Options Trader: Monday Morning Ideas

by: Philip Davis

Well I wanted to be all positive about the markets today, but I'm a little concerned about commodities dragging things down. As you can tell from my previous post, I'm a little down on oil at the moment, and the .88 drop this morning (6 am) on the finally-rolled-over contract shows there may be more than a few Nervous Nellys out there.

The Nikkei added almost another point, but the rest of Asia was mixed, waiting for Honda Motor Co. (NYSE:HMC), Sony Corp. (NYSE:SNE), and Canon Inc. (NYSE:CAJ) to announce this week. Komatsu, the Japanese Caterpillar, got clobbered -- falling 4%, but Yahoo Japan put up some very nice numbers after the bell.

I don't even know why Europe bothers most days; as soon as U.S. futures open they tend to move in lockstep with U.S. markets. It's time they just abandon their Union and give all their money to Goldman Sachs or Fidelity -- they're going to get it one way or another eventually!

Just as, eventually, Warren Buffet will always find a bargain! Berkshire Hathaway Inc. (NYSE:BRK.A) is coming to the rescue of Lloyd's/Equitas, who have a potential $5.7B overhang from asbestos claims which has rendered them less than liquid. That makes Owens Corning (OWENQ) a stock to watch, but not buy, as the shares may liquidate in the final bankruptcy settlement.

Halliburton Co. (NYSE:HAL) was solid this morning, and Ford may have a hard time losing as much as is expected, but the markets look pretty weak at 7 am.

The Dow needs to hold that 12,000 mark to avoid a top being called, but I already called it last week so we'll see how things work out.

We'd like to see the S&P hold 1,360 and the NYSE remain above 8,600, and anything above 8,700 there will be a very good sign! The Nasdaq is our most likely trouble spot, especially if we lose the SOX, and 2,325 looks like a weak floor:

COMP 2-month Daily Chart 23 10 06

The SOX have fallen below their 50 DMA at 450, and need to climb above it for us to have any sort of rally, while the transports aren't so bad if they can maintain the 200 DMA at 2,560.

We finally have everyone on the same page with the December oil contract (I don't know what happened to November) officially opening the morning at $59.33 and is, at 7:15, down .71 for the morning.

We're going to have to let this little drama play out as the price of oil is the only thing holding up $4T in commodity pricing and we know how easy it is to manipulate the NYMEX. As I said back in September -- "it doesn't pay to manipulate the contracts buyers don't see" so the games begin today on the December contracts.

Let's look for $61 to offer serious resistance, but there may be a push to keep prices up in the last 7 days of this month.

Gold is going to continue to do whatever the dollar doesn't, and Japan's economy is weak enough to give the dollar support this week. At the same time, the U.S. is pressuring China to float their currency, creating some negative headwind.

Dollar direction is very important today as it rests at the 50% retracement from the 200 DMA it failed at last week, and needs to brace here at 86.25 in order to make another run to break through at 87.

US Dollar 2-month Daily Chart 23 10 06

In general I am inclined to wait for the Fed as I really think they should be raising on Wednesday rather than let the economy overheat again, just when they put a (leaky) lid on inflation. It's now or never for the year, as they simply can't raise right before the holidays, and I bet Bernanke really would like one more quarter point he can use as a bargaining chip in the spring.

======================================

We have serious directional indicators from American Express Company (NYSE:AXP), who will know before anyone if we are slowing down in the upper income spending. Amex posts mid-day, and make a very exciting put if they miss! The $55s are .35 and make a nice, quick momentum play if you catch them right, but it's a very risky day trade!

Texas Instruments Inc. (NYSE:TXN) is another risky one with earnings out after the bell. We already know there is pressure on the sell side, but it's possible that it's TXN who is applying the pressure on Broadcom Corp. (BRCM) and others to lower prices. On the whole, expect a penny beat, but more than that should make the $32.50s a nice momentum play in the morning (I wouldn't take the chance ahead of earnings!).

Cramer was on the Kraft Foods Inc. (KFT)/General Mills Inc. (NYSE:GIS) bandwagon, and KFT is up 8% since he explained that they make more money on a box of cereal than XOM does on a gallon of gas. As I said at the time: "When people start filling up their tanks with 20 boxes of cereal a week, give me a call."

Amgen Inc. (NASDAQ:AMGN) may pull out a beat out of the hat, but this one is a tough call! The $75s are just $1.45, but I'm not going to play them in a down market. Take a look at Replidyne Inc. (RDYN) today before you think about betting on biotech!

I must be hallucinating because I think Cramer just recommended General Motors Corp. (NYSE:GM) again! I can only pray they buy that thing up again so we can take another crack at it.

==================================

Ah, here's Ford with a $5.8B loss -- right in line, so good for them! Nobody wants a truck or an SUV, and they were lucky to escape with that. On the whole this $8 stock lost $3 per share in three months, and should officially be given tax-free status as a charity. They also will have to restate earnings from 2001 until this quarter "due to accounting errors involving derivative transactions." Anyone out there betting that's a good thing?

Definitely not a good thing is 83 servicemen dead so far in October, the worst month in Iraq since we "won" the war two years ago. "I'm patient. I'm not patient forever, and I'm not patient with dawdling," Mr. Bush said. "But I recognize the degree of difficulty of the task, and therefore, say to the American people, we won't cut and run." Sunday's killings raised to at least 950 the number of Iraqis who have died in war-related violence this month, an average of more than 40 a day. The toll is on course to make October the deadliest month for Iraqis since April 2005, when the AP began tracking the deaths.

There is a great shouting match going on CNBC (8:20) between union reps and Wal-Mart spokesman Richard Berman that I hope someone can find on YouTube -- quite the heated battle!

AT&T Inc. (NYSE:T) had a very nice quarter with a 74% rise in net profit on a 52% rise in revenue to $15.6B. Wow, good thing we broke those guys up!

If Xerox Corp. (NYSE:XRX) is making money then things must be going well! The company's sales have been dead flat since 2003, with the emphasis on dead, but margins have steadily improved but this quarter they posted a surprising .23 a share, even after .14 of restructuring and litigation charges. Guidance is a little light so we'll watch closely to see how the market reacts.

Amazon 5-year Weekly Chart 23 20 06Amazon.com Inc. (NASDAQ:AMZN) is my put of the day (assuming the market is down) with earnings out tomorrow and up more than 20% since the last earnings disaster. We have effectively filled the gap since last earnings, and it's a long way back to $25, so I'll risk the Jan $30 puts for $1.60 but sell 50% of them against Nov $30 puts for $1.10 to lower my basis to $1.05.

Be careful out there today, it's going to be a bumpy ride!

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