Options Trader: Monday Morning Ideas

by: Philip Davis

OK -- fun time is over...

Everyone is back from vacation, the big boys have had their strategy meetings and they've captured Paulson (just kidding about that but the article is great -- thanks JB!) so it's time for us to get serious about 2007.

It's been a while since we had some data but it's coming in spades this week. Nothing of note today, but tomorrow we get the NY Fed Manufacturing Index, which was 23 last month and CAN'T get worse (one would think), followed by the Consumer Confidence number at 5 p.m., which can't get better (I think it was 108 last time).

Wednesday morning we will be assaulted by data:

  • 7:45 a.m. MBA Refinancing Index
  • 7:45 a.m. ICSC Store Sales Index for Jan 13
  • 8:30 a.m. December Producer Price Index, previous: +2.0%
  • 8:30 a.m. December Producer Price Index, excluding food & energy, previous: +1.3%
  • 8:55 a.m. Redbook Retail Sales Index for January 12, previous: -1.6%
  • 9:15 a.m. December Industrial Production, previous: +0.2%
  • 9:15 a.m. December Capacity Utilization, previous: unchanged
  • 1:00 p.m. January NAHB Housing Market Index, previous: 32

Thursday brings us jobless claims, the CPI, Housing Starts (which were up 6.7% on warm weather), Consumer Confidence and the Philly Fed AND the EU's GDP report, followed by a rate decision from the ECB. Busy, busy, busy!!!


There's not much going on today, but Asia took a dive in the morning as those markets are looking toppy, and our sell-off on Friday really spooked them. Japan was closed, but the Hang Seng dropped 200 points, holding 20,000, and boy am I mad we never took those iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI) puts!

China is officially on inflation watch, and China Mobile (Hong Kong) Ltd. (NYSE:CHL) and China Telecom Corp Ltd. (NYSE:CHA) are moving from the madly profitable phase of their business to the "needing to spend $30B building next generation infrastructure phase" that our phone companies are just coming out of.

Oh yeah -- just for the sake of nostalgia -- a kid got bird flu in Jakarta. Remember when that was our biggest worry? I bet you don't hear a word about it all week! Good thing to remember next time they tell us to panic about something...

Europe is in a good mood ahead of their GDP report, and they probably should be! Unemployment there fell to 7.6% -- the lowest level since EU measurement began in 1993. Just another example of how ridiculous it is to say the economy isn't strong!

Do we look up or down today? Sadly down, as anything up is great today. But there is no way we're breaking out to the upside ahead of all this data, so let's just make sure we stand our ground. We are actually a hair below many of the levels I set Friday, and we must hold today or we face EXTREME danger of a major drop if we drop a data point tomorrow!!!

US Markets 8 1 07

Oil is getting as pushed as it can be, and the dollar is weakening in response to China's tightening and Europe's anticipated strength this week. We're looking to see if $57.21 holds to the upside. I think I'll be pleased with my ExxonMobil Corp. (NYSE:XOM) Apr $80 covers for today, but inventories are shaping up to be a disaster for oil bulls this week. See Zman's excellent wrap-up on last week's crude data.

A responsible analyst would calculate the next upside target for crude so he'd be able to point to it later and say he did cover all the bases, but I will tell you right now that there is no upside for crude right now and any upward movement today is engineered nonsense!

We're going to watch our bounce levels on the majors today, notably: ExxonMobil Corp. (XOM) -- $74.50, Oil Service HOLDRs ETF (NYSEARCA:OIH) -- $136, Energy Select Sector SPDR ETF (NYSEARCA:XLE) -- $57 and Valero Energy Corp. (NYSE:VLO) -- $50. If we get above these AND oil is above $58, then a rebel attack is on the way; otherwise, it's just a desperate pump job rushing headlong into disaster.

You know an industry is in trouble when the big boys jump in and start snapping up small fish to create excitement... Last week we discussed how General Electric Co. (NYSE:GE) has hundreds of Billions of dollars riding on high oil prices, and today they ponied up $1.9B for Vetco Gray, an E&P equipment supplier. The company is private, but they take in $1.6B in revenues and, with an industry average 18% operating income, they sure didn't pay a premium!

Forest Oil Corp. (NYSE:FST) also came through and is going to buy The Houston Exploration (THX) for $1.5B in a half-cash/half-stock deal, just a 7.8% premium to THX's closing price, still 10% lower than they were on November 15th ($57.75), and WELL below last year's high of $71.47 or this year's high of $66.21. When two companies who have lost 1/3 of their value start doing cash and stock deals, you know THE PARTY IS OVER! Where's Dandy Don Meredith when you need him?

Gold is just sad at the moment, and Newmont Mining Corp. (NYSE:NEM) (not very hedged) took a downgrade from someone (I don't see it but I heard it). It should get a little support as the dollar retests its own 50 DMA at 84.25. Should the dollar fail there gold may test $320, but, if the dollar bounces up, we'll see if shiny bits of metal you find in the dirt really are worth $600 an ounce.

Oil Dollar Gold 8 1 07

You know gold is in trouble when the gold bugs start talking about "protecting yourself against inflation." What inflation? Inflation is 5%, 8%, 10% -- not 2 or 3%!!! These "analysts" must think this is a country full of undereducated yokels who have no sense of historical perspective, and believe any crap they hear from "experts" on TV as long as they take the trouble to draw a chart! Not on my watch....

Here's a chart for you. The price of gold vs. the price of the inflation-protecting IMF fund. If you roll it back to 2 years we get a score of gold up 62%, IMF down 10%. That's a little bit of overhedging against inflation my friends!

Gold vs IMF 8 1 06

It's a shifting global paradigm, and they're still trying to tell you that governments may collapse and we'll all be gathered around the big black monolith again making bone weapons and trading our women for gold (I know a lot of you are already wondering how much gold for which women!).

Astronaut Monkey 8 1 06I've got news for you, the monolith is the Internet and the knowledge of making fire is already being distributed around the world at the speed of light. There are over 2B humans on-line every day and that number is growing at a rate of 40M people per month -- the genie is not going back in the bottle, and soon there will be more people on the astronaut side than the monkey side.

An educated global populace will be a wonderful thing for our global economy, and it is only too bad that the U.S. is one of the few countries on the planet that is heading the other way in terms of education with an actual decline in the proportion of workers with advanced degrees. There is indeed no child left behind -- other than the 40 million who are projected to go through high school with 70% or less grades. Well, at least we taught them 70% of what an average 18 year-old should know -- have a fun life in the information age kids!

I guess this is what we can expect from a President who pushes an education policy that denies we ever came from monkeys in the first place....


Next week is a short week and expirations are closer than you think!

Frankly I find picks a little distracting on a day we should be minding our positions, so let's concentrate on that. We'll see which way things break and perhaps pick up some Diamonds Trust Series 1 ETF (NYSEARCA:DIA) or NASDAQ 100 Trust Shares ETF (QQQQ) plays (and if you're not hedged you need to be!), but let's watch carefully as we get our first real market test with the big boys back in the saddle.

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