Options Trader: Friday Outlook

Let’s put this annoying week to bed!

It’s barbecue time this weekend as we open our pools and fire up the barbie, enjoying both for the last time this summer before we are shocked by the gas bills we’re going to get in a few weeks, as summer fun has never been more expensive. Americans are already scaling back their holiday plans with 25% of the people surveyed changing travel plans to cut down driving and 20% canceling plans altogether.

Probably most damaged by this will be lower-cost hotel chains, such as Choice Hotels (CHH) (Comfort Inn, Econo Lodge) as their customers are the most likely to cancel trips altogether. Another that will be affected is InterContinental (IHG) which owns Holiday Inn etc. but both of these stocks have already been beaten down so I’m not playing them. But - yuch!

Is George Bush destroying the his core base of support? Well, maybe not Texas but here’s a red and blue state map from the Philly Fed (thanks Barry for pointing this out!) not of Democratic and Republican strongholds but of the Fed’s Coincident Index, which is an index of economic indicators whose movements closely coincide with the overall cycle of economic activity. Along with lagging and leading indicators, this index highlights the speed and size of growth or shrinkage in an economy. Texas is doing just great on the oil boom but many other Republican strongholds are suffering deeply while the "blue states" are mainly blue, indicating growth despite all the economic turmoil. (Click to enlarge.)

This does not bode well for the Republicans in the election as not only do you have a dissatisfied voting population but it’s also going to put a damper on campaign contributions, which is very bad for the GOP because, as our President said, "You got to keep repeating things over and over and over again for the truth to sink in - to kind of catapult the propaganda." I do wish I just made this stuff up but he really does say these things!

Our decisionmaking process today is simple, either oil pulls back below $130 and stays there to rally the markets, or it doesn’t and we go very tightly covered into the weekend, which was kind of our plan from last week anyway, so "stay the course" I guess… We’re catching a break on Apple (AAPL) (who were added to GS’s "conviction buy list with a $215 target), Google (GOOG) and Intuitive Surgical (ISRG), all of which we need to cover and Baidu (BIDU) is too hot to hold so let’s just plan on exiting that one. It’s going to be cover, cover and when in doubt cover against our long positions, just like last week. We’ll take our lumps by rolling up our callers IF the market takes off but this week, that if never came and those covers saved us.

The Hang Seng dropped another 329 points, closing out a very lousy week down 1,000 points. The Nikkei held flat for the day and off their lows of the week but finished the session with a 150-point drop but they were Asia’s shining star as the Shanghai Composite fell 0.68% and India dropped 1.5% and Pakistan fell 615 points (4.5%) and Taiwan dropped 2%. Even commodity-rich Australia fell 1% as $130 oil is truly the magic number that can bring the global economy to its knees.

Oil bulls are pointing to gas lines in China as a sign of demand, but we reported earlier in the week that China was going to scale back gasoline subsides so the pictures you see on CNBC being touted as "evidence" of strong demand is nothing more than drivers seeking to top off their tanks before the prices jump up. This is how the "news" is being manipulated to drive up energy prices on television networks whose parent companies make tens of Billions of dollars both directly, from sales of energy-related products, and indirectly, from ad revenues from energy companies.

Europe is also ending a rotten week on a down note, also unnerved by the oil shock with auto makers leading the decline, along with airlines, who seem ready to throw in the towel. Silverjet Airlines [LSE:SIL] (the all-business-class one) was halted as funding was pulled, and the fuel-intensive mining sector hit the 2.5% rule to the downside as cost issues began to outweigh the runaway price of the commodities.

Our futures are down considerably pre-market and we continue to watch our levels for the pass/fail test of the week with Dow 12,600, S&P 1,390, Nasdaq 2,450, NYSE 9,400, Russell 730 and SOX 400. Holding those levels today would be amazing and will cause me to go 1/2 covered on some of my favorite positions (GOOG, AAPL, ISRG, SHLD, C, BA, FDX, IBM, PEP) but, if we are below the line on any two of them, then I’ll sleep better over the long weekend fully covered.

Oil is the key to happiness as $130 seems to be the breaking point we’ve been looking for. This doesn’t seem to bother the energy bulls, much the same way $1M for a 2Br condo in Miami didn’t bother the real estate bulls in 2005. Those apartments are now back around $500,000 and still no one is buying them, even though they still "aren’t making any more land." We hit peak land somewhere around 5 Billion BC yet the price of that commodity still goes up and down - that’s the fundamental flaw in the "peak oil" logic the bulls are resting their case on. Much like the waves of land speculation that come and go over the years, this too shall pass - we just need to ride this one out.

