Options Trader: Friday Morning Ideas

by: Philip Davis

Phil Davis submits: I don't trust the market and I don't like what THEY have done to pump them up! I'm saying this at 6 am, before General Electric Co.'s (NYSE:GE) earnings, and my opinion is subject to change after I get a look at their earnings, but I had a nice revelation today thanks to a guy in comments who compared me to Hunter Thompson (something I take as a great compliment).

I'm pretty sure Hunter would have loved blogging, being able to get your thoughts on paper and "straight to the people" without delay (or editorial cuts) would likely have appealed to him. He made a great career out of picking on the establishment and taking down conventional wisdom with a sense of humor, and I never thought much about how much his writing influenced me as it's been years since I've read his stuff.

He was, in fact, the first blogger. Back in 1971, in an effort to "be fresh," he would fax in his work: "Because of the freewheeling nature of the campaign, a first-generation fax machine was procured at great expense by the magazine (Rolling Stone) for Thompson. Dubbing it "the mojo wire", Thompson used the new technology to extend the writing process precariously close to printing deadlines, often haphazardly sending in hastily written notes as the "article" mere hours before the magazine went to press. Fellow writers and editors would have to assemble the finished product with Thompson over the phone."

Fear and Loathing on the Campaign Trail '72 was one of the first adult reads that really moved me, which I suppose is pretty warped for a 9-year old -- but the damage is done so we move on! Like me, Hunter used conspiracies as a literary device to talk about complex socio-economic confluences of events that are way too tedious to actually get into (and besides, it's always fun to have someone to blame!).

I never thanked him for that and I guess I should!

He was the darling of conspiracy theorists everywhere though, and that reminds me I need to take a break every once in a while and remind people that I say a lot of this tongue-in-cheek and, other than the actions of this administration, there are perfectly rational economic reasons for most of the movements we see in the markets.

Speaking of the markets -- for whatever perfectly rational and economically justifiable reasons, it looks like oil is back on the rise and (now 7 am) GE's earnings were fractionally better than in-line, but a quarter cent from GE is like a dollar from 100 smaller companies!

I'm not sure if the steroid-enraged market will see it that way, as it needs constant fixes of great earnings to keep performing at this enhanced level.

GE had good overseas growth, predictably in energy, but NBC is still dragging them down (no surprise there as they move to 4th on Thursdays), and costs seem to be creeping up slightly as revenues were a clear beat but guidance remains in-line.

So far we've had disappointments from Alcoa Inc. (NYSE:AA) and Genentech Inc. (Private:DNA), but we need to look ahead next week to Apple Computer Inc. (NASDAQ:AAPL), Yahoo! Inc. (NASDAQ:YHOO), Intel Corp. (NASDAQ:INTC), International Business Machines Corp. (NYSE:IBM) and Google Inc. (NASDAQ:GOOG).

Pepsico Inc. (NYSE:PEP) had great earnings and raised guidance, but it didn't matter enough to get them back to their all-time high of 9/27, and I'll be watching them closely to see what the market is really up to.

Fed Gov Moskow is concerned about Pepsi's 12% earnings growth as a lot of it comes from raising the price of orange juice 10%, and he said this morning, "The risk of inflation remaining too high is greater than the risk of growth being too low. Thus, some additional firming of policy may yet be necessary."

If that just-doesn't-matter I will be found at the bar of the Hotel Jerome in Aspen, muttering to myself and using the phrase "bastards" more often than is polite...

Oil is up .89 in pre-market, and I see no reason for it, but the Asian markets rallied on strong retail numbers and a strong case of 12,000 fever. I guess a record trade surplus doesn't hurt them either. Commodities are back on the rise but no one seems worried that yesterday's beige book clearly indicates that wages are not rising fast enough to afford all this.

The big, under reported news in Europe is a pending trade agreement with former colony India -- welcome back boys! Just 60 years after poor Ghandi starved himself to get away from these people it looks like India will be accepting junior membership in the EU.

