Fascinating Development

Post to follow before noon

This won’t be ready for some time — but I will post updates as I gather the details;  Here’s some early hints:

Raw-Material Pullback, Catches Some Off Guard
ANN DAVIS
WSJ, July 3,  2006; Page C7
http://online.wsj.com/article/SB115151516900993222.html

U.S. third-quarter profit warnings ramp higher       
Reuters

Americans look for political manipulation as gasoline prices plunge               
http://www.usatoday.com/money/industries/energy/2006-09-25-gas-poll_x.htm?csp=15
USA Today  9/25/2006 7:01 PM ET

Energy refinery margins fall; stock ratings cut               
Thurs., Sept. 21, 2006, 8:50 AM
http://www.billcara.com/archives/2006/09/energy_refinery.html

How Low Can It Go?                   http://tonto.eia.doe.gov/oog/info/twip/twiparch/060920/twipprint.html

Meanwhile, talk amongst yourselves . . .

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What's been said:

Discussions found on the web:
  1. Michael A commented on Sep 27

    The headlines suggest the slowdown is here. Apparently no one is listening. Look out below.

  2. Uncle Jack commented on Sep 27

    Wow, just imagine if there is manipulation in the oil market and it totally backfires. bummer.

    I can tell you down here in Florida that no one believes the price of oil is moving down due to oft-sited reasons: no hurricanes, peace in middle east, end of driving season.

    I ask everyone my own little survey every time I go to the grocery store (yes, I’m the annoying one who talks to everybody in line), and they all think oil will go back up after the election.

    This month’s question to get the conversation started, just in case you think I’m baiting the fish: “Hey, how about the price of gas, huh. How long do you think this will last?”

  3. russell commented on Sep 27

    OK
    Into a popular search engine I put:
    profit warning commodities political manipulation refinery

    And its top result was:
    Civil Society in Yemen: The Political Economy of Activism in Modern Arabia (Cambridge Middle East Studies) (Paperback)
    by Sheila Carapico (due out in 2008)

    So I am guessing that you are going to tell us about an upcoming civil war in Yemen.

  4. Alan Greenspend commented on Sep 27

    As has been noted in several blogs, but first and most notably, Russ Winter noted how Goldman Sachs Gamed the Gas futures-

    http://www.xanga.com/russwinter/532194209/goldman-sachs-games-gasoline-futures.html

    “Goldman Sachs elected in July to arbitrarily game their widely followed commodity index. Illustrating how this can be done, and with no questions asked, they suddenly changed the unleaded gasoline component of the index from 8.45% to 2.30%, right at a point in time when speculative funds were heavily long. In addition GS blew up the arbs with this jewel,

    “On July 12, 2006 Goldman, Sachs & Co. announced that, for the roll occurring in September 2006 (the September Roll) in relation to the Goldman Sachs Commodity Index (GSCI) futures contract expiring in October 2006, it would roll the existing portion of the GSCI that is attributable to the Reformulated Gasoline Blendstock for Oxygen Blending (RB) futures contract on the New York Mercantile Exchange but would not roll any portion of the GSCI that is attributable to the New York Harbor Unleaded Gasoline contract (HU) contract into the RB contract.”

    Quite the smoking gun, would love to see this investigated, as might the Amaranth pension fund losers…

  5. ac commented on Sep 27

    Well from the WSJ:

    Durable-goods orders fell unexpectedly by 0.5% during August in a fairly broad-based decline, and an indicator of business equipment investment dipped.

  6. KirkH commented on Sep 27

    “They” are cutting fuel prices in anticipation of Bernanke’s helicopter cash drop. The Fed is going to need a lot of gas to pull it off. That’s my conspiracy theory.

  7. trendwatcher commented on Sep 27

    I heard a rumor that “Distilates” which includes diesel fuel oil inventories were quite high while and that a possible cause was that the US military was drawing down their Reserve supply.

    The DOE analyst quoted in one of the links talked about gasoline inventories being high but only gave a couple of data points.

    Love to see some charts on these kinds of metrics and on the Goldman Sachs indices mentioned in a previous post by “Alan Greenspend”

  8. Robert Coté commented on Sep 27

    The refiners don’t have anyplace to put the stuff but the airlines give an early indication of what I suspect our esteemed host is following. It was everyone, everyone hedging the price. I call this the $5000 cat market. Sometimes all it takes to for your cat to be worth $5000 is for someone else to put his up for sale at $5000. When GS and others stopped trading their cats for $5000 the only people left were those who actually want a cat, or beanie baby or oil.

  9. wcw commented on Sep 27

    Not much of a political manipulation when the company involved is the only solidly (D) house on the street. I absolutely believe they may have gamed the index to make a little money, though.

