Options Trader: Monday Morning Ideas

by: Philip Davis

Attention all bearish analysts -- we have now left the orbit of your knowledge of the markets!

That sinking feeling you have in your portfolio is a perfectly normal reaction to the stock market slipping away from the pull of all earthly concerns as we head out into deep space. I urge my passengers to remain seated though, as it is very easy to get disoriented or giddy until the captain is able to turn on our VIX drive once we have firmly set our market direction.

Captain Buffet and his crew of the world's top investors is aligning the ship for a jump into hyperspace and we can keep an eye on the screens here:

Berkshire Hathaway Chart 18 12 06

Berkshire Hathaway has always outperformed the Dow, but it has also always been a great leading indicator of direction. Not only has it outperformed the Dow by over 10% in the past 3 months, but our man Warren just told us we were undervaluing his company!

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Does that mean we are also undervaluing the rest of the market? Do you really think the answer could be no? Berkshire Hathaway is the market -- Acme Bricks, Benjamin Moore Paint, Borsheim's Jewelry, Business Wire, Clayton Homes, Dairy Queen, Fruit of the Loom, Geico Car Insurance, General Re, HH Brown Shoe, Iscar Metal, Jordan's Furniture, Mid-America Energy, Net Jets... They are a diversified basket of what Mr. Buffett considers the best quality (not always the biggest or the fastest growing) companies in each sector and they generate almost $100B in sales with a 10% net income.

Additionally Berkshire holds significant amounts of stock in major companies like American Express Company (NYSE:AXP), Anheuser-Busch Companies Inc. (NYSE:BUD), Coca-Cola Co. (NYSE:KO), ConocoPhillips (NYSE:COP), General Electric Co. (NYSE:GE), The Home Depot Inc. (NYSE:HD), Lowe's Companies Inc. (NYSE:LOW), NIKE Inc. (NYSE:NKE), Tyco International Ltd. (NYSE:TYC), United Parcel Service (NYSE:UPS), Wal-Mart Stores Inc. (NYSE:WMT), Washington Post Co. (WPO) and Wells Fargo & Co. (NYSE:WFC) (to name a few I agree with) and all year long he has been buying more. So do we relax and have faith in our captain (who has returned 1,400% to investors since just 1993) or do we jump ship because the bears are screaming? Just remember that you'd be screaming too if you were bearish this year!


Over in Asia we need to get ready to put on our Hang Seng 20,000 caps!

After lagging the Dow from 1987 to 2003, the Hong Kong market broke out in April of '03 and has outperformed the Dow by 45% in the past 3 years. In the past 30 days the Dow finally crossed over and began outperforming the Hang Seng (by a whopping 1.5%), but the Asian markets have come out of their mini-slump and the Dow needs to get going -- more so than it is now -- or get left firmly in the dust! The Nikkei jumped ahead of us on 12/1 and is 3% ahead over the past 2 weeks, on its way to challenge the April high of 17,500. The Nikkei is another index that used to perennially lag the Dow!

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A huge contract to build nuclear plants in China was awarded to Westinghouse, who was bought by Toshiba, which is truly amazing to those of us old enough to appreciate the irony of American and Japanese companies working together to bring nuclear power to China. Shaw Group Inc. (SGR), a $2.5B engineering firm, will handle much of the construction work on this $4b project, and I like the Apr $35s for $1.20.

The Asian markets are being driven by gains in exporters, meaning the dollar is perceived to be safe for another quarter, which bodes ill for gold and the dollar which we will get to later. China Mobile Limited (NYSE:CHL) (12/12 pick) is back in vogue as Beijing (once again) may soon issue 3G licenses.

Europe is taking the morning off so far and has gone nowhere as the bears over there are shouting "too far, too high, too fast" at the markets. While Europe may also be way behind the Asian markets, they are also kicking our butts! The Siemens AG (SI) scandal continues to steamroll, and there now appear to be over $500M in "suspicious transactions." This is just about the point where I want to step in and start buying!

