Options Trader: Thursday Morning Ideas

by: Philip Davis

Now what?

Greenspan retracted his recession statement, in Tokyo this morning, saying he DOES NOT think such an economic slowdown is "probable." Now that he’s a private citizen perhaps we should just short the market the day before he is scheduled to appear anywhere! Hopefully Mr. Greenspan has learned that he still carries a very big stick and needs to walk a little more softly but private corporations don’t hand out big, fat speaking engagement checks to hear carefully worded statements so the former Fed Chair is going to have to choose between income and integrity in the future.

It’s too late to put the fear genie back in the bottle though and it will take a lot more than a "mea culpa" to restore investors to a state of less than rational exuberance.


Asia continued down other than India, which jumped almost 2% as investors decided the new budget was not as bad as first thought. Notice that yesterday morning, India was not on my list of Asian indices to short at it was Asia’s strongest economy last year, something I predicted after the Jan ‘06 World Economic Forum. I picked the U.S. economy this year but I didn’t think it was going to be the strongest of a weak group, which is how things are shaping up - let’s hope we can pull it out before things really do turn ugly.

Japan led the downturn with a 1.5% drop in industrial output and retail sales falling .8% .8%, indicating that the Japanese economy may still not be strong enough to withstand paying half a point to barrow money. The weak index of mining and industrial output "can be seen as a sign that the Japanese economic growth is losing momentum," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. Inventory developments — which will likely affect future demand and consumption — should be carefully monitored to gauge the outlook for Japan’s economy, she added.

Keep this in mind when CNBC tells you about the rising global demand for oil against as the World’s number one and two economies both just significantly lowered their economic forecasts!

I mentioned on 2/20 that EADS would be cutting 10,000 workers, which is why we held our BA leaps through thick and thin, as one would think it will be hard for Airbus to catch up with 30% fewer people. They made an official statement today. This also, coincidentally, makes 10,000 trained aircraft builders available for Boeing (NYSE:BA) - how convenient!

Swiss Re (OTC:SWCEY) said 2007 profits finished with a nice double and they are going to buy back $5Bn worth of their stock over the next three years. This should be good for our American International Group (NYSE:AIG) leaps (time to buy more I think). Net profits were about 30% ahead of analysts’ estimates

I hope I was clear yesterday when I said
: "If you drop a ball from five feet and it bounces one foot, do you bet 10% of your portfolio that the next bounce will be two feet? No - you get the air pump!" Hopefully our "It is NOT my Job to Save the Market!" post helped as well, as we are back to looking at breakdown points this morning - same as yesterday (but I’ll fix my RUT mistake!):

Dow still need to hold 12,200 or, as I said yesterday, we are on the express train to 12,000.
• Transports need to react positively over 2,850 on falling oil, without both of these factors, we are sunk!
S&P MUST hold 1,400 or we probably have another 5% drop ahead of us.
• NYSE has to hold 9,100 or we are just over 5% away from 8,600 support.
Nasdaq 2,400 is a must hold with 2 50-point drops below it!
SOX really, really must hold 470, really, really, really!
Russell needs to retake 800 and below 780 and I will be throwing in the towel on the whole shebang!

US Markets

Today is not a day for market heroics - today is a day for Duck and Cover! If we break these levels we have a lot of protective puts we can add to.

I hope the lunacy of oil rallying into a global market melt-down doesn’t escape you - this marks 45 days of unfounded gains since crude tanked to $51 in early January. We’ll see how they hold up today but let’s keep an eye on Suncor Energy (NYSE:SU), who have been a more realistic indicator of direction.

After telling us last week how to end the Iraq war, Hillary is unrolling her new energy policy via video this week, calling for "An Apollo-like effort" through a "strategic energy fund" using windfall profit taxes and repealing tax breaks for energy companies. In this particular case - I LOVE to say I told you so! This is a campaign issue that will not die as Gore and Clinton attack from both sides. The next step is for Obama to come out blasting big oil, making Hillary seem like the moderate. ROFL - I told them they should have just let Prop 87 pass, now the oil companies are getting blowback on a national scale!

If the markets are really in trouble, expect gold to go up. As I said on Tuesday: "Gold still needs to break $690 if it’s going to get to $700 (duh…) but it better do it soon or momentum will evaporate. If gold follows stocks and the dollar down then we know we are watching a deflating commodity bubble rather than a global equity panic - the two are very hard to tell apart with commodity stocks making up over 20% of the markets!"

How many Yen were used to borrow dollars and how long will it take to unwind? I think far less than people think and that is what, ultimately may save this market. We’ll keep a close eye on the dollar at 83.5 but we may need to test 82 before we can really turn this thing around.

Oil and Dollar


While it’s tricky to buy anything right now, I’m going to be looking to set up a position in Qimonda AG (QI), a German semi (recent Infineon spin-off) that’s a big game-chip maker. They’re a great company with a p/e of 9, 1/3 the industry average and they seem to have just sold off with the rest of the group for no good reason. This is one of those situations where you are probably better off just buying the stock for $14.52 and selling the calls for a nice, immediate return and room grow before you get called away. This is the kind of stock where if it went down to $8 I would be doing a triple down anyway.

With a market cap of $4.97B you can put this one in your CNBC challenge portfolio, but I just can’t resist the calls as I think these guys would lead a semi bounce-back just as they have outpaced the SOX pretty much all year.

How about those Chicago Mercantile Exchange Holdings (NASDAQ:CME) puts if the market tanks? They gained 30 points yesterday but never put in a good test of $500. Plus, we can always sell March, April and May puts against them if we’re wrong…