With Dow Component Alcoa set to kick off the Q2 earnings cycle on Wednesday after the close traders were more focused on the Michael Jackson memorial than buying stocks ahead of earnings.
Market Stats Table The economics for the day were minimal. The weekly Chain Store Sales snapshot came in at 0.1%, down from +1.6% in the prior week. There is too much noise in the weekly numbers to be of any interest to traders. The Job Openings and Labor Turnover Survey (JOLTS) for May came in at -36.3% compared to -36.2% in the prior month. That means job openings were down -36.3% from May 2008. Openings were down -1.9% from April. This was a lagging report for the May period and did not tell us anything we did not already know. The report was ignored by traders. Wednesday's is going to be devoid of any material reports with only the Mortgage Applications, Oil Inventories and Consumer Credit. The biggest event on Wednesday will be the $19 billion in 10-year notes. Tuesday's $35 billion auction of 3-year notes was weaker than analysts had hoped. The bid to cover was 2.62 times the offer amount but analysts said it was below the average BTC rate for May and June. Foreign investors and large institutional investors were still the major bidders. Analysts fear that all the demand is going into the short-term notes and demand for the $19 billion in 10-year notes on Wednesday and $11 billion in 30-year notes on Thursday will be weak. With $2 trillion in U.S. debt coming to market in 2009 analysts are afraid we will eventually run out of buyers. The big news today was not really in the markets but in the Los Angeles Staples Center where 17,000 people gathered for the Michael Jackson memorial. The event was carried on dozens of channels, some without commercials, and was filled with appearances by stars and VIPs. Unfortunately for California it was another $4 million headache for the cash strapped city and state. Inside the Staples center the costs were covered by various people and the family. Outside the center the city of LA and the state had to supply security, traffic control, sanitation, etc and estimates for the cost range from $3 million to $4 million. The city and state were asking for online contributions to defray costs. Sure, like that is really going to happen. While the memorial was in progress there was already a move underway to process the estate and collect taxes. In a hearing while the memorial was underway a judge was set to rule on the 2002 will and appoint John Branca, a Jackson attorney and John McClain, a music executive, as co-executors. Their task will be to determine how much of the $500 million estate is fact and what is fiction. Under Federal law estates of more than $3.5 million must pay a 45% death tax to the IRS in cash within 9 months of the death. Everyone knows Michael Jackson had no cash and was deep in debt. It will be up to the executors to unravel the maze of conflicting details and come up with a final valuation and the cash to pay the IRS. That is going to be a tough job. If it requires a fire sale of some Jackson assets then those sales will have to be organized quickly. Jackson had a family trust but nobody knows what was in it. He also had an insurance trust outside the estate that is normally used to pay the estate taxes. Since the tax rate for contributing to that trust was also 45% while he was alive there is a lot of doubt that a cash strapped Jackson contributed enough to defer more than just a fraction of the estate taxes. While reading about the tax vultures already circling it made me decide to review my personal arrangements again. I strongly suggest anyone with a material estate should review their arrangements again. As Jackson's (age 50) death along with the sudden departure of Billy Mays (age 50) last week aptly showed, you never know when your time on the earth may come to an abrupt end. In the energy markets today the price of oil fell another $1.60 to close at $62.92 and right on the 200-day average. This is more than a $10 drop in the last two weeks. The big drops this week are related to fears of a lingering recession and lower decline as well as some regulation fears. The CFTC said today the commission would hold hearings this summer on limiting speculation in commodities. The fear of regulation and putting limits on position sizes has also caused a rout in the energy market. A survey last week showed that passive investors increased their oil holdings by more than 600 million barrels in June, up +30% from year-end. Whenever potential position limits are discussed in the press the price of that commodity always falls. Many institutions accumulate large positions as hedges and swaps against the actual commodity. They do this so they can cover hedges for customers and maintain an orderly market. If they are suddenly forced to sell tens of thousands of contracts because some overzealous regulator decides to make a political statement then their losses could be huge. Whenever this talk appears in the market they always lighten up on their positions to reduce risk.
Crude Oil Chart The commodity ETFs are running scared and the managers for the USO oil ETF filed a statement with the SEC on Monday in an attempt to rebut the constant claim that the ETFs were hazardous to the commodities market. The USO managers supplied charts of open interest and prices that contradicted the common claim that ETFs were to blame for price increases. The natural gas ETF UNG was halted for trading Tuesday afternoon because it had distributed all available shares and had suspended the issuance of new units until the SEC approved their registration statement for additional shares. The UNG fund requested authorization from the SEC back on June 5th to issue an additional billion shares. The SEC has not yet approved the request and some feel this is due to the ongoing move by the CFTC to limit position sizes. Trading resumed at 2:22 PM after the news had been disseminated. The UNG saw an influx of $1.7 billion in new money in June making it the largest inflow of the top ten ETFs by nearly 100% over the second place TIP bond fund at $942 million. The rest of the top ten inflows in sequence were VWO, IVV, XLF, SDS, DIA, DBC, GSG and number ten IJH.
UNG Chart I believe this is a tempest in a teapot and there will be no material change in the position limits. The commodity markets were constructed so that producers and consumers of commodities could use speculators to reduce their risk of price fluctuation. There has to be an equal number of speculators in order to lay off the risk. If you eliminate the speculators there will be no way for producers and consumers to hedge their risk and the volatility in prices would escalate substantially.
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