The Coming Correction, China’s Deal with Chavez, Icelandic Volcano Fallout and More!

by Addison Wiggin & Ian Mathias

  • Famous investor calls for 15-20% correction… why traders still resist

  • While U.S. frets over Goldman, China positions… their latest super-sized oil deal

  • Byron King on why the Icelandic eruption is “no quaint story”… economic impact larger than Sept. 11

  • Readers, Dan Amoss chime in on the Goldman put conspiracy 

      "Markets are overdue for a correction," former Investment Symposium speaker and “Investment Biker” Jim Rogers begins today’s 5 Min. Forecast.

    “When the markets are ready for a correction, something will come along,” Rogers said yesterday, explicitly citing the Goldman Sachs lawsuit.

    "Any market that goes up this much, this fast, this steadily without correction — it's not normal. When that sort of things happens, the market could be setting itself up for a 15-20% correction."

      Mr. Rogers may be right, but the correction isn’t upon us yet. The S&P 500 opened slightly higher this morning, after a 0.5% gain Monday.

    It’s actually hard to fault trader optimism — blue chips like Citigroup, IBM, Intel, Coke, J&J and UnitedHealth have all reported higher-than-expected earnings in the last 24 hours.

      And of course, the mother of all earnings announcements this week — Goldman Sachs reported a $3.4 billion first quarter profit this morning. That’s a 91% rise in net income from a year ago and a bloody pounding of the Street’s expectations. Rest assured, fraud or no fraud, the cogs of world’s great money machine are still turning… morning, noon and night.  

      Goldman will need that extra cash for the wave of lawsuits on the horizon. AIG — back from the dead — threw its hat in the ring today as another potential pursuant of civil retribution. Rumor has it the fallen insurer will seek between $2-6 billion, heh… if it can find the money to take Goldman to court.

      On the other side of the planet, matters of actual importance: China just struck a $20 billion oil deal with Venezuela. In exchange for some hefty financing, China will eventually gain access to roughly 400,000 barrels of oil per day. That’s roughly 5% of China’s daily consumption… almost enough crude to satisfy all of Greece’s daily needs.

    The icing on the cake: Half the deal with be conducted in Chinese yuan.

      “The Chinese will build you what you want or loan you money, but you’ve got to pay them with crude oil,” summarizes Chris Mayer.

    “This deal is one of the biggest deals China has ever done. It’s also more-expensive oil, given the distance it has to travel to get to China. Much of Venezuelan oil is also heavy oil, which is a lower grade. You have to have special refineries to handle it. Most of them happen to be in the U.S. — much to Hugo Chavez’s irritation, I am sure.

    “But last year, China approved the construction of a large refinery in Guangdong province. We know that there are a number of new refinery projects under way, with more planned. Most of them are in Asia and the Middle East.

    “I won’t say China’s move smacks of desperation. It just shows you how valuable quality oil reserves are. China doesn’t make this deal unless there aren’t any better alternatives. So it would seem that the case for oil — particularly high-quality, low-cost oil — is still a good one.”

    Chris’ Special Situations readers are well prepared for such a reality. For example, one stock in their portfolio plays a vital role in building those refineries in faraway lands.

    Chris has done a fine job keeping his brood ahead of the curve… readers have had a great 2010 so far, booking average gains of 67%. To join his ranks, look here.

      More ammo for Chris’ argument, a Bloomberg headline from this morning:

    “Saudis Tighten China Energy Ties to Reduce U.S. Dependence”

    “With China, there is less baggage, there are easier routes to mutual benefit,” Saudi Prince Turki al-Faisal told the agency. We remind you, China took over the U.S. last year as the world’s biggest importer of Saudi oil. Our bold forecast: It’ll stay that way.

      Oil’s up about a dollar today, to $82 a barrel. Gold has rebounded from Friday’s losses, too. An ounce goes for $1,142 as we write, up almost $20 from Friday’s low.

    “Maybe it is no fluke that most commodities tumbled Friday, right along with the stock market,” postulates our colleague Eric Fry.

    “Goldman is not merely an excuse for a stock market sell-off; Goldman is the stock market… and it is also the commodity market and the Treasury market. Goldman is the biggest market maker in the U.S. stock market and among the biggest players in every major commodity market. Goldman is also one of the largest primary dealers of Treasury securities.

