Options Trader: Thursday Outlook

Wow, now we are looking at a good open!

The ECB did, as expected, tighten rates by a quarter point, now 4.25% to our Fed’s 2% and our payrolls were indeed down 62,000 jobs with 5.5% unemployment and May was revised DOWN another 13,000 jobs to minus 62,000 as well.  All this was worse than expected with manufacturing and construction losses of 69,000 jobs were combined with 51,000 lost "Professional and Business Services" jobs and those were offset by 29,000 new government jobs, 15,000 Health care jobs and 7,000 service sector jobs.

So, the short story is you are losing your job and becoming either the foreign health-care worker you once hired to watch your granmother or you are getting your government paycheck by working for the man who has expanded government more than any TWO Presidents in US history.  The good news is wages went up 3.4%, we need some wage inflation to pay for the gas to get to work!

Hopefully, all this bad news is already baked into the cake and we can limp into earnings next week with our heads held - well, not exactly high but not quite on the chopping block just yet.  Earnings are either going to set us free or be the executioner’s axe that will destroy the markets in an Asian-style melt-down that will hit this country like a tsunami from which we will have a very hard time recovering.

I laid out my bullish premise in last night’s wrap-up and let’s focus on that ONE THING which can turn these markets around.  It is a very rare opportunity to have a reliable signal that will let us know when it’s a good time to commit so let’s stay on our toes and stick with the game plan.  Three quarters of the global economy is indicating they are serious about fighting inflation - no need to guess who the jokers are in the eyes of the world but, gluttons that we our, we are only 300M gluttons and we can only consume 25% of the world’s resources - believe me, if we COULD consume more, we WOULD consume more!  We discussed during the last G8 meeting that Bush was given a month or so to take action after which the World would move on and let him twist in the wind and tha’ts what’s happening.  Too bad it’s US that pays the price for his lack of action…

South Korea is having violent protests and strikes as inflation has exacerbated resentment about wealth concentration and limited opportunities and left Koreans yearning for the good old days of socialist military dictatorships . "Democratization has been a disappointment," says Yoon Geum-soon, who runs a small fruit farm and is active in a women’s rights group staging protests. "All the wealth goes to a few people, while others work hard for too little."  Its very sad that a Korean fruit farmer has a better grasp of economics than the average US voter.

The World Bank is calling on the G8 to do more to fight inflation and the G8 meets again in Japan next week so we’ll see how that goes.  The Hang Seng dropped another 2% this morning (461 points) giving them a down 1,600 point week (7%),  The Nikkei recovered from a steep drop at the open and finished the week down "just" 350 points, right at the 2.5% rule.  The Shanghai gained 2.5% on the day but still finished the week below 300 at 295, still down over 50% from their highs.

Europe had a terrible downturn yesterday and is improving back to even off a terrible open this morning.  Trichet’s remarks were somewhat comforting to the markets and the key is to let them know that the ECB is on top of things so they can move on with their investing.  Mission accomplished there!

Today is a short session and it wil be a real disappointment if we don’t get somewhat of a bounce to float us into the weekend.  If oil goes over $145 I think we’ll go red but, other than that, it’s bargain hunting time.

Comments

[junkyarddog]

Phil, I read your articles daily, with great interest. Reading what you have to say is the information I look forward most each day.

Allow me to take a "contrarian" view: the weak dollar being good for the US economy. The weak Japanese yen allowed Honda, who only manufactured motorcycles until 1968, to eat alive (destroy!) Detroit in the 70's and beyond. Why? They sold their cheap piece of junk Japanse cars and collected the sales in dollars, strong at that time.

A weak dollar boosts US exports and creates opportunities. Low interest rates keep things moving. The worst we can do now is slow even further our economy with higher interest rates AND increase unemployment. If people don't have jobs, yes, they won't buy oil, but... they won't pay for their mortgages either.

Now, ECB raised rates. What do you believe is going to happen? Stronger Euro, weaker dollar! Whose products then become more competitive in the market? America's.

A weak dollar raises the oil price - so they say -- but let's face it: fundamentals are not playing a role here. The dollar can go 1.30 to the Euro and the oil barrel price will stil increase. So, forget fundamentals there.

Thanks again for you incredible articles every day. You definitely make your readers think!

[who]

junkyarddog

interesting, but a weak dollar has meant almost all commodities which are traded in US$ has increased hence US products are not cheap.

can GM sell cheap cars to rest of the world?

[junkyarddog]

who: It's not only about commodities or automobiles. I was thinking more in terms of services, which get cheaper for America to sell out there. The US is having record exports and I'm not sure if it's a good thing to stop this trend.

Europe will hold off inflation (so they hope) but at what cost? Their already slow economy will be even slower. Then their unemployment will rise and they'll be risking an even steeper recession.

