Options Trader: Wednesday Outlook

This is one exciting week so far.

We had a great day yesterday and oil has plunged in the overnights down to 126.69 as of 7:30 so it’s going to be a very busy day over at PSW! Don’t forget we have inventories tomorrow but they will only run through May 23rd and will not cover the holdiday weekend, where we may have a shocking build in gasoline stocks due to very poor demand.

Last week there was a draw in crude of 5.4Mb and an 800Kb draw in gasoline as refiners kicked it up to 87.9% utilization and local service stations started stocking up for the weekend, topping off their tanks in the face of rapidly rising crude prices and the anticipated Memorial Day demand (and rumors were circulated to gasoline retailers that supply would be short). While this was going on, imports were down to just 9.2Mb per day, 696,000 barrels a day less than the previous week, accounting for 4.9Mb of the 5.4Mb of crude that was "drawn down." Typically, we import around 11.5Mbd but we haven’t needed that much oil for almost a year as US demand has fallen off steadily.

Fortunately, we actually read the EIA report last Wednesday and shorted the hell out of oil at the top as these numbers set off all sorts of warning bells for us. Another interesting tidbit from the report is that jet fuel demand for May was tracking 5.6% lower than last year - and that was before American Airlines (AMR) announced drastic cut-backs…

Yesterday we took out our callers on Valero Energy (VLO) and initiated calls on Sunoco (SUN) (June $45s at $1.65) as gas prices hit record levels at the same time as the refiners are getting a 10% discount in oil prices. We’ll keep an eye on the dollar, which faces another test at 72.5 and looks ready to break up again. So far, the dollar is actually 1% lower than it was last week, so don’t blame the greenback for a pullback in commodities, that shoe is yet to drop!

Shoes are still dropping in Asia as the markets there can’t get out of their own way. Exporters led the pullback of the Nikkei, which lost 183 points as the dollar fell back below 104 yen. TM is an excellent buy down here with the Jan $90s at about $13 this morning, which have just $4 in premium at that price and July $100s can be sold against them for $4 but you may get $4 for the June $100s on a good bounce. The Hang Seng was off just 32 points and the Shanghai Composite jumped 2.5% but only because the launch of index futures spurred demand for financial stocks. Companies with investments in futures trading surged in the afternoon. Citic Securities, China’s largest brokerage by market capitalization, ended up 6.2% and real-estate developer Shanghai New Huangpu Real Estate, the parent of Huawen Futures, ended up 10%.

This is good timing for Bank of America (BAC) [another one of our LTP holdings], who are exercising $1.9Bn worth of calls to up their stake in China Construction Bank (CICHF.PK) to 10.75% from 8.2% in China’s second largest bank. BAC’s original $3Bn investment in June 2005 is now worth about $30Bn. The 2010 $35 calls are just $4.70 and make a fantastic long-term investment.

Europe is in a much better mood this morning as the financials take off there as well. This despite the fact that French consumer confidence was even worse than ours, coming in at -41, down from -13 last June with inflation concerns dominating the survey. All of Europe is seen as slowing down markedly with German confidence also taking a nosedive last month.

As I said yesterday, our goal is to just suck less than the other markets and money will find its way into US equities. We’ve had pretty good Q1 earnings and if we can put in something that looks like a bottom in housing, knock oil back down under $100 and put the dollar back on track, our markets are going to start to look downright sexy to foreign investors!

Let’s not get too excited though, Coca-Cola (CCE) just gave a pretty poor forecast, citing "weakening economic trends" and if people aren’t buying Coke, we have some real problems! CCE said weaker economic trends have "continued to limit volume performance in North America, particularly in higher margin 20-ounce packages of sparkling beverages and water, negatively affecting operating income."

Durable goods orders were off 0.5% in April but they were brought down by volatile aircraft orders and, without transportation, we actually had a 2.5% increase, which is our best climb in 12 months. Perhaps the trend is that consumers are cutting back on the junk they don’t need and saving up for important things - just like rational people might do! Is it possible that $4 gasoline is really changing people’s habits so rapidly? If trends like this continue, we may even see US consumers actually saving some money one day - that would be a shocker!

Today will be very exciting but it’s a long, hard climb to get back to 13,000 and we need to get through that at some point. It’s all up to oil and we need it to contine back down to $120, staying below $130 at all costs, or the bottom can fall out of this little rally very quickly.

Comments

[User 143167]

Look at the durable goods orders# carefully, the unfilled orders and inventory both hit the highest since 1992. Don't follow those stupid talking heads on the media to interpret everything into buy, buy, buy..

[crimfunk]

uhh, inventory isn't until Thurs.

[crimfunk]

further SUN is the worst refiner with its sweet refining.

[User 143167]

Quoted from Census Bureau:

Unfilled Orders

Unfilled orders for manufactured durable goods in April, up twenty-six of the last twenty-seven months, increased $7.6 billion or 1.0 percent to $804.5 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 1.3 percent March increase.

Inventories

Inventories of manufactured durable goods in April, up nine of the last ten months, increased $1.7 billion or 0.5 percent to $328.6 billion. This was also at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 1.0 percent March increase.

[jigs]

"We’ve had pretty good Q1 earnings and if we can put in something that looks like a bottom in housing, knock oil back down under $100 and put the dollar back on track, our markets are going to start to look downright sexy to foreign investors!"

- Have you tried Stand-up comedy before. I am sure you will make a killing there... - Looser !

[Don'tbelive thehype]

The drawdown last week wasn't as dramatic as everyone is claiming. If you look at the total stocks in the EIA's oil inventory report, we only had a total stock loss of about 700k barrels. Basically, refiners turned the oil into products (mostly propane and plastics components)

[Philip Davis]

Durables - not great but BTE. Unfilleds are interesting and inventories are an issue with the GDP tomorrow.

SUN - We know they have problems so we took the 30% gain off the table, VLO was a double and we're out of that too.

Looser than what Jigs?

Drawdown - Don't forget that retail stations were stocking up for the holiday too. That won't be reflected this week but next week the disappointing weekend driving might cause some serious blowback. It's ridiculous anyway when imports drop 696Kbd and they try to say there's tight supply.

[crimfunk]

FTO is the bomb.

[omooc]

I think a reader should not post uncomplimentary comments that merely reflect that reader's own unsubstantiated views. After all, Davis is generous to share his personal views -- on a daily basis, no less. If one does not even know how to spell (and, to this reader, English is not his native language, I apoogize for poor language usage), one's credibility is further diminished, approaching zero as the limit.
Phil, keep up the good work. We enjoy your daily posts.

[bill d]

Gotta watch out for those petards ('I apoogize for poor language usage'). Some folks just like to bitch about Phil & Shedlock. Don't know why they continue to do it. If they are so damn knowledgeable why am I not seeing them as authors ?
They also delight in taking things out of context - they really need to read the ENTIRE article and not just stop as soon as they read something that sets them off.