Options Trader: Tuesday Morning Ideas

by: Philip Davis

Big data week. Really Big!

NY Manufacturing this morning. Consumer Confidence this evening (plus Intel Corp. (NASDAQ:INTC) earnings). PPI, Refis, Retail Sales, Industrial Production and the Beige book on Wednesday. CPI, Jobless Claims, DJ Business Barometer, Consumer Confidence and the Philly Fed on Thursday... A pretty busy week!

Lots of earnings too:

  • Intel tonight and Commerce Bancorp Inc. (CBH) (my favorite bank) -- Wells Fargo Cap IX (NYSE:WFC) also worth noting.
  • Bush gives us the State of the Union tonight -- this should be entertaining!
  • Wednesday we have Apple Computer Inc. (NASDAQ:AAPL), JPMorgan & Chase Co. (NYSE:JPM), Lennar Corp. (NYSE:LEN), Washington Mutual Inc. (NYSE:WM), Southwest Airlines Co. (NYSE:LUV) and AMR Corp. (AMR).
  • Thursday we get Capital One Financial Corp. (NYSE:COF), Continental Airlines Corp. (NYSE:CAL), Harley-Davidson Inc. (NYSE:HOG), Novartis AG (NYSE:NVS), UnitedHealth Group Inc. (NYSE:UNH), International Business Machines Corp. (NYSE:IBM), Xilinx Inc. (NASDAQ:XLNX) and Merrill Lynch & Co. Inc. (MER)
  • Friday we have Citigroup Inc. (NYSE:C), General Electric Co. (NYSE:GE), Schlumberger Ltd. (NYSE:SLB) and Motorola Inc. (MOT)

Housing Bubble Mr 16 01 2007Centex Corp. (CTX) warned with a projected loss today, so LEN will be very interesting! Only one of the 15 analysts who cover CTX rated the company as a sell, and that brain trust came up with an average estimate of .81 for Q4 earnings, which still would have been 1/3 of last year's $2.52. But CTX says that was WAY to generous! How generous? Well it looks like about $2.80 too generous as the company is looking at a loss of $2 per share!

A 12% drop in home closings and a 24% drop in sales means less homes are selling for WAY less money and the company is writing off $300M in "land adjustments."

Even without the adjustments, the company still missed by about 8%. The full extent of the damages will be revealed on Jan 23rd. Well, it has to get better from here right? No. New orders are down 24% despite all the rebound news the PR monkeys shoved down our throats last week!

Back in November I wrote a piece on what to watch out for in Homebuilders, and CTX is a textbook example of one that expanded themselves to death. Now that earnings season is finally here, there may be a harsh day of reckoning approaching for some (we already have many homebuilder shorts).


Asia had a very mild pullback (10%) of yesterday's huge gain as both Samsung and LG Phillips LCD Company Ltd. (NYSE:LPL) are having trouble making money despite booming sales of flat-panel TVs. This is why we play the people who sell stuff to them (Texas Instruments Inc. (NYSE:TXN), Corning Inc. (NYSE:GLW)) rather than the actual manufacturers!

China is considering giving $2B to 3 major airlines (they don't even bother to pretend to be neutral), which is reason #26 of why I hate to invest in Asia! It's hard to compete when they other guy gets to buy planes for free... Smaller Asian markets continued to gain with the exception of South Korea, led down by Korean Air, who were not given $2B, making their shareholders sad.

Europe is flat today with German Unions pushing for more money and the markets in general are looking for more direction from us. There's a big brouhaha brewing in the credit card biz as the EU is looking into the entire practice of how credit card companies set fees. This is potentially devastating news for MasterCard Inc. (NYSE:MA) (who we have puts on) and Visa (about to go public), but not for American Express Company (NYSE:AXP), who don't handle fees the same way as the others.

