Options Trader: Tuesday Outlook

So many cheap stocks in such a horrible market!

It is very tempting to hit the buy button.  We’ve been waiting to deploy some more cash since Thursday the 12th, when I thought 12,000 made a good bottom, but this morning it looks like we will open over 200 points lower than that and we still haven’t added many new positions.  I wrote last night about what I think is going on this week and we’ll have to wait out the week to see if this is simply "window UNdressing" to close the quarter or something more serious.

Oil is relentlessly holding onto the high $130s (also discussed last night) and there is little chance that we are going anywhere without some relief on that front.  MJ provided a very interesting set of videos to members last night of a lecture by Lindsey Williams on "The Energy Non-Crisis" and it’s well worth watching to give you some perspective of the other side of the oil story from people who’ve worked inside the industry. 

No one was buying in Asia today as the Hang Seng fell 258 points and the Nikkei was flat in a very choppy session.   The Shanghai picked up 2.2% and held 300 again (301) and we were buying New Oriental Education and Technology Group (EDU) yesterday as it hit the ridiculously low price of $60 a share so I imagine there is lots of bargain hunting going on in China.  Honda (HMC), who I mentioned last week, seem to have put in a bottom at $33 and we’ll be keeping an eye on them for a play today.  Pakistan’s market finished the day up 8.6% but don’t get excited about it - the Karachi Stock Exchange issued a 30-day ban on short selling to stop the slide!

Europe is down about 1.5% in morning trading as oil ticked higher and destroyed what looked like a rally in early trading.  It looks like $137.50 is the point at which the markets break now.  There was good news in French consumer spending and auto sales but it all went out the window as oil went up!  Barclays (BCS) is raising $7.9Bn from Asian and Middle Eastern investors but, overall, the ECB seems to be falling into the same stagflation trap we have gotten ourselves into.

Iceland is officially in a recession, it’s first in over 20 years, with a 0.4% drop in GDP after rising 5.3% last year.   This forecast is down from 1.8% growth that was predicted as recently as March and does not bode well for other European economies. “We now see much slower consumption growth accompanying the ongoing housing correction and the less favorable international environment,” said Alan Barrett, an economist at the Economic and Social Research Institute. “The longer term picture for the economy is the same, but the bottom of the downturn is deeper.”

To combat a recession in this country, General Motors (GM) is taking a page out of GWB’s play book and is giving money away to try to get people to buy their crap.  With auto sales through June running at an annualized rate of 12.5M vs. 16.3M last year (down 23%) and GM down to a market cap of just $7.8Bn, or about 15 days worth of Toyota’s (TM) sales, GM has decided to mortgage what little is left of their future by giving customers incentives like zero interest loans for 72 months and rebates of up to $7,000 to please, please, PLEASE drive one of these things off the lot…

According to the WSJ: "An investor who wants to buy credit protection on $10 million in GM’s bonds for five years currently has to pay $2.8 million upfront and $500,000 annually for that insurance, through what are called credit-default swaps. A year ago, that protection cost only $400,000 annually, with no upfront cost, according to Credit Derivatives Research LLC."

The need for an upfront payment means the market regards GM as likely to default over the next few years. Based on market prices, debt investors currently see more than a 70% chance that GM will default on its obligations sometime in the next five years, said Boaz Weinstein, co-head of credit trading at Deutsche Bank AG.

I have been calling for years to replace GM with TM on the Dow, as GM gives us no indication whatsoever of the health of the US economy.  The company has been a disaster for years and as recently as 2006, GM was pushing their light truck strategy and last month, with sales of such vehicles in free-fall, GM’s share of the U.S. vehicle market sank to 19.4%, according to Autodata Corp. — the first time in a half century or more it was below 20%.  In May, GM’s U.S. sales of trucks and SUVs were 37% below those of May 2007, the biggest decline in the segment among the major auto makers.

Let’s see if we can hold our January and March lows - it’s not much of a goal, but it’s all we can hope for today while we wait on the Fed!

 

Comments

[junkyarddog]

Phil, holly smokes, I just watched the video you mentioned in your post, "The Energy Non-Crisis". What is true and what is not? What is your view??

The speaker predicted in October 2007 that we'd paying 4 to 5 dollars for a gallon of gas "very soon". So, if this is all true, is there any way oil is coming down even though we have plenty of it (according to the speaker)?

[vodka]

expensive rate for credit protection....rather stay away from GM if you wanna build a large holding....although for small amount you could forego protection....market going down boys ;)

[Commodity bubble proponent]

Phil,

Just a few thoughts on some of your earlier posts.

The whole point of oil futures, like options, is to allow for producers and consumers to come together and trade oil.

In a contract in any other industry, when you enter into a contract, one person buys oil, the other person sells. If one party defaults on the agreement (which is basically what rolling the contract forward is), then they owe the other side of the transaction their entire deposit. If the producer defaults on the deal, then they are responsible for paying recourse to the buyer. End of story.

This is how real estate, buying a car off of a factory line, major purchases by industrial users, and conceptually how a futures contract should work. If there is no recourse (penalties for breaching a contract), the entire market is a complete fraud because both sides of the transaction could be lying through their teeth.

The game is completely disconnected from economic reality. It's basically like me selling you a 5 star hotel I don't own that you won't buy, and then the entire hotel industry uses that pricing as a basis to set the rents on their buildings. This game would work for awhile until all of the sudden supply and demand catch up to you. Sound familiar?

The Enron loophole allowed parties to enter into bilateral agreements between parties that don't have any crude oil between them which have then been used as market comparables for the pricing services(Platts, etc.).

These issues are easily regulated without really impacting the "free market", margin requirements, position limits, etc.:

1. Recourse for the other party in a cancelled future contract. If buyer rolls the contract, seller gets his margin. If the seller cancels out of their deal to sell oil, buyer gets a recourse fee.


2. Any publicly traded company that clears OTC trade swaps on a non-approved market will face fines of several millions of dollars/transaction per dayl.


3. The buyer and seller must use an independent clearing house for oil futures transactions. This would stop the conflicts of interest where goldman acts as the seller, takes a fee for clearing the contract, and then loans the money to the buyer for the contract.

4. The independent clearing house can not loan money to either party to complete the transaction.

These are pretty simple benign changes, but it would fix the issues of non-recourse contracts.