Options Trader: Tuesday Outlook

We’re just waiting on the Fed.

I said to members yesterday that we should just sort of drift into tomorrow afternoon as we wait on the Fed, even though it is very doubtful they will do anything surprising, that’s just the time the final cards are dealt and the big boys will start to push their chips around the table. Until then it’s a penny-ante game while we wait.

Another thing we wait for is oil to get real. Just last night in chat, Xian pointed out yet another Bloomberg article pumping oil in what is becoming a concerning pattern for what used to be considered a reliably unbiased news service. This latest load of BS is from Deutsche Bank’s (DB) CHIEF energy economist Adam Sieminski (and I will now make sure we know who these people are and who they work for so you know where to move your money away from when they are spectacularly wrong) who wrote a report on the 25th that became news on the 28th because oil still needed a push.

Mr. Sieminski says "There is a huge risk that the oil price simply continues to escalate until it gets to some level ($200 a barrel?) when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now.” Yes, that’s right, what happens in a demand curve is that people use the same amount at $80, $120, $140, $160 but at $200, THEN demand just suddenly collapses as people say "Hey, I can’t afford $200!" I mean REALLY, that’s their CHIEF energy economist? Oil prices are up 82% in 12 months, you don’t think that is impacting demand already???

We talk about the PR activity of oil manipulators (hyenas) when they are trying to push prices over a critical level and let’s take a look at these amazing coincidences in publishing that occurred last night:

Analysis: Sky is the limit for oil prices - This is Money

No end in sight for costly oil bubble - Times Online

Oil nears $120 a barrel, may reach $200—Deutsche Bank - Manila Standard Today

Supply side to blame for high oil prices - San Francisco Chronicle

It is almost as reliable as predicting a Nigerian rebel attack when oil goes down, to predict a slew of peak oil articles when they are trying to avoild putting in a double or triple top at a new breakout. Kudos to the London Times, who hit the nail on the head with their headline: "Oil speculators push price to £5 gallon" in which Lehman Brothers (LEH) joins me in estimating that fuel is 30% overpriced due entirely to an influx of speculators. Lehman "believes that hot money accounts for between $20 to $30 of the recent increase in oil prices and that about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year."

£5, by the way is about $10 per gallon - ready to change your behavior yet? Europe has always paid more than us for fuel, but imagine the change in your life if you had to fill up at $10 per gallon! I defy you to find mention of Lehman’s analysis in the US press though; the energy companies have already co-opted the US mainstream media.

In fact, the online WSJ’s top two headlines at 8:55 am were "Oil Prices Pump Up Shell, BP" and "Oil Nears $120 on Nigeria Unrest." REALLY Rupert? Still going with Nigeria 72 hours after the fact as your lead story? This is obviously some version of "Fair and Balanced" in which balance is achieved by presenting just one side of a story until everyone starts believing your point of view - wouldn’t it be terrible if the conservatives got a hold of a TV station and started doing this? Perhaps Mr. Murdoch is simply running tomorrow’s headline today since a pre-market drop in oil is sure to have some energy executive on the phone to Rent-A-Rebel this morning, ordering up some mayhem ahead of tomorrow’s inventory report.

We are, of course, heavily short on oil as we called shenanigans early at $110 and pressed our bets on the way up but I’ve decided to point out how the news is being manipulated, hopefully to save some people from being victimized by the next bubble they try to stampede you into. News just crossed the wire (9 a.m.) that Bush is going to hold a news conference at 10:30, so I will issue both an oil reversal and market plunge alert ahead of his speech.

So nothing much matters until the Fed and I’ll wrap this morning up quickly (make sure you check my massive earnings preview from last night) with a quick review (for me anyway) on the global markets:

Asia was mixed, India surprised us with a tightening of reserve requirements to reign in inflation so we need to watch our IBNs but I think they’ll be OK. Europe is dead flat and DB (the ones with the not-too-clever Chief Energy Economist) reported their first loss in 5 years including trading losses (probably in energy) of $3Bn and $5Bn in write-downs. This was all in-line with very low expectations for DB.

In the US it’s earnings, earnings, earnings but we also have data like Q1 foreclosure filings up 112% since last year while home prices are down 12.7% in the same period with 17 of 20 metro areas surveyed showing record declines. Mastercard (MA) and Visa (V) had good earnings (and we have both!) but let’s make sure we’re covered as the Fed and other regulators are looking to pull the plug on this party. MA is still in our safety zone and we’re not going to adjust our butterfly there unless they break over $270, which I very much doubt.