It's up to the U.S. markets to show us the money this week, and we should get off to a good start as we fell behind the world yesterday. Let's see what we can hold onto:
Dow is actually looking at 12,600, holding that would be amazing! 12,500 needs to firm as a floor.
Transports need to take out 2,800 for that to happen with 2,750 being their floor.
S&P is aiming at the all-time high of 1,432 and it will be a disappointment if they don't make it.
NYSE likewise is heading to 9,210, and we would hate to see a rejection.
Nasdaq needs to continue leadership above the 2,500 mark, we are in uncharted waters here!
SOX are still well below last spring's 559 and must get it together (it's all up to INTC tonight!).
RUT still needs to retake 800 and post an all-time high at 802.

US Markets 16 01 2007 Chart

I'm not banking on any spectacular moves today as commodities will continue to drag down the markets but, at 20% down from last year, already their influence on the broader markets is waning.

8:45 Update: Oops, the NY Mfg. Index was a huge disappointment -- so much for a big market day! Any pullback over .5% is very bad as this news is really not as surprising as the analysts think, and will take the Fed back off the table. The big danger is that it gets confirmed by other bad news during the week.

They are trying and trying to get something going in oil. CNBC is desperately trying to find something to get people to buy some but IT JUST KEEPS FALLING! Let's not get too excited, remember how awful we felt on Friday and be prepared to take some profits off the table if we get a good drop but I feel very good about our oil puts.

Oil Stocks 16 01 2007We need to keep in mind that the February delivery contract expires on Monday and my best guess is they need to take it down to 100,000,000 barrels, which means 100,000 contracts need to be pared down over the next 4 sessions. Since March ($53.87) is already loaded with 295,000,000 barrels scheduled for delivery that month, it would take a tough roll into low demand April ($54.66) in order to avoid taking the loss on the February contracts.

Since we're talking about $6B worth of oil that needs to find a buyer in the next 4 days, it will be a real gut-check for the energy traders this week and we'll follow that action closely. I apologize to the people who have no interest in oil but this is the most exciting thing in the markets right now!

As I mentioned on the weekend, oil storage is literally at the point where they have to dump it into the ocean to get rid of it. Aside from the fact that the EIA routinely underreports actual storage levels, on thing we do know is 325Mb is a lot! Now here's the thing -- just like with natural gas, you can see how typically we get a build of 30M barrels between Jan 6 and April 6 -- where are they going to put them? Ice storms don't help because people don't drive in ice storms...

The dollar is consolidating for a move over 85.5, which, if executed will throw oil into the $40s for the first time in over 2 years, although the dollar has been much higher as recently as early '06. Our current oil targets are $52.10 on the way to $50.79 and, hopefully, $49.50! Expect a lot of upside resistance at $53 but no real danger until we cross $53.40. All this changes on Friday or Monday when they roll the contract.

Gold has done a hell of a job getting back to $630 for no reason whatsoever and we'll see how it holds up wedged between the 50 DMA at $630 and the 200 DMA at $621 but take any trouble it has getting over $625 as a very bad sign. Copper is heading back to $250 and since most gold miners are copper miners too, what do you think they do when they're not hitting their numbers selling copper? That's right -- they sell more gold!

I may have jumped the gun in August when I wrote: "Gold: Heading for a Trainwreck Due to Oversupply?" but that's the problem with fundamentals, it takes the charts a while to catch up sometimes!

Oil Dollar Gold 16 01 2007 Chart


We have a lot of open items and I'm going to try to cut some back ASAP so we can position for next month's options. Setting 20% (of the profits) trailing stops on whatever is up by 20% or more on Jan and Feb plays. That means if the option goes up 25%, we get out at 20%, up to 30% -- out at 25%, up to 40% -- out at 32% etc....

Most of our underperformers are in oil and housing so let's watch out for those on a bounce. There will be a lot so don't expect me to be on top of all the moves today, as we also need to manage our sales.

As with all our plays -- do not let calls you sold expire in the money! It's more hassle than it's worth so buy them out or roll them into February!

Hewlett-Packard Co. (NYSE:HPQ) claims to have just given new life to Moore's Law with an 8-fold increase in the number of transistors they can put on a chip. Nanotech is the key and this will be huge if the process proves out as it can be adapted to existing fabs. We just rolled out of HPQ Jan $40s on Friday but I'm going to grab the Feb $45s for .75 as a placeholder while we decide what to play.

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