Options Trader: Monday Outlook

Strap in folks, this is going to be a wild one!

We are right on track with our Friday predictions, as Asia had a big sell-off this morning with the Hang Seng diving 856 points and the Nikkei also giving up 3%, crashing back below the 13,000 mark, down 406 to 12,917. The Shanghai stock exchange fell 5.6% in a terrible session;the limit for any one company is 10% in a day, so for every company that stayed even, one company fell the limit and was halted!

India is taking very tough actions to curb inflation, going as far as to ban cement exports this morning. "The move is aimed at addressing supply-side constraints that are fueling inflation," said Commerce Minister Nath. In India, as in other countries, food prices are driving the top of the inflationary spiral the way fuel did last year. The increased fuel costs have worked their way down the chain in ways that have made what may be a permanent impact on the cost of farming.

While you (since you have a web connection I can assume you are one of the 2Bn richest people on earth) worry about the price of gas for your car, 2 out of 3 people on this planet are more worried about whether or not they can afford to feed their family dinner on Wednesday. This is driving wages higher from the bottom up and will send another inflation shock up to our (investors) end of the line in the form of increased production costs.

Inflation is biting farmers worldwide. In New Zealand, farm wages are up as much as 20% this year, and the average price of a dairy cow has jumped to more than $1,900 — almost double last year’s average of about $1,000. In Thailand and Indonesia, farmers are complaining about sharp increases in the price of fertilizer and diesel fuel.

So that great trade you made on Bunge (BG) or Potash Corp. (POT) is translating into that 30% increase in the cost of a loaf of bread for your kids’ lunch. That may not matter to you, but to an Indian farm worker making $40 a week, that’s a dollar he just doesn’t have! This forces him to ask his boss for more money, which the boss doesn’t have, since Deere (DE) and Caterpillar (CAT), along with BG and POT, want to pass on their higher costs. This is inflation in action.

Farmers are "terrified" of high costs if crop prices ease back, says Michael Swanson, an agricultural economist at Wells Fargo & Co. (WFC) in Minneapolis. Such fears could make them reluctant to expand production as much as they might do otherwise. That would mean more constraints on food supplies — and even higher prices. If we do not get a commodity correction soon, these prices will embed themselves and put us on a very ugly path.

Keep in mind that we are a nation with 300M people and about 50M people living in relative poverty, while Asia has well over a billion people living in abject poverty. Of course they are going to take this much more seriously than we are. And when you hear these IMF reports with dire warnings, you better take them very seriously; we’ve grown the global population by 100% in the past 50 years and it’s not a good time to inform 3Bn people we are unable to feed them!

The G7 meeting ended in disappointment with much noise being made about doing something but nothing actually being done. "I don’t read into the communiqué any joint action," Norbert Walter, managing director and chief economist at Deutsche Bank Group, said of the G-7 gathering. "What I do read into it is acceptance that national governments and central banks continue to act according to what they consider to be domestic needs."

Still, the G7 did seem like they WANTED to do something, and that was dollar positive for a minute. But Wachovia (WB) had a surprising loss and scrambled to raise $7Bn in capital, which is spooking the markets and the dollar right back to Friday’s levels and lower. Europe is down about a point this morning, getting hit by the WB news as well as a big miss from consumer giant Philips (PHG), who took a big hit in the TV segment, spooking EU and US markets on the consumer side yet again.

This is not a complicated cause-and-effect item. Stretched consumers and tight credit means not too many $3,000 TVs being sold this quarter. This is a very stupid report to panic over, folks, and tells us nothing about consumer spending that we don’t already know. I’m not saying this is a reason to buy Philips, but it’s certainly not a reason to dump the consumer sector (again).

Our own retail numbers overall came in with a surprising 0.2% gain after dropping 0.4% in February (revised up from down 0.6%). This is well over analyst (do we still have to call them analysts when they are this clueless?) estimates of down 0.1%. Since consumers make up 70% of the GDP and a recession is defined as two consecutive quarters of declining GDP - might this not be a problem for the doom and gloom crowd?

Unfortunately, gasoline sales led the way with a 1.1% increase. Without gas sales, retail sales were flat overall. Building and materials were down 1.6%, and even internet retailers dropped 2.1%, so let’s not crack open the champagne (sales down 0.4%) just yet, but this number should have been worse and puts us in line with my mild recession theory, and well on track with our "least sucky" premise for US equities.

Blockbuster (BBI) is enthusiastic about the numbers. So much so that they’ve put in an offer to buy Circuit City (CC) for $6 per share ($13.5Bn), up over 50% from Friday’s close! I think BBI is nuts, but they have little to lose in issuing a non-binding proposal. If BBI were a real company I’d short them, but that damage has been done long ago. I did think CC was worth more, we used to play them but got fed up in the fall.