In a move to put a stop to the competitive flow of natural gas into Europe (which got so bad over the summer that companies had to give it away to bleed off some excess), Statoil ASA (NYSE:STO) and Norsk Hydro ASA (NHY) will be merging their offshore oil and natural gas units. NHY gained 23% on the news, since this will give them the ability to price gouge at Exxon-like levels!

Back home, the US current account deficit jumped to $225bn, 6.8% of our GDP for Q3 -- if the air wasn't so thin up here I'd be seriously concerned but -- wheeeee!

As I mentioned earlier, we need to remain strapped in until the captain has given the all-clear, and let's make sure we can take out our new levels as we set our sites firmly on 13,000:

  • The Dow needs to pop right through 12,500 without looking back
  • Transports remain critical between the 200 DMA at 2,581 and the 50 DMA at 2,620, and it will be up to FedEx Corp. (NYSE:FDX) [Wed.] to give us the thrust we need for deep space
  • The S&P should fly by 1,430 but will likely pause at 1,440
  • The NYSE needs to top 9,200 for us to feel secure
  • The Nasdaq is 2,475 or bust! You really don't want a bust when you're in space
  • The SOX are the leaky seal in the airlock, and we can't take off our helmets until we see this gauge firmly above 490
  • The Russell CAN"T have anymore trouble with 800 or we may have to recalculate our whole orbit again!

US Markets 15 12 06

Oil is a serious problem up here and any positive move may still damage the economy, but a nice downward spike will let us throw out last week's data set as a "confirmed pump" in which case the charts go back to looking very weak. Don't forget they are printing the new February contract so the $63 print we're seeing is just .30 above our $61.69 danger zone on the January contract.

I'll run adjusted numbers this evening for the new contract, but let's see if they can hold $63 for the day.

Gold will have to test $620 (as predicted), but could be in BIG TROUBLE if the dollar keeps rising and pressuring it below the 200 DMA at $615.

The dollar shorts are feeling the pain (also as predicted) as Super Banker and Chair Man (of the Fed) fly back from China with concessions in hand that keep the 10-year note below 4.5% for the 4th consecutive year!

Options Trader 12-18-2006

As exciting as all this is, we have so many successful positions that I'm not looking to jump on too many bandwagons until our Warp Drive is ready to go on-line (and, as you know, we need to be well clear of the Earth to do that!).

Until then we will manage our existing positions and pare them down to the ones that will give us the best maneuvering room for the long voyage ahead.


I haven't finished with the Google plays I promised yet as the options prices are highly inflated at the moment and we may have to let go of the idea of making any plays other than spreads as straight calls are so out of control that the Jan $500s are $7. Luckily, the WSJ just warned on Google's earnings, so perhaps we will get a chance at a lower entry on the March calls (as I want to be in through earnings).

Biomet Inc. (Pending:BMET) is being taken out for a small premium (about $44) and will give us another great opportunity to by a leap and sell calls as this deal is unlikely to close sooner than next fall! We'll touch base in comments on this one as I love these plays.

Wal-Mart Stores Inc. (WMT) has officially joined the Communist Party as Chinese employees were allowed to set up a branch in the company's China HQ. Poor Senator McCarthy must be rolling over in his grave! "The establishment of the party branches and trade unions are 'part of Wal-Mart's efforts to integrate with China... and follow the rules of the country,' said company spokesman John Dong. I cannot begin to comment on the massive hypocrisy of this situation...

As we heard over the weekend, the iPhone was announced today -- by Cisco! [cue dramatic music] OMG what a mess! It seems Cisco Systems Inc. (NASDAQ:CSCO) patented the iPhone (for Internet Phone) long ago and has rushed into production with a line of consumer handset products to secure a superior usage position to Apple (and that other little company that has the name, I forget who).

Who cares about all this name silliness though? Lost in that article is the concept that CSCO is making phones for eBay Inc.'s (NASDAQ:EBAY) Skype division! That's huge!!! Our EBAY Jan $32.50s are already at $1.60 (up 39%) from our 12/6 and 12/12 pick. I think it's time to pre-roll into the Apr $35s for $2 with a tight .20 stop on a small position we can build into (assuming it keeps going up!).

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