those "traditional homes," the VAST majority of which are adjustable. Crisis, what crisis?

I hope I am doing my job in making you aware of the way the mortgage lobby is vilifying the borrower in the press. How many stories do you now hear every day of the "scammers" and the "people who should have known better" and the "no-doc loans given to who knows what kind of terrible people." It seems to me that we were receiving so many solicitations from these "innocent lenders" that the government had to set up a "Do Not Call" program to cut back on the abuses. Just two years ago I couldn’t get out of my bank without someone begging to tell me how I can cut my mortgage payments in half - all I had to do was just not pay my principle!

So the dealers get you hooked by giving you easy entry into the paradise of a beautiful home with a super-low "teaser rate" and assure you that you can lock-in "anytime." Once they have you committed, they raise the rates again and again and, just when you can’t take it anymore, they change the lending requirements and tell you that YOU don’t qualify for THAT rate lock. Bad consumer, how dare you want a house! Tricking those poor bankers into taking your fees in exchange for nothing but a guarantee of all the miserable assets you’ve accumulated so far in your life - how dare you! Thank goodness the government changed those bankruptcy laws in ‘05 (just when the banks were pushing all those sub-prime loans) so you nasty people can’t take that "easy way out."

So this is the background against which the market is moving. The sub-prime lenders came roaring back today as Goldman Sachs (GS), Merrill Lynch & Co. (MER), The Bear Stearns Companies (NYSE:BSC) and others all made statements that they don’t see a big issue and would, in fact, be looking to buy some of those troubled firms. This gave a boost to the homebuilders, and money came flowing back to basic materials at the slightest sign of a housing pulse. But other than that, our levels remain lethargic:

Click to Enlarge
Phil\'s US Markets

Source: WSJ Market Data Group

US Markets

We pointed out last month’s alarming negative flow rates as an early indicator of a correction, but looking at today’s levels, we can see we are a long way from making up what was lost last week. For the entire day, just $197M went into the Dow (16% of the week’s loss), $168M went OUT of Oil & Gas, continuing the weekly and monthly slide, Telcom lost money too and even the financials, who "led" the rally, only managed to get back $345M after dropping $2.1Bn on the week (16%).

On the bright side, of the indices we track, Russell and the SOX are in our "Possible Recover" zone and only the Transports are still in the "Danger Zone." I would be more excited except for where everyone is ending up - just UNDER the 5% rule for the month!

Oil dropped all the way to $57.55 after a mild gas inventory report and lack of action from OPEC. Not to worry though, our own homeland energy cartel stepped in and the White House is working to cut funding to geothermal energy. Why? "The Department of Energy has not requested funds for geothermal research in our fiscal-year 2008 budget," Reuters quoted Christina Kielich, a spokeswoman for the Department of Energy, as saying. "Geothermal is a mature technology. Our focus is on breakthrough energy research and development." In other words - we won’t fund it because it works!

An MIT study said that new geothermal power projects could provide 100,000 megawatts of electricity — enough to power about 80 million U.S. homes — by 2050, but would require $300 million to $400 million over 15 years to become cost competitive with other source of power. $20M a year! Quick, somebody put a stop to this madness! Meanwhile, the Waxman report, which identified 118 Federal contracts worth $745Bn "that have been found by government officials to include significant waste, fraud, abuse, or mismanagement" has yielded NO cancellations or recoveries of monies owed to the government, including $1Bn by Haliburton (enough to power over 200M homes).

Nonetheless, demand destruction is in the air and you can hang all the chads you want but you can’t stop Al Gore from making movies, and word is there’s one in the works exposing the vast energy conspiracy that keeps America, the single most energy-rich nation on the planet - beholden to foreign sources of oil solely for the purpose of further enriching the "axis of oil" that has driven government policy since, oh, around 2001.

The NYMEX trading was fast and furious today and it took the exchange of 226M barrels worth of contracts to shave just 18M barrels off the April order (I kid you not!) - now with just three trading days left to expiration. Let’s not forget, oil contracts don’t expire, you MUST take delivery of all open contracts!

Only 7M hot potato barrels landed in May while June picked up 4M and 3M bounced all the way to July, that leaves 6M barrels that were either canceled or pushed into later months, but May has already fallen below $60, closing at $59.96 and not having a good week at all!

Gold tested $650 again on a bad dollar/high inflation day, but settled back at $648, still a $10 gain - this one could really go either way. I’m running short on thinking of ways the dollar can recover so I think we’ll have to rely on the kindness of strangers to prop up our ailing currency.

Oil and Dollar

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Since yesterday's session was public, I’ll review the day’s picks here, rather than our usual members intraday trade section:

We took out our poor American International Group (NYSE:AIG) Apr $70 caller for just .45 (up 267%). I think it’s finally ready to move…

The Chicago Mercantile Exchange Holdings (NASDAQ:CME) $550s we picked up at $2 worked, but not the way we intended as we ended up selling the $530 calls against them for $10.50 and rode them down to a very nice profit. The $550s finished the day at .70 (down $1.30) but the $530s finished at $6.80, a net gain of $2.40!

Diamonds Trust, Series 1 (NYSEARCA:DIA) Apr $122 puts came in at $1.75 and finished up at $2.

iShares Russell 2000 Index (NYSEARCA:IWM) $77 puts never hit our trigger as the Russell stayed positive all day.

Marathon Oil Corporation (NYSE:MRO) Apr $90 puts also seemed cheap at $1.45 and finished the session at $1.60, not bad for a first day…

We picked up NASDAQ 100 Trust Shares (QQQQ) $43 puts for .30 and they rose to .40 but I was greedy and held mine as I didn’t think much of today’s action. The Qs closed the session at $42.89 so we’re cutting this one very close.

So far we’re glad we sold the Sears Holdings (NASDAQ:SHLD) $175s for $1.65, they closed at $1.20. The stop should now be $1.50.

My Wednesday suggestion to open a CNBC portfolio for every sub-prime lender, putting 100% in each one paid off in spades today as my top choice, Accredited Home Lenders Holding Co. (LEND), had a nice 56% gain on the day (my real top choice, New Century Financial Corporation (OTCQB:NEWC), gained 101% but it was ineligible as they changed the symbol).

All in all not a bad day, I hope my advice to be patient was helpful as this was not the best day to jump back in. Tomorrow is expiration "quadruple witching day" and anything can happen - up 200, down 200, both…we’ll have to wait patiently and see.

Source: Options Trader: Thursday Wrapup