Commentary for the Week of March 8

(Rich Cash, a wise and prolific contributor to the Rick’s Picks forum, as well as a blogger of note, has written insightfully and with good humor on a subject near and dear to our heart – i.e., the put-and-call game. Fortunately, we retired our powder-blue market-maker smock and badge (#K30)  just before the Feds started using RICO laws to prosecute white-collar criminals. We were a scurvy lot, for sure, and Rich has captured the flavor of the game in a way that explains what drew so many of us sleazeballs to the options trading floor. RA) On Monday, some of the Fast Money Crowd were ready to jump off the bridge after INTC, JPM and GOOG flamed out on brilliant earnings. Tuesday, they were extolling weekly call options on AAPL with 70% volatility premiums. That’s right -- if a security that expires in a month is not a risky enough disappearing asset, now we can buy weekly options at a price almost guaranteed to absorb all price fluctuations and expire worthless. Options have a long and checkered history that dates from the seven years Isaac worked to marry Rebekah, only to wake up in the marriage bed with her older sister Leah, and work another seven years for the woman he loved. In the early 1900s, Jesse Livermore frequented options parlors known as bucket shops. For a small amount of money down, you had the brief right to buy or sell a security at a fixed price. If it went higher in that short amount of time, you made money. If not, you were out of luck. The bucket shops were so good at pricing option premiums they usually bucketed the orders rather than enter them. Livermore was one of the few that did well enough in the bucket shops

(My wife Marilyn, no great fan of our President, is alarmed over the Administration’s veiled attempts to regulate and ultimately control the Internet. The supposed goal of providing “equal access” to everyone is the Trojan Horse here, and although we are confident Internet users are strong enough to defend the medium against whatever radical-leftist depredations Mr. Obama may have in mind, we are not so blithely unconcerned as to ignore the threat entirely. Marilyn’s essay explains what’s at stake. RA) Why should the FCC regulate the internet? Well they shouldn’t, but that hasn’t stopped legions of media watchdogs, consumer advocacy groups and every talking-head panel on PBS from heralding the dangers to our public welfare if the Feds don’t take over the internet “for the people.” These do-gooders want the FCC to classify the internet as a telecommunications service, which would give the Feds the power to regulate who gets the service (everyone!), how much it can cost (profit should not be the issue here) and how each bit traveling through the pipes must be treated…(why, fairly, of course). Oh, and they can make the ISPs pay into a federal universal-service fund used to provide telecommunications services to poor areas. This must be done, they say, to keep the internet "open" and fair. What’s at stake? It appears a lot of hypothetical “threats” to our freedom to send and receive the information we want through the pipes owned by private, profit-mongering companies like Comcast, AT&T and Verizon. Charges that these capitalistic behemoths can’t wait to choose favorites and pick winners among content providers drives the social justice wonks to the perverse conclusion that an all-encompassing Federal regulation is the only solution to the problem. What problem? Apparently, there have been two breaches of bit-rate “neutrality” in seven years, one of them

Just when we thought it might be safe in another five or ten years to go back in the water, our muckraking colleague Matt Drudge is out with a report asserting that methane levels in certain areas of the Gulf of Mexico are a million times higher than normal.  Drudge didn’t pull that number out of thin air, unfortunately – it came from a chemical oceanographer at Texas A&M named John Kessler.  A “chemical oceanographer.” Doesn’t sound like a kook, does he? “Methane levels ranged from 10,000 to nearly one million times higher in some spots than normal concentration,” said Kessler, who had analyzed water samples collected from within a seven-mile radius of the Deepwater Horizon wellhead. The possible implication is that sea life could die off in a big way because of oxygen depletion, and that greenhouse emissions could cause the climate to change. You can search the web for this story, but it is no longer available even at Drudge’s site. We found it linked at www.floridaoilspilllaw.com, but the whole methane angle seems to have fallen beneath the radar of the mainstream press. GoogleNews has provided spotty coverage of the Gulf disaster lately, presumably because the news-gathering organizations from which Google steals its stories have relatively limited access to the facts. Even so, there was a scary echo of Matt Simmons’ doomsday talk in the latest, officially acknowledged developments. Most significantly, it would appear that the bedrock separating the oil and gas from the terrestrial world is more fragile than the guys-in-the-know care to discuss. It is also clear that oil and gas seepage is occurring away from the wellhead, and it may be occurring on a catastrophic scale. But yesterday was the first time we heard Admiral Thad Allen himself allude to the possibility of a collapse