The dollar is not going up, oil is not going down, we need both of these things to get bullish but we can expect the energy traders to try to push the markets higher as they wiggle out of their front-month contracts. This scam will be evident if you watch the insane trading levels at the NYMEX, who will trade their 200,000 remaining contracts over 300,000 times today as they cancel all but 40M of the barrels currently scheduled to be delivered to the US (and already paid for by US consumers) by the 22nd.

If the oil was really worth $110 a barrel and there were actual buyers at that price, then why wouldn’t they have it delivered? Because putting the oil they actually ordered for May into US market in May would flood us with a 50M barrel weekly build that would send the oil markets crashing through the floor! Only by "rolling" the barrels to June, where they can fake an interest in having 300M barrels delivered in that month, can the NYMEX traders keep this shell game floating.

That’s why the merest hint of regulation sends these roaches scurrying for cover as this global game of hot potato, in which 300M barrels of unwanted oil a day are being traded purely to make it seem valuable, continues under the same deregulation that allowed Enron and others to steal billions from US citizens.

We were expecting a bottom to form this morning so let’s see what happens. We’re not going to get sucked into a false rally, but uncovering our some of our callers may be prudent if we can hold our lower levels.

Comments

[User 143167]

It could be a scam in oil trading, but you should also notice that Russia's oil output is starting to wane down and this world's oil production's very likely peaked in 2007 and may only go down from now. You can always argue that American consumption is going down, but how about global consumption?
And you call a bottom in the equities day in and day out. How come are you so optimistic if I agree with IMF's chilling predictions?
For the "surprising" retail number, I saw nothing else beside inflation. So be prepared for a HUGE CPI number on Wedenesday, but what's new?

[bearfund]

A huge CPI number? No way. There's nothing to be optimistic about here, but the government is not honest about inflation. Those retail sales adjusted for true inflation would be way down, but that's exactly why. I expect a number around 0.1%. After all, they got away with "flat" last month, so why bother making it believable this time? This number has been so obviously and thoroughly manipulated for so long that no one even wastes time laughing at it any longer. Its only value is that it tells us what the government wants us to believe.

What I'm curious about is why there's so little action in TNX calls. Some sharpie is long 4044 contracts in March 09 at 42.50, a position I assume he entered at a price much lower than today's $5.00 ask. If there were any trading at all in this market I'd be jumping in with both feet.

[Gunslinger]

Oil production did not peak in 2007. And the peak oil advocates purposely leave out non-conventional production/reserves from all calculations. That's TRILLIONS of barrells of already discovered reserves. With the price of oil this high, they will be sought after for production.

Enough of the peak oil followers calling a "peak" year-after-year... And being wrong every time.

[User 143167]

Gunslinger, it is not a prediction, but a FACT that Russian Energy Ministry implied that that country's oil production peaked.
You are right that there will be more oil to be drilled out if the oil prices keep going up. However, that doesn't mean the oil price will go down, because the marginal drilling costs have also risen at the same pace of the oil price.

[Gunslinger]

I have no doubt oil prices will trend higher.

But we're talking world production here. Certain countries will peak now or soon. However, that production and more will come from unconventional. New recovery technology and the new price of oil will hasten it.

And that's not even mentioning 'new' oil. The peak oil doomsayers remind me of the global warming (excuse me, climate change) fanatics. Their predictions never come true. Ironically, global warming would dramatically increase the formation of new oil prerequisite.

[KobayashiMaru]

DON'T blame POT for higher farm or commodity prices Phil! The cost of fertilizer returns a minimum of 3.5:1 higher productivity yield on a crop, and often more depending upon the type of plant.

The fert complex price increases add about .03 to .10 cents to a bushel of a crop - given that a bushel of corn can sweeten about 400 cans of your favorite soft drink, or a bushel of grain can make several hundred loaves of bread ... try to do some research before you shoot from the hip and hit the wrong target.

Many people trying to improve their lifestyle - THAT is why commodities are going north in a hurry.

[giogio]

Thank You for the great article.
A comment on "global warming (excuse me, climate change) fanatics. Their predictions never come true" .. The ignorance of people that talks on this subject without knowing much is astonishing even in the face of such consequential damage.

[Gunslinger]

I will wager a lot on which one of us is more knowledgeable on the climate.

About that "peak oil..." How much has been discovered this week alone? And finally someone with a brain has figured out how to speed up the process of oil creation - dramatically!

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