It's a tough choice, but personally, choosing between a) having a job with inflation or b) be unemployed with no inflation, I prefer having a job ("a").

I know economic purists, especially the gold bugs, think the job of the Fed ought to be only to protect the dollar, making it strong. Question: what good is a strong dollar in the middle of a depression?The Fed also needs to foster economic development and this balance is tough. I'll be the only American out there saying the absolutely outrageous, I even risk being lynched: given the circumstances I believe Barnanke is doing a good job. There, I said it. :-o

[Philip Davis]

Thanks junk! Yes, who is right, the Japanese did not cause runaway commodity prices by trashing their currency and they were getting paid with what was, at that time, the world's best currrency which they would use to buy steel and such to make more cars and such...

What we are doing, and I wrote an article called "Burn dollars to fight gravity" which you will like, is printing up more and more dollars in order to get ourselves out of debt but the energy speculators siezed on this plan (that was hatched by GS former CEO Paulson and taken advantage of by GS currently) to divert all those extra dollars into commodities, tripling the price of commodities on a 40% decline in the dollar. That still net's out to them as an inflation-adjusted 100% increase in what they get for the commodities.

Also, what's really great is that we get nothing of lasting value for out dollars since this country produces virtually nothing (other than homes, which they crashed first to put a stop to it) so we are spending and spending and spending and accumulating no assets for it and the government goes further and further into debt to keep the whole charade going.

In the end, GS/MS et al hope to be the last men standing when they pull off the deal of the century and broker the restructuring of our $10Tn national debt as our creditors fear we will slip into bankruptcy. They could easlily collect a $250Bn fee for that and eliminating BSC and LEH along the way (and C if they can) means that pot will be split less ways.

Cash is good Blink, we're mainly cash and giving it to earnings to see if we can break oil and get some good news, otherwise it's off to Vegas to do some real gambling!

Al - Yes, two weeks ago (6/13) I called a bottom. I also shamefully called a top in September at about 13,800 and 3 weeks later we went over 14,000 where I continued to say we were too high and people just like you (was it you) said the same kind of things.

Since we run diversified portfolios on our site, it isn't the sort of thing we shift on a dime from day to day. We have actually committed very little additional cash this month despite my desire to as we look for a proper bottom but if it somehow satisfies you to say "wrong, wrong, wrong"


I don't know what your deal is - clicking on your name shows that in Aug '06 you said "Phil, Thanks for your response. I have been enjoying your posts for almost a year now. You have lots of good ideas and a refreshing take on things. Hope you keep them coming. Aug 20 06:54 PM"

I guess you must have lost your smart ass on Sept 24th when oil was below $70 and I said it would go up (after we had correctly called the sell-off) and you said "Wow, are you finally capitulating on your bearish stance on oil after all this time?... Maybe I should think about shorting it now... "

Oh I see, it must have been Sept 28th, with the Dow at 13,895 when I recommended puts on the DIA and you corrected me by saying "Why puts on the DIA?? It's a mega cap, diversified index that is easy for i-banks to move around? These are huge companies with enough moving parts that they can print any number they want at earnings time (at least for a couple qtrs). " Yeah, I'd be embarrassed too to be that totally wrong trying to call someone else out. Sorry about that...

I also love your May 21st statement: "I think in the long run higher energy prices are the best thing that can happen to this country. I hope it goes to 200.00 a barrell. " So far so good I guess...

May 23rd, still on topic: "Here is a tip Phil. Take everything to do with oil off your screen. It isn't really as important as you think! You need to move on because its getting really pitiful."

Gosh thank goodness you explained to me oil wasn't going to be a big problem for the markets, you are really being borne out by the action since then.

I have no problems with people who wish to engage in an intellectual debate on a topic but when you make comments like "Everyone reading this needs to know that Phil is full of shit and just trying to promote his subscription based website. (June 13th)" then it says a lot more about you than it does about me.


Have a happy 4th everyone (else)!

[DonaldRay]

Sounds like Phil uses his position as a forum too attack President Bush...when he should be attacking the courts and congress.

[saifl]

Hey Phil [Comment edited for abusive language. Commenter put on notice] you still have not answered my question. How come Natural gas is up more than 80% this year with the largest net speculator short position?
How come Sugar is down 45% from 2006 with Speculators being long all the way?

[Philip Davis]

Oh I get to them all Donald, it just takes too long on a daily basis!


Saifl - Obviously you are too lazy to do your own research or just like misleading people with your ridiculous comments. Facts are here: in.reuters.com/article...

I would suggest you go and do some research next time before embarrasing yourself again but your "body of work" speaks for itself: seekingalpha.com/user/...

