Options Trader: Thursday Morning Ideas

by: Philip Davis

Are we ready to take off again?

After Monday's aborted moon mission you can understand why I'm a little leery of getting back on board that rocket, as it just blew up on the launch pad 3 days ago! This time we're going to triple check our levels and see if we can get the SOX drive working, but the oil pressure is already over $55 and may scrub this mission before we even get to a countdown.

Moonshot 25 01 2007This is a tricky spot for us because we are long on tech and short on oil and builders, pretty much the exact opposite of Cramer's advice from last week. So while we are looking for a Nasdaq led rally, we are also expecting to jettison two of the main booster rockets very soon.

Beazer Homes USA Inc. (NYSE:BZH), one of our builder thrusters, has already flamed out, posting a Q1 loss of $1.54 per share vs. $2 in profits last year and far short of analysts' expected .26. There were $1.95 in write-offs and investors have been very forgiving of other builders (though for the life of me I don't see why), and continued to buy them as if they were the next big thing -- behavior that is so 2004!

"Operating conditions remained extremely challenging for the housing industry during our first quarter of fiscal 2007," said President and Chief Executive Ian J. McCarthy. "Most markets across the country continue to experience lower levels of demand for new homes, high cancellation rates and significant levels of discounting."

I need a button with a very sarcastic sounding "BUYBUYBUY" for that one!

Quarterly home closings were off 31% and orders were off 54% -- that's the year fellas! Cancellation rates are up to 43% -- that's 43 out of 100 people walking away from deposits rather than go through with a home purchase. What happens when they don't even want to make the deposits anymore?

BZH also lowered guidance for 2007 to $1.25(ish), down from $2.47(ish) and WAY down from $8.89 last year. Beazer's stock gained 7% since 1/16, when we picked up Centex Corp. (CTX) and other HB shorts on what seemed like some very obviously bad numbers coming out of the sector. We'll have to see if reality catches up with them today. Just be warned that bad builder news trickles down through the markets very quickly!

Asia trickled down a bit with the Hang Seng and the Nikkei showing slight drops as the falling dollar is starting to worry exporters. I said yesterday that the dollar would continue to fall until China tells OPEC to cut it out, and today might be the day as now it's starting to cost them money. $55 oil was bothering the manufacturers as well, and I'm very glad we covered our volatile FXI play by selling calls as we should see a nice pullback here.

Europe is flat this morning, waiting to see what we're up to. British Airways plc (NYSEARCA:BAB) says it will cancel "hundreds of flights" next week, as predicted on Monday when we took the March $100 puts for $1.45 (already $2)! At the time we took it on the possible strike news and "as a hedge against higher oil prices" -- good call on both counts (pat, pat).

Gee that's a lot of oil they won't be using...

Butterfly Effect Trailer 25 01 2007

Back home, the Nasdaq/LSE deal is still unwinding and we'll see if that index can hold up in a weaker market today. "As we sit here on this Wednesday there are no meetings scheduled, and if you go by the press reports yesterday you could reasonably come to the conclusion that the chances of the two sides getting together between now and Saturday are extremely low," said Nasdaq CEO Robert Greifeld. A little cryptic but I don't see the deal going through at this price (another bluffer!).

It's time to take Alcoa Inc. (NYSE:AA) off the table, as a strike in Guinea could tighten supplies of bauxite! A neat example of the butterfly effect in action! Today we'll see if our own indexes are ready to leave the cocoon and fly to new heights, or if we just have a moth that will be drawn to the flames of fear, panic and capitulation as our market roller coaster plunges into another dip:

US Markets 25 01 2007 Chart

This is a MUCH easier list than I gave the markets yesterday, and I will not be happy at all if they can't handle these very simple requests.

EBay Inc. (NASDAQ:EBAY) should get us off to a rockin' start with great earnings and raised guidance. Lockheed Martin Corp. (NYSE:LMT) and Northrop Grumman Corp. (NYSE:NOC) are doing well in the war biz. AT&T Inc. (NYSE:T) continues to rock and roll with huge results (nice roll for those of you who took it!). None of this matters as Microsoft Corp. (NASDAQ:MSFT) announces later and that will set tomorrow's market for good or bad.

We have natural gas inventories today, and they are counting on a whopping 175Bcf drawdown to keep the energy rally going. Zman projects 165Bcf, which I still think is a bit high as I think people were a little slow to turn on the heat, much like they are in the fall when it first starts getting cold but that's just my thoughts, I wouldn't bet on it...

Gas vs HDD 25 01 2007

What I am betting on is that a bouncing dollar and rising inventories will force a huge sell-off on March contracts, despite President Bush assuring energy traders that he stands ready to take 750M barrels off their hand at any price. That's right, Bush's SPR plan is actually a huge, government-funded bail out for the energy traders who can now roll their contracts with confidence because, at some point, he will be using your tax dollars to pay whatever premium it takes to make them whole.

If oil holds $55 through Friday, we will have to throw in the towel and move to March, but not with more money, just a consolidation into a few positions of whatever looks the most overbought. The fundamentals are trashed for the oil companies, but more and more roaches enter the trap every day to the point where I'm tempted to go in there and see what all the fun is about!

Gold needs to hold $650 for oil traders dreams to come true, and the dollar need to fall below 85, so we'll see how that goes for the week. But let's keep an eye on the Euro, which will either break $1.30 or $1.28 against a dollar move to either direction.

Oil Dollar Gold 25 01 2007 Chart


I have no idea what will happen today, and if we don't hold our levels I'll be doing a lot of lightening up. We don't want these levels to look like a double top as it could be a long, hard consolidation if we fall down from here!

Be careful out there!

- Phil

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