Also, airline tickets are up 10.2% last month and the airlines are hoping to merge as quickly as possible so they can charge you MORE money. The rush to merge is driven by the flight of the lame duck as it is very unlikely a Democratic President is going to greenlight the formation of an even bigger monopoly in yet another vital service industry.

Looks like an exciting day ahead!

Comments

[cjwirth]

After Peak Oil, when oil production begins to decline this year, we will see $500 per barrel oil and then $1000 per barrel, and eventually the oil flow will cease. This is a catastrophe, and scientific and government studies support this view: www.peakoilassociates....

[bearfund]

Airlines are a vital service industry? Could've fooled me, I'd forgotten they even exist. They cancel about half their scheduled flights and the ones they do fly are always late. Service is awful, tickets are expensive, and don't even get me started about the "security" nonsense at airports. Does anyone even fly any more? You wouldn't know it looking at the airlines' financial reports. And it's not like these guys move huge freight volumes, either. If the airlines are "vital" because they're USPS contractors, I'll simply observe that the USPS could move just as much mail with 1/100 as many aircraft, and do it at a lower cost. FedEx has mastered this business so well it's boring.

Far from a "vital service", air travel is something virtually everyone can do without. There's a weak need for one or two airlines flying a few standard international routes and perhaps a dozen or so transcontinental routes for people who are in a real hurry. The need can't be that great; after all, the country went from backwater rebel colonies to a major world power in a little over 100 years, a time in which the global economy experienced phenomenal growth. In all that time no one had ever seen an airplane. Vital? These days we have other tools that didn't exist then, either, for those who really believe in the need. For business meetings, there's teleconferencing. If you're going to Grandma's house or shipping parcels, just take the train. UPS is to rail freight what FedEx is to air freight; they move parcels across the country in about 3 days. So much for trains being too slow for business needs. And even decrepit, forgotten, government-subsidised Amtrak can move you there in about the same time (and without taking off your belt, even!). Imagine what it would look like if we'd invested the tens of billions spent bailing out airlines in rail transit instead.

Your portfolio would surely be better off without these relics from the era of cheap oil, cheap credit, and government handouts. A century from now, ubiquitous air travel will be seen for what it was: a brief curiosity made possible by the chance convergence of economic, political, social, and technological circumstances. And yet life, and the economy, will keep on keepin on after it's gone.

[Shaun]

I agree oil is overpriced but going short will probably turn out to be a bad idea. Oil is in a giant uptrend. It will most likely keep going up. If it starts heading down then I'll get on board but not before.

www.stocks-simplified....

[Al Rob]

Phil has been trying to call the top in oil for 2 years. It won't roll over till he capitulates.

[investorslive]

Visa and Mastercard both gaining support and momentum if they can hold through lunch these both may squeeze into close

www.investorslive.com/.../

[PAR]