It is interesting to see the same people appear over and over again in rabid defense of certain positions. Nonetheless, you have inspired me to write up a primer for how oil is mainipulated through the buying and selling of relatively few contracts, I think it would be helpful for people to understand and something we can get before Congress when they reconvene next week.

[saifl]

seekingalpha.com/artic...
This is hilarious.
By the way, do you know how much you can buy oil for in Dec 2012? $67.38 for guaranteed delivery of as much oil as you want. Where is T. Boone Pickens? This is 5 years past his peak oil $200 prediction, he should have a billion contracts at this price shouldn't he? Come on T Boone, let's put some money where that mouth is!"

So much bullcrap there and the price of oil has doubled. Mr Penguin continues to huff and puff. In 2 years it will double again and then again moron phil will talk the same BS.
World oil production is flat for about 3 years now (your fav EIA and IEA stats) with demand rapidly rising in the emerging economies.

[saifl]

Some more bullsh** form pHil [Comment edited for abusive language. Commenter put on notice]
That's right, we have rounding errors in our inventory reports bigger than China's entire daily import consumption! China's demand will grow by 10% (300Kbd, best case) next year? Bring it on! U.S. passenger cars alone consume 10Mb of oil PER DAY, we could save 300K barrels by checking our tire pressure!

Call us when you get to 5M barrels a day, which, at the current growth rate, will be around 2015. If between today and 2015 President Gore raises the mileage requirements for cars from 20mpg to 35mpg (where Europe is now), the U.S. will save more imported oil than China is projected to consume in its entirety! What would the headlines be if we projected China's net oil demand slipping to 0 by 2015?

Russia is doing it's best for China, bumping production up 2.1% this year, that's 200Kbd, almost as much as China's increase right there! Thanks Vlad! Russia, China (they make it too), Nigeria, Venezuela (thanks Hugo) and even Iraq, have ramped up production over the past two years and it is now estimated that there are 2.5Mbd of excess production capacity globally, the most in 5 years. That number is expected to rise to 4Mbd by next year, even assuming a 1.8% (high) increase in global demand. Should the rest of the planet follow the U.S. with a 1.8% DECREASE in demand, there could be as much as 8M barrels overproduced every day in 2008 -- the most in history!
seekingalpha.com/artic...
"Should Saudi Arabia decide to hold back volumes to maintain prices, their proven capacity utilization would probably need to drop to 75-77%, which has historically been a threshold level. While this may sustain pricing for others, it would of course lower Saudi's market share, given that few other OPEC members seem inclined to assist."

8 MPD overproduced in 2008? Wow Phil stroke of genius. What an awesome prediction. And china's demand far exceeded those projections. And oil on its last legs? oil spent only 30 days below the price at which you made this stupid prediction.

[jjason]

saifl,

I read one of your articles on your site. Please do not post on SeekingAlpha anymore because all you do is trash Philip Davis and others.

I really do not want to read your rantings anymore. I have better things to read.

Also, I am AGAINST speculation in ALL commodities. You don't seem to understand that chasing commodities is like chasing stocks...eventually, the bubble bursts and there will be lots of winners and lots of losers too.

Look at the mess caused by "flipping" houses; combined with unaffordable housing prices and incompetent lenders and the MBS, CDO, etc.etc.

Do you live in the United States?

[saifl]

In That case you should be against Phil davis as he is "Shorts" oil. That to me is Speculation.
I trash him not on a personal level. I trash him because he misinforms the public about how serious a problem we have with "peak oil".
I have been in this since $30 a barrel and I have heard all you guys explaining it away with Iraq war, China surge in demand, Weak dollar, refining capacity (lol that was freaking funny) and Speculation.
Do you know which was the best performing commodity from 2001?
It was Rhodium. 99% of the people who trade futures have not heard about it. Because it does not have a futures market. The Commodity bull market has just begun. Like Phil Davis and you it has many detractors which means we are still pretty early.
What do you think happened from 1970-1980? Gold went up from $35 to $850. Sure many called it a bubble after it was up 3X.
It went up another 8 fold after that!.
"Do you live in the United States?"
Yes.

[saifl]

jjason maybe you can explain this
July31st 07 CFTC report, Net Speculator long position in oil 130,000 contracts oil price $72.
June 25th 08 CFTC report Net Speculator long position in oil 12,000 contracts oil price $138.
Speculator positions down by 90% and prices double.
can you explain that on your Speculator theory?

[JimHawthorne]

I am most suspicious of anyone who, as Phil Davis did on Jun. 13th of this year, calls a Market Bottom with such arrogant certainty.
Anyone who subjects this author's views to the slightest and most casual review will emerge a confirmed skeptic.
The European Markets, far from finding comfort in Trichet's remarks, displayed a very common phenomenon: they tanked the next day. Another great call by Davis.