Saturday, May 17, 2008

Weekly Commentary From the BWS Contributors

There is no denying the stock market remains resilient thanks, we think, to the chorus of the "worst is over" from a crowd of talking heads, Wall Street execs and DC denizens. Senate housing bailout may also provide market support. For the week, Dow rose 1.89 percent, S&P 500 gained 2.67 percent, Nasdaq added 3.41 percent. The S&P 500, Nasdaq at five-month highs.

We remain long term bearish on the stock market and view the rebound from March as a bear market rally. "The worst is over" mantra is nothing new as a quick view of the Dow from 1931 to 1934 shows some strong rallies predicated on the worst being over, but of course the worst was yet to come. The more important debate may well be whether we're in the calm eye of the storm, or if the angst markets have experienced since last summer has only been strong outer bands of the approaching real storm. We think the ladder given signs of growing damage in the HELOC world where real losses as opposed to write downs will have to be booked. Commercial and retail real estate continue to show signs of cracking as commercial net loan charge-offs, just one example of many, are increasing.

We're still keeping an eye on complacent volatility readings relative to moving avgs and increasingly shabby put to call ratios. A low VIX doesn't necessarily mean an automatic slump in the stock markets, but many a times it has been a decent trade (either short SPX, or long VIX). Pundits say its different this time and the big drop in the VIX is too simple a way to look at the market. What? LOL. All we can say is be careful out there. In very recent history, the VIX has been good to help determine major tops and bottoms as well.

Dow could see a lift Monday from settlement of American Axle vs UAW which could help GM.

Crude parabolic in the early days of the month, still a locomotive; attempts to slow it down unsuccessful, so no meaningful correction for the time being. Dennis Gartman, famed futures trader and pros pro, has said he is not trading in the crude market because of the huge volatility. That says something about who should and shouldn't be trading energy futures. Just stay away.

Gold back above $900 Friday. We love the frustration this gives to folks who have a vested interest in selling you either their excess stock inventory, or shyster stock related products (stock market pumping newsletters, a variety of hedge funds, etc); they damn gold to be melted in hell, yet with inflation running amok and geopolitical events simmering towards a boil there shall be no such outcome for gold - quite the opposite.

The dollar shall play a key role in how all of the markets will move. What better indicator of what's ahead for the buck then a Fed balance sheet that has deteriorated so rapidly?

The powers-that-be will try to scapegoat many of the present financial ills on a variety of parties. "Shoddy monetary policy" should be at the top of all lists. The Fed, as illustrated by the above chart is public enemy number one for its reckless bailout of its own on Wall Street. We'll all be paying for this for the rest of our lives, and many generations thereafter will also foot this huge bill.

Economic data points last week - Pretty bad stuff.
  • The latest TIC report showed more net outflows of foreign capital
  • Consumer confidence is now cliff diving.
  • Single family homes sales, the lowest in 16 yrs. When population growth (pool of potential home buyers now vs 16 yrs ago) is taken into account, the housing numbers are looking truly dreadful.
  • Toll Bros said there is "pent up demand" for housing, but didn't know when slump would ease. I would imagine there is "pent up" demand for Bentleys, just that most of those who would love to buy a Bentley can't say when they'll ever have the money to afford one.
  • Inflation spiral. Ex the whopping impact of crude rise, YoY import prices up 6% last month.
  • Inflation denial. Gov't CPI data shows a decline gasoline prices for April thanks to seasonal adjustment.
  • Industrial production down more than double expectations
  • Monthly retail sales ex-gasoline, down; Redbook weekly numbers a bit firmer
  • Jobless claims were in line remaining under 400k, a trend likely to continue to employers go from cutting hours to all out cutting of jobs
Week ahead includes Leading Indicators, PPI. Also latest Fed minutes are due.

A few other indicators we continue to watch - yields across the yield curve, also demand by banks for funds from the Fed, European monetary statements, data; deeper level credit indicators. In a moment of clarity and real honesty this week, Ben Bernanke said credit market conditions were far from normal. Paulson, the grand puppet master of financial system propaganda, is probably water boarding Benanke this weekend for having such a loose tongue, but Bernanke's words should be deeply considered.

