Options Trader: Monday Outlook

Oil is at $142.50.

That’s it, I can end my column there.  What do you think is going to happen with oil over 100% higher than the high of Q2 last year?  You can cut back your consumption by 30% but if they drive the price to $200 a barrel, you’ll be just as broke - only 30% less mobile than you were.  This morning we had the usual pre-market Nigerian rebel attack…  Well, that is to say according to CNBC, there was a platform attack in which 5 people were killed.  I’m still waiting to see it pop up on a legitimate news source but I think it’s just another case of CNBC reading Wednesday’s copy by accident on Monday, ahead of the scheduled attack.  These mix-ups occur frequently in the summer when Rent-A-Rebel requires advanced notice of all attacks so as not to conflict with vacation schedules…

Don Harrold made a scheduled attack on the Fed over the weekend and I can’t say I disagree with him at this point.  Certainly the free market couldn’t possibly screw the people of this country more than an active Fed has been doing lately.  The only possible way I could find a legitimate justification for the Fed’s actions last week was if they KNOW, for an absolute fact, that the oil bubble is about to collapse and they are leaving liquidity in the market in order to lessen the devestation of the now $6Tn energy sector dropping 30% in short order. 

With oil at $142.50, it seems more likely that Don Harrold is right and even Cramer was right, after he was wrong, and then right, and then right even though he was wrong…  I spent the weekend reading lots of different viewpoints on the market and my conclusion is - nobody has a clue what’s going on so I may as well stick to my guns.  My position is:  I think the markets are oversold.  I think that the woes of the world are entirely due to commodity prices, particularly oil, which is sucking up 10% of our Global GDP and 30% of the planet’s disposable income, taking much needed money away from housing as well as goods and services.  I think the price of oil is greatly exaggerated due to speculation and I think that the price is unsustainable.  That is the crux of my bullish premise so if oil keeps climbing here, I can’t be bullish.  

This isn’t about the dollar, the dollar was just 3% higher last November when oil was 42% lower.  As I mentioned in today’s article on the dollar, the entire S&P 500, when measured in the price of oil, is off 62% from last June - that’s a pretty steep decline!  The S&P’s value peaked out recently against oil in Jan ‘07 at 26.88 barrels of oil to the index (about 1,425/53) .  On Friday’s close, you could get just 9.07 barrels of oil in excahnge for the index.  That is a 66% decline from the peak - isn’t that enough of a sell-off in the value of US companies?  If oil goes to $200 a barrel and the S&P falls another 20% we will achieve an exchange of just 5 barrels of oil to the index, another 40% effective decline in the S&P and we will have cut the value of our market by 80% to OPEC, who use oil to create their wealth.

That’s how bad this situation is folks yet you allow it to go on every day that you don’t do something about it, don’t make other people aware, don’t ask your elected leaders to act.  This is your country that is being sold down the river, one barrel at a time while this administration tells you that more drilling, not less consuming, is the answer.  This country does need to become energy independent but it is much faster to conserve.  In WWII, rationing cut our use of fuel by 25% almost overnight.  I’m not saying we need to ration, but we sure need to start getting rational!

Asia continues to feel our pain as the Nikkei drops another 0.5%, most of it in a very steep drop after lunch, back below the critical 13,500 mark.  The Hang Seng flatlined for the day, holding the 22,000 line (down 50%) while mainland China dropped another half point and India took a 2.5% hit as banks fell out of favor around the globe. 

Over in Switzerland, the Central Bankers got together to talk about inflation, and the European markets are very mixed this morning, with the UK up a point and Germany down half a point.  Eurozone inflation hit a record 4% and is driving the dollar further down as EU bankers HAVE to act to get back to their 2% target zone.  The Bank of International Settlements issued their annual report from Basel yesterday and they paint a dire picture for the global economy, stating we are at a "tipping point" where further increases in oil and commodity prices can lead to a global collapse and "urged most central banks to raise their key interest rates. ‘With inflation a clear and present threat, and with real policy rates in most countries very low by historical standards’."

