Options Trader: Weekend Ideas

by: Philip Davis

It's going to be a tough call on the economy for the Fed.

4.4% unemployment and rising wage pressures say tighten but home sales data says we just can't take it any more:


Inventories are just starting to level off but at this stage it's hard to tell whether that is due to demand picking up or if people are just unwilling to list their homes at 10% less than they were worth last year.

Builders have stopped building and are working their inventories down but as we reported on October 12th's note on Kara Homes, it just isn't enough to save them all.


The fact that investors are "excited" about the probability of gridlock in Congress shows how short-sighted Wall Street really is.

We have major pressing issues of deficits, social security, Medicare, global warming, peak oil (if we are to believe them) and, of course, Iraq, Iran, Afghanistan, Nigeria, North Korea and so many Mexicans coming in we need to build a wall...

Our military budget alone has gone from $289B in 2000 to $462B this year and that does not include Iraq and Afghanistan which are funded from a "special" budget (ie. not counted in the deficit).

How much is that "special" budget? Guess.

Guess again. No, much higher. No, higher. Really, higher...

$549B through 2007! Ka-Ching!

Maybe another two years of ducking our heads in the sand isn't going to be the best thing.


The most surprising market statistic I'm looking at is that, out of 3,300 NYSE companies, only 20 made new lows yesterday vs. 104 that made new highs.

I don't usually watch the Russell 2000 but they added a third of a point yesterday after being down almost 2% on the week.


I'm still dumbfounded by the jobs numbers. They added 97,000 jobs to September's 51,000 reported (190% off) and they added 42,000 jobs to August's 188,000 (22% off).

Is the administration manipulating the reports or are they genuinely grossly incompetent?

One thing they are competent about is timing! Saddam will be found guilty (oh sorry, I mean the verdict may be decided) tomorrow, just in time for the pre-election papers.

Whatever you do don't question the fact that this trial, which started in December of 2003, is suddenly drawing to a close.

Zalmay Khalilzad, the American ambassador to Iraq, last week denied the verdict was set to coincide with U.S. elections.

"That decision was made by the Iraqi judges," he told CNN. While U.S. officials assist the tribunal with logistics and security, Khalilzad added, "we don't determine the date for holding the meetings, or the trial, or the date for making the decision, or announcing the decision."

See, move along people, nothing to see here!

U.S. officials, who have "financed and advised the tribunal since its creation" have charged Saddam with murder, forced deportation, torture and "imprisonment and the deprivation of physical movement."

No wonder Bush doesn't like to visit Iraq!

I want to be very clear that this is not my point of view but I always find it useful to get another perspective so I found this interpretation of Bush's 2003 UN speech very interesting.

There's a documentary about war profiteering that has just been released but Republicans don't have to worry as nobody watches those things anyway...

Speaking of profiteering, North Korea is getting tough on refiners who took advantage of the consumers by colluding to lock in their record profits.


Moving on to happier topics -- Delta Air Lines [DALRQ] had great numbers with a 1.7% increase in revenue passenger miles and, more importantly, a 4.7% increase in load factor. The bankrupt stock rose 5% to $1.04 on Friday.

I like the Jan '08 $2.50s for .05 rather than owning the stock. Let's say I want to buy $10,000 worth for $1, that's 10,000 shares. Suppose I am hoping to make 20% but it's risky because they are bankrupt and could reorganize me out of my shares.

So I buy 200 contracts for .05 instead, risking just $1,000, controlling 20,000 shares for 14 months and limiting my downside while freeing up $9,000 for more sensible plays. Now I can just put them away and forget about them or just set a sell at .15 (.10 is not worth it) and hope for some exciting news between now and then.


Alaska Air Group Inc. (NYSE:ALK) (funny symbol for someone who drives a plane!) had good numbers too and is much less bankrupt but still need to test the 200 DMA at $37 before I want them.


Caterpillar Inc. (NYSE:CAT) says they are on track to record $50B in sales for 2010. For those of you who do math, that's a pretty good increase over this year's $40B.

That settles it for me, I'm going for the Jan '09 $60s for $12 with the intention of selling calls once they hit $65 (I can wait!).


Update on Saddam.

