Options Trader: Tuesday Outlook

Oil is at $142.50.

As I said yesterday, what do you expect to happen when a tank of gas costs $70?  We were hoping for some relief but we are not getting it.  Every sell-off on the NYMEX, like the one yesterday that dropped oil back below $140 just 5 minutes before the close, is met by an after-hours pump that takes it back up.  Congress is on vacation and the speculators are going wild, driving the prices to new records.  Note the spikes in the price of oil, EVERY SINGLE DAY as we approach the close at 2:35.  Note that 75% of the week’s gains come in pre-market trading while only 1 day in the past 4 has had a close that was higher than the open - yet oil climbed $4 in 4 days!

I mentioned last night that Bush debased our currency further yesterday, taking advantage of Congress’ recess to authorize a $163Bn war spending program and to postpone a Democratic proposal to rein in Medicaid costs that had broad bipartisan support and was due to be implemented today.  All told, those two acts alone raised our 2009 (starts today) budget deficit by over $200Bn, giving us a whopping $600Bn shortfall for the year.  This is causing foreign investors to throw in the towel on America pre-market and our stocks are in free-fall this morning.

On the banking front, Lehman (LEH) adamantly denies the rumors that knocked their stock down 11% yesterday and 20% since they were floated last Wednesday, which also drove the whole financial sector down another leg.  LEH is, in fact, investing $3Bn in small hedge funds and is attempting to do business as usual even as the hyenas circle around them.  As with BSC, it doesn’t have to be true to kill the company and a crisis of confidence can force them to sell.

The Nikkei had another wild up and down day and, once again, ended up going nowhere at 13,463.  The Hang Seng was closed for a holiday but that didn’t stop the Shanghai from falling another 3%, down to 287 now while India had another nasty 500-point sell-off (3.7%) and finished below 13,000 for the first time since last April.  Banks in China were trading limit down on expectations that the PBOC will raise rates to fight inflation and the property market pulled back as DIS denied rumors which have been driving that segment that they will be building a theme park in Shanghai.  Japan’s manufacturers’ confidence is shot due to high oil prices.

It was Europe that tipped the morning markets as very poor manufacturing data combined with a 6% fall in UBS dragged the markets down to the 2.5% rule across the board.  UBS bowed to pressure and adopted new corporate-governance rules and changed their board but that isn’t stopping the US Justice department from attempting to force the bank to turn over the names of US clients who are involved in a tax shelter scandal run by UBS.

The U.K. manufacturing index slumped to 45.8 in June, its lowest level since December 2001.  "We cannot underline enough how appalling these survey findings are for activity in the manufacturing sector — a sector we had hoped would prove one of the more resilient sectors of the U.K. economy," said David Page, an economist at Investec Securities.

Way back at the beginning of the year, I predicted that American Equities would be the "least sucky" place to put our money in what we expected to be a very sucky year but what I should have said is "THE Americas" as this side of the globe has clearly kicked the collective asses of European and Asian markets by a wide margin.  In fact, on a dollar-adjusted basis, our markets only appear to be down 2% to a global investor in Q2.

Does that mean we are flattening out or that we have a long way to fall?  Is sucking less going to be good enough to bring investment dollars back to US equities?  Perhaps, it’s how we pick most of our leaders, so why not our investments…

While this morning is very disappointing already, the real question is "will we hold our levels"?  It doesn’t matter what the Dow does because it’s not the same Dow as we measured last year as Bank of America (BAC) and Chevron (CVX) have been substituted for Altria (MO) and Honeywell (HON).  MO used to be an anchor for the Dow and would typically outperform in a down market.  While CVX has posted an 8% gain for the year, BAC has dropped over 40%, exerting a tremendous drag on the index.

Other Dow zombies include General Motors (GM) - who are down 40% this quarter and off 54% for the year, AIG (AIG) - 38.8% for the Qtr and 55% for the year, General Electric (GE) - off 28% this Q and the same on the year, Citi (C) - off 22% this Q and 43% on the year, JP Morgan (JPM) - who took a 20% hit on the quarter, Pfizer (PFE) - off 16%, and Home Depot (HD) - down 16% for the quarter.  The only "good" stocks on the Dow this whole year are:  Walmart (WMT) - up 18%, IBM (IBM) - up 9%, Chevron (CVX) - up 6% and Caterpillar (CAT) - up 2%.  That’s it!  Boeing (BA) had an accident in South Carolina that will delay the Dreamliner and that should knock them to new lows today.  The Dow is off 100 points this morning as of 8:30.

