Options Trader: Thursday Outlook

Lots of data today, but the retail sales are already looking spotty and oil is back to $110 pre-market, getting what oil traders are calling a "convention bounce" as they start to believe they may be able to hold the White House next year.

Aside from oil inventories today, which are expected to show a 200,000 barrel build in crude, a 1.4Mb draw in gasoline and a 500Kb increase in distillates (net 700kb draw), we have ADP showing us a 33,000 loss of jobs, much better than the -75,000 jobs in the Federal Employment data.  We will also get a report on Productivity along with ISM Services number and we’ll be looking for signs to offset a pretty mediocre Beige Book, which seemed to me to be based on older data. But we’ll have to wait for the next one to see where the turn comes (if ever).

Speaking of crude inventory and manipulators:  The CTFC is finally investigating whether energy-market players are injecting false data into the marketplace to influence perceptions about crude-oil supply and demand.  This is a scam I’ve been talking about for years but better $2Tn late than never I suppose …  According to the WSJ:  "A company could theoretically underreport barrels in its tanks, for example, at a key hub to suggest oil is scarcer than it really is, and then sell its physical oil at a premium when oil prices jump on misleading news."  Gee, ya think?!?

Pressure on the CFTC to exert more aggressive oversight has mounted lately as Congress has debated whether to require the agency to take new steps to curb abuses or to study the impact of speculation on the market. Several lawmakers have criticized the agency for lax regulation.  The agency previously settled civil charges against a unit of Marathon Oil Corp. (MRO) alleging that company attempted to manipulate the cash price of crude oil through bidding activity on Platts. Enforcement attorneys also have been pursuing a theory that some traders have leased oil tankers as floating storage to make oil inventories on the ground appear less-well supplied than they really are, say attorneys familiar with its inquiries.

That’s not the only noose that’s tightening on the energy markets.  Jack Stanley pleaded guilty to orchestrating "more than" $180M in bribes for Haliburton/KBR (HAL), many of which were under CEO Richard Bruce Cheney (following our PSW policy of using his full name so as not to embarrass other Richard Cheneys who are not evil bastards hell-bent on world domination at any price).  Bribing such officials subjects companies and executives to possible prosecution under the U.S. Foreign Corrupt Practices Act.  The story the administration is sticking to is that CEO Cheney had no idea that $180M was being used to bribe Nigerian officials (oh yes, this is JUST the Nigerian bribes so far) even when he "vetted" Mr. Stanley when he put him IN CHARGE of KBR in 1998.  Cheney left Haliburton in 2000 to commit much greater atrocities for the Bush Administration …

On the retail sales front, August Retail Sales are much like July, with Wal-mart (WMT) taking the lion’s share of the gains with a 3% bump in sales and a very nice 4.2% growth rate at Sam’s Clubs (excluding fuel sales, which dropped the totals by about .2% due to falling gas prices, not a bad thing!).  WMT had conservatively projected growth under 2% and the company raised September guidance sightly on strong back-to-school sales.  Costco (COST) was up 9% in August but JC Penney (JCP) and Kohl's (KSS) had 5% drops which were, nonetheless, better than expectations.  Buckle (BKE) and Aeropostale (ARO) did well, and both are discounters, and that seems to be the theme so far in retail.

Toll (TOL) and Hovnanian (HOV) both posted disappointing numbers last night but neither were devastating.  We dumped out of HOV on the afternoon pop but I’ll be looking to get back in under $7.  TOL’s drop was actually less than expected but their outlook is not exciting.  What is exciting (at 8:30) is that Productivity is up 4.3%, huge gains and double expectations, while Unit Labor Costs are down 0.5%.  These are usually considered good things for companies, which are the things we are buying stocks of - but the market is down huge in pre-market trading.  As I said last night, the market can remain irrational longer than you can remain solvent so we may have to throw in the towel if this news can’t cheer up investors. 

The big negative here is that strong productivity and rising GDP allows the Fed to move to a more restrictive monetary stance sooner and the markets don’t like that AND it boosts the dollar (the ECB and BOE held rates steady, also a dollar booster) which, as I pointed out yesterday, pushes our stock prices lower.  Another negative here is that a 4% gain in productivity means you can make the same amount of stuff with 4% less people - that’s not good for employment prospects and that is reflected already with a 0.8% drop in hours worked, the biggest drop in almost 6 years.  Real compensation fell 1.3% indicating paychecks are not keeping pace with inflation, widening the wealth gap in this country considerably as this data shows the business owners with big gains while the workers make less…  Initial jobless claims rose by 15,000 to a still-recessionary 444,000 for the week ending Aug 30th, that sent the S&P right back to my 1,266 level pre-markets (9 am). 