No surprise, he is sentenced to death. That's what you get for refusing to do business with the Bush family!

It's a shame they have to kill him because Saddam and Bush's dad used to work together. Note to the CIA: Please stop training foreigners to employ WMD's if you are unable to maintain long-term relationships -- thanks!

There's a book on the war called Hubris, which is nicely summarized here. One thing this reminded me of is that it was our friends in the Nigerian government that gave us the key (and later proven false) information used to justify the war. Hmmmmmm...


Go Berkshire! Berkshire Hathaway Inc. (NYSE:BRK.A) had a nice 350% increase in Q3 profits, putting them on course for a clean double this year.

Last year the hurricanes took a big toll on profits but this year it looks like Mr. Buffet's company will make about $6K for each $105K for a P/E of about 15.

They might make my stock of the year pick again at this rate!

"Clearly, these are highly satisfactory three-month and nine-month earnings for Berkshire," wrote Mr. Buffett in a press release. "Just as clearly, our insurance business has benefited in a major way from the absence of catastrophe losses. This is due not to managerial brilliance but rather to good luck," he wrote.

I love this guy!


I can't believe we gave up those Archer Daniels Midland Co. (NYSE:ADM) Jan $35 puts! That happened on 10/17 when we decided to ride the bounce off the 200 DMA without put protection (and they were, at the time, up 34% which seemed good).

It was the right decision as the stock went up $2.50 from there, but we should have bought them back when we sold the March $40s for $3.20 (even) in the disappointing pullback on the 27th, but c'est la vie!

Way back on 9/18 I said:

"Is Archer Daniels Midland Co. really worth twice what it was last year after trading between $10 and $20 since 1993? I thought so in the spring when we all made money on ethanol fever, but who knows which way this goes. I think either way we get a big move soon, so I like the spread of the Mar $40s for $3.20 and the Jan $35 puts for $1.35."

I think this nonsense with oil is hurting my confidence in fundamentals -- which still do work sometimes!

The chart is a great example of how deceptive a low volume spike can be!

I think ConAgra Foods Inc. (NYSE:CAG) is setting up for a big miss and I'm going to pick up some Dec $25 puts for .30 as I don't think they can make .32 a share against rising costs and declining sales.

Aside from oil, the biggest rising cost is corn, which is up over 50% in the past 45 days -- this will be very bad for ethanol producers.


Europeans are doing their best to reduce oil consumption by holding mass blackouts! In France alone 5M people have had no power this weekend as the grid went down in 5 countries yesterday.


How did unemployment drop .2% when we added just 92,000 jobs (even with the other 140,000 jobs "adjusted" that's still just 232,000 out of over 147,000,000 jobs)?

Well, aside from rounding (which accounts for 70,000 jobs one way or the other), there's the undercounted work-at-home crowd, which includes us traders and bloggers who are lucky enough to make a living at it.

There is a strong and growing Google/eBay economy out there that flies under the radar of traditional economic data. Google collected over $8B that was paid to AdSense customers this year. In all, roughly $16B was paid to Google and their millions of advertising partners this year with another $16B being spent on "traditional" web advertising.

This is a very high growth area but still a drop in the bucket in the total U.S. ad budget of $220B.

A guy selling Star Trek items on eBay making $1,000 a week is not technically "employed" but that doesn't stop him from getting an new cell phone for Christmas (with a Star Trek skin, of course!).

There are over 16M items for sale on eBay in the U.S. alone and well over $30B worth of products are sold through the service annually.

Then there's the web entrepreneur crowd, like my brother, who has an on-line travel agency which recruits thousands of people who wish to make supplemental incomes.

So between Google et al, eBay (and what little competition they have) and an army of part-time travel agents, we have perhaps $100B worth of income that doesn't come under the traditional "job" categories.

That's enough money to take 1M people out of the workforce with six-figure salaries!

The downside to this -- many of our "best and brightest" are opting out of corporate America and, as we can see from mounting wage pressures, it will be hard to get you to put a tie back on and get back to the daily grind!


Speaking of web jobs -- YouTube is looking for "directors" and has a sign-up on their site for the new program as they negotiate with Comcast Corp. (NASDAQ:CMCSA) to provide fresh content to Comcast's 21M subscribers.