This is a huge world-changing event as it creates a larger potential economic sphere than the U.S. can possibly hope for in the next century. If China joins this block down the road, we will effectively be left with only Japan and the Americas as serious trading partners, with almost half the world's population in an economic alliance. That will leave us to market to Africans, who don't have any money, or the Muslim nations who... oh yeah... right... So, how about those Africans!

Of course Europe is happy and not at all bothered by GE so far (as GE's international sales were the highlight of the report), while one of the biggest losers was L'Oreal on news of disappointing U.S. sales. Hmmmm....

The Dow is now 147 points above the level we hoped would hold, so I will repeat last Friday's statement: "At this point it will be very hard to end the week badly!"

Likewise for all the indices, as they could all lose a full point today without causing any technical concern, so let's just move on and hope for the best.

Anything up today, anything will really get me, if not on board with the Energizer Rally, then at least in Dr. Strangelove mode (ie. How I Learned to Stop Worrying and Love the Dow).

I said my piece on oil yesterday, and the market is rushing to prove me wrong as crude gains a dollar in Europe to push back towards $59 as they myth of Chinese demand is seized upon by traders desperate to get out from under crushing speculative losses.

This article is typical of the nonsense they are getting you to swallow with truthful but misleading statements like: "China's farmers boosted crude oil purchases by 24% in September compared to last year. " A) China's farmers consume less than 1M barrels of oil per day. B) Last September oil was $70, having spiked up $10 from August. This September, oil is $60, having spiked down from $75 in August. If you were a Chinese farmer -- what would you do?

Let's remember that our danger zone on oil is $60, not $59, as we have to keep a longer-term perspective (like 3 days!):

You can use micro statistics to prove anything if you set your mind to it, but this article also shows that demand is up 3.29Mbd from last year, but does not take into account the build in China's SPR (perhaps larger than we've been told), and the action of refiners topping off their tanks as oil drops 25% from July's levels. They also understate the build in U.S. inventories by 40%, so you can imagine who must have supplied the data.

Speaking of statistics -– ignore the retail sales numbers today as of course it will be way down with oil costing 10% less than the month before. Wait until they come out with numbers that take out energy and auto spending so we can get a good look at reality!

ConocoPhillips (NYSE:COP) just came out with a shocking forecast for oil: $35 next year! That is according to Conoco's Chief Economist Marianne Kau.

Gold is flying up on a weakening dollar (the entire rest of the world thinks the India-EU pact is a big deal and a long-term negative for the U.S.), and we'll see if they can take out the $590 level. Once again an irrational rise in mining stocks presages a sudden jump in gold, so perhaps we need to come up with a Goldcorp Rule to guide us through the metals markets.

That's all I have to say at the moment, I am not picking anything, and I am setting 20% profit losses and 20% stop losses on all remaining positions other than my November oil puts which I will hold unless oil crosses $60.


Putting a damper on the international airlines is not one, but two European carriers coming out with business-class-only planes that cross the Atlantic for $1,900, about 30% less than U.S. airlines charge. That extra $1,000 is a tremendous amount of our airline's profits.

  • Oops, I said I wasn't going to make any picks, but I like Glaxosmithkline plc (NYSE:GSK) Nov $55s for .90, as they come off a bounce on the 200 DMA at $53.50 (stop point) and have some interesting studies around Avandia as a prevention for diabetes, a huge change of use! Earnings are 10/26, and this is a risky but potentially rewarding play.

Rising oil and international competition may be a recipe for a correction of Continental Airlines Corp.'s (NYSE:CAL) 33% run since 9/11, but perhaps that was a fear date that was holding the stock down since it topped out in July -- must remember that for next year! Happened last October too!

Be careful out there today. My personal goal is 75-80% cash going into the weekend.

Just because I don't want to close a position out, doesn't mean I can't lighten up on it to reduce the risk -- trading does not have to be all or nothing!

Read all of Phil Davis's articles on Seeking Alpha.