Traders,
Expiration, as expected, was rather volatile. We blew through many strikes – the whole week saw serious up and down moves and the open interest was spread across the board. The INDU has given back all the gains (almost all) from the low that was visited in Feb and March and is now again testing them a 3rd time. The SPX is also getting close (about 40-50 points). But the NDX is still significantly above the 1700 lows and the RUT as well. The NDX is a volatile beast and with some heavy weight (over weights) driving it higher – it could see more volatility and drive lower. It seems like one of the few places that some have rushed too for cover, don’t know why. The one bright spot is the RUT holding in at the 720+ area. The broader market has not seen the suck out that the INDU or SPX has seen. Will it hold? For now we will have to see.
Hopefully you do NOT watch this fool that blows more smoke than a 3 alarm fire: http://www.youtube.com/watch?v=_nkZ3eHeXlc (Tom, thanks for sharing!)
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Oil leader’s weekend Pow-Wow
Well – news that the Saudi’s are going to push out a little more oil initially got oil to slightly retreat – but then it started back up again. The conference was full of talk and looked more like a political election with promises and tons of rhetoric. The reality, according to oil and commodity investors like Pickens and Rogers is that Saudi Arabia is already at maximum extraction or very close to it. They pump out MORE sea water than actual oil now days at the biggest field in the world to keep pressure up. Pickens doesn’t think they can increase extraction much more – he’s been there and been in the oil business for longer than most of us have been alive (no offense to his age). OPEC president said prior to the meeting that any increase promises of more supply is not going to curtail oil prices – he was right so far. Most of the talk was to ease the Nigeria supply concerns – between surprise attacks in the regions at deep water facilities and pending strikes – all of which interrupted supply – has cause more concerned. Additionally – the Israeli military exercise and show of force has also brought increase instability to the region. Major world players, CEOs, Heads of State, and others attended the meeting. China mention their growing concern about the need of regulated supplies (as their cities are growing and demand increasing). However, China’s spin was about REGULATED supplies not MORE supplies. I think they are equally concerned about volatility and supply disruption – however what was not said is that they have cut a deal with almost every oil producing nation (regardless of politics) – unlike the U.S. that will not deal with Iran, Sudan, and other non ally countries. It will be interesting to see how long we remain that course if and when demand out strips supplies.
So far oil has not seen the big sell off that many expected after the meeting and some analyst say that ANY sell off will probably trigger more buying opportunities and not necessarily the Top as others predict.
The oil story is far from over and now we are entering the driving season!
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Citi continues to clear the decks
Citi, which promised not to cut the dividend, did. Citi, which stated the worst was behind us in January, was wrong. Citi, which said they will only be shedding about 6,000 jobs, now states that it will probably double that number. When will we get to the bottom of this behemoth?
CEO Pandit, (the new CEO who had sold his now defunct hedge fund for almost a billion dollars to Citi before being hired – where do they come up with these people?), is now talking tough (didn’t he already do that?) and is looking to lower costs and shed assets after they have reported two straight quarterly losses over $15 billion. So far everything that Pandit has said has NOT been the case – no dividend cuts, the write downs are done, we are done with the layoffs - doesn’t seem to be holding any water. The stock has now broken in the teens.
Pandit so far has not steered the ship around and so far it is still hemorrhaging as it continues to take on more water. Expectations are for more write-downs to come by several analyst. One analyst indicated that Citi is just too big to get out of its own way – it has too many divisions that rely on credit and mark-to-market. Many of these divisions have illiquid positions and to ascertain a relatively accurate mark in an illiquid asset is near impossible. As Buffet likes to call it “Mark to Myth”.
To be fair to Pandit, he is trying to shore up those losses, cut costs, and unload $300 billion in positions over the next few years. The problem is that he has very little control on unloading $300 billion in assets – he may WANT to do that – but he must find a buyer and even if he can he will probably not get the price he wants. It’s like all those real-estate speculators that tell you their house is worth X and they have X amount of equity – the reality is that is only true if you can find a buyer. Equity doesn’t mean anything if no one is willing to buy. Pandit is in the same boat. He can SAY he wants to sell off $300 billion and that is what his “Mark-to-Market” may tell him what it is worth – now good luck finding a buyer! So he must fall back on what he CAN control – and that is costs. Expect more layoffs, cost cutting, and dividend cuts – that is the only thing he can do.