The weather could become Topic A around here if the markets get any more boring than they have been. Yesterday’s snooze fest was impressive in one respect, though: It demonstrated that the Dow can fall 265 points, as it did on Friday, and wake up Monday morning with no trace of a hangover.  Did stocks perhaps fall because cyclical forces had ordained it?  We’ll never know.  But whatever may have been troubling traders as the week drew to a close, it was not a factor in Monday’s gratuitous waft higher. The Industrial Average closed with a gain of 56 points, showing no particular strength or enthusiasm, only a mild propensity to take the path of least resistance.  The hum-drum price action is corroborated by some widely followed technical indicators, including the McClellan Oscillator. We’ll be hearing more about the McClellan later this week from our friend and colleague Larry Amernick, who thinks that tedium will be with us for yet a while longer. From a McClellan standpoint, he says, traders can only get in trouble by taking a plunge right now. Continuing a pattern that has persisted for some weeks, yesterday’s unimpressive strength in the broad averages was matched by unimpressive weakness in Gold futures. The Comex August contract was  down nearly $12 at the lows, trading for 1176.90.  This is the lowest the futures have been since May, but it stopped shy of breaching a major supportive low at 1168.00 recorded on May 21.  Actually, we have been anticipating somewhat worse by way of a Hidden Pivot target at 1140.10.  Bulls will have a chance to take a stand at 1155.00, the corrective target of a lesser pattern and our minimum downside objective for the near term. But if the support fails, you can infer that more weakness to

It’s high summer here in Colorado, with the mercury at 93 – possibly the coolest day we’ve logged all week. Our car thermometer registered 108 yesterday, but surely this was a mistake?   You don’t hear many complaints, though, probably because the humidity is so low hereabouts.  In the winter, with the heat cranked up on a cold day, we’ve seen the humidity fall below 10 percent inside the house – practically as dry as the Gobi Desert. On the comfort index, a 93-degree summer day in Colorado feels like maybe 77 degrees in Baltimore.  When we moved here from San Francisco in 1999, many of the things we brought with us that were made of laminated wood dried out and cracked after a few years: cutting boards, a coffee table, dining room chairs.  Anyone planning on moving to this region of the country with a Bösendorfer should consider selling it and buying another piano when you get here, since the climate change is bound to play havoc with the instrument’s soundboard. At this time of year, newspapers seem to suffer heat stroke before the rest of us.  We searched in vain for the obligatory boy-in-the-well story, but perhaps the editors are saving it for August. The big news over the weekend was that BP’s oil cap appeared to be holding, and that pressure levels were sufficient to suggest the well-bore is intact. Unfortunately, good news is no news as far as the tabloids are concerned, and so this very encouraging development in the Gulf didn’t even rate a mention in the “Editor’s Picks” of the New York Daily News. As of late Sunday afternoon, here are some of the stories that did make the list: 1) Biden Defends Tea Party Against Racist Claims; 2)  Neo-Nazi Groups Patrol Arizona-Mexico Border; and, 3) 

Our assertion here yesterday that stock-market bulls have bought into an epic swindle elicited some spirited discussion in the Rick’s Picks forum.  We remain dumbfounded by the fact that there are otherwise intelligent people out there -- Fred Hapgood, old friend, are you listening? --  who think the economy will somehow extricate itself from the morass without our  suffering a period of misery equal in severity to the Great Depression. How could anyone believe that the Ponzi scheme being perpetrated by The Government is anything but a brazen deception worthy of Goebbels?  Here’s a post from “DG” that throws cold water on some of the fantasies and delusions that so far have helped keep The System nominally afloat: “Reading the comments in the forum yesterday, I was struck by the nonsense of a comment stating that there was no fraud. Seriously? The real estate boom was not fraudulent, when it is documented that there were fraudulent loans creating fraudulent buyers offering fraudulent prices? Doesn’t that indicate fraudulent price discovery? Isn’t the real estate collapse documenting this? (More than 7 million homes in some state of ‘off-the-market-yet-for-sale’ price discovery?)  The credit-crisis duct-tape repair job is not fraudulent when you take from taxpayers, to ‘kinda make whole,’ the same buyers who created the aforementioned fraud? “Does the bottomless pit of Fannie Mae seem a bit odd?  It seems like a house on fire, where they just keep coming with fresh wood from the mill to pile on and destroy more capital. Public pensions? How can someone who for 30 years contributes 8% of an average $50,000 income (for a $120,000 total) realistically expect to spend the following 30 years extracting $80,000 a year? These are better returns than Bernie Madoff offered. (Don’t tweak me on my numbers – they are close enough, and many are