Have a good weekend!

Comments

[User 198721]

What do you mean? Are you covering shorts or writing covered calls. Caught a break on Apple sounds like you are long. Baidu are you selling or just not doing anything. Please explain. Thanks.

[Al Rob]

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.

[ship shapeand bristolfashion]

People lining up before gas stations before a price hike. Yes that is sufficient evidence for me to say that oil demand will drop after the price hike.

Mr Davis do you really believe what you write? And if you really believe what you write you must have a very narrow vision. It is time to realize, that the Chinese have huge savings rates. We do not. In other words they can afford it. We do not. Because we are busy complaining instead of getting more efficient.

[Philip Davis]

User 198 - These are just exerpts that SA takes from my membership site. All those details are discussed in the member section and the web site is linked at the top of the page. Those were day trades from the day before, we had long Apple calls that we UNcovered on the dip on Thursday and held naked overnight. BIDU was a call we picked up on yesterday's close that we escaped even this morning.

Well Al, on Wednesday our screens told us to go short on XOM, CVX, SU, USO and HES as oil topped $133 and today we cashed most of them out to give you a chance to buy them back up "on the dip." If it weren't for people like you and Ship Shape, we'd have no one to buy puts from so I'm not even going to try to change your mind. In fact, we even grabbed XOM $95 calls at the close so please, go to town on Monday, we'll be shorting again when you get to around Wednesday's close - have a great weekend!

[contender]

Oil needs to come down. Oil will come down.

I dont much understand why prices have to skyrocket so so much more than demand. Im sorry but pricing for suspicion of future supply/demand problems doesnt get it for me. This stuff should be priced at a supply/demand rate that looks out only a fairly short time - pricing ih oil armagedon is not useful nor truthful at this point.

With the supply situation right now, /at least/ the front-month contracts should be around 95 /at most/ -- and I prefer $65 as closer to the truth for the front-month.

If hording is going on then perhaps there is truth in some of the what... 40% rise in oil in the last year, but Ill believe hording is going on if you can tell me theres been a marked increase in barrels actually being delivered.

Im glad we hit the breaking point. Congress crying, drivers staying home so they can afford to buy nice compact 36mpg vehicles with their cash (since no one will give em a loan)... it all means that oil is about to recede -- and if its true to its nature itll recede with a BANG as all the crooks get out of the trade to bring oil back down before the cops step in so they can play the game again sometime.

I think this time will be a little different in that when it does stabilize lower the dips will be bought pretty agressively, so it may not languish long as the second-strikers get their chance to get in.

Im tempted to play oil short -- Jack be nimble...

[ship shapeand bristolfashion]

Enter your comment hereRussia saw crude production fall nearly 4% in Q1. Mexico lost nearly 5%, Venezuela -5%, Nigeria -5%. Over a dozen countries saw production fall more than 2%. Only 2 countries saw production increase by a material amount, Saudi Arabia and Angola.

Oil won't come down.

[Philip Davis]

Now, you see, that is exactly the kind of baseless and totally false information I'm talking about!

Here is the EIAs April 2008 Monthly report which clearly shows that the global oil supply was 84.64Mbd in 2005, 84.60 in 2006 and 84.59 in 2007 - flat as a pancake.

www.eia.doe.gov/emeu/i...

While they also do show an increase in demand from 84.62Mbd in 2006 to 85.35Mbd in 2007, the fact of the matter is that global inventories were 3,586Bn barrels in Q1 '07 and are at 3,534 in Q1 '08, a 52M barrel draw over 12 months, NOT 30 days!

www.eia.doe.gov/emeu/s...

The projection for Q2 is for a build of 63Mb to 3,597 IN ONE QUARTER because demand is falling off a cliff and this increased supply is projected to hold steady through 2009.

In short, there is no shortage of supply, simply a growing shortage of demand. Mexico's production in Q4 was 3.35Mbd and in Q1 was 3.30, hardly 5%. Other countries are not broken down in the report but I'd love to see the list you are working from that contradicts the IEA by such a massive amount.

I urge anyone reading these discussions to seek out the facts for yourself, do not believe what you are being spoon-fed, either by the media or by anonymous posters who throw "facts" out without bothering to cite sources.

