Options Trader: Tuesday Morning Ideas

by: Philip Davis

Is inflation really the market’s best friend?

Inflation in England rose to 3.1%, up from 2.8% last quarter and over 50% above their inflation target of 2%. This forces the Bank of England draft a letter of explanation (imagine that, accountability!) to the Treasury, which then must make a public reply the same day. While this may all seem like charming old world nonsense, it has the very real effect of sending the Pound to $2, the highest level since 1992 (Bush the 1st).

It’s not just the UK that takes inflation seriously, the entire EU operates under strict inflation guidelines and none of that "ex-food and energy" nonsense since they have done studies that show that many Europeans, unlike our government’s fantasy Americans, do in fact eat food and consume energy. The actual CPI for March is up .6%, multiply that by 12 and we get 7.2% annual inflation, but the markets will celebrate the 2.5% core rate because only the bottom 99% of the population care about the price of milk and gas. You people really, really haven’t mattered since we got rid of LBJ.

Let’s keep an eye on CSX Corporation'S (NYSE:CSX) earnings today, that will give us a hint on whether or not things are really slowing down (Warren Buffett seems to think not). There’s nothing inherently wrong with inflation. This is the policy Paulson and I have been pursuing since I wrote my "Inflation Nation" policy last November and was the goal we pursued on our December trip to China, where we explained the Roach Motel Theory to the Chinese as it applies to holders of U.S. currency and debt.

Let’s be more concerned about a pullback in Europe today than in our own markets, but if they can hold up, we will have a green light to head off to the races. (Kind of like Brazil in the good old days!):













Fib Level


Dow 12,720 108 12,400 1,245 12,528 12,650
Transports 2,872 42 2,736 2,817 2,889 2,983
S&P 1,468 15 1,410 1,426 1,427 1,460
NYSE 9,625 102 9,250 9,250 9,218 9,465
Nasdaq 2,518 20 2,400 2,440 2,454 2,500
SOX 474 1 470 472 477 490
Russell 831 12 790 798 803 820
Hang Seng 20,788 31 19,400 19,941 20,192 20,600
Nikkei 17,527 -100 17,200 17,417 17,617 18,000
BSE (India) 13,607 -88 12,750 13,425 13,814 14,200
DAX 7,306 -31 6,700 6,818 6,830 7,100
CAC 40 5,827 -35 5,500 5,597 5,601 5,780
FTSE 6,468 -47 6,200 6,298 6,297 6,450
Click to enlarge

US Markets

It’s very much the SOX’s game to win or lose today but if a pullback in the EU doesn’t put the brakes on oil, then unfortunately, nothing will.

Of course, oil doesn’t look all that expensive to Europeans. Their currency is up 20% since Jan. ‘06, making oil an effective $59 for them. Therefore oil isn’t getting more expensive; the dollar is simply getting "more worthless" (gold too). Let’s see how oil performs around the $65 mark today, but Brent looks like it’s running out of steam and if the dollar doesn’t collapse below 80, then we might get a mild pullback. If, however, the dollar falls through the floor (look for gold to break $700), then we may realize T Boone’s wildest dreams this summer.

Check ZMan out for an excellent rundown of today’s energy market. We’re both patiently waiting for the fall, but we may have a long way to go as even I would rather have a barrel full of oil than a barrel full of dollars this week!


Earnings Update:

• Johnson & Johnson (NYSE:JNJ) (got ‘em) was much better than expected
• The Coca-Cola Company (NYSE:KO) (got em) did well everywhere in the world but here
•Wells Fargo & Company (NYSE:WFC) (need ‘em) is up 11%
• Dow Jones & Company, Inc. (DJ) (neutral) dropped but only because of a special gain last year.

Intel Corp. (NASDAQ:INTC), Yahoo! (NASDAQ:YHOO) and International Business Machines Corp. (NYSE:IBM) report later, and we’ll be taking some PowerShares QQQ Trust, Series 1 (QQQQ) puts for security as the Nasdaq tops out this morning, just in case.

Let’s be careful out there - everyone was investing in Brazil’s "hot" market, too!