Options Trader: Thursday Morning Ideas

by: Philip Davis

Personally I'm thrilled to have a short week.

I've been very busy and have a lot of catching up to do, so expect a lot of output this weekend despite the holidays!

We still get our Payroll and Unemployment data tomorrow despite the holiday, along with the ECRI Inflation Gauge, Wholesale Trade and Consumer Credit. Today we have jobless claims (probably up) the Business Barometer (probably down) and the Chicago Fed (better be better).

A combination of a "Goldilocks" job number (105-120K) and nothing blowing up over the weekend could give us a good day on Monday. Yesterday morning I said: "The simple fact of people seeing Mahmoud as less than totally insane will decimate the "terror premium" very quickly. If Nigeria reaches an "accord" with the rebels, then you know that OPEC is simply freaking out about the growing seeds of demand destruction and looking to drive prices back below $60, possibly back to $55."

Cuties 05 04 2007Don't forget I predicted last week that the hostages would be home by Easter, and now Royal Dutch Shell (NYSE:RDS.A) has "reached an agreement with local communities allowing it to return safely to the Niger Delta and that it expects to resume full production within five to six months." I say this so I can tell you how frustrating it is for me to be right about the bigger picture -- but wrong so far on the energy sector's reaction to it. I'm going to hold the puts through the weekend, reluctantly take a cover (we'll see who later in the day), and hope we are hit with a dose of sanity early next week or I will have to take my medicine and roll over to May, which is very scary as we near summer driving season.

The big picture in Asia is the Hang Seng's 1,400-point gain in 14 sessions -- how's that for an average daily gain? The Hang Seng was closed today and the Nikkei went with the pause-that-refreshes and pulled back 50 points into the long weekend as India continued its recovery. The Bank of China is raising reserve requirements for the 3rd time this year, trying to put the breaks on their runaway markets as China's CPI so far for the year is 2.4% vs. 1.5% last year. Although this is expected, we need to cover our iShares Trust FTSE-Xinhua China 25 Index Fund (NYSEARCA:FXI) leaps for the weekend by selling the $105s for $3.40.

Nat Gas pressure 05 04 2007No one from Asia will be invited to Doha next week (we're not invited either), where Russia and 13 other natural-gas producing nations (NOT Saudi Arabia) will be getting together to form a brand new natural gas cartel which we will call the Organized Gas Assembly Group or OGAG, although I think just Federated Unified World or FU World is a more appropriate description of their goals.

According the WSJ:

A major aim of the forum is to gain firmer control over the fast-growing market for liquefied natural gas, or LNG, said a top negotiator for one of the largest producers in the group. The world gas business amounts to a patchwork of regional markets, because gas is mainly distributed through pipelines confined to individual big markets such as the U.S. LNG, a super-chilled form of gas that is loaded on tankers, has the potential to change the market because it can be shipped around the world, making it a truly global commodity like oil. But that tradability also makes LNG more susceptible to price swings, prompting the producers to start thinking about a cartel.

Needless to say we can expect natural gas prices to remain volatile through next week.

Europe is the odd man out here, as they have very little gas of their own, while the North America is mainly self-sufficient -- so don't expect much opposition from this administration which gets a lot of campaign contributions from U.S. gas producers -- even though Ileana Ros-Lehtinen, ranking Republican on the U.S. House of Representative's Foreign Affairs Committee, urged Secretary of State Condoleezza Rice in a letter April 2 to "vigorously oppose the establishment of this global extortion racket."

Europe is flat again today, waiting for the U.S. markets to catch up, and we are getting close to hitting so many levels I'm going to have to raise the bar next week -- and that's a good thing!

Click to enlarge



Day's Move

Break Down

38% Fib Level

50 DMA

Break Up

Dow 12,530 19.75 12,350 12,369 12,450 12,500 Transports 2,789 -14.11 2,736 2,830 2,812 2,983 S&P 1,439 1.6 1,410 1,407 1,425 1,440 NYSE 9,398 17.1 9,100 9,073 9,220 9,400 Nasdaq 2,458 8.36 2,400 2,411 2,438 2,450 SOX 473 4.42 470 469 469 490 Russell 811 -0.98 790 786 798 810 Hang Seng 20,209 0 19,400 19,789 19,969 19,800 Nikkei 17,491 -53 17,000 17,244 17,412 17,600 BSE (India) 12,856 69 12,900 13,253 13,557 13,600 DAX 7,082 9 6,700 6,707 6,797 6,900 CAC 40 5,737 -2 5,500 5,495 5,590 5,700 FTSE 6,375 11 6,200 6,205 6,276 6,350

I expect more healthy consolidation today. I doubt anyone is going to commit ahead of the weekend, but the EU is back at the table with Iran on their nuclear plants (we're not invited because we kept making faces at the last meeting), and we'll see if Mahmoud's new diplomatic mood carries forward or if that was a one-time gesture.

US Markets 05 04 2007 Chart

I think David Fry hit the nail on the head with this S&P chart, where he points out what we talk about almost every Monday: Merger Mania is simply reducing the supply of stocks and inflation and the collapsing dollar (and the vastly increasing supply of collapsing dollars) does the rest:

D Fry Market Outlook 05 04 2007_009

It's a very chincy way to have a rally, but we'll take it!

I'm very excited that Paulson and Bernanke have adopted my policy to inflate our nation out of debt, and the market rally is proceeding exactly according to my 12/9 "Burn Dollars to Fight Gravity" scenario. You won't care that gas is $4 per gallon when a hamburger at McDonalds costs $3 and minimum wage is $20, let's just make sure we own a few stocks (and little cash) when inflation really starts to kick in.

Match 05 04 2007Oil SHOULD hold up into the weekend, and it will be very bad for that sector if it doesn't, but the barrel overhang at the NYMEX is severe, and 5Mb stacked up this week alone, so someone better restart a refinery before we go right into glut mode. As I said last week though, "Valero Energy Corp. (NYSE:VLO) and BP plc (NYSE:BP) had significant outages this week and VLO is up 10% while BP is up 5%. If your stock performed that much better when you had a refinery on fire, would you invest in fire extinguishers or matches?"

We have nat-gas inventories today and ZMan predicts a small build. But, more importantly, he promises an industry review this weekend, which I'm very excited about!

The dollar looks doomed as the global economy seems to have decided they don't need us anymore but the BOE had some mercy today and left their rates unchanged, perhaps giving us a bit of breathing room. Gold is testing $680 now, not on Iran news but on stagflation watch so we'd better hope we don't see wage inflation in tomorrow's jobs report. Actually hope is the wrong word -- inflation is real, get used to it. We'd better get raises because gas prices aren't coming down and that house we bought doesn't look like it's going to fund our retirement and now food prices are rising. Thank goodness the government ignores food and energy or things could look ugly!

Oil Dollar Gold 05 04 2007 Chart

Have a very happy holiday weekend,

- Phil

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