Options Trader: Monday Outlook

The week is off to a bad start:

• A series of bombings in Baghdad.
• TM cut sales forecast yet again.
• Chrysler and 22 banks can’t agree on refinancing terms for $30Bn in credit.
• RYAAY had a big miss.
• The housing bill is spooking the financials as lenders must step up and take a hit.
• German consumer confidence hit a 5-year low.
• ANZ (Australia/New Zealand Bank) had write-downs and warned.
• China shifted policy away from infaltion fighting to growth.
• MER put out a very bearish economic analysis.
• The IMF says US real estate is still overvalued by 20%.

So happy Monday to you!  We thought last week that, with 1/3 of the S&P 500 reporting by the week’s end, we’d have some market clarity but the results were mixed and our feelings remain mixed as we wait for the markets to pick a direction and stick to it for a change. 

Oil is still way too high at $125 and RD2.0 found this great article from Conde Nast about how the MSM doesn’t even ask the right questions when looking at the oil crisis so how can we possibly expect to find any answers?  This is a must-read article and one of my favorite lines is:

As journalism has passed from a hungry to an elite profession, there’s no shock value in the fact that Exxon Mobil paid only $5 billion in U.S. income taxes last year while it paid $25 billion to foreign governments. Even with Exxon Mobil making $76,000 a minute, the last thing that occurs to many assignment editors and reporters is to investigate whether a windfall-profits tax would drive Exxon Mobil, BP, and other oil companies to invest in the alternative-energy strategies they boast about in their television commercials.

MJ pointed out that the CFTC finally discovered a manipulator after months of pressure from Congress.  The "Commitment of Traders Report" for the week contained a special announcement concerning the energy markets but, what that special announcement doesn’t tell you but what commodities expert Ted Butler does, is what "you can only get from studying the different tables provided. As a result of the closer scrutiny, the CFTC suddenly 'discovered' that a very large trader in crude oil needed to be reclassified from the commercial category to the non-commercial category because the position that this trader held did not represent a bona fide hedge and was, therefore, a speculative position.  What was shocking about this position is its size. This one trader held a spread position of 147,000 contracts in NYMEX crude oil futures and a spread position of 326,000 contracts in futures and options combined, a position of more than 10% of both the entire futures market and futures and options combined." 

One person was moving 10% of the NYMEX contracts around and was considered a hedger, not a speculator, even though 326,000 contracts represents 15 TIMES MORE than all of the contracts that were actually delivered in the entire trading month of July or August.  According to Butler "The reclassification and revelation of the size of this single trader’s positions raises some disturbing questions":

1. Why has the CFTC allowed such a large position to exist?
2. What effect has this position had on the market to date?
3. What potential does this position hold for disorderly market conditions, should the position be unwound in distress conditions? (Think of Amaranth)
4. How many misclassifications are there in other commercial positions? (Think of the short side of silver and gold)
5. What is the economic justification for such a large position?

As I said last week, we have reached a critical mass and the NYMEX crooks will have a lot of trouble maintaining their scam under the light of scrutiny by Congress and the media.  It is up to us to keep the pressure on them or they will simply trade new cons for old (today they have Iran rattling sabers again to defend the $125 line).  The direction of oil is critical here, if it heads back up, the markets head back down, no doubt but if they can’t rally this week, our $110 target may be in very good shape as will 13,000 on the Dow.

Asia was mixed and flattish this morning, as is Europe, so we’ll skip right past them and talk about what a huge data week we have here in the US.  Unfortunately, the big stuff comes Thursday and Friday including the GDP (very big), Chicago PMI (must get over 50), Non-Farm Payrolls and Earnings with the ISM on Friday.  Briefing.com lists the following:

Date	ET	Release	For	Actual	Briefing.com	Consensus	Prior
Jul 29	10:00	Consumer Confidence	Jul		50.0	50.0	50.4
Jul 30	08:15	ADP Employment	Jul			-48K	-79K
Jul 30	10:35	Crude Inventories	07/26		NA	NA	-1558K
Jul 31	08:30	Chain Deflator-Adv.	Q2		3.0%	2.8%	2.7%
Jul 31	08:30	Employment Cost Index	Q2		0.7%	0.7%	0.7%
Jul 31	08:30	GDP-Adv.	Q2		2.8%	1.8%	1.0%
Jul 31	08:30	Initial Claims	07/26		380K	NA	406K
Jul 31	09:45	Chicago PMI	Jul		50.1	49.0	49.6
Aug 01	00:00	Auto Sales	Jul		5.0M	NA	4.9M
Aug 01	00:00	Truck Sales	Jul		5.0M	NA	5.0M
Aug 01	08:30	Average Workweek	Jul		33.8	33.7	33.7
Aug 01	08:30	Hourly Earnings	Jul		0.3%	0.3%	0.3%
Aug 01	08:30	Nonfarm Payrolls	Jul		-40K	-68K	-62K
Aug 01	08:30	Unemployment Rate	Jul		5.5%	5.6%	5.5%
Aug 01	10:00	Construction Spending	Jun		-0.2%	-0.3%	-0.4%
Aug 01	10:00	ISM Index	Jul		50.5	NA	50.2

So it’s very likely to be chop, chop, chop until we see the GDP on Thursday morning.  We should have a good improvement over last time, but it’s already expected, which makes it hard to rally off.  Meanwhile, we wait for the housing bill, which only helps (in theory) 400,000 of the 2.5M people being foreclosed on this year and that is just not enough.  Political compromise is not going to solve this crisis, we need real change - let’s hope we find someone who can do that for us in the 100 days left before the election.

I’m loving our cautious portfolio mix at the moment as it looks like we’re still in the summer doldrums at the moment.  We’ll keep our eye on earnings, which are still coming fast and furious and we’ll look at this week’s selection a little more closely this evening.  Tyson Foods (TSN) gave us a big miss this morning and is getting punished for it in pre-market.  Pacific Century Financial (BOH) had a nice beat (always good to see banks surviving) as did Kraft (KFT), Old National Bancorp (ONB) (another bank), Simon Property Group (SPG) (real estate!), Verizon (VZ) (but still going down) and Wrigley (WWY), who are flying on very good earnings.

It’s going to be a bumpy ride so let’s strap in and have some fun!

Note on Friday’s post.  The opening Chart was from David Fry’s ETF Digest and originally forgot to mention that or the excellent work David does every day.  Sorry David!

 

Comments

[Mmarrkk]

What's a Monday without a bash of Exxon, eh Phil?

Why is it surprising that XOM pays more to foreign governments than in US taxes? An overwhelming amount of Exxon's work and reserves and production come from foreign countries, so why wouldn't an overwhelming percentage of the fees/taxes/confiscatio... go to those governments?? And why are you so darned interested in driving and Oil and Gas company toward alternatives? Why not have companies specializing in alternatives investing in alternatives and have oil and gas companies investing in oil and gas and returning profit to shareholders? As a shareholder of XOM, I like it when they give me dividiends and buy back stock. That gives me the flexibility to invest that money in alternatives.

To support the earlier figure, I give you stat's from JS Herolds on Exxon's "New Sources" of oil/gas in 2007-2015:

27% from Qatar
20% from West Africa
11% from Canada
10% from Norway
9% from U.S.
8% from Kazakstan

again, why shouldn't the majority of the fees/royalties and taxes go to other countries?

And, instead of just quoted US Fed Income Taxes and compare to all charges/fees to foreign governments, why not be a bit more CONSISTENT and compare total fees paid to US governments via state taxes and royalties to the federal government and the states?? That $5 billion number would grow substantially. And how about the royalties paid to private land/minerals owners? That's a big number too. In foreign countries, there are no payments to private owners as the countries own the minerals. And while you are at it, throww in the production/severance taxes. And make sure you throw in Alaska's 50% production tax that was just implemented (Alaska now has one of the world's highest government takes on oil/gas production!! Hello Hugo Chavez, meet Ms. Palin!).

