Oil Falls

by Larry Levin

Today was all about oil. There was other news to be sure, but the euphoria of a $3.34-barrel drop of the black goo was too much for the bears to overcome. June S&P futures closed +11.30 for the day.

The Commerce Department reported sales of new homes climbed in April for first time in six months, but economists said the gain was a rebound from a sharp drop the prior month and doesn't mark a turning point for the embattled housing market. Last month's sales gain was just a rebound from the sharp 11% drop in sales in March to 509,000 units, which was the lowest level in sales since April 1991.

Even with the slight increase, existing inventories remain stubbornly high. "Inventory of existing homes is still very close to its record high so prices will continue to fall rapidly," said Ian Shepherdson, U.S. economist at High Frequency Economics.

The Case-Shiller home price index was also released this morning. This index tracks home prices in 20 major U.S. metropolitan areas...and tells us these prices have dropped a record 14.4% in the past year! The sharpest decline has been in the formerly bubble areas such as Las Vegas , Miami and Phoenix .

"There are very few silver linings that one can see in the data. Most of the nation appears to remain on a downward path," said David Blitzer, chairman of S&P's index committee.

Gas prices and a slowing job market made for another weak report this morning - consumer confidence. Consumer Confidence Index dropped to 57.2, down from a revised 62.8 in April, which marks the fifth straight month of decline. This is also the lowest since the index registered 54.6 in October 1992 when the economy was coming out of a recession.

"Weakening business and job conditions coupled with growing pessimism about the short-term future have further depleted consumers' confidence in the overall state of the economy," Lynn Franco, director of the Conference Board's Consumer Research Center, said in a statement.

Like many reports, the Consumer Confidence Index is made up of many segments, one of which is "inflation expectations." In this latest reading inflation expectations jumped more than economists had expected, prompting Ian Shepherdson, chief economist for High Frequency Economics, to write in a note to clients that the expectations index is "stupefyingly awful."

"The details are worse than the headline, which is being held up -- relatively -- by the current conditions component, which in fact lags the economy," Shepherdson wrote. "The combination of falling home prices, soaring food and energy prices, the credit crunch and the worsening labor market is killing consumers."

In a speech this morning, the San Francisco Fed president, Janet Yellen said that the road ahead for the economy was particularly uncertain given the financial turmoil, the housing cycle and commodity prices. However, she also warned that the central bank would have to pay close attention to inflation.

Although Ms. Yellen's comments were certainly "hedged" like a good trade, she is one that until now had been ignoring inflationary pressures. Therefore, when she mentioned it, it was taken as another sign the Fed will not be cutting rates soon. This could have been one reason why the 30-YR bond was hammered today, falling -1.07 points.

The Swiss banking giant UBS admitted to more trouble in its real estate portfolio. Yesterday it warned that that it may have to record losses on non-U.S. real estate as it seeks (another) nearly $16 billion from shareholders to repair a dented balance sheet. At one point I noticed UBS was down -16.0% today.

But UBS wasn't the only mega-bank with problems today: Banc of America analysts downgraded, Lehman Brothers, Goldman Sachs, and Morgan Stanley. "Slowing economic growth and still large balance sheet exposure to residential and commercial mortgages and hung bridges suggest a lackluster, low-visibility environment for the large I-banks through '08," Banc of America's Michael Hecht and Scott Buck wrote in a research note.

Lehman Brother's trouble may just be beginning again. The rumor mill is once again saying that LEH could be the next major bank to fold. But this time it isn't really conjecture, but facts that are troubling so many on the Street. Some analysts are now forecasting a loss of 50-cents a share compared to its prior projection calling for a 76-cent profit for this quarter.

However, none of this matter today because oil traded lower.

Real Time Trading Signals*for

Trade Date: 5/27/08

E-Mini S&P Trades*
(before fees and commissions):

1) VA sell @ 8:45am at 1380.75 = +1.00 & +2.50

2) VA buy @ 9:20am at 1380.75 = b/e (1 lot)

3) VA buy @ 10:00am at 1380.75 = -2.00 (1 lot)

4) VA buy @ 11:05am at 1373.75 = +1.50 (1 lot)

5) OTF sell @ 11:30am at 1377.00 = -.50 & b/e

6) Engf sell @ 12:05pm at 1376.75 = b/e (1 lot)

7) TP sell @ 12:25pm at 1377.00 = -1.75 (1 lot)

8) Algorithm trades (7)...combined total...-+4.50

E-Mini Russell Trades*
(before fees and commissions):

1) No ER trades today.


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