Asian markets were off about a point yesterday.  Sony (SNE) is recalling 440,000 Vaio laptops but I STILL like them down here as the dollar’s strength will give them a very merry Christmas if it holds up.  Auto makers are seeing something that looks like a bottom and North Korea is citing a breach from the administration as the reason they are moving to reopen their Yongbyon nuclear reactor, something that has also been used to boost the price of oil in the past, which is kind of funny as everyone cheered last night when Palin promised to build nuclear reactors…

The UK markets were holding up but Germany is in a tailspin, dropping another 2% towards their close.  Our man Cheney is in Georgia, dropping $1Bn in aid on our pals and looking to drum up International support, which has been a very hard sell so far.  Signs are that the EU economy contracted overall in the second quarter and the third is shaping up to be a technical recession, their first ever.  Gordon Brown is scheduled to give a big speech on the economy later today.

Our opening looks terrible and all we can do is watch yesterday’s levels and hope they hold.  I’m very disappointed in what I’m seeing. I still think we’re in better shape than the markets are giving us credit for, but that doesn’t help when our stocks are tumbling, so we may have to move to a more defensive stance.  I told members today would tell the tale. Better to test our lows at the open than later in the day, at least …

Comments

[User 143167:]

Philip, I think today's market gives you a lesson, which is :" There is nothing you can actually cheer about the plunge oil price that reflect a deeper global recession."
Now every sectors will be sold-off and the bear market is just about to begin.

2008 Sep 04 12:22 PM

[junkyarddog:]

As far as the White House goes, we all better get used to McSame. I have to give it to them: "Hockey Mothers for Palin Power" is one of the biggest idiocies I've seen in a while, but Palin was the bomb last night. Her appeal was great, and that's all it takes sometimes to win an election.

Give it to the Republicans: politically they're a lot smarter than the dems. Unless, the dems really wanted to lose this election on purpose, as I'm starting to believe.

So, Phil, the oil bouce back to $110 won't last long. Thank goodness the downward pressure is still on.

Your article "The Oil Shortage, and Other Fairy Tales" published here on May 22, 2008 is the best piece of literature published this year. Man, you're good, I just wish you wouldn't hope so much for politics to change significantly the status quo. Not with these candidates. Our options are simple:
a "community organizer" versus a "war monger".

Tough choice.

2008 Sep 04 01:08 PM

[Brad_West:]

You are so right JunkYardDog on the candidate types. My real questions. When will the public get a cut of the money when the CFTC, congress and the rest of the regulators find out that speculators made prices rise on incorrect data from import suppliers that were caught in a make more money scheme. The speculators never bought the oil and the suppliers sold it to the people that did at the high premimum....

I won't hold my breath. Neith one of the candidates are saying anything about that...this is why specualtion and manipulation of data is still going on. If a bank (Goldman...cough...Cha... cough) is found to help cause this they would have to pay a small fine compaired to the billions they made because they don't care and are going to keep doing it until things change. Hummm...they screw us in the mortgage game and get our money...then they get caught and loose everything they get more money from us some other way (oil)...then they go to the precious metals market when oil is being looked at...now they are moving to the corn and grain markets since gold and silver are getting press...wonder where they will go next. Someone needs to stop this crap.

2008 Sep 04 01:30 PM

[Brad_West:]

Hummm...funny...I sart putitng out guilty banks names and it gets removed from the post...weird.

2008 Sep 04 01:32 PM

[BSchecker:]

Oil going down certainly not saving the market today. Goog and BIDU really takking it on the chin.

2008 Sep 04 01:54 PM

[User 143167:]

You guys are all on wishful thinking. The biggest wishful thinking is "oil prices are manupilated by speculators, so that its plunge has no indication on global recession."
Just hope, yeah, but you can keep that up until DOW are under 10000.

2008 Sep 04 09:42 PM

[junkyarddog:]

User 143167: you are a freaking genius. You're right. It's not manipulation, it's pure market fundamentals. Due to the current state of the world economy people are driving less, flying less, consuming less oil (even China!), and... the price of the barrel of oil is low, and purely on fundamentals. How dumb I was to think that oil at $146 was price manipulation! These ethical oil traders would never do that to us. Kudos to you for your wisdom. Thanks for sharing, I'm sure nobody here knew about this. Wow.

2008 Sep 05 09:29 AM