MMK for the BWS

Friday, May 9, 2008

Our April 14 Range Upgrade for Crude Was Well Timed

... and that begs the question of where to next? Crude cannot sustain this advance indefinitely. With the month only 9 days old -- yes, some like it hot, some like it cold, some like it in the barrel 9 days old -- WTI light sweet is up a stupendous 11% month to date! Thus, the rise has become quite parabolic and the danger of a short and sharp correction should be a part of every trader's thinking. (See our crude trading range upgrade from mid-April a few posts below.)

Lesson learned from this recent leg up? 87 mln is the number to remember. 87 million is about DAILY world consumption of barrels of black gold. 87 MILLION 42-gallon barrels of crude on the wall.. you take one down, pass it around...

Pundits have been puzzled by how the dollar can bounce from its lows, yet crude continues to go higher. They forget that crude is not just about the dollar, or U.S. supply/demand. China demand has doubled in just the last decade, for example. Non OECD demand will continue to dog the crude bears and lend major support to energy prices. The OPECers are only a few million barrels from their peak light sweet crude production capacity and non OPECers have been slow to grow their output.

The numbers say it all
I'm convinced pundits don't study this kind of stuff, but a close examination of the stats gives enlightenment on why this has been a bullish trade. Talk about fund manipulation is blather - it's all in what's going on in the world.

While we have been energy bulls and and agree with Goldman Sachs that a spike to $200 is likely, we're still open minded enough to realize that parabolic markets are bound to correct and even sharply so. Now that articles are starting to pop up in the financial press practically encouraging people to go out to their backyards and drill for a gusher, there are some signs of mania. Ok, I exaggerate obviously about drilling in the backyard, but talk about the virtues of energy ETFs, for example, are sure signs that the trade is getting very crowded. Be careful since in a secular energy bull market, the corrections have tended to be short and sharp (recall the last time we saw the $50/bbl v-shaped bottom). Crude is a market which is driven by fear of supply disruptions in the most unstable of the OPEC nations, worries about overall resource depletion and geopolitical factors like war with Iran, etc. These are factors that won't be arrested just because the price of crude corrects. You can bet that crude shall resume its upward trek once whatever correction runs its course.

I would add that gasoline crack spreads being more than 50% below home heating cracks is another factor that is keeping the market guessing over whether gasoline supplies here in the U.S. market will make it to the market's comfort zone going into the summer driving season. There's no scarcity of the crude to make gasoline, or even a scarcity of mo-gas itself, but an incentive exists for refiners to make more HO and other distillates and less RBOB which adds further uncertainty.

In very quiet fashion, natural gas has very meaningfully rallied to pre Katrina/Rita highs. Over $11 per decatherm in May?!? Thank goodness this isn't winter, or we'd be stung by a combo of shock at both the gasoline pump and with the monthly heating bill. I pity the Nat Gas short (fool) if there is any sign in the months ahead of a storm that would threaten Gulf of Mexico energy assets. An unusually hot summer would also stress the supply/demand balance. And i pity all who are being setup for a winter time shock with the heating bill. The heating bill would be the final nail in the coffin for many consumers. Any direct hits to gulf energy -- then we're talking $20+ natty. This adds up to a bullish looking trade for nat gas, though a sharp pullback in crude would temporarily pull the overall energy complex lower (which would mean an even better entry point for nat gas).

So our range for nat gas going into hurricane season is between $8.50 and $25/mmbtu. Sorry for the wide range, but a third straight uneventful hurricane season would send nat gas a bit lower, while another Ivan, Rita, or Katrina would mean game over. We just don't have a magic weather machine that will tell us what will happen between June 1 and September but recognize what's at stake in terms of how the weather behaves this year since nat gas prices are already high. Remember, preliminary winter forecasts that will begin to emerge in the Labor Day time frame will also impact the price of NG before the official end of summer. So, regardless of the unknown of summer weather conditions, we're also bullish on natural gas. For that matter we're bullish on natural gas, crude, gasoline, propane, electicity, wood stove pellets and fire wood over the longer term.