Options Trader: Tuesday Morning Ideas

by: Philip Davis

North Korea declared WWIII today -- will THAT matter?

"The (NYSE:UN) resolution cannot be construed otherwise than a declaration of a war against the North, also known as the Democratic People's Republic of Korea," the statement said. The North warned it "wants peace but is not afraid of war," and that it would "deal merciless blows" against anyone who violated its sovereignty.

The U.S. has finally confirmed that last week's test was, in fact, nuclear but either a dud or a very small one. Korea looks like they are getting ready to try again this week.

All right people, move along, nothing to see here...

I'm going to start taking bets on which will happen first: Will a Republican tell voters that it is a bad idea to change leadership "in this time of crisis" or will someone ask Bush about the war and he replies "which one?"

Bush's pal Saddam had a chance to weigh in: Mr. Hussein issued an open letter Monday saying Iraq's "liberation is at hand." The former leader said he was addressing Iraqis in a letter because, "my chances to express my opinion are limited" in detention. "It was only a few times that I managed to address you through the farcical, so-called trial when the microphones were not switched off," he said, acknowledging that he tries to use the trial for political propaganda

Speaking of farcical -- Goldman is putting it on the line with a downgrade to neutral on Intel Corp. (NASDAQ:INTC), ahead of earnings! Very ballsy move by Goldman Sachs Group Inc. (NYSE:GS), who is on a roll after downgrading The Home Depot Inc. (NYSE:HD) and General Electric Co. (NYSE:GE) yesterday...

Earnings, earnings and more earnings today and the markets look like they are in no mood for bad news!

I am less concerned with Intel and more concerned about Linear Technology Corp.'s (NASDAQ:LLTC) earnings as Linear makes sensors that go in cell phones as well as major appliances. Strong demand for their products will be a good sign of general economic strength.

My biggest concern about Wachovia Corp.'s (NASDAQ:WB) earnings yesterday, were the 23% rise in loan volume, not so much for their bottom line, but can American's still be going even further into debt? We set a record last year and 23% more than too much is WAYYYYY too much!

I lost faith in our Citigroup Inc. (NYSE:C) puts at the end of September, but this is pretty much what we were expecting at the time for the banking industry although, so far, WB seems to be much more affected than most.

I am blown away by this graphical representation of the stock option scandal in the Wall Street Journal! Although I was already well aware of all the numbers and figures involved, seeing it presented like this makes me angry and will likely make a jury angry as well (not to mention Congressmen and other regulators). This is far from over!

Yet another hedge fund in trouble: Vega lost 1/3 of the value of its select fund this quarter ($500M) and investors have taken back 65% of their money, dropping the total fund to $5B from $12B. It's shaping up just as we suspected it would, Ritchie Capital, for example, avoided a sell off of its assets by "reorganizing" but trapped the remaining investors for 3 years as they attempt to "ride out" the downturn.

China has started arresting fund managers for "economic crimes," perhaps the SEC should take note!

Asia seems slightly concerned about nuclear war breaking out in their neighborhood, and those markets were generally down for the day. China now is holding 1,000,000,000,000 U.S. dollars -- more than the entire GDP of all but 9 countries on this planet. Most of that money is in U.S. treasuries, and they continue to add $20B a month. A change in that policy on China's part can send rates up 2-3% very quickly!

Europe is on a downswing this morning as high oil prices are crushing the usual suspects. Both Asian and European markets were saved from disaster by the massive oil gains that pretty much happened after they closed yesterday. As I always say, that is nothing to base a rally on!

Anticipated Dow pullback is still the 11,865 I called for yesterday. The S&P can drop to 1,350 without setting off any alarm bells and the NYSE built up a nice buffer above 8,500, below where I would become concerned.

The Nasdaq needs to hold the 2,300 line but you'll be worried long before it drops 63 points! It's funny how things work out as the SOX stopped right on the 200 DMA at 477 last night and anticipation of strong INTC earnings should have put them right over the edge but, with a GS downgrade, it will be a tough trick today.

The transports are in day-4 of oil denial, but we're breaking $60 today and we'll see if that matters to the companies that run on fuel...