…..hmmm, very interesting. I’m flabbergasted. We’re to start in analyzing this commentary. I’ve never once commented on a single commentary on seekingalpha.com because frankly they’re a little silly and embarrassing for the mere fact that almost all of them argue in favor of whatever position the author is holding. Reading this piece however left me awestruck and I just had to respond. I guess I have to start off by saying that I’ve read Phillip Davis’ outlooks before and you have to commend someone for putting in the time and energy to give there two cents on market happenings each and every day. Some of the things he writes in this piece however are just absurd. Yes, there are market manipulators that try to sway prices in every single market. Is there a concerted PR onslaught by the mainstream media, backed by big-oil, to drive prices higher? I have no idea. What I do know is the author himself contradicts his supposed principles when after writing four-five paragraphs on the matter he then discloses “We are, of course, heavily short on oil as we called shenanigans early at $110 and pressed our bets on the way up but I’ve decided to point out how the news is being manipulated, hopefully to save some people from being victimized by the next bubble they try to stampede you into.” The author simply points this out because he wants to “save some people from being victimized by the next bubble they try to stampede you into.” Wow, what a humanitarian. It couldn’t possibly because he like many other oil traders have gotten absolutely obliterated on their shorts, (many have called a market top at $90, $100, and the most often recited $110 which took nearly a month to break through.)
I have no idea which side is correct on oil as market sentiment seems split 50/50. I don’t trade energy in any capacity and have no skin in the game whatsoever. I could care less if it goes up or down with a slight bias towards the downside since that would actually benefit equities (minus the energy sector), which I tend to trade the most. To say however that MEND is being manipulated or paid off by big-oil to cause disruptions that spike prices is preposterous. Now the rebels themselves may have an agenda, maybe they’re nefariously invested in oil futures through intermediaries around the world and then of course they would have an ulterior motive to their actions, but to say that there is a conspiracy by huge publicly traded companies that are incorporated in western nations with strict laws on such behavior is ludicrous. Yes, there is a bubble in the oil market, and yes it will go burst as all market bubbles eventually do. That however doesn’t mean that because the media reports on this bubble or some analysts think it will expand farther that they are somehow trying to manipulate the market. They’re just reporting a fact, the oil market is in a bubble right now and prices may continue to escalate for the foreseeable future.
According to the Lehman analyst who the author praises as the true prognosticator of oil, “hot money accounts for between $20 to $30 of the recent increase in oil prices and that about $40 billion (£20 billion) has been invested in the sector so far this year — equal to all the money pumped into oil last year.” If that’s true and speculation accounts for roughly $25 of the current price of crude then on the supply and demand side alone with speculation completely stripped out of the equation oil should be at $95, from the current top of $120. So taking that into consideration with the fact that with oil today at $120, the drop in demand has been minuscule at best and with demand forecast to rise nearly every year on a y/y basis for the foreseeable future then if oil should be at the “correct market price” of $95 without speculation then if it simply follows the supply and demand aspect it will still continue to rise steadily and eventually the “correct market price” will be at the $120 mark it is today with speculation stripped out of it. What will the author say then?
Now I’m just a lonely day trader who doesn’t hold positions for more than a very short time usually, with the occasional swing trade here and there, so I don’t have a bias one way or the other. Oil may very well see a temporary pull back, maybe even all the way down to the mid to high 80’s. That doesn’t change the fact that every year more and more people procreate around the world and have children and those children eventually procreate and so on and so and so forth. Unless there is a cataclysmic natural or man-made disaster the world population will continue to swell with a vast majority of it consuming petroleum products and byproducts every single day. Demand will continue steadily upward until one of two things happen. Either demand will continue to increase until the very last barrel of oil is sucked out of the ground or the development and use of alternative energy sources will increase dramatically. Now it’s just me, but I don’t I think scientists and engineers have developed a way for heavy industrial machines such as planes and boats to run on natural gas or bio-fuels.
Even if world leaders completely abandon the third-world and continue with this ridiculous push to subsidize corporate farmers so we can take the worlds food supply and put it in our cars, (whish I highly doubt since food riots are beginning to flare up around the world), the implementation of putting the infrastructure in place worldwide to fuel our cars with bio-fuels would take an astronomically long time to put in place. Even if scientists somehow miraculously find a way to fuel our cars with a non-food bio-fuel such as bio-waste or even seaweed the technology as it stands today would be so astronomically high in price that it wouldn’t be feasible on a cost scale relative to oil to make it practical. If you’re telling me that if the Chinese or Indians are given a choice between bio-fuels or oil as an energy source and the bio-fuels cost more than the oil, that they are just going to pay more for the bio-fuels out of some sort of deeply held environmental principle, then you’re insane. The Chinese and the rest of the developing world have made it perfectly clear that they are going to industrialize and develop their counties by any and all means necessary, environment be dammed.
As it stands today I would like to know where we are going to get all of the oil that the world will need as each and every third-world or developing nation comes online and begins to industrialize. Are Caucasians and the West so arrogant as to think that only we have the will and ability to be industrial? Eventually all societies modernize, if they didn’t all of us would still be wearing animal furs, living in caves, and hunting and gathering to survive. With the exception of maybe one or two “lost tribes” in the Amazon, every single human society has progressed and modernized using the means available to them. Almost all of the means available to humanity today in order to build and run modern societies require oil. That worldwide demand will only continue to rise. Now if the worldwide supply of oil continued to rise to meet the escalating rise in demand then that is simple economics and prices would be kept in check. As we all know however oil isn’t an infinite resource. Once it’s all sucked out of the ground it’s gone. So that being a universal truism where are we going to get all of the oil needed to fuel a booming worldwide population? You could add together the find off the coast of Brazil, all the tar sands in the world, and send a deepwater drill into every last corner of the seas and it will all run out eventually. Now I’m not saying we’ve hit peak oil, even though Hubbert and nearly every other respected geophysicist has said we’ve either reached peak oil already or are going to sometime in the next 5-20 years, all I’m saying is that to somehow state that the worlds oil supply won’t eventually run out is delusional.

[JREwing]

Oil 150$. Is gonna get close in Q4 again.

[russ]

retitle your column, it has become just a rambling rant about your personal views. I'm looking for something about Options but they seem to have disappeared from the column

[VWinner]

dont buy anything in india as long as cows share the roads....