Insights

Exxon Gets Gas, Dubai World Bailed Out, Citi Escapes

The big news the market woke up to this morning was that Exxon Mobil Corp. (NYSE: XOM) was shelling (not the other oil company) out $41 billion for XTO Energy (NYSE: XTO).  XTO is more deeply involved in natural gas than oil and Exxon is more concentrated in oil than natural gas, so the combination makes the combined company more diversified.  Currently, the ratio in prices of oil to natural gas is at a historically high levels and by looking at the buyout through this lens, the deal makes even more sense.  ExxonMobil is shorting oil (selling their shares) and  going long natural gas (buying XTO) in order to bet that the very high ratio reverts to the norm over the long term.  Exxon is a hedge fund now?  No, just a company that knows a LOT about energy.  Another factor in the buyout may be the cap and trade legislation, possible carbon taxes and the fact that natural gas is much cleaner burning fuel than coal or oil.

News out of the Middle East had a positive effect on the market as Abu Dhabi pulled a 180 and announced a $10 billion bailout of Dubai World.  After saying they were not going to stand behind Nakheel a few weeks ago, the reaction to this news was possibly reason enough to reverse course as UAE stocks took off on the news.  One market that really likes this bailout news is the gold market, as the dollar dropped today as investors nerves were soothed by the bailout and the appetite for risk increased.

Even with such a major deal being done the Dow Jones Industrial Average was only up 29.55 points (+0.28%, 10,501.05) and the S&P 500 gained 7.70 points (+0.69%, 1,114.11).  The Nasdaq 100 outperformed the other indexes adding 17.03 points (+0.95%, 1,809.09).

I am seeing a few chart indicators that the pullback in gold may be just about over, opening a window for a favorable entry point into the gold trade.  Gold trades inverse of the dollar and on the day Dubai World announced their debt problems and gold dropped $46 an ounce the PowerShares DB US Dollar Index (NYSE: UUP) traded their all time high volume of 12.9 million shares.  The dollar shot up, gold got hit and it looked like volume was marking the bottom for the dollar.  Last Friday the UUP traded 15.2 million shares on the peak of their run up and traded lower today.  The SPDR Gold Shares (NYSE: GLD) has pulled back to trade just 30 cents above its 50 day exponential moving average, which represents a support level, and traded higher today.  The stochastic oscillator for the GLD has fallen, and while it has not turned upwards yet, we are approaching an area where it is likely to.

The GLD closed today at $110.24 (+0.84%, +$0.92) and watching for a breakout above $111 before entering may be a safer trade.  If the GLD trades below where the 50 EMA is ($108.44) get out and take a $2.56 loss (-2.3%) while the upside to this trade, if you hold just back to its all-time high for the GLD, is $8.54 or 7.7%.  Many traders regard a 3-to-1 ratio of a trade’s success to be what they look for.  (7.7 / 2.3 = 3.35).

New York Spot Gold gained $8.90 an ounce (+0.80%, $1,124.00, 4:10 p.m.) as the dollar dropped today.  The UUP lost 5 cents (-0.22%, $22.63) as the Dubai World news eased investor fears and they moved money to riskier currencies and in effect, put the ‘risk trade’ back on again.  The big question is whether or not this Dubai bailout will embolden the carry trade cowboys enough to bottom gold out here and cause the dollar bounce to be short lived.

Citigroup Inc. (NYSE: C) got clearance from the Fed to repay their TARP loan causing the shares to drop 6.32% (-$0.25, $3.70).  Citigroup is planning a huge secondary to raise the money and this could dilute Citigroup stock by as much as 20%.  Looks like Uncle Sam is going to come out of this deal with a tidy little profit as well, as analysts estimate a $13 billion profit.  This of course is if you ignore the hundreds of billions of dollars of toxic paper the Fed bought off Citibank and the Citigroup debt that got U.S. Government guarantees.  Then again, those guarantees did not do Fannie and Freddie’s bondholders a whole lot of good.

Nymex crude dropped 21 cents (-0.30%, $69.66, 4:10 p.m.), even with the big oil patch deal.  This drop in oil may be what kept the market from rising on the XTO announcement, as the dropping commodity worked against the merger news in the oil stocks.  The Nasdaq 100 did have a strong day and there are few (if any) oil stocks in that index.

The big economic event this week is a Fed meeting that starts tomorrow with the announcement on interest rates scheduled for Wednesday at 2:15 p.m.  The view on the Street is that with this time of year being a thin trading time, the Fed will not alter their statement at all, and no one expects a hike in interest rates.

Friday is a quadruple witching day for options.