[Philip Davis]

Oh here you go, it took me all of 20 seconds to Google the latest news on OPEC supply. "OPEC oil supply in May is expected to rise by 700,000 barrels per day (bpd), led by higher output from members including Nigeria and Saudi Arabia, an industry consultant said on Wednesday." Gee, that's not a 5% reduction from Nigeria...


www.guardian.co.uk/bus...

"Nigerian supply is likely to rise by about 200,000 bpd to 2.05 million bpd" Let's see 1.85 M must have been last month so take 200,000 and divide by 1.85M and that looks like a 10.8% INCREASE in production. Must be my calculator that's off righ?

"Iran, which has been storing unsold crude at sea on oil tankers, is expected to produce about 100,000 bpd more in May, bringing supply to the market to 3.65 million bpd."

"They are still putting a lot into storage. The heavier grades are not selling well," Gerber said."


I don't have production numbers on Venezuela but their Oil Minister just announced their reserves are up 30%, must be those pesky environmentalists that are stopping them from pumping 10 ANWARs worth of oil that they've recently added...

www.economicnews.ca/ce...

[ship shapeand bristolfashion]

Believe what you want. If you invest the way you talk, you didn't make any money when it comes to energy. I did the last three years.

My numbers are from the IEA, I copied it from an article on Rightside advisors.

There is a lot of sour crude around, yes. That's why the Saudis for example have cut their prices for it.

Sweet grades on the other hand are scarce. Since NYMEX Light Sweet Crude WTI is basket of sweet grades, NYMEX crude is expensive.

Thanx to environmental legislation, gas and diesel is required to have less and less sulfur in them. I know you don't believe it, but refineries are old, everybody but you knows this, and therefore refiners need low sulfur crude - the light sweet stuff.

Check the EIA numbers, since you trust them.

tonto.eia.doe.gov/oog/...

Cushing, OK is what matters, when it comes to WTI. Believe me that's how it is. When you check the link, you can see that inventories are down by a quarter or so compared to last year. Right? And now consider the fall of the dollar within the last year and you're almost there.

Don't get me wrong. I know that oil has gotten ahead of itself, yea. Last week was the capitulation of the bears with a powerful short covering rally upon Wednesday's inventory data. I guess it's gonna go down from here. But I don't think it will fall much under the 100$ mark.

If you want WTI to come down, You have got to be for more drilling here in the US. 85% of our coastline are unexplored. We do not know if there is nothing out there or if there is the biggest oil field ever out there.

Congress and You are busy witch hunting. This will accomplish nothing.

Anyway, chinese cars need gas, too. And the one who can afford it, are the ones who gonna get it. Period.

Instead of holding hearings Washington should act by opening up the OCS. Down in Florida they have no problem pumping sewage into the ocean, but they have a problem with oil production.

Instead of complaining consumers should conserve. There is no reason why average joes here need 6 and 8 cylinders, while average joes elsewhere drive 1.6l 4 cylinders.

[ship shapeand bristolfashion]

BTW, not even your left wing friend Paul Krugman thinks it's a bubble.

[bill d]

If only Paul Erlich had been right.
If only Saddam had not tried to steal Kuwait's oil.
If only he had not tried to kill Bush the 1st
If only Algore had not invented the Internet.
If only Florida could learn how to count votes.

Am looking forward to gas lines, odd/even days, license plates ending in odd or even, fill-up limits, closed gas stations - will really be great now that vehicles are way bigger with even bigger gas tanks.
Don't know how many of you remember the 70's but if the Dems win I suspect they will be back. At least if you listen to THEIR solutions.

[barnburner]

god I get tired of the backbiting political references here. Hey, that gas crises that created line of odd and even days happened in Jimmy Carter's Presidency but it was created by and continues to be caused by the inability of Congress to pass a comprehensive energy bill. It laughable that Kenny Lay of Enron probably wrote Dick Cheney's energy bill but these clowns are no worse than the ones who proceeded them. Maybe the problem really is the U.S. voter who refused to demand an Energy policy after the last crises, just said "hey, give me a Hummer or an Expedition baby, I really need a big "safe" car like that to drive to work in.

[RW]

SHIP SHAPE If you are right on the soul crude, do you think FTO is a good play? They refine sour crude from Canada and got a large contract before oil shot so hi.