Options Trader: Thursday Morning Ideas

by: Philip Davis

"I imagine one of the reasons people cling to their hates so stubbornly is because they sense, once hate is gone, they will be forced to deal with pain." - James Baldwin.

I was going to start this morning by comparing this market action to Nero fiddling while Rome burned but then I realized that, in itself, it was a forced analogy. Nero absolutely did not fiddle while Rome burned, this was something made up much later to exemplify the decadence of the Roman Empire. First of all, the fiddle (violin) wasn’t even invented until the 16th century and second of all, Nero actually raced back to Rome on news of the fire and spearheaded a grand reconstruction project, housing homeless people in his palace until homes could be rebuilt.

So I have to think to myself, are things really that bad or am I just clinging to some old prejudices that won’t allow me to just put on my rally cap and enjoy the game?

Wile E. Coyote

After the Thanksgiving dip, I suffered a similar bout of introspection and I came up with a plan (Burn Dollars to Fight Gravity) to send Paulson to Asia to make a deal with China to devalue the dollar, allow commodities to run wild while we run our dollar printing presses at full speed to shrink our deficit through inflation. Who’d have thought they’d actually do it?

I said at the time: "That’s where the old Roach Motel Theory kicks in - not as it applies to oil, but as it applies to dollars. The Chinese have a Trillion U.S. dollars! While they may threaten to diversify them into something more stable, Mr. Paulson is going to point out to them that they are not the only roach in the motel.

Japan also has a Trillion of our dollars, we send them more every time we buy a Toyota, but the biggest joke of them all is that we’ve been shipping these ever devaluing dollars to OPEC and every other oil producing country at the rate of $165Bn a month (what, did you think Jihads just fund themselves?). Oil is traded in dollars, people who want to sell oil must accept dollars, people who want to buy oil need dollars to buy it…

We will keep printing dollars and China will keep buying them, as will everyone else and, now that we have pushed commodities to the limit, they will start using those dollars to buy other American goods and services - maybe even an IPod! For we investors, that ever expanding money supply has to go somewhere and we may be heading into a very, very soft landing on a very big pile of U.S. dollars!"


So let’s not think of it as fiddling while Rome burns, think of it as seeing a big fire (of burning dollars) and being savvy enough to grab a stick and start roasting some marshmallows. This market has gone straight up from 11,000 in July on $70 oil, $350 copper, $700 gold, Iraq, Iran, Korea, Bird Flu, global warming, rising interest, falling housing, Democrats taking control of Congress… NOTHING seems to be able to stop it! If we pop the Dow back through 12,500, it’s time to get back on this train and ride it to 13,000.


Japan had some catching up to do and the Nikkei jumped 256 points while the Hang Seng punched up 173 more points, pushing them both just below our 38.2% zone. Meanwhile, India drove right through with a whopping 362-point gain. The fact that North Korea stormed out of the arms talks didn’t seem to phase investors in the least (remember when that sort of thing caused a crash).

The European indices also jumped over our 50% levels, all rising neck and neck at this point. Our goal for the week is now simply to hold 50% gains into the weekend, as the past three days’ market movement is usually enough for any month in the markets.

So we will be very simple today, up is good, down is bad and let’s get ready to make some positive bets on some lagging plays. One obvious one is Microsoft (NASDAQ:MSFT), with the July $30s just .70 - what kind of rally will this be without Microsoft? General Electric (NYSE:GE) June $37.50s are .35, also a nice deal if the rally is real while ConocoPhillips (NYSE:COP) is still a top oil recovery play with the May $70s at $1.25.

David Fry points out that a lot of what’s driving the market is the same old shenanigans that we were complaining about last week, but as I said yesterday, sometimes a fake rally can spark a real rally - and who are we to fight the tide?

US Markets

That’s a pretty strong tide, isn’t it?

Another tide we can’t keep fighting is the tide of oil. If the market goes higher, the oil patch seems determined to go higher too, so we’ll see how high they can take it today as oil has already punched over $60 in overnight trading. Zman points out that we are once again being flooded with oil while everyone pretends we are running out:

Oil Imports

At the same time CNBC has mentioned the "gasoline shortage" coming into the "summer driving season," which used to start at the end of May, but apparently has moved up to Easter according to the weather girl. Just how severe is our "gasoline shortage?" Prepare yourself for this shocking graph:

U.S. Gasoline Stocks

Oh my gosh! It’s the end of the world as we know it! This is the BS you are being fed non-stop by the media and this is the BS logic that hundreds of billions of dollars are being invested upon. So at some point we have to give up trying to shovel it out and either jump in or simply stay away.

The fact that the near record build in gasoline stocks was reversed by three weeks of record refinery shut-downs and the fact that many of these refineries are coming back on-line now that the crack spread has hit record levels is no reason to cry foul - just do what the analysts tell you and BUYBUYBUY refiners.

We’ll watch the dollar and see if it can hang onto 83 today. Failing that level could lead us to some very nasty lows and, ordinarily I’d say that would matter, but the only people who get screwed by that are people who can’t afford to place the bulk of their assets in commodities (oil, gold, housing, stocks) - and we haven’t worried about THEM since 2001, so why start now?

Gold and Oil

So I guess I will be cautiously optimistic, but I stand ready to throw caution to the wind if we can keep up this market momentum - this will already be my worst week in quite a while, as I worried far too much about the smell of Rome burning when all I really had to do was dance to the Market’s fiddle.