This morning’s move is the move we wanted to have yesterday, a nice morning sell-off to close out the quarter, giving us a final flush to buy into.  We didn’t get it then and I have to say I’m undercovered today, especially after taking a chance on Apple (AAPL) into yesterday’s close.  We will get many retests this morning, including Apple at the $165 line, and it’s going to be very hard to get a good recovery with the market closed this Friday and Thursday being a 1/2 session so I suppose we’ll have to do a little capitulating if we can’t hold our 20% levels from Thursday’s Big Chart.

I will be most concerned with the Nasdaq holding 2,289, the Russell holding 684 and the AMEX holding 2,230 as they have been holding us up for the quarter.  The Dow finished yesterday just below the 11,354 20% line and the S&P has cushion to 1,261 before hitting that mark.  The NYSE has the most breathing room, with a 20% level at 8,310, but that can break too as we are being subjected to the same old noise about:  Recession, Iran, The Banks, Commodities, Inflation, The Auto Industry, Unemployment…  All the things that were bothering us since last year, when I ran this picture with the Dow at 14,000.

As we sit here at 11,200, with the media treating everything old like it’s new again, I have to say the only variable that has really changed is oil, which was "only" $80 at the time.  A 50% increase in the price of oil has sent the industrials tumbling 20% since then and if we are going to continue to have oil punched up $2.50 a barrel between one day’s close at the NYMEX to the next day’s open, then how can we ever expect to recover?

 

Comments

[omooc:]

Good comment on Dow component substitution. Technically, past years' Dow data should be recast using substituted components. Is there such a study?

2008 Jul 01 10:03 AM

[DamonRich:]

What accident at the South Carolina plant for Boeing? This has not been reported nor does it reflect in the stock at this point.

2008 Jul 01 11:45 AM

[buyforeclos...:]

I am disgusted by the lack of action by our government. The housing industry is screwed and nothing is going to change that. The Fed must shore up the dollar by raising rates 1/2 a point and buyng dollars. THIS will send oil down and the stock market up. Otherwise we are going to be screwed both in housing and stocks and really be in trouble. BUSH should be in prison... bot just for al lthe lies, illegal war, but stupidity as well: the moron just sent the dollar into further decline the other day. If brains were dynamite he couldn't blow his nose

2008 Jul 01 12:33 PM

[Philip Davis:]

I don't know of a proper Dow study. The S&P routinely changes components too and the Russell just rebalanced but with the Dow just having 30 components, you really can't just go pretending it doesn't matter when you trade 2 in, especially with their whacked out weighting system - that in itself could have used an extensive study to figure out what the hell they did.


SC Boeing: www.bloomberg.com/apps...

I would understand the lack of action by the government if the situation was insoluble, but it isn't. It just takes firm action and some vision. Unfortunately, those are things we are very short of in our government.

2008 Jul 01 05:54 PM

[fatcat:]

Phil,you are the man..I googled the hell out of boeing accident sc and found nothing.You should be an Indian scout...very impressive!

2008 Jul 01 06:12 PM

[jakw:]

Options trader was wrong yesterday (7/1) and he is wrong most of the time. Reason: He blames BUSH for everything thre market and dollar value does. (Surely he didn't knoew any of the 3000 people who were killed on (9-11). Face it, you can not follow the script of partisan clap rap and invest wisely.

2008 Jul 02 09:02 AM

[Jakeoff:]

Jake, do you know know of the 4000 plus US boys and girls dead in Iraq? Can't make money being a fool.

2008 Jul 02 09:18 AM

[David M:]

Iraq War spending = high budget deficits = weak dollar = expensive oil. BTW, the fanatics who attacked us were from Afghanistan and Saudi Arabia.

The math is not partisan. The timeline is not partisan. Bush/Cheney policies got us into this mess.

Another important point was touched on. We've lost more Americans and spent more money in Iraq than we lost on 9/11/2001. So what "message" did we send to the world; that no one can hurt us more than we can hurt ourselves? Yeah, that'll show 'em!

2008 Jul 02 09:40 AM

[jackooo:]

Philip Davis....
"Bush debased our currency further yesterday, taking advantage of Congress’ recess to authorize a $163Bn war"
You are so off.... C O N G R E SS voted for that. Not one man. You have to get in touch with reality.

2008 Jul 02 12:37 PM

[jackooo:]

buyforeclosu

You talk about Bush being a moron? Look at yourself first.
The Federal reserve is independant. Bush nor congress controls it.
You talk about an illegal war. The Democrat MAJORITY funds the war, not Bush.

2008 Jul 02 12:47 PM