Options Trader: Wednesday Morning Ideas

by: Philip Davis

Are we there yet? We have tried so hard for so long to get this market to a new level it would be a terrible shame if I have to pull over and turn these indices around -- so let's hope they behave!

Asia is certainly behaving this morning with strong gains across the board, but Japanese investors put a lot of money into dividend paying stocks on concerns about a global slowdown. In China, the telcos continue to fly on the news I reported yesterday, and miners made a comeback as nickel, lead and aluminum all hit highs on the London Metals Exchange.

South Korea took a hit as the dollar sank to a 9-year low against the won which threatens their export industry (Samsung, Hyundai, Daewoo). It's a very sad day in America when South Korea has to hold meetings to figure out how to bail out the U.S. economy!

Europe's economy looks like it will grow 2.7% this year, up from 1.4% averaged over the past 5 years. This will push the GDP of the EU past the U.S. to $14.2T for 2006.

Well, we're #2 now, but we try harder...

US vs European Growth 6 12 06

While we build a 700 mile wall to protect a 1,500 mile border (I know, he got a C in math...) to keep out our neighbors, those growth crazy Europeans are expanding the "borderless zone" to include 10 additional countries. Same planet, same terrorists -- better leadership, different attitude!

Those Europeans will let anyone come in! They've even allowed the NYSE (NYSE:NYX) to merge with Euronext which will probably force the Nasdaq Stock Market Inc. (NASDAQ:NDAQ) to pay too much for the LSE.

Our Congress will have none of that! The White House (and I'm with Bush on this one) was forced to withdraw a proposal to allow foreign investors greater access to U.S. airlines. This will be a nightmare for U.S. airlines, as we are having a gate war with Europe, and ownership is a very sticky issue.

Continental Airlines Corp. (NYSE:CAL) Jan $40 puts are expensive at $2.20 but I'll jump on them if oil takes off after inventories.

After two very solid up days we certainly can't begrudge the markets a little rest, but I'm going to be very demanding about my levels as we certainly haven't proven this isn't a top yet.

Anything up is a winner:

  • Dow 12,300 is a no brainer, 12,361 is the record
  • Transports will lead up or down from 2,650
  • S&P needs to hold previous record of 1,408
  • NYSE is halfway to the moon at 9,050
  • Nasdaq will lead us all, up or down from 2,450
  • SOX impress no one, still 70 points below the January highs, anything down will crush the Nasdaq
  • Russell needs to break 800 to join the NYSE in space, otherwise we risk looking toppy

US Markets 6 12 06 1

For the more likely downside, please see yesterday's post.

Intel Corp. (NASDAQ:INTC) will make or break the SOX this week and, since 85% of their revenue comes from overseas (where the money is!), I'm getting back on that bandwagon (ONLY if we are green) with the Jan $22.50s at .45 as well as the Jan '08 $25s for $1.20.

Oil inventories come at 10:30 today and "analysts" expect a build of 500Kb (do they ever expect us to actually use our reserves?) of crude, a build of 140Kb of gasoline (although the refineries are all producing distillates for the winter), and a fairly exact 860Kb draw (at last) in distillates.

We had a small draw last week, but what no one tells you is that imports fell to just 10Mbd, down over 4 Million barrels for the week!

I have to quote Zman on natural gas here:

"Bulls Take Heart, The Analysts Are Trying To Rescue Gas By Bagging Expectations: 'Natural gas is falling not so much because it's cold, but because we should see an injection in next week's [supply] report,' said Flynn, senior analyst at Alaron Trading. Are you friggin kidding me? You expect an injection? With the weather just slightly warmer than the prior week when we withdrew 32 Bcf!!! What are you smoking, and does it serve as a heat source for you? Man, I wonder which side of the trade Alaron is on."

He is way too polite. we don't have to wonder -- that's why we have Google! This is from Alaron's own web site: "Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000."

So Flynn is a 7-year bull who is now VP (congrats) of an energy consulting firm. Of course those guys love to go over to a client and say, "this energy thing is over..."

By the way, oil peaked out at $35 in 2000 and plunged to $20 into 9/11 and didn't get back to $30 again until the end of 2002, so thanks for nothing on that call!

Sorry, inventory day always annoys me since it has become a total farce...

On Monday I said: "That 3.5% drop in the dollar in the past 10 days should have boosted the price of gold $20, and it did boost it $30, so there is an element of sentiment shift creeping into gold as the dollar loses stability, but a dollar bounce at this level should lead to a very quick correction back to $640 or less."

Sometimes it does take a full 48 hours for me to be right..

Let's thank South Korea for jumping in and saving the dollar -- hopefully it's not "too little (no offense intended to Kim Jung II), too late."

Speaking of foreign policy disasters, the Iraq Study Group delivers to President Bush this morning -- hopefully they included a lot of pictures! If the study group is anything like the study groups I used to participate in at college, those guys will be pretty tired and hung-over from pulling an all-nighter the day before the project is due.

This is another market downer as EITHER the report will say the war is a total disaster and the best we can do is try to save face by pulling out without causing the whole country to erupt into civil war, which will worry the markets, OR it will paint a rosier picture which everyone knows would be total BS which will worry the markets.

Only a complete and total loss of perspective (which we may have per yesterday's comments) can allow spaceship market to ignore what's going on down on planet earth.

Our best chance for a good day is a nice, orderly decline in crude on a nice orderly rise in the dollar, but it would be like pulling a hat trick to get all that lined up!

WhatMeWorry 6 12 06


I'm pretty much sidelined again as I continue to pick off positions. The fact that we lost 3 calls and only 1 put on an up day was a good warning sign that choppy waters lie ahead.

A flat day today would be a major victory, and most of the action will probably be later as we look at possible oil trades heading into inventories at 10:30.

Of course I'll be watching those Chevron Corp. (NYSE:CVX) Jan $70 puts, which have been very, very good to us.

I am officially scared of ExxonMobil Corp. (NYSE:XOM) -- until I see them fail to break $80 I'm not going back after them without a cross, some holy water and a wooden stake!

Hydril Co. (HYDL) was very weak yesterday and the Jan $70 puts are attractive at $1.75, hopefully less if we get a nice morning pump.

I'm keeping an eye on Tidewater Inc. (NYSE:TDW), a nice growing support company that should go higher but got weak this week on what I have to assume is pessimistic demand numbers. They will guest star in the Valero Group this week.


Apple Computer Inc. (NASDAQ:AAPL) is under attack as the WSJ has the nerve to question the durability of the iPod. Puh-lease! Sony Corp. (NYSE:SNE) batteries actually exploded and they made it through... This will be a great nerve test for Apple investors at the $90 mark!

I would almost call Yahoo's shifting management game "rearranging deck chairs on the Titanic" but Yahoo is no Titanic... They are more like the Exxon Valdez -- they have a drunken captain but they'll list into port after spilling half the company's value, but there are a dozen salvage operators anxious to patch them up and put them back in the water!

Iran has blocked YouTube so they must be doing something right!

I'd say that NASDAQ 100 Trust Shares ETF (QQQQ) $44 puts for .30 will make a good momentum play if you are trying to cover but there SHOULD be strong support at $44, if not -- hello $43!

A very tricky day, this is a watch list as I would much rather have cash!!!

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