Beat up Exxon all you want but at least have the intestinal fortitude to do a consistent, like-for-like comparison instead of cheap shotting and then parading the ridiculous "windfall" profits tax around. What next? Maximum wage allowances to go with Minimum wages? Oops, forgot, we have a presidential "messiah" who already thought of that and makes it part of his economic platform.

[win]

Phil,
Briefing.com is expecting a BIG beat on GDP - they predict 2.8% and perhaps even 3%. I'm buying some calls on weakness this week.

[PokerDonkey]

Interesting stats on the NYMEX trader. As for the Exxon bashing, my thoughts echo Mmarrkk.

[User 175295]

Mmarrkk-you have it right. I get some lease money from an oil company and I see them putting out all kind of money in and aound our community. A huge amount! While congress is about it, why not put windfall taxes on Google, Microsoft, Coke and the movie industry, they make big money with not near the risk oil companies have to take every day. And don't forget Oprah.

[Philip Davis]

MMark - Those are good points but you do understand that that was a quote from the Conde Naste article, not a product of my own research. The article had many nasty points about XOM so I suggest you read it in its entirety and comment on their site. If you have and article with substantiated links, I would be happy to link to it. If you read me often you know that one thing I always tell people is "don't believe what you read" whether from the right or the left. Anyway, thanks for that, I do enjoy hearing contrary views!

My main issue with XOM is they do spend more on stock buybacks, bonuses and dividends than they do on E&P. I don't think that's good for America or XOM in the long run.

LOL Win, you are getting your wish on weakness. We're scooping up GOOG at $480 today and the same old financials but overall, this is a nasty little drop. Maybe for show ahead of a turn around on Paulson at 2:30, we'll see.

[Mmarrkk]

I read the article and found it to be complete crappola. Not worth my time commenting on anymore. I cut and pasted the comment above and sent it to the author.

If XOM spent more on E&P they would be hammered by Wall Street for a lack of capital discipline. Believe me, I've been in the conference calls and heard the questions and reactions to responses. Plus, I really think the opportunities to spend more are very limited. So to ensure that a risk-based portfolio of investment yields good returns, XOM cannot ramp up extreme wildcat exploration a great deal. That leads to poor results and lots of wasted money. That's the reply to queen nancy and the chosen messiah-O to their cute little "Big Oil isn't drilling on the land they already have" dittie. The land the isn't being drilled is being worked at the science level to determine if there are prospects to be drilled and if the risk/reward equation makes sense.

Paying executives...pretty much think that's a problem across wall street and until Boards of Directors grow independent and with backbone, its not changing. But not a Big OIl exclusive!

[David Fry]

Thanks for your acknowledgment Phil.

Dave

[User 145883]

Phil's opines are more specific and to the point, David Fry is less an opinionator. Not to belittle the chart work cause it seems everyone enjoys it, but Phil is more open to attack cause you know exactly where he is. Quite refreshing, I might add.

[Philip Davis]

I tell you what BS, since anyone who read the last post where you turned out to be full of it yourself in the plays you claim I missed, why don't you try to explain how the AMZN or BIDU play are down big - I'm dying to see what line of BS you will need to come up with on those week-old butterfly spreads.

As to AXP, the position was the Jan $45 calls with the Aug $40 calls sold against. It's called a bear call spread and AXP is supposed to go down, that's how we make the money. Perhaps first get a grasp of the basics before criticizing...

[mikefarr]

And the $1trillion questions is: who is that mysterious trader?

Is it possible to agree with both Phil and Mmmark? Taxes should go where the oil is extracted, sounds logical. I don't mind stock buybacks because that money will flow where investments dictate and new energy will continue to be attractive at $100+oil. At the same time, oil companies are good at building large projects. As soon as one of them figures out that it is more profitable to invest in alternate energy generation then others will follow at increasing speed. I think the government can help by the proper carrot and stick tax policy that makes that stampede moment happen sooner.