At home, things are going to be simple - our markets will do whatever oil doesn’t, there’s not enough data to suddenly buck that trend.  Even the cost of rebuilding the World Trade Center has gone up 50%, "just" 6.5 years after GWB promised to do everything he could to help NY get back on its feet, the only thing we can say is thank goodness we’re not New Orleans - those guys REALLY got screwed! 

We’ll be hoping to rebuild our portfolios this week but I’m expecting a flatline into the holiday with the real action coming next week as earnings season kicks in.  Would I like to trade a barrel of oil for a share of IBM (IBM) plus $20?  Sure I would!  Would I rather have 10 shares of Apple (AAPL) or 8 barrels of oil, 21 shares of Boeing (BA) or 5 barrels of crude, perhaps a share of Google (GOOG) in exchange for 4 barrels?  Things have certainly gotten crazy but I think a prudent investor can skip a couple of $75 fill-ups to buy some Valero Energy (VLO) at $40 or Intel (INTC) at $21 - there are so many things I would rather have than a barrel of crude and I don’t think the speculators will be far behind me, now that we’ve knocked the S&P down 67% to the barrel.

 

Comments

[HardHead:]

Don't forget to mention that Godfather Goldman sold 23% of their XOM last week after pumping! After listing to Jim Rogers last week I think we should put him at the FED. GREAT Article Phil!!!

2008 Jun 30 09:45 AM

[Prudent Man...:]

As long as Obama stays strong, oil prices and other commodities will continue to rise and the economy and stock prices will continue to fall. Look at the correlation!

Obama is an economic and security disaster and the large international investors know it. McCain is not that good, he is a Senator so he is not experience in getting anything done but get re-elected, but he is not a disaster like Obama.

For the readers who do not have the experience of the Great Depression, as I do, you may have your chance if Obama becomes our president. He can print money only for so long as Germany realized too late in the twenties.

Politics today is not a spectator sport. I am an old man so this affects me little. But those with young families better get involved or they will suffer the consequences.

2008 Jun 30 09:49 AM

[fatcat:]

Phil, I love the way you think,but you're wrong on New Orleans...With what they threw at that city,you could have bought a nice new house for every family down there!!

2008 Jun 30 09:52 AM

[junkyarddog:]

Call me crazy, but I think this is all by design. No, I'm not a conspiracy theorist! I simply don't believe there is too much mystery behind the scenes.

1) Steep decline of the US dollar since 2003.
2) Mortgage rates at 1% variable, no money down to buy a half mil house (what did you expect?) Mortgage meltdown!
3) USA losing "market share" in the world
4) China's meteoric rise and influence
5) The EURO slowly taking place of the US dollar
6) US debt: 9 trillion and still counting
7) Lastly, war in Iraq.

So, if you look at this picture, what is the simplest 'solution' to the US problems?

I say, the US tells its creditors: you want US dollars, we'll give you US dollars! Inflation. Another benefit: kill the EURO. Lower the dollar and give free money (2%) to banks and help exports. Didn't the Japanese automakers do that to us in the 70's and 80's with their cheap and then piece of junk cars? The weak yen helped them. Cheap dollar helps the US in the short and medium term. Look at our trade deficit shrinking (discounting oil, minor detail...).

Italy, France, and Spain are struggling with the strong Euro, yet ECB is talking about raising their interest rates. You bet these countries won't be happy about that and it'll hurt their ability to compete in the international markets.

And then oil. What a better way to slown down the economy, make people forget about the war in Iraq, and help JP Morgan, Goldman Sachs, and the rest of the gang to recoup their money from the mortgage meltdown? What a better way to slow down China, even if momentarily? What a better way to restart drilling offshore?

In the end, look at who benefits the most with all of this. Is it OPEC? Maybe, but I still think they're peons. Could it be more power to Congress? Didn't Rep Watts already propose nationalizing the oil companies? Doesn't the SEC & FED have more controlling power and increased jurisdiction than ever before?

In the end, this is all my guess and it could be all crap. I simply believe there's too much "coincidence" on all of this. It could be very well our leaders are that stupid and this chaos is random.

