Options Trader: Tuesday Outlook

Includes: AAL, DAL, DB, MC-OLD, UAL, UAUA, V
by: Philip Davis

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 (NYSE: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 (NYSE:MA) and Visa (NYSE: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!