Options Trader: Monday AM Outlook

by: Philip Davis

It’s already shaping up to be "one of those days."

According the WSJ’s Asia Markets section: "Regional Indexes Close Mix Ahead of Fed Rate Decision." I find this an interesting use of the word 'mixed,' as Australia is down 0.5%, Hong Kong is down 1.2%, India is down 0.6%, Singapore is down 1.7% and Thailand is down 1.2% with Japan closed for the day and Indonesia, Pakistan, S. Korea and Sri Lanka flat and the Philippines up 0.39%.

I’m sure we all see how the positive movement of the Philippines (462B GDP), completely offsets the "slight" negative moves of the Australia ($680B), China ($10,000B), India ($4,148B), Singapore ($145B) and Thailand ($597B). I suppose they are hanging their hat on the runaway Shanghai composite, an index we usually ignore as wildly untrustable Shanghai composite, where both A&B shares gained 2% to make fresh highs.

Chinese banks exceeded their lending target last year and have extended 3.08 trillion yuan in loans in the first eight months of this year, or 97% of the total for all of last year. "Since 2003, the central bank has carried out moral suasion on banks every quarter….The efficiency of the PBOC’s moral suasion has been declining," central-bank Vice Gov. Wu Xiaoling said Friday ahead of the rate increase. To soak up liquidity, the central bank raised banks’ reserves-requirement ratio seven times this year and boosted the issuance of central-bank bills. The latest reserve-ratio increase takes effect Sept. 25. The central bank also said it will raise lending rates for the public housing fund, which helps individuals buy property, by 0.18 percentage point, signaling its resolve to contain housing-price inflation.

Move along people, nothing to see here…

China condemned a massive rally organized by Taiwan’s president calling for the island’s membership in the United Nations, warning Sunday that Beijing was now preparing for a "serious situation." The statement did not say what constituted a serious situation, although China has long threatened to take military action against Taiwan if it declares formal independence or indefinitely delays unifying with China.

In yet another Chinese attack, Baidu has started an online video-advertising service. Could Baidu-Tube be far behind? This may be a great opportunity to take out our Google callers!

Europe is not on holiday but Steve Ballmer wishes they were as the EU Court of First Instance dismissed Microsoft’s appeal of their 2004 anti-trust conviction and upheld $689M in fines. They should have paid up when the dollar was 40% stronger! The next and final appeal goes to the European Court of Justice but, if the Fed lowers rates - they’re probably better off paying now before it’s $2 to the euro!

Northern Rock’s customers continue to withdraw those valuable euros as the run on the British mortgage bank has now led to $2B, possibly $4B (4-8%), of their deposits being pulled by nervous investors. This amount does not take into account that millions of people TRIED to withdraw money on-line on Friday and crashed the system while others were REFUSED large withdrawals! In its editorial yesterday, Murdoch’s Sun paper railed the bank. "The bank has continued to lend customers five times their salary and 125 percent of their home’s value despite all warnings of economic instability and an impending fall in house prices," read the editorial. These crazy deals have kept the property bubble inflated for too long. Gee, only 5 times salary?!?

Amid the turmoil, London’s FTSE is off 1.7% for the day (so far) but the German Dax and the French CAC-40 have recovered to down just half a point as our housing ripples spread "across the pond." Trading on Northern Rock was suspended this morning as England’s 5th largest bank dropped 30% in early trading. Sector peers Alliance & Leicester dropped 12.9%, Bradford & Bingley lost 9.9% and HBOS declined 4.2%.

Hey, does anyone remember when we used to have lots of M&A deals on Mondays? There are lots of mixed signals coming from the ABN deal and, if that $100B merger falls apart we may want to run, not walk, to our own banks to make a withdrawal!

Other than that, things are just great! Greenspan says we are doomed but people have decided to ignore him now, Bush is appointing a new AG who will be ignored for 15 months and everyone seems to be ignoring the fact that our own Nasdaq is selling 30% of the London Stock Exchange to our OPEC pals at Qatar. So we can’t sell a shipping port to China but we can sell the World’s largest financial port outside the US to a country that just lobbied strenuously for OPEC NOT to ship us any additional oil this winter.

Speaking of thieving crooks who are choking our nation, our assault on the NYMEX is gathering steam, now we have an official celebrity spokesman! While the markets do their best to ignore $79 oil, we are gaining converts to our cause every day with Mike Rothman of ISI going me $15 better and calling for $45 oil! "It wasn’t that they were depriving people of barrels, but OPEC had less demand for their oil… My forecast for the fourth quarter, excluding Angola and Iraq, is for about 26.6 million barrels a day. Their production right now is about 26.8 million barrels a day."

WHAT??? Is that the sound of demand destruction I hear?

"I have never seen the gap between reality and the perception of reality as big as it is right now. The perception of what I call Chindia, the idea that demand growth globally is robust and is going to be led by the emerging-market economies of China and India, is still strong. It is a great idea. But when you look at the data, you will see it doesn’t match, and when you talk about peak oil and see what is happening to non-OPEC supply, there is a problem because supply growth this year is going to be one of the largest in almost 30 years, and next year looks like it is going to be similar to this year. Guys like me care about the totality of non-OPEC supply growth, even biofuels, or non-oil fuel, which are a subset of the non-OPEC supply curve. Biofuel supplies, which include soybeans for diesel fuel and corn for ethanol, will be up this year roughly 350,000 a day versus last year. That’s a big number, about 40% in terms of its volume. It is going to be up by a similar volume in 2008. This is in response to higher average oil prices and concerns about availability."

As usual, whenever pressure comes on oil prices as people start to question this con game, they wheel out one of their septuagenarian prognosticators, the kind of guys who will be dead before their idiotic statements embarrass them, to make public calls for $100+ oil. This time it’s former RDS.a Chairman, Lord Oxburgh, who felt compelled to bandy $150 about for a 20-year target as he addressed THE ASSOCIATION FOR THE STUDY OF PEAK OIL this weekend.

We noted last week that, even with such wonderful markups in their future, the NYMEX traders decided the US didn’t really need 92M of the 289M barrels that they had locked up at $75.75 as of last Monday. Now with "just" 197M barrels scheduled for October delivery at $79.10, we’ll see what other manipulative nonsense these crooks can pull this week.

In addition to October, 313Mb are on order for November at $78.09 and 205Mb are ordered for December at $77.17 and 68Mb are on order for January at $76.49 with just 35Mb scheduled for February delivery at $75.86. That means if we shut the NYMEX right now, 715 MILLION BARRELS of oil would be delivered to the US by December 31st - let’s see how many they actually let us have if we let them keep running that shell game!

We will be keeping an eye on Dow 13,400 of course, holding that would be very nice but it’s 2,600 on the Nasdaq and the very critical 1,485 on the S&P that Happy Trading and I will be keeping our eyes on:

I would be very surprised if we get a serious breakout ahead of what I believe is a no-win scenario for the Fed tomorrow so let’s all just be careful out there on the first big volume day since last Wednesday.

We have lots of gold in our portfolio and that’s a good thing right now!