We took a deeply skeptical view here yesterday of the buying frenzy that has pushed stocks sharply higher since early July. Not surprisingly, some market observers think the rally is the real McCoy – an entirely normal upthrust in an ongoing bull market. “The only question is, when will you admit you’re wrong?” asked a contributor, Keith P., in the Rick’s Picks forum. “[At Dow 12000? 14000? 18000?  I’m just wondering. Will you be like the rest and say everyone else is wrong the whole way up -- or at some point will you say, yes, I was wrong? I’m not bashing you at all,” he continued. “You kept us in many long positions the whole way up. You’ve done a great job. I’m just saying I expect new all-time highs in the market within a year or two. There will be no crash, no depression. We are not on a gold standard like in the 1930s.” While we’re genuinely pleased to hear that Keith evidently has made hay taking our sometimes bullish advice, we couldn’t disagree with him more about the nature of the rallies; for they are a fraud, a key piece of the epic deception that would have us believe it is possible to extricate ourselves from a black hole of debt by taking on massive new quantities of...debt.  "Ultimately, America faces certain bankruptcy," we replied. “The Federal Government’s ability to create money from thin air may obscure this fact for yet a little while longer, but [we] seriously doubt that it will bring us new all-time highs in the stock market — or even a fleeting instant of real prosperity.” Financial Sociopaths Many who responded to Keith’s post evidently share our pessimism, but there was one reply in particular, from “Red Will,” that we would like to

U.S. stocks took yet another idiotic leap yesterday, presumably buoyed by news of a ghastly increase in the U.S. trade deficit. Of course, on Wall Street these days all news is fabulous news, and so no one should have been surprised when the broad averages leaped to embrace and celebrate this latest, absolutely appalling evidence of a failing U.S. economy. The Commerce Department reported that imports exceeded exports by $42.3 billion in May. A dip below April’s already frightening enough $40.3 billion deficit had been expected, but it was simply not to be.  One analyst attributed the latest increase in imports over exports to the stockpiling of Chinese goods by U.S. retailers and producers fearful of a trade war. If so, Wall Street’s best and brightest are bound to see this prospect as a win/win development, since the very process of losing such a war would necessarily ratchet up the flow of cheap Chinese goods into the U.S., stimulating more borrowing by American consumers.  That should please the Keynesians, too, since it would give the nation’s tireless, ever-patriotic shoppers a chance to pick up the apparent slack in government borrowing caused by a growing reluctance on Capitol Hill to ratchet up the U.S. debt ceiling beyond its current, so-far ineffectual, threshold of $13.2 trillion. Rally Suits Us Fine Meanwhile, if stocks should continue to rise it will suit us just fine, since the rally so far has been as predictable (and therefore easily tradable) as the rising epidemic of Chlamydia among U.S. teenagers.  On Monday night, for instance, with index futures flatlining, we advised subscribers who monitor the markets in the wee hours to jump on the E-Mini S&Ps if the futures tripped a “buy” signal at a predetermined price.  The recommendation was geared toward traders who are  proficient at using the Hidden Pivot Method, but

Put options on BP may look like a tempting play here, but we wouldn’t touch them with a ten-foot pole. The company’s shares have rocketed nearly 40% since late June, making them appear ripe for a retrenchment. Don’t bet too heavily on it, though.  The puts are so pricey at the moment that you could probably get better odds buying scratch-off cards at the liquor store. August near-the-moneys, for one, are trading with an implied volatility of around 70, meaning the stock would have to plummet by at least 11% before August 20 for bearish speculators to merely break even. Stranger things have happened, of course, but anyone who made essentially the same bet on Friday, just ahead of yesterday’s powerful short-squeeze rally, would have seen a third of his stake go up in smoke at the opening bell. The August 36 puts eventually settled at 2.87, down 1.48 on the day, and they could get halved again on Tuesday morning if BP shares open firm-to-higher. Carnage in the July puts has been even worse, since they are due to expire this Friday. The chart above shows how the July 33 puts have fared since early June, when the stock was trading about where it is now -- around $36 per share. With fear and despair hitting a transitory peak back then on horrific headlines and the prospect of a tar-ball disaster spreading along length of the Eastern Seaboard, the puts nearly tripled in price in a single day, rocketing from $224 to $650. Yesterday, however, those same puts could have been bought for as little as $18, and they seem unlikely at this point to awaken from their coma unless the latest effort to cap the oil blowout meets with a catastrophic setback. Careful What You Wish For It