Options Trader: Wednesday Morning Ideas

by: Philip Davis

The dollar is collapsing!

US Dollar Chart 1 11 06

Election rhetoric may not fool anyone in this country, but the rest of the world is listening to this nonsense and is losing confidence in our country.

The drop in the dollar against they Yen has gotten so bad that the Nikkei is faltering over it. The Hang Seng is less affected because they manipulate their currency to be worth whatever they want, and thank goodness too, because the dollar can't afford to lose ground to yet another major currency!

This should finally push our Sony Corp. (NYSE:SNE) puts into the money, so we have that going for us, but rising import and commodity prices are not the best recipe for holiday cheer. The only good thing about this is that we can expect some of the CBs to step in and bail us out.

Lucky for us the Europeans may be feeling generous as the EU's economic confidence index rose to a 5-year high (in stark contrast to our report yesterday) while their inflation fell to 1.6%. Unemployment in France (where they were rioting last year) is down to a 5-year low of 8.8% -- we have no idea how good we have it!

The robust EU economy is boosting the miners, while DaimlerChrysler (DCX) chipped in with a report of lower-than-expected charges against a massive job cut.

Back home, Mrs. Jones will try to keep the fires burning. We have construction spending and September home sales at 10 along with the ISM index, so don't trust anything until then. We would still be thrilled to hold 12K, but let's look upwards as a weak dollar will give a lot of our local boys an initial boost.

The S&P faces a challenge at 1,380 that bears watching and, of course, 1,370 is bad. The NYSE will lead the markets one way or the other, but should have good resistance at both 8,800 and 8,700. The Nasdaq is also stuck between 2,350 and 2,375 and needs to break up soon if we are going to get this party rolling again.

Comp Chart 1 11 06

The SOX will give us a big warning signal if they slip below 453, but I'm hoping we can stay over that pesky 460 mark today. The Dow will not be going anywhere without the transports and they will be going nowhere but down if they break below 2,550.

Oil needs to go down and down and down for the Republicans to have any chance of pulling out the Senate (the house seems to be a lost cause), and a loss of both will leave Mr. Bush with the historical title of "the veto President."

Inventories are at 10:30 and a big 3M barrel build is expected and beating that number may get us moving down towards that magic $55 level, but the 5% rule says $58.56 should be the bounce zone with no real danger until we get back over $60. Below $57 is a pretty good path to our next stop at $54.28, and we'll know we are getting there if oil gets stuck below $57.

Gold continues to benefit from dollar weakness and the miners may get a boost this week, but I don't trust the sector until the dollar proves it can't bounce back, as it has all year.


Earnings sentiments have taken a nasty turn and I will be stepping back from playing anything today until I can get a handle on this. A lot of very good reports are being punished while weak reports in the energy sector continue to be treated like an IPO.

Speaking of IPOs, Mastercard Inc. (NYSE:MA) is heading to $80 as net income climbs 82% (I knew those fees were a little high!) -- over 30% ahead of the estimates of 17 analysts who will somehow keep their jobs, including Citigroup and GS who downgraded them on the 9th! I wish I could find the comment but, at the time, someone asked if that was a cause for concern, and I said a downgrade from your biggest competitor is no reason to panic

Devon Energy Corp. (NYSE:DVN) had a nice beat today! $1.66 (ex items) vs. $1.52 expected. They have great long-term prospects as premier deep-water drillers, so we will see how they get treated today by adding them to the Valero Group.

Baidu.com Inc.'s (NASDAQ:BIDU) profit is up 10 times from last year and up 46% from last quarter on triple sales, but that just is not enough for a company trading at 185 times earnings! They added 13% more customers in Q3 alone and got 12% more revenue from 102,000 marketing accounts. Forecasts were 5% light for Q4 and the stock got hammered in AH trading but should recover somewhat. The question that this administration will never ask is, as always: What did the people who sold it off all day yesterday know?

Speaking of high expectations -- investors were high if they thought Chipotle Mexican Grill Inc. (NYSE:CMG) was going to justify a P/E of 62. It's a fast food joint kids -- there's only so many you can build in a quarter and only so many people who can fit in the door! I'm scared to short this super-stock, but the $60 puts will be mighty attractive as a momentum play. As of yesterday the Dec $55 puts were $1.55, but that was with a very high earnings premium.

DreamWorks Animation SKG Inc. (NASDAQ:DWA) performed some movie magic by posting a "surprise" profit after having issued a warning for the quarter as recently as July! Apparently someone got a different kind of warning in September as the stock gained 30% since then and gapped up just yesterday to a 3.3% gain. As I said last week, there are enough underwater hedge funds out there where the cheating is just becoming blatant at this point!

Speaking of suspicious trading -- Newmont Mining Corp. (NYSE:NEM) jumped up 1.7% ahead of earnings today, capping a 10% rise in the stock over the past 2 weeks. This was especially impressive from the 20th to the 23rd when gold dropped $20 but Newmont gained 2%! The fact that there seems to be a gold glut, first reported by me back in August, the fact that Compania de Minas Buenaventura SA (NYSE:BVN) had a miss, and the fact that Uzbekistan is seizing a Newmont mine does not seem to deter the buyers.

I was trying to find out something about the Uranium shortage when I found this little gem of an article from 2002 -- ah memories! They have an updated top-25 list here, but I don't suggest reading it on a full stomach... The most disturbing and, strangely, least surprising story is the one that uncovers what kind of psycho corporation would have sold the high-tech components for Iran's nuclear program and neatly explains why no one is being prosecuted.

Here's a scary article for the U.S. auto industry. This economics professor points out that, much like OPEC, while Ford, GM and Chrysler are cutting back production, total U.S. auto production is actually at record levels (remember Auto Nation's glut comment?). "So how do we reconcile these two pictures? Obviously, the answer is that auto production in the U.S. is being gradually taken over by the big Japanese auto manufacturers, who seem to be able to make up for Ford and GM's production cuts, and then some. That's why I tend not to see Ford and GM's problems as being signs of a sick industry in the U.S., but something much more prosaic: the replacement of poorly-run firms with well-run firms."

We broke the story on the blueprints from Apple's new iPod device last month, but now The Big Picture has the actual picture! It's a mock-up, but it fits with the patent... I will be curious to see if Tom is forced to revoke Apple Computer Inc.'s (NASDAQ:AAPL) cruising license as Cingular, Yahoo and Napster are launching a music service for cell phones to compete with iTunes.

Boeing Co. (NYSE:BA) got it's first order in many years from TAM S.A. (NYSE:TAM), a loyal Airbus customer. There is nothing better than starting a relationship off with a $1B sale! Here's a nice recap of Airbus' woes.

Garmin Ltd. (NASDAQ:GRMN) is getting killed pre-market with upward guidance on slightly lower than expected (up "just" 62%) revenues, even though earnings beat! This is a sign that investors are getting much less forgiving of any sort of earnings miss. More shenanigans as that stock has been hammered this week by those in the know... I'll be looking to pick up some calls when they settle down -- perhaps the Jan $47.50s for $2.

CVS Corp. (NYSE:CVS) is doing the thing I hate more than anything else -- buying a company that's worth more than they are. Word is they are in merger talks to purchase Caremark Rx Inc. (CMX) for $21B. They are going down too fast to short, but I will consider it on a bounce.

We'll be looking at the same oil plays as yesterday around the inventory report but STRICTLY following the Valero Rule as we are just tired of getting killed there!

I'm going to put together a list of up and down oil plays so we can play the market both ways more effectively as, on any given day, you can make money on both!

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