      Last today, an apology of sorts: We underestimated the effect of this Icelandic volcano eruption. Last week, it felt like some rare, mostly unimportant earthly event that would ruin some European vacations and give MSNBC something new to yap about. Today, we learn the economic cost of the eruption has now exceeded that of Sept. 11.

    “This Icelandic volcano is not just a quaint story about some faraway place,” Byron King reports

    “The most immediate, and most public, effect of the Icelandic volcano is that transatlantic flight has reverted to the pre-Charles Lindbergh days. Basically, there is no more flying to and from Europe across the North Atlantic. And so, the airline industry is losing about $200 million in revenues per day, while stranding millions of passengers.

    “According to Eurocontrol, which operates the airspace in Europe, about 20,000 flights per day are canceled. By my back-of-the envelope calculation, that translates into about 1.5 million barrels of jet fuel per day that's not being burned to power airliners. That's just shy of 2% of total daily world oil demand. So with this fast hit to demand, it's no wonder that the price of oil has dropped about $4 per barrel in the past week…

    “Meanwhile, world trade is suffering. Perishable items, from flowers to exotic fish and fruits, are rotting on the loading docks… Chinese auto assembly lines are slowing down due to lack of electronic components from Germany. There are reports of mass layoffs in nations as far apart as Kenya and Colombia, due to the inability to export goods via airfreight to Europe. Then consider all the personal and business disruptions and expenses from casual and business travelers unable to fly.

    “Can the world economy take this hit? And it's going to continue for how long? Nobody knows. Or put another way, do YOU want to be on the first airliner to fly through an ash cloud?”

      But of course, just like the Goldman trade we mentioned yesterday, someone out there is raking in volcano chaos profits. "We have bubbling hot waters, spas, saunas and heated water pools to swim in," the Icelandic Tourist Council reminded the thousands of reluctant “tourists” stuck in Reykjavik today. We’re sure hotels, rental car companies, supermarkets and drug dealers, to name a few, are doing just fine as well.

      “Hmmm, who had insider knowledge?” a reader asks, referring to our story yesterday on some extremely profitable Goldman Sachs options trades. “I read elsewhere that Goldman knew five months ago about this lawsuit coming. Would Goldman insiders bet against their own company just to make a buck?

      “Wouldn’t it be interesting,” another wrote, “if Goldman had a huge position in the puts and made enough to cover the settlement and then some.”

      “Given the ‘penetration’ of Goldman with the government and the SEC,” a reader writes, “and given the timing of the announcement, given options expiration day, it wouldn’t surprise me in the least if Goldman had the insider info on all this and made a fortune on shorting its own stock. Probably made more than the eventual fine. Now, that’s a place to turn one’s attention.”

    The 5: We’ll take a page from Goldman’s playbook and remind you that our suggestion of insider trading is “completely unfounded.” With that out of the way… more speculation:

    “My guess,” says our resident short seller Dan Amoss, “is that one party with suspiciously good information avoided a big loss on its short put position, while another lost big-time. It would be worthwhile for the SEC to look into the parties involved.

    “I'd understand this situation if it were a case of put sellers just buying to cover a few put contracts that they'd sold short, but the spike in volume is suspicious. Some entity — probably a quant fund — probably took the opportunity to short a huge block of put contracts that they were nearly certain would be worthless in a few days, and instead took a beating when the short position in these puts soared in value.”

    Good point. Hate to be the guy that sold those “sure thing” puts early last week. Someone, after all, has to be on the other side of those 87,000-140,000% gains. (Dan’s Strategic Short Report readers need not worry of such catastrophes… they purchase most of their puts six-12 months before expiration, allowing their themes plenty of time to stew.)

    By the way, we’ve got a very special offer happening now, where you can test-drive Mr. Amoss’ Strategic Short Report for just $1. Really, one dollar. You’ll get access to the SSR portfolio and a full month of Dan’s analysis and advice. Can’t beat that… details here.  


    Ian Mathias

    The 5 Min. Forecast

    P.S. You have less than 24 hours to take us up on six free months of Bulletin Board Elite. This is our most expensive service, with our most tightly controlled subscribership. So if you’ve been waiting for your chance… this is it. Wednesday night, the deal’s off.

    P.P.S. Tomorrow, check out “Midday with Dan Rodricks on our local NPR station. At 1pm (heh, immediately following former Gov. Ehrlich) our commander in chief, Addison Wiggin, will be discussing the Tea Party movement and health care reform. Don’t miss it. 


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