2008 Jun 30 10:02 AM

[marcos:]

Your article is spot on. Has Congress EVER done anything timely or effectively? Now that they are 'investigating' speculation in oil as a 'possible' culprit in price hikes (too little too late as usual), it will be a clear road for a long time for speculators to romp with abandon in the oil and commodity pricing game. That's the frightening fact.

2008 Jun 30 10:30 AM

[secmaven:]

The most recent spike in oil looks like short covering. Until the shorts come back into the oil market it is clear sailing to the upside as index funds and other investors stake their positions. Commodities are where the action is and oil is at the epicenter. The ETF/ETN industry has a marvelous array of products aimed at John Q. Investor. Money will flow in that direction.

2008 Jun 30 11:07 AM

[rono:]

I think the real problem lies with our so called vice president who's former employer,haliburton,ha... all the contracts in Iraq or sub-contracted thur other companies, and then,what george bush sr.could not do with with the so-called wepons of mass destruction, George W. has buried us with mass debt!! And we still have yet to receive a barrel of oil from Iraq!!For those who watched 60 Minutes last nite,the christians in Iraq have either been killed or left the Country!! enough said,I think you can get the picture!!!!!! Pray For Us

2008 Jun 30 11:39 AM

[Philip Davis:]

Hardhead - I would love it if you have links to that GS action.

Prudent, I think you may be mixed up (understandable at your age), Hoover was a Republican, Roosevelt was a Democrat who cleaned up the mess. Nixon/Ford sent this country into a financial crisis, Carter tried to reign in the madness and was quickly replaced by even the even greater spending madness of Reagan/Bush the 1st, who were Republicans who oversaw the first major debt expansion and the S&L crisis. Cinton was the Democrat who cut spending and raised the country out of the gutter.

The Republicans haven't been the party of restraint since Lincoln and they shot him and then the "radical republicans of Congress" tried to impeach him for violating an act they passed while he was President. They replaced him with Grant, who was the puppet president who ushered in the age of carpet-bagging and created a financial crisis through greed and exploitation that was so excessive that the Republicans were voted out of power in his second term. Sound familiar?

Also familiar was the "Black Friday" crisis under Grant in his first term where gold speculators wrecked the markets while Grant waited for thier OK to "fix" the markets. Another good one pulled under Grant was the "Whiskey Ring" in which over $3M in taxes were stolen by high government officials. The leader of the gang was pardoned by Grant.

There were MANY other sickening abuses of our democracy under Grant - he was the template for the modern Republican administrations you worship today, a puppet leader controlled from behind the curtain by the powers that be...

Junkyard - I agreee. I wrote an article called "Burn Dollars to Fight Gravity" pretty much on that subject and predicted this would be the policy the administration would pursue under Paulson back when they first picked him. I just never imagined they would push things this far!

Unfortunately, oil is the only "safe-looking" place to put money with everything else melting down.

Don't even get me started on Cheney Rono!

2008 Jul 01 05:56 AM

[me3tv:]

Prudent man is not all wrong. Take a look at who was running congress in those years of R presidential profligacy. The current massive deficit can be traced back to the vote that took place in November of 2001 in which other people entirely decided how America and the world would spend their money in the next decade. A few disasters and a couple of wars later with loose money to float all the effort - well, here we are.

2008 Jul 01 09:45 AM

[ohm:]

Energy Independance: Carter killed nuclear, Clinton gutted the military and taxed us to death, G W Bush using the best info available took on Sadam but could not find his stash of WMD.

Are we any better off ? Iran would love to take over Iraq in a heartbeat and with the oil they already have even our military couldn't fill the tank in a tank.

Skip ahead to November: IF we can turn it around in Iraq Israel stays on the map, the price of oil drops below $100 /bl , the middle east cools off, no more twintowers, we drill where we need to, we use wind, nuclear, coal, geothermal, hydro, tidal, solar, biofuel where they're profitable and we move away from oil as fast as we can (decades).

2008 Jul 01 11:04 AM