Options Trader: Thursday Morning Ideas

by: Philip Davis

Lots of stuff going on today!

We get a lot of data but I think the final Q3 GDP is the trump card today. Our year is already set as the real GDP grew at a blazing 5.5% in Q1, causing the Fed to overtighten just a bit, and Q4 is traditionally lower. We've already had preliminary Q3 reports and this one is just a formality.

These are huge numbers! If we average 3% for the year (and it will be hard not to) it means this country created $390B more goods and services than it did last year. It means that someone (and it can't all have gone to Exxon and Goldman) made $390B more than last year, and that almost 40% of the new dollars we printed up were legitimate!

Real GDP Chart 21 12 06To keep this in perspective: $390B is larger than the entire GDP of Belgium who, at $371B, is the 17th largest economy in the World! Saudi Arabia, you may be surprised to know, has a GDP of just $309B with our "arch enemies" Iran at $192B and North Korea is $40B (estimated). As I mentioned last week, the entire GDP of Iraq is (or was before we showed up) $89B -- the U.S. has spent more money ($600B) fighting in Iraq than that country makes in 7 years! You broke it, you bought it 7 times over suckers!

Meanwhile the President vowed to stay the course yesterday, and I know I resolved to be less political after the elections, but it's not the new year yet and the man actually went on TV yesterday and said we have to make a "sustained commitment" for "success in Iraq and the BROADER war on terror." What? Is he looking to expand this thing or is he putting it in context?

Price of War 21 12 06He is calling for a permanent increase in the size of the U.S. army and "additional sacrifices." You know, I don't need to say a thing about this -- just listen to the man himself!

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We have jobless claims and corporate profits before the bell today and lots of data around 10 so -- if we can get of to a good start we may get just the thrust we need as the day goes on, especially if the Philly Fed numbers are good at 12.

Asia was pretty flat today with our pals in Thailand dropping 2.5% to settle down at 5% under the week's open, not too bad after that debacle... Nippon Steel is taking over Brazil's Usiminas ($1B), which should be good for United States Steel Corp. (NYSE:X), Mittal Steel Company NV (NYSE:MT) and Nucor Corp. (NYSE:NUE).

Europe is also trading flat ahead of the U.S. GDP. Forecast for Europe -- it's around 2% guys! Holy cow, what do people think is going to happen? In more "gee who'da thunk it" news: Catastrophic insurance claims are down $50B from last year's record $65B. Yes investors, that's why we call them catastrophic -- they don't happen every year! Feeling good about those insurance plays!

While there may be a slight variation in the final GDP number, it is nothing to get excited about. As unreliable as government statistics have proven to be (remember the jobs adjustment?) I can't believe how everyone waits for them like they are written on stone tablets. I suppose it's no more ridiculous than the shock everyone has when it gets cold in the winter or when we have hurricanes in the fall or if people go for a drive on a summer vacation and use gas...

We'll see what remains to be written about our markets today:

US Markets 21 12 06

8:30 am update: GDP is 2% -- the low end of expectations, it will be (heaven help us) entirely up to the Nasdaq to lead us up today, so let's watch that and the SOX very closely!

Now we will check the guts of the oil traders as the U.S. economy is growing 10% less this quarter than previously projected! A quick look at the data looks like a lot of our pullback was in the service sector, which won't affect oil demand. Meanwhile, Germany and the UK are raising their GDP forecasts, but they don't waste gas the way we do. Russia is growing at 6.8%, India 7%, Columbia has record growth... This is why our multinationals are doing, and should continue to do well.

We're targeting $60.80 as a downside for our oil target with $62.40 as our nearest resistance, but only if oil stays below $64 -- otherwise we may have to wait out another run.

The dollar should weaken as our relative GDP growth (although, as I mentioned, a huge raw number) is falling behind the rest of the world. The conventional wisdom is that the world can't survive without us, but (and I hate to burst your bubble here) the world doesn't seem to feel that way.

We'll see what level will entice Central Bankers to intervene on the dollar's behalf. I'm guessing 82.5 will still hold, but will confirm a downtrend, so today will be a great day to see how far the rest of the world is willing to go to stabilize our currency.

Let's watch gold because those guys know what the CB's are going to do and gold should telegraph a move in the dollar. Any improvement in gold pricing, especially if it breaks $630, will be a very bad sign, as gold has been in a downtrend of its own.

Options Trader 12-21-2006

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The markets may take this as a sign that the Fed is done (again), but I still don't want to hold much over the holidays unless it is well covered, so I will be reducing naked positions across the board and knocking out the underperformers unless we have a level-breaking rally today:

  • Best Buy Co. Inc. (NYSE:BBY) got a Credit Suisse upgrade and BOY did we need it!
  • Boston Scientific Corp. (NYSE:BSX) got some good news today, and BOY did we need it!
  • Circuit City Stores Inc. (NYSE:CC) got a JPM upgrade, and BOY did we need it!
  • Best Buy Co. Inc. (BBY) got a Credit Suisse upgrade and BOY did we need that!
  • Congrats to Alabama, who are putting the bite on ExxonMobil Corp. (NYSE:XOM) for cheating on their royalty payments to the tune of $3.5B. Ouch! Even Exxon has to feel that one! This is heading to the Alabama supreme court for Exxon's final appeal (they already lost and then they lost even worse on appeal).

Read all of Phil Davis's articles on Seeking Alpha