Who will be the first "Wayne's World" type show to become a hit in the mainstream media?

Speaking of YouTube, here's this week's number one political spot, anti-Bush yet uplifting at the same time... A note to conservatives, I'm happy to show clever, creative pro-Bush footage if you can find any (in the interest of presenting a balanced view). I think the problem is that the administration just doesn't tend to inspire the artistic types.

Here's Dick defending the war -- can't be more balanced than that!

I don't know what they did but they really seem to have boosted the download performance of YouTube this weekend (still no fix for poor blogger though).


I'm back to looking at Gannett Co. Inc. (NYSE:GCI) for a reentry. We got stopped out on the dip on Monday, but I still don't see any realistic advertising alternatives for local vendors as the web is really more of a national platform.

Over time, we can expect rates to adjust to reflect the changing nature of the ad mix but I'll be very interested in GCI again if they go back below their trendline.


FedEx Corp. (NYSE:FDX) is raising cargo rates 5.5%, could be a good combination if fuel prices start to decline!

I'm keeping an eye on United Parcel Service (NYSE:UPS) and the rest of the transports to check the timing. YRC Worldwide Inc. (NASDAQ:YRCW) is another one that should bottom soon!


We talked about gold in comments and I'm very happy with my Metallica Resources Inc. (MRB) at $3.61 (up 22% since 9/7) and Northern Dynasty Minerals Ltd. (NYSEMKT:NAK) at $6.78 (down .02 since 9/18) but I'm going to add the Barrick Gold Corp. (NYSE:ABX) Jan '08 $30s for $5.20 with an eye towards selling the Jan $32.50s for $2-$2.50.

I'll also be watching the Nov $32.50s (currently .30) as a momentum play if the Nigerian rebels make good on their threats.

Gold Fields Ltd. (NYSE:GFI) and Newmont Mining Corp. (NYSE:NEM) are the only other gold stocks that appeal to me but neither one is in a good option spot for me right now.

Nothing is certain until the votes are counted on Wednesday!


Duke Energy Corp. (NYSE:DUK) showed surprising weakness on Friday with a 1% drop that accelerated recent declines. They are also awaiting a Supreme Court decision on whether they have to abide by the EPA regulations as, "The utility has alleged the EPA, under the Clinton administration, wrongly altered longstanding emissions regulations allowing companies to skip permits for upgrades as long as the hourly rate of pollution doesn't increase."

Gotta love those loopholes! In other words they figured out a way to run the plant with slightly less pollution per hour, but for more hours per day -- increasing the total pollution substantially...

Dominion Resources Inc. (NYSE:D) also got hammered on a downgrade so either it's a letter thing or there's a chink in the armor of the gas/utility plays.

American Electric Power Co. Inc. (NYSE:AEP) is one to watch as they've been holding onto $41 but slipped under on Friday. The Dec $40 puts are .50 and the weather forecast is pretty warm for the next two weeks...

Ormat Technologies Inc. (NYSE:ORA) took a nice bounce off the 200 DMA at $36.50 and if it goes below that we could have some fun as a short but it's not optionable.

Don't forget we got killed on Public Service Enterprise Group Inc. (NYSE:PEG) last month so I'm cautious about this sector.


It turns out Chevron Corp.'s (NYSE:CVX) recent gains were partly the result of the government deciding it will not try to collect hundreds of millions of dollars owned by the major oil companies ahead of a presidential election (oil companies contributed 40% of the $300M raised by Bush in the last election).

Louisiana alone collected $100M in a verdict against Chevron under the same guidelines that the government is declining to even take to court!


Here's one of those wacky California energy projects the oil companies are working hard to put a stop to: LiveFuels, Inc. expects to have "economically feasible biocrude" by 2010.


Soccer posted this great link on Merrill Lynch & Co. Inc.'s (MER) investing trends for the next 12 months, I will go over some later if I have time after football.

Most interesting was: "Listed commodities (including oil) appear to be priced 60% above what could be justified by fundamental supply/demand factors," Merrill says. "There could be substantial downward pressure on energy prices for a reasonably long period if demand continues to slow."

Read all of Phil Davis's articles on Seeking Alpha