Trader Talk

Conspiracy Theories Rule The Morning


The conspiracy theorists are out in force today: lots of "I told you so!" going on today as traders point to a front page story in the WSJwhich says that the Commodity Futures Trading Commission (CFTC) will issue a report blaming wild swings in oil prices on speculators.

This follows on the heels of a Rolling Stone storyabout the alleged manipulations of Goldman Sachs. These allegations have floated around for years, but this time they seem to be hitting a stronger chord with traders, who ten years ago would have laughed off these allegations.

The question is whether they have reached an intensity great enough to actual result in some kind of additional regulatory action.


1) Traders are watching the delicate dance that is going on between President Obama, Treasury Secretary Geithnerand Chinese officials who are meeting with them in Washington, led by Vice-Premier Wang Qishan. There are the usual assurances that the Americans will maintain a strong dollar policy and protect the Chinese investment in US Treasuries, but this time they are being delivered with more force. The Chinese are worried that inflation is not far away.

2) Shares of Office Depot plunge 16 percent pre-open. The office supplies retailer posted a much larger-than-expected Q2 loss ($0.22 vs. $0.12 est.) as North American same-store sales fell 18 percent in the quarter. The problem: cost cuts couldn't outweigh sales volume declines.

3) Coach is down about 6 percent pre-open after reporting Q4 results inline with estimates. Comp store sales down about 6 percent was a bit of a disappointment. Earnings fell 21 percent from last year's levels, hurt by weak sales and declining margins.

Bear in mind Coach has had a huge rally in the past two weeks, up over 20 percent, so a pullback would not be a shock.

Sales declines in North America (down 6 percent) and Japan (down 10 percent) were off set by double-digit growth in China. Margins declined significantly too, dropping nearly 8 percentage points from the year-ago quarter. This wasn't due to more promotional activity though; instead, the luxury goods retailer unveiled a greater number of lower-priced items rather than relying on discounting strategies.

4) Viacom shares drop 9 percent pre-open despite beating earnings estimates by a penny. Revenues for the media giant fell short of expectations however on weak ad TV sales, disappointing box-office results, and slower sales of its Rock Band video game franchise.

5) Oil refiner Valero down 4 percent, reported a loss of $0.48, about in line with expectations. They made $1.37 for the same period last year.

The difference was much lower margins for diesel and jet fuel; simply put, the spread between what they bought a barrel of oil for vs. how much they could sell diesel and jet fuel for collapsed due to weak truck, tractor, and aircraft demand.

Another problem was the differential between the types of crude have narrowed. Valero had an advantage because they were able to process heavy sour, which is the cheapest crude to buy but it is expensive to process. But the price spread between heavy sour and light sweet has narrowed (because demand is lower and it easier to process the light sweet variety), so Valero lost much of its advantages.

The good news is that the gasoline spreads have improved a bit recently. But demand is still weak, so refiners are still reducing capacity.



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