    The EIA did a recent piece on gasoline, too.

  10. oexmaster commented on Sep 27

    I live in the back yard of BA and MSFT. One of my restaurant buddy told me his business is among the worst in the past 20 years. He said he had two prior downturns. One was the 2001 peak, the other was the 1992.

  11. Michael C. commented on Sep 27

    Once in a while, we need to look at other scenarios in order to keep an open mind. Especially given the recent market strength, I believe.

    The question on my mind is – there are clearly negatives in the economy, and every week there seems to be a new negative datapoint, but if the market is holding up this well, what if we actually get some *positive* datapoints?

    What will that do to the price action? or bears that are pressing too hard?

    I believe we are creating an air pocket in this market. Where the next correction will be as or more swift than the one we had in May. But this may come now or from SP 1400+, so I like to try to keep an open mind.

  12. wcw commented on Sep 27

    Hey, I have October SPX calls. Short-term I see the rally continuing.

    Oil seems to have been hit on the inventory report. Maybe it’s not just Goldman, huh?

    FD: underweight the complex, short VLO

  13. fred hooper commented on Sep 27

    Recent 2006 Marketwatch Headlines:

    Existing-home prices fall for 1st time in 11 years
    Mortgage applications fall even as rates plunge
    Durable-goods orders unexpectedly fall 0.5%
    Housing starts fall more than expected, 3 year low
    U.S. third-quarter profit warnings ramp higher
    Oil imports lead to record trade gap in July
    Rising Inventory of Unsold Homes

    And here’s a 2005 Marketwatch article that has some amazingly accurate, albeit premature, predictions on the economy:

    http://tinyurl.com/z42j4

    Rate hikes may create ‘perfect storm’
    Commentary: How oil, housing, and China could all crash
    Joe Duarte
    Apr 5, 2005

    The oil connection

    ” With the IEA projecting a 25% increase in Chinese oil consumption for 2005, OPEC is continuing to pump at full tilt. Yet, this is a dangerous game, since any kind of significant slowing in the Chinese economy could lead to a major decrease in oil consumption. The bottom line is that a sudden drop in demand would lead to an oil glut.

    Conclusion
    Assuming that the Chinese economy hits what is an inevitable bump in the road, that would mean that somewhere later this year, perhaps in July or August, the traditional time for financial markets to start stumbling and churning, we could be in for another Asian meltdown, as in 1997’s Thai Bhat debacle.
    That could mean that by October, the usual bad month in the markets, things could be fully underway.
    If U.S. households find themselves in a cash flow crunch, as a result of rising mortgage rates, and the Chinese economy is suddenly drained of foreign cash, being repatriated to the United States due to the lure of rising interest rates, a significant change of scenario in the markets is not just likely, but inevitable. The shift could start suddenly, and progress quickly, fueled by fiberoptic communications and the flow of information at the speed of light. A sudden slowing of the global economy would also nearly guarantee lower oil prices, a situation that in and of itself, given the geography of OPEC and Russia, the world’s number 1 and 2 oil producers, could lead to geopolitical instability.”

    BTW, the Dow is poised to set an all-time record high. Maybe this means something really bad is about to happen??

  14. Sherman McCoy commented on Sep 27

    If you’re headed in the “manipulation” direction, you need to be careful. The M.O. of the investment world right now SEEMS TO BE price manipulation. If you have the ability to throw bazillions of dollars at a commodity in an afternoon, or pull it out, all the name of making a profit for your stakeholders- is that manipulation or is that seeking the fastest buck in today’s business world? You could call it both, I think, but it’s not being done with nefarious motives.

  15. alexd commented on Sep 27

    Ironicly a refiner Alon (alj) whoose price has been taken to the woodshed and back again is UP on the news. Talk about calling a bottom. Betcha it is a bottom for that stock. As of writing this I do not have a position in it but I am thinking about it.

  16. wcw commented on Sep 27

    All the refiners are up on the inventory. Front-month spreads are up, too, though average spreads are down on the bid, flat on the ask. I’m standing pat on my small position; I’ll take the loss if consumption or inventory data turn against me, but not ’til then.

  17. wcw commented on Sep 27

    Oh, forgot: this picture and this one speak volumes (cough). Someone’s got to buy that stuff for refiners to make money.

  18. me commented on Sep 27

    A 10 dollar drop in a barrel of oil does not translate into a one dollar drop in the price of gasoline. Anyone that doesn’t think the price goes right back up in December becuase of war, its cold, its too cold, is looney.

  19. wcw commented on Sep 27

    Well, of course not — there are 42 gallons in a barrel. If crude goes down $10 and the decline in product prices (unleaded and heating oil) is exactly proportional, gasoline will drop $0.24 a gallon.

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