Remember just because the price of a stock SEEMS cheap, it doesn’t mean that it IS cheap. Retail people consistently make the mistake of dollar cost averaging when they have no concept that price doesn’t necessarily equate to value.
I think Citi still has a long and tough road ahead. I wonder how long Pandit will last if he keeps telling shareholders one thing, but we see another?
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Futures Pre-Market
The oil prices have seen some action, first down and then up and then back down after the big oil meeting in the Middle East and now every talking head has speculated on what it actually means for oil prices. The futures are not front running the cash and we are seeing the spread begin to widen going into the premarket. If it remains wide expect a pop in equities at the opening.
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Support / Resistance
Well we hit some bottoms and also some low end supports after Friday’s blowout. It looks like the futures are getting a little pop as the bottom pickers, again take a stab at it. I wonder if retail people will ever make the connection between price and value, probably not.
INDU 11750 / 12000-12250 (What can you say – we are 100 points off the earlier lows this year. The market got hammered in less than a month and we are starting again from this area a third time. I am just wondering if it will hold this time and as there is no light at the end of the tunnel and no one can put a finger on what WILL help this economy recover – I think any bounce is probably a dead-cat bounce.)
NDX 1925 / 1975 (We are just off the short-term support. However, this index is still up in the high area and nowhere near the previous lows of earlier this year. Can AAPL, GOOG, and their brethren be the safe haven? I wouldn’t beat the farm on it. It could mean it just has more room to go down – who knows at this juncture.)
SPX 1300- 1325 / 1375 (We are actually below a support area and hanging right between the 1300-1325 area. Kind of a unknown – we need to close above 1325 or get to 1300 to get any clarity.)
RUT 720 / 740-750 (The beast is strong and has stayed above 720. The broader index is NOT showing the running for cover that we are seeing in the INDU and SPX. Is this a sign that we have bottomed? Maybe – but watch that 720 line close – if it breaks and then break 700 – the INDU and SPX will most assuredly not hold the low supports and go lower. If it holds 720 – well we could see a good rally in the SPX and INDU.)
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Conclusion
More oil? Well even if we get more oil from the producers and see oil prices come off some – we are still well above the $100 mark and gas prices probably will not fall enough to give consumers a break. Additionally the increase in supply only narrows the ever increasing gap between consumption vs. extraction. At the end of the day we can speculate on why oil prices are this high, speculators, OPEC, big oil companies, etc. We can point the finger at everyone, believe that Obama or McCain have an answer, look for alternative fuels.
However – while all that might have some impact on the price it comes down to economics 101 that has not changed since the birth of civilization, it is rather simple and we never learn, everything has to be a conspiracy or more complicated. That simple economics 101 rule (which might as well be a scientific law) is that when demand out strips supply expect prices to rise. No one can argue that the world is using more and more oil. China, India, and many emerging countries are become more and more reliant upon that nation’s black blood to keep their wheels turning. No one can argue the physics of extracting oil, we may not run out of it, but we can only get it out of the ground at a certain rate (give or take a little). If you just look at the math – it is as clear as the morning is bright. Unless demand begins to wane the supply lines eventually can NOT keep up. All the rest is just the premium fluff in the price that traders in the commodity work to build better models to squeak out their edge. The fundamentals spell oil prices rising. It’s funny that no one believed Hubert back in the 60’s about a looming oil crisis in the 70s as the US hit maximum extraction and would have to rely on foreign oil. Many geologist are calling between 2005 – 2015 as the global extraction vs. consumption peak. Are we there? It would seem like it.
We are facing some interesting challenges and it is going to be tough for all. Commodity prices affect everything from the consumer at the pump, shipping costs, food costs, retail numbers. Everything – we cannot escape the economic building blocks of society, which are the commodities we live off of.
I saw an interesting show on Discovery about mining for Pot Ash, I didn’t realize the importance of it. One of the largest mines for Pot Ask in Europe is already 5000 feet deep and now 10-15 miles under the North Sea. I was wondering in order to keep up with production and mining of that very important ingredient for fertilizer, how much further do they have to continue to dig. When I saw miners driving trucks 5000 feet underground 10-15 miles down a tunnel to get to the latest vein of pot ask, I was wondering when that vein runs out how much further do they have to go. That mine runs 24 hours a day, 7 days a week. It just gets you thinks about the earth’s resources and what we need to maintain society. While I think we can always discovery new methods, sources, etc. – It does show the cost involve in order to get the commodities we need to keep the wheels of society going and how prices can rise as demand rises or the cost of extraction increases.
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