Can we really have come this far only to turn back here? The PPI was down 1.3% for September due entirely to falling energy prices while the core PPI was up a scary .6%, too high for the Fed to tolerate! If prices are creeping into the core and energy prices are back on the rise, can the Fed really sit silently next week?

Oil continues it's relentless pursuit of my $61.69 bounce target despite all sorts of evidence that there is an oversupply, including the fact that OPEC has to cut production to maintain pricing. The entire run in oil since 2003 has been based on people telling you demand outstrips supply and there is no excess capacity. Even as it is confirmed that supply is outpacing demand and there is plenty of excess capacity, oil can still rise $4 in 2 weeks during the slowest demand season. Am I the only person who finds this strange? Apparently so!

The WSJ has a great roundup of oil news here.

Gold must break $600 as the 50 DMA moves dangerously close to crossing below the 200 DMA right at that line! I don't think it can be stopped at this point, so it's just the severity of the downturn that will be in question. Who knows though, Korea's next test may be a huge success and send people back into gold.

Happy birthday to U.S. resident number 300,000,000! Today is the day that we become only the 3rd country in the World to hit that mark. Expect a commodity push, including water, in the next week-or-two as many articles come out telling you how much all those people use. Aqua America Inc. (NYSE:WTR) Mar $25s make a fun population play at $1.

Today's Picks:
Today will be very interesting and I am getting ready to make some plays as we are getting enough earnings reports to see which sectors have strength. Hopefully the markets can weather today's storm and continue to accentuate the positive!

  • Chicago Mercantile Exchange Holdings (NASDAQ:CME) is buying CBOT Holdings Inc. (BOT) for $8B! That should matter to BOT as it's a $1B (15%) premium. CME only makes $300M a year and adding BOT's $100M is still going to make for a tough mortgage payment! I may be interested in a short position if CME pops up today, but it's very dangerous!

United Technologies Corp. (NYSE:UTX) had great earnings, as helicopter sales are "en fuego!" This is a heavily weighted Dow component that was an old pick of ours due to their ownership of Otis, who are also participating in the global construction boom.

Sony Corp. (NYSE:SNE) is finally recalling batteries in their own computers! The company says they are 'considering whether it needs to revise its earnings outlook." Gee, ya think? The stock rallied back $3 in the past week, and is projected to earn $1B, but I see 4M Dell recalls, 2M Apple recalls and more than a Million other miscellaneous companies times $100 (guessing) per battery = $700M + shipping.

Obviously not all the batteries will be returned, but every one that isn't is a potential fire lawsuit. I wonder what kind of batteries are in those little PSPs? The Nov $40 puts are .90.

I floated a business idea about providing outsourced health care and just one day later I already have an ideal partner! Chindex International Inc. (NASDAQ:CHDX) runs the United Family Hospitals in China and is able to fully insure you for less than $250 a month with a $1,000 annual deductible!

Merrill Lynch & Co. Inc. (MER) looks like a 30% beat -- stunning numbers! Office Depot Inc. (NYSE:ODP) also posted big gains and we'll see if it's enough to get them to a new high ($46.52).

Wal-Mart Stores Inc. (NYSE:WMT) is spending $1B to buy China's Hypermart, a deal that will add 100 stores over 3 years at a cost of $10M per store. I call this to the attention of people who question the value of Sears Holdings Corp.'s (NASDAQ:SHLD) 3,900 U.S. and Canada locations!

Level 3 Communications Inc. (NASDAQ:LVLT) is buying Broadwing Corp. (BWNG) for $1.4B in a cash plus stock deal, a 20% premium but well worth it for Level 3 strategically.

  • Merck & Co. Inc. (NYSE:MRK) got their approval and we protect our gains in this kind of market so be realistic!

Eli Lilly & Co. (NYSE:LLY) is acquiring ICOS Corp. (ICOS) for $2.1B, a 20% premium. One would almost think all these merger announcements were timed...

In general earnings remain strong and I'm certainly not ready to panic on the basis of the PPI alone. Let's wait for the CPI tomorrow to panic!

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