Options Trader: Monday Morning Ideas

by: Philip Davis

Asia is flat to down, Europe is flat to down as the global markets are on Fed watch.

The Dow is right on the 11,000 mark so it bears (oops, don't say bear!) watching while the S&P continues to treat the 200 dma of 1,260 like an unobtainable goal and the Nasdaq seems like a real lost cause. This is the perfect recipe for a huge rally!

To get a rally this week several things have to happen:

* Funds need to try to salvage the quarter. As we are close to negative the question is whether they would rather take a small loss or work hard to post a small gain needs to be answered but the quarter ends on what should be a wild Friday.
* Today's meeting of Central Bankers in Basel needs to go off without incident.
* Tuesday's economic forecast needs to be strong with consumer confidence over 103 and home sales flat.
* Thursday's Fed statement needs to give us something to hold on to at the same time as the ECB makes a statement.

If all of the above happens, we could have a really good week, otherwise - probably not!

Let's keep our eye on the NYSE which is right under its 200 dma of 7,928 and provides a nice, broad view of the markets.

Warren Buffet gave Bill Gates $37Bn this weekend (and I told there was no way America was going to win the World Cup!) and PD is giving N $40Bn (these soccer fans...) who is giving FAL $20Bn (cheapskates) in one of the more complicated deals of the weekend.

Oil and gold are off a bit on another quite weekend but it will take another few days for the new shot of terror fear to drain out of the markets.

Much like Asia, I will just watch and wait today hoping for a sign.

I fear another commodity rally today that will again give us false hopes to be dashed by the Fed. My big prediction is that if the 10 year hits 5.5% (possible if we get a half point hike) then the markets will drop another 5% as money flows into the safer securities (although there was a great article by Ben Stein in the Times this weekend that made the argument that our notes are literally not worth the paper they are written on).


The PD deal is a huge bet on continued high commodity pricing but the downside for PD is pretty much the whole company if they are wrong. They are paying a 20% premium for a company that is paying a 20% premium to acquire FAL (so the FAL guys make out like bandits) but both N and FAL are up 300+% from '04.

Of course they are only spending 30% in cash and the rest is in PD stock which is up 400% since '04 so it could be argued that this is a good deal for PD but, like I said, they are betting the farm and every other farm on this one.

Clearly they are overpaying by $10Bn and PD is only worth $17Bn, smaller than N or FAL... If copper even flinches down this thing can sink faster than the titanic, as it is look for a successful test of the 5% rule for PD to the downside today.


Now I wish we had just held that MT put as their persistence paid off and Arcelor accepted their ridiculous offer which should send MT below $30!

Let's keep our eyes on GM and CAT who were among the only Dow gainers last week but I still say GE, TXN, APPL and INTC are going to be the best indicators of market strength.

Oil looks to have a good week as Chinese demand shows no sign of slowing and US GDP will likely be over 5% so look for $70 to be well defended. Of course all this commodity bullishness backs the Fed into a corner as inflation cannot be denied at these prices.

JNJ picked up Pfizer's consumer health care division for $16.6Bn, this is great news for our JNJ Aug $60 puts (were .50), which may go in the money on this news!

It is also good news for PFE and I may want to play the Aug

I still think the oil majors are undervalued but there is now a fear factor built into them that they will get deal fever and start throwing their cash around and overpaying for E&P companies. XOM has stated over and over that they don't believe in $60 oil so I think they are least likely to pull the trigger so I will be hoping for a pullback to play the $57.50s for under $1.50.

Be very, very careful out there!