Testy Tuesday: Do We Need More Stimulus Already?

Includes: OIL, SPY
by: Philip Davis

SPY 5 MINUTEDo we need more cowbelll?

After 48 hours of market euphoria last week have the markets already sobered up over the weekend and need another fix? We had a minor pullback (so far - see Dave Fry's chart) in the US and Europe but China's Shanghai Composite index has fallen 3% in the first two days of the week, giving up all of the gains of QE3 (not to mention China's own generous stimulus last week) and falling back to levels not seen since 2009.

Our own data continues to come in terribly, with yesterday's Empire State Manufacturing Survey a disaster at -10.41, putting us steeply into contraction with another round of Global PMI reading coming later in the week to possibly confirm the Global Recession.

Of course with no manufacturing activity it's the materials sector that's priced way too high. Gold and oil were two of our remaining short positions in the $25,000 Portfolio (see Friday's Post) and yesterday morning I mentioned how excited we were to short oil at $100. That worked out very well already as it plunged back to $95 yesterday afternoon - paying futures players (/CL contracts) $5,000 per contract in one fell swoop.

At PSW, we find it very amusing that "Analysts scrambled to explain Monday's dramatic plunge" when this is exactly the plunge we've been waiting for based on our premise that the NYMEX traders are nothing more than con men running a shell game and faking demand for hundreds of millions of barrels contracts they have no intention of accepting delivery of in order to drive up prices and rob the American people of hundreds of billions of dollars each year. In that context, yesterday's move was EXACTLY what we expected since last month.

For all those "confused" analysts, we are happy to point out the only chart that matters and that's how many open October contracts remain on the NYMEX, which expire on Friday - forcing traders to accept delivery of barrels (1,000 per contract) that they have no actual use for, no authorization to buy and no intention of owning.

In fact, despite trading over 6Bn October contracts back and forth in the past month, in the end, traders will only accept delivery of about 30M barrels - reflecting the ACTUAL demand - the rest is just faked in order to drive up prices and the cost of each trade is, of course, passed on to the consumers and paid, as fees, to the NYMEX and their traders, who add a nickel here and a nickel there until they are rich and you are paying $60 for a fill-up.

Click for
Current Session Prior Day
Open High Low Time Set Chg Vol Set Op Int
Oct'12 96.71 97.23 95.81 08:29
Sep 18
- -0.81 33672 96.62 98376
Nov'12 96.98 97.55 96.13 08:29
Sep 18
- -0.82 25653 96.95 318770
Dec'12 97.27 97.84 96.46 08:29
Sep 18
- -0.79 6396 97.25 203642
Jan'13 97.88 98.07 96.70 08:29
Sep 18
- -0.89 1852 97.59 110732

In three days, 2/3 of the October contracts will be cancelled. Forget the fact that these traders have firm orders for 98M barrels of crude that guarantee delivery in October and by canceling those contracts they are jeopardizing America's energy security - that's a game they play with impunity every month. As you can see, they also have no room to roll the contracts. Usually, our front three months have 500-550,000 orders (90% fake) at the beginning of a cycle and the NYMEX crooks are very adept at rolling that fake demand along each month to keep you paying double the fair market rate for oil.

Their problem here is that they now have over 700,000 open contacts - about 20% too many - and not enough buyers, even in the future months, to allow them to dump their October contacts. Any October contracts that are not rolled or cancelled by Friday will be delivered next month and that would cause a huge glut in the US inventories (where a 5Mb build is considered a huge deal).

President Obama (and thank you Mitt for assuring us he will remain President, you elitist tool!) - now would be THE BEST time to release some oil out of the SPR because the traders at the NYMEX will choke on these open contracts and oil will drop over $10 almost instantly as there will be nowhere for them to hide their contracts anymore. Just a 15Mb release will do it, not even 2% of the total reserves. PLEASE!!!

Even as I write this, CNBC has guests on who can't imagine what happened at the NYMEX yesterday when the contracts plunged on heavy volume into the close. Was it a computer glitch? Was it a trader with "fat fingers" (oh, that guy again)? If so, wouldn't oil have gone right back to $99? Of course it would - they are lying to you. These are crooks who got caught trying desperately to come up with a cover story before their whole scam gets blown.

As to the other scam that's running - QE3 should be good for a lot more than a 2-day pump job. The real wild-card for the week is what will the BOJ decide to do tomorrow about the strong Yen/weak Dollar. Should they approve another Yentervention (likely), the Dollar will pop back over 80 and materials will again plummet and we'll be testing a lot of significant lines on our Big Chart - which is good, as we do want to see what holds up under pressure.

Also, keep in mind that it's already September 18th and we're just 3 weeks away from the official start of Q3 earnings reports but already, today, we have early reports from FedEx (NYSE:FDX), Manchester United (NYSE:MANU) and Schiff Nutrition (SHF) and tomorrow we get AZO, CBRL, GIS, AIR, ADBE, BBBY and MLHR so earnings season has begun, official or not.

As you can see from the chart, expectations for Q3 could not be much lower but, just like 2007, despite deteriorating earnings quality people are BUYBUYBUYing stocks at record-high prices because we have faith that our Government and the beloved Fed will fix everything - so we will continue to ignore all those nasty facts and continue to party like it's 1999 - or 2007.

After all, the past has nothing to teach us - this time it's different, right?

Disclosure: I am short USO, GLD, AMZN, PCLN, DIA, QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (we have offsetting longs and are generally neutral with focused short positions).