Options Trader: Monday Morning Ideas

by: Philip Davis

I didn’t like the Asian markets today.

The Hang Seng and the Nikkei both had strong opens and both dropped over 150 points into the close. The Korean KOSPI and the Shanghai Composite index both made new records, but are both relatively small markets.

Other Asian stocks finished roughly flat to slightly up, but it seemed like surging oil prices hurt the markets as well as a "disappointing" (up 22%) report from China Mobile. The Nikkei has its big earnings season starting this week and there was big news today that Citibank Inc. (NYSE:C), HSBC Holdings plc (HBC), JPMorgan Chase & Co. (NYSE:JPM) and Standard Chartered will be able to begin accepting deposits in Yuan from Chinese citizens, a real prize in a country with a 25% personal savings rate and a population of 1.2B people!

Globe

Regardless of the Nikkei’s troubles, IF we can keep the new oil contract under control and IF the U.S. markets don’t tank today, I’m liking the very flat iShares MSCI Japan Index (NYSEARCA:EWJ) (Japan Index Fund) as it has let the Nikkei get away from it in the past few weeks and the premium on the May $14 at .75 is just a dime, not a bad way to leverage a position!

iShares MSCI Hong Kong Index Fund (NYSEARCA:EWH) has tracked the Hang Seng much more closely, but we can take advantage of today’s pause to dip into the June $16s for .98, a .36 premium. I like them straight up as well as the spread of owning those and selling the May $16s for .82 for a .14 spread but, if you wait, you may get a free trade on the deal. The danger in these trades is that Asian earnings may be a bust due to creeping inflation so be careful with these! I lile the EWH’s enough to offer to buy 10 at .90 for the $10KP and remind me to time the sell in comments.

Chinese developer Country Garden Holdings gained 35% on its IPO with a $15Bn cap, a p/e of 29 and close to double early value estimates. China Citic Bank raised $5.4Bn in its IPO, setting a new mark to beat for the year, but far short of ICBC’s $21.9Bn raise last year.

Still, we're looking at PLENTY of money still looking to go into, not just stocks, but SPECULATIVE stocks, and until we see a "flight to quality" I’m going to remain bullish on Asia.

Lane Ends Merge Left

Over in Europe, ABN AMRO Holding N.V. (ABN) and Barclays formally announced their $91B merger. Along with this deal, ABN will be spinning off LaSalle to Bank of America Corporation (NYSE:BAC) for $21B and
AstraZeneca plc (NYSE:AZN) is buying MedImmune, Inc. (MEDI) for $15.6Bn in cash, a 20% premium over Friday’s close.

Both Barclays and AZN sold off to lead Europe lower as you can expect both companies’ shareholders to be concerned about that level of cash outlay. On the whole, the E.U. markets are holding about even, but let’s watch their close to set a direction for our afternoon.

Stock Market Indexes

Fiat S.p.A. (NYSEARCA:FIA) doubled its net profits as tiny car sales boomed, further sowing the seeds of long-term demand destruction for fuel. They’ve upped their forecasts for the year as their ambitious program of new, small, fuel-efficient cars hit the market at just the right time. One out of three cars purchased in Italy is now a Fiat.

We were worried about Nigeria’s elections, but it’s France that can’t pick a leader and that country is heading to a run-off as the Conservative and Socialist candidates are the two primary survivors. 85% of the people in that country voted in the weekend election (what a novel idea - holding an election on a day most people are able to vote!).

That brings us to another ETF I like. The iShares MSCI United Kingdom Index (NYSEARCA:EWU) (London’s FTSE) recovered nicely from a big dip. However, the index is falling far behind iShares MSCI Germany Index Fund (NYSEARCA:EWG), the German DAX, and the French CAC, the iShares MSCI France Index (NYSEARCA:EWQ), mainly on the runaway price of the Pound, which is at 20-year highs against the dollar. But England sells few hard goods to us and has a strong export profile. As long as the other EU indices hold up, I like the October