Options Trader: Wednesday Morning Ideas

by: Philip Davis

Et tu, Intel! Then fall, Nasdaq.

It's looking pretty dire for the Nasdaq as first Symantec Corp. (NASDAQ:SYMC), then Rackable Systems Inc. (OTCPK:RACK), the SOX and now even Intel Corp. (NASDAQ:INTC) all take a stab at it. Will the Nasdaq die a death of 1,000 cuts? It's really just the top 100 we care about, but there's a lot of pressure mounting on Apple Computer Inc. (NASDAQ:AAPL), International Business Machines Corp. (NYSE:IBM) and Motorola Inc. (MOT) to give us a brighter vision of the future of tech than we've gotten so far this week.

Et-tu 17 01 2007

As I said last week, we need Nasdaq leadership to guide that commodity money off the sidelines and into something new -- I'm not sure that the industrials will be up to the job. Like the Roman senate, the analysts are all too willing to take down the Nasdaq just as it's breaking out, but they have no clear plan for a successor! Without a hot sector -- the markets, like Rome, will crumble.

Asian markets weathered Intel's storm fairly well today, also working hard to shake off falling commodity sectors. The BoJ backed off raising their rates for this session -- a bit of a surprise that rallied the real-estate sector over there (you'd be amazed at what kind of house you can get with a 1.5% mortgage!). We had a Bugs Bunny rush back into steel, real-estate and construction with banks giving up some ground, as there is not much margin to be made on 0% interest.

Europe is trading flat ahead of our open and their timing couldn't have been worse for Intel as the EU is recommending formal charges against INTC for not playing nice with Advanced Micro Devices Inc. (NYSE:AMD). As we know from Microsoft Corp.' (NASDAQ:MSFT) monopoly case, the EU's bark is worse than it's bite, but never underestimate investors' fear of a barking dog.

Back home we got some good news from JPMorgan & Chase Co. (NYSE:JPM), who are still cranking out profits at a record pace with a 50% increase in investment banking revenues. That perked up the DOW pre-market, which includes JPM as a component. Still, I'm going to be watching the downside today as anything up is obviously good:

Hopefully we won't be shocked by the PPI this morning, but the expectations are very low (.5%/.2% -- ex. food & energy), perhaps unrealistically low, as the last report was 2%/1.3%. After the NY Mfg. Index was a bust yesterday no one is expecting much from the Industrial Production report, but we also get the Redbook Sales Index, which better perk up! The whole thing is subject to change at 2pm when the Fed puts out the Beige Book, so we might have a fun day playing Diamonds Trust Series 1 ETF (NYSEARCA:DIA), S&P 500 Index (NYSEARCA:SPY) and NASDAQ 100 Trust Shares ETF (QQQQ)!

T Boone 17 01 2007Our man T Boone is back! He's drawing a line in the sand at $48 and is still predicting we get back to $70 this year. Since there is a real dearth of barrels under contract at $56 or less for the rest of the year. I once again challenge Mr. T to put his money where his pump is and pick up just 50,000 December $56 contacts -- what's $2.8B to him when it's a "guaranteed" $3.5B return in 11 months?

According to the WSJ, another factor aggravating oil's decline has been heavy selling related to various hedging deals. In a conference call Friday, Goldman Sachs analysts told clients that financial firms have been aggressively selling oil to keep losses from growing on deals they struck in recent months with companies seeking to hedge themselves against falling prices.

Well T Boone went 0 for 12 against me in monthly oil targets for 2006 -- best of luck to him in 2007! Word on the street is he lost $600M last year on oil plays, but made up for it by shorting natural gas to the tune of $1.8B, so he's still got plenty to teach me on that front!

We'll be testing my $50.79 target again this morning for oil, as OPEC has told the U.S. energy roaches they are on their own this time. OPEC has, at best, one more tightening move to make, and they can't afford to have it fizzle or we'll be back at $40 in no time, so they are going to grin and bear it, hoping the market will find a bottom without them.

I really thought we'd get some sort of bounce this morning, but it's not looking that way -- it looks like we'll see what $49.50 looks like on the downside. $52.10 is our new upper danger zone, but let's see if $50.79 can firm up as a ceiling rather than a floor (isn't it amazing we are even able to say this so soon!). It will be too bad if oil goes into freefall and we find ourselves light on shorts, but let's get through inventory before we go betting the farm on it!

The dollar may have come too-far-too-fast, and I'm not sure it has the energy to break 85.5, but the PPI/CPI numbers and the Fed report may prove me wrong. We'll get our first indicator shortly...

8:30 -- PPI up .9% (highish) but the core PPI is a very tame .2% (in-line). They've adjusted December up -- bad for the markets! This is a mild dollar booster.

Gold will continue to do whatever the dollar doesn't, but whichever way it breaks will give us a pretty good idea of the rest of the month. It is possible that oil collapsing below $50 will trigger a sell-off in gold and a flight to the relative safety of the dollar which will push oil further down and make U.S. stocks look on fire to foreign investors as our balance of trade with Asia improves due to the new exchange rate. It could happen!

Oil Gold Dollar 17 1 07

==========================================================

Lots of fun in earnings season already:

Lennar Corp. (NYSE:LEN) had a bigger loss than expected (50%) -- also on write-offs. It would be nice if they disclosed what percentage they are writing off, as there is no way to tell if it's a one-time event or the first of many. My suspicion is that if they sell $15B worth of homes this year, that would imply $3B worth of land, and we could assume they have 3 years worth of land ($9B), so $300M amounts to a 3% write-off -- which hardly seems like enough of an adjustment to me...

Be careful as LEN and other builders will trade up as the CEO said, "If the current environment of strong employment, low interest rates and a healthy economy continues, AND the market for new homes demonstrates traditional seasonal improvement, we will meet or exceed our 2006 earnings of $3.69 per share." That's a pretty big IF and AND, but the housing bulls are jumping all over that statement and ignoring a terrible quarterly report!

McDonald's Corp. (NYSE:MCD) logged a 7.2% rise in global sales, although the stock is already on fire, it may still have a long way to go with those kinds of gains.

Sony Corp. (NYSE:SNE)/Telefonaktiebolaget LM Ericsson ADR (NASDAQ:ERIC) said Q4 profits more than tripled as sales of high-end phones blew past analysts expectations. "Sony Ericsson is pretty much in a sweet spot right now. They have cool, attractive models supported by cool, attractive brands," said Neil Mawston, associate director in the wireless practice of consultancy Strategy Analytics." Yeah, that iPhone will never sell...

In the oil sector:

All the oil companies are approaching a short-term oversold condition but, if this breaks down without a bounce, there is very little support against another 10% correction. We need to keep in mind that options expire on Friday and all sorts of shenanigans may go on between now and then.

No new plays today, as we need to mind the ones we have!

Be careful out there,

- Phil

Read all of Phil Davis's articles on Seeking Alpha