Options Trader: Friday Outlook

Includes: AIG, TM
by: Philip Davis

Well, we’re getting our $125 oil pre-market.

Karl Rove-style attacks on Hugo Chavez as they headline: "A cache of controversial computer files closely tying Venezuela’s President Hugo Chávez to communist rebels seeking to topple Colombia’s government appear to be authentic, U.S. intelligence officials say." Well, when have US Intelligence officials ever steered us wrong before? This is, by the way, something that has been going on since March, it’s only news today as they need a reason to take oil over $125 but this may be the Journal’s last chance to wave this flag as Interpol (at Columbia’s request) will release an independent analysis next week.

Mr. Chávez has repeatedly said the files were faked by Colombia. "We don’t recognize the validity of any of these documents," Bernardo Álvarez, Venezuela’s ambassador to the U.S., said in a Wednesday interview. "They are false, and an attempt to discredit the Venezuelan government." FARC itself has suggested the files are fake. A FARC statement published on the Web site of Venezuela’s Information Ministry ridiculed Colombia’s claims about the computer files, saying computers couldn’t have survived the Colombian army attack "even if they had been bullet-proof."

Perhaps the documents are true, perhaps they are not, but are we going to be marched headlong into another war (even if it’s only a trade war, with sanctions) rather than sit down and try to work out our differences with Chavez, who has been a Bush attack target since he took office (kind of like Saddam)? Either way, any escalation of hostility with Venezuela will be a jackpot for traders who bought $150 July oil options yesterday, and death for the US and perhaps the global economy. I know we’re all trained to go blindly nationalistic at the first mention of terrorists but there are tremendous costs to our actions and the possibility that the administration may be "wagging the dog" to distract the public is very scary at this point.

Note the WSJ headling is very definitive: "Chavez Aided Columbia Rebels, Captured Computer Files Show." This is very much like the "proof" they had that Saddam had WMDs, but it’s been a whole 5 years since then so I guess we’ve all forgotten how well that turned out.

Of course Chavez is not the administration’s only target as the President attempts to boost his approval rating back over 30. Iran has been in his sights for months and we’re also accusing Syria of building a nuclear reactor, a charge that Syria claims it utterly without merit as well. "Syria again rejects the US allegations and reaffirms that it has nothing to hide concerning its legitimate national defences. Syria wants to see peace in the region, unlike the current US administration which has been behind all its wars and crises."

Then there’s our pals in North Korea (who we are tying in with Syria now) and, if that doesn’t work, we’re back in the fray in Beirut, where the US-backed government there is under siege by Shiite opposition forces who somehow got the impression that the US is hostile to Shiites (perhaps it is the 300,000+ Shiites - over 1/2 civilian casualties - who have been slaughtered under US occupation in Iraq?).

Imagine living in Lebanon, with US armed forces marching in the streets supporting a US-backed government you didn’t elect and every month you see these numbers of Iraqi civilian casualties… Kind of makes you wonder if perhaps Bush is wrong and our policies may be recruiting more future terrorists than we’re killing.

So aside from $125 oil, it’s small wonder the global markets are having a rough morning as international investors tend to pay more attention to politics than US investors, few of whom could point to Lebanon on a globe (or Syria or Myanmar or Columbia for that matter). I have said we want to be well-covered into the weekend but with all this going on I think we want to pick up some gold as well!

The Hang Seng dropped 386 additional points this morning and the Nikkei fell 287 points (2%), led down by Toyota (NYSE:TM), who reported after their close yesterday (but ahead of our open so we ended up setting the price) as well as other auto makers on outlook that was so bad even Bridgestone (tires) dropped 6%."The market was feeling the impact of Toyota’s reports today, and investors were turning cautious, taking a wait-and-see stance ahead of more corporate results next week," said Tsuyoshi Segawa, an equity strategist at Shinko Securities in Tokyo.

As I predicted yesterday, the rumors of China’s intervention in the markets were false and the Shanghai Composite gave up 75% of yesterday’s gains, led down by banking shares all spooked by AIG’s surprisingly poor results. Note that AIG’s (NYSE:AIG) issue is not just the write-downs, the massive write-downs are actually masking a really rotten quarter in the insurance business.

Both China and the EU are struggling with massive inflation while our government continues a policy of denial that is seen as a joke by the rest of the world and is back to crushing the dollar. The IMF has taken the first G7 move to punish the US for doing absolutely nothing since the meeting last month to strengthen the dollar and is urging linked currencies to take independent action: "For emerging economies with currencies closely linked to the dollar that are fighting overheating concerns, macroeconomic policies need to be tightened in response to generalized inflation pressures," said John Lipsky, the IMF’s deputy managing director said in New York yesterday. For China, that meant moving to a flexible exchange rate, he said.

Europe is trading down about 1.5% ahead of our open, also led down by financials on the AIG news, and we got a better-than-expected trade report this morning, which is bad new for countries who export to us as it was led by a drop in consumption. US exports, in fact, fell 1.7% in March, dropping by $3Bn, but they were outpaced by a 2.9% decrease in imports ($6Bn) that was the biggest drop since December 2001. The bill for March crude imports jumped to $25.03Bn, from $24.8Bn in February (up 1%) but the price of crude was up $5.09 to $89.95 (6%) and our import barrel count for the month dropped by 8M barrels (3%) to 278M.

The world is feeling our pain as every extra dollar we paid for oil came out of what we used to pay to other countries for goods and services. As I’ve been saying for quite some time, there is not enough money in the world to support $120+ oil AND the rest of the economy without MASSIVE inflation. We’re not there yet but something is going to give, and soon!

I predicted a 200-point drop yesterday and if we hold that I may have the attitude that "what doesn’t kill us makes us stronger" but there’s it’s going to be pretty hard for me to get positive, even if we do stage some kind of rally if oil doesn’t break down and that is looking pretty unlikely.

Sorry, try to have a nice weekend!