Options Trader: Tuesday Morning Ideas

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Includes: GOOG, SNE, UPS
by: Philip Davis

P&G's numbers were great!

They posted a 12% rise for the quarter and raised 2007 guidance. When a company that sells everything you use in your home; Duracell, Gillette, Crest, Tide, Bounty, Pringles, Charmin, Pampers, Folgers... to the tune of $75B a year tells you that they are keeping costs down and doing better than ever, then perhaps the economy is in better shape than you think!

BW Cover 30 01 2007Business Week published an article on "The World's Most Innovative Companies" back in April and, of the group, only Starbucks Corp. (NASDAQ:SBUX), Google Inc. (NASDAQ:GOOG) and Samsung haven't gone up huge in 2006. We'll hear from Google and Starbucks this week and Samsung is just piled in with the poor Semi sector and gets no respect.

On the other hand, United Parcel Service (NYSE:UPS) only posted in-line earnings and was a little light on revenue and guidance -- all the better for our FedEx Corp. (NYSE:FDX) calls as their earnings are behind them and were actually very good. I go back to my gift card thesis with UPS -- there is no way a 10% increase in gift cards doesn't cost them money as you just stick a card in the regular mail or (lol) FedEx it!

While I know that UPS takes overnight letters too, I know very few people who use them for that purpose, just as far less people use FedEx for package shipping. There's nothing wrong with UPS's numbers, they just don't have any major growth drivers (which, unfortunately may spook investors). We put off buying them ahead of earnings hoping for a nice dip and it looks like we'll be getting it!

UPS Inc 30 01 2007

Sony Corp. (NYSE:SNE) had a decline in profits on strong sales, but we expected the PS3 to be a loss leader. The question is what did the shareholders who bid them up 20% since Thanksgiving expect? They raised guidance, and I would be very pleased with this report if I were a Sony shareholder, but I'm sure glad I'm not! Again, how unhealthy can the economy be when this entertainment conglomerate's sales gain 10% for the year to 2.61 Trillion (yen, that is)?

Sony Inc 30 01 2007

Our Honda Motor Co. (NYSE:HMC) jumped up ahead of earnings, and managed to offset Sony's disappointing bottom line to keep the Nikkei flat. China Mobile (Hong Kong) Ltd. (NYSE:CHL) gained 3% (yawn), and makes up 8% of our iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI), which is holding up well even though China continues to chop down the property sector. Some builders went limit down (10%) as the government moves to restrict growth. Keep in mind that the Chinese building boom is the cornerstone for the bull case on commodity pricing. If they are serious about curbing the growth, people are going to start trading their shiny bits of metal for U.S. dollars again!

This didn't stop the Hang Seng from adding on another 223 points to leave the Dow well and truly in the dust at 20,460. Retail sales fell in Japan for the second month in a row, which pretty much takes a BOJ rate hike off the table -- also good for the dollar.

Europe is flat as our markets were no help in giving them direction yesterday, and it continues to amaze me that the EU is still fixated on what goes on in the U.S. markets rather than minding their own shops. The EU is calling for a cut in sugar production "to hem in a surplus" so sugar speculators beware!

Market Canary 30 01 2007We'll see how our canaries are doing today; hopefully we can get to some safer levels as things are still very dicey:

US Markets 30 01 2007 Chart

Yee Haw with Motorola Inc. (MOT)! Carl Icahn, who owns 1.4% of the company, wants a board seat! Mr. Icahn is famous for turning his attention to undervalued companies -- this will be great news for our leaps!

The Saudis dropped a bombshell last night and announced they have another 158,000 barrel a day surplus, yet another indication that there is absolutely no indication of a global shortage as that is more oil than is called for in all of China's 2007 growth! I imagine CNBC (Coercing Neophytes to Buy Crude) will try to spin it differently, but what kind of supply/demand curve has the suppliers having to cut back more and more production every month?

Far from running out of oil, Saudi Arabia alone has taken 1 million barrels a day out of production (don't cry for them, they still sell 8.5M b/d!) since the summer while the rest of OPEC has done about the same, that's a 2M barrel/day global surplus over and above the weekly builds we've been seeing in our inventories. Add to that the fact that Russian and China are ramping up production and we are heading into a glut of biblical proportions!

Long term, even companies like Schlumberger Ltd. (NYSE:SLB), Halliburton Co. (NYSE:HAL), Smith International Inc. (SII) and Weatherford International Inc. (NYSE:WFT) (they last two reporting today) may suffer as production starts shutting down and new drilling comes to a virtual halt. Let's watch our levels for crude, with small resistance at $54 and real resistance at my week's target at $53.23. The upside danger zone is now $54.60, but breaking that won't be too impressive until they get over $55.

Zman posted a great chart in his section on the MASSIVE growth (30%) in Cheniere Energy Inc. (NYSEMKT:LNG) shipments. As he says: "An additional 500+ Bcf in just two years can't be positive for gas prices in a market where demand growth typically only runs between 1 and 3%."

LNG Shipments 30 01 2007

Still, it's all up to the dollar, and we'll keep an eye on the Euro and the $1.28 level, as well as gold going below $640 to give us a solid directional indicator.

Oil Dollar Gold 30 01 2007 Chart

No picks today, it's all about the cuts if this market can't break my levels, so expect a lot of portfolio moves during the day as I really don't want to carry any February contracts into the weekend unless they are specifically targeting short-term moves.

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