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Morning Update

Last night’s Asian trading session was dominated by risk-off sentiment as traders focused on China’s slowing economy and talks in Europe about the ESM, Greece, and Spain. The Chinese HSBC PMI was reported at 54.2, up from 52.0 last month. A story in the China Securities Journal says the government is likely to introduce more interest rate cuts to help ease the economy. The Euro is lower heading into the North American crossover, which could be supportive of US equities which are lower pre-market.

While the broad market gave up its pre-market gains on Friday, Phillips 66 closed up 1.4% on the day and had bullish options activity. We saw one trader buy 10,000 Jan. 2014 60 calls for $2.15 and another trader buy 5,000 Feb. 55 calls for $1.05. Phillips 66 stock closed at 46.02, so the first trader is expecting a 35% move higher and the second is expecting a 22% move higher. This bullishness could be attributed to a rising crack spread, which is the difference between crude oil and gasoline. Since a refiner buys crude oil and sells gasoline, a wide crack spread means strong margins and high profits. In the last month WTI crude has plunged over 15% while gasoline has fallen only 2.5%. Gasoline’s relative strength has been due to refinery outages in Southern California which have caused fuel shortages and caused spot prices to jump. PSX has also recently raised its dividend 25% and now yields 2.15%, and is a favorite at Berkshire Hathaway, which bought 27.2 million shares in August.


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