Options Trader: Friday Morning Ideas

by: Philip Davis

Here comes the CPI!

As I've said before, the CPI can wreck us. The PPI was way up yesterday, and the CPI may be worse because consumers don't employ purchasing managers who negotiate the best possible prices for them like the producers do -- that's how we get to pay $3 a gallon for gasoline...

Now I'm a big fan of inflation -- you can read all about that in my famous (and controversial) "Inflation Nation" article, so I won't get into it here. But I predicted this at the beginning of the week when I said: "Thursday we get the PPI, which has a ridiculously low expectation of .2% and the ever-depressing Philly Fed Index followed by Friday's CPI, which should also be boosted by gasoline prices."

I also warned you a week ago to watch out for the manipulations of the infamous "Plunge Protection Team," and Denver points out that our man, David Fry, is on top of the case this week with evidence of $57B of your tax dollars being injected into the market in the past 2 days alone! Take a look at yesterday's inflow chart, and think how bad it might have been without the Fed's largesse. Now if our government is willing to do that, do we really think they are above fudging a few numbers to prop up the market as well?

Raining Dollars 16 03 2007"But Phil", you say, "these numbers are terrible -- doesn't that prove they're legit?" Not necessarily. It could mean that the legitimate numbers are so horrifying that the entire economy would implode the minute they came to light, and that our government is borrowing $100B a month from foreign investors by writing notes they can never repay just so they can shove this problem under the rug for one more month and pray for a miracle to save them.

Does that sound like any governments you know?

Still $57B is a lot of cash to throw around in a market that trades perhaps 2B shares on a good day, so we can thank Uncle Ben for the reprieve, short-lived though it may be. I pointed out yesterday in comments that you could see the cash being spent to rig the Dow as 9 of the top 16 components (by price) were being pushed positive while only 6 of the lower priced (and lower weighted) components were kept up. At least the Fed gave the money to people who know how to manipulate a market!

The same goes for the masterful game being played with the subprime lenders. It's amazing how investors can be led to believe all is well in a $20T market because the market cap of Accredited Home Lenders Holding Co. (LEND) went from $178M to $238M. That's the beauty of getting the media to focus on a few small stocks that can quickly be pumped up. The same is true in Asia; I must have heard 20 times yesterday how the Shanghai Index has "bounced back," meaning it regained $100B in lost value, while (as I pointed out yesterday morning) the substantially larger Hang Seng and Nikkei barley budged off their lows. I know we like to think we are sophisticated 21st century investors with the knowledge of ages at our fingertips, but we still fall for the same old shell games and ponzi schemes that have been around since we painted on cave walls.

The Nikkei unbounced this morning and fell 116 points to finish out their week 100 points off their 3/5 low and 1,556 points below their 2/26 high. The Hang Seng finished flat, 294 points off the low and 1,847 points off the recent high (they were 200 points higher than that in late January).

European markets were flat ahead of the CPI, which just came in at .4% (much higher than expected) but only 2% without food and energy, which we are all learning to live without now. It's 8:35 and the pre-markets are rallying, but I stand by my above statements and I declare shenanigans on the CPI number. Probably we are in for a nasty shock on the next report when they are forced to adjust.

No levels on our markets today: up is good, down is bad -- good rule of thumb. Bear in mind that we look like this so don't get excited, Barron's could do an expose on the economy over the weekend and we could wake up Monday gapping back to our lows.

US Markets 16 03 2007

Remember back on March 6th we were excited about an "abandoned baby" candle pattern forming on the Nasdaq? Today we need to beware the opposite pattern developing, leaving that little candle hanging up there all by itself. If we see that near the close, we'll be making some pretty bearish covers later today.

Oil has just been pathetic all week, but that's the problem with giving Goldman et al Federal money to do what they want with, as their beloved oil stocks have been propped up all week. The refiners in particular have benefited from raising gasoline prices, while the crude they purchase dropped $5 for the week. The performance of oil against the dollar leads us to believe that there is BIG TROUBLE afoot if the dollar should start forming a nice W on the bounce.

Oil Dollar 16 03 2007

Notice the patterns. If you believe the markets will bounce, then you must believe the dollar will bounce. And if the dollar bounces then oil should fall (plus the chart looks weak anyway). Wen Jiabao spent much of his press conference last night reassuring investors that "China's purchases of U.S. dollar assets are mutually beneficial. China's formation of an investment company for its foreign-exchange reserves will not affect U.S. dollar assets." Mr. Wen said the goal of the new agency will be to "preserve and increase" the value of China's foreign-exchange holdings. All right, maybe we can start calling him "Helicopter Wen!" (see Liquidity Trap)

As it's expiration day we'll be busy, busy, busy cleaning up the portfolio, but let's make sure we have some index puts and calls lined up as momentum plays. We already have plenty of Diamonds Trust Series 1 ETF (NYSEARCA:DIA) Apr puts, and the NASDAQ 100 Trust Shares ETF (QQQQ) puts, in case today goes badly. I think I'll be looking at DIA $122s as a momentum play if we break up, and the S&P 500 Index (NYSEARCA:SPY) $139s should be right on the money. Both of these are day-trade protection while we decide what to do with our puts, but I will be surprised if I have to trigger either of these plays today.

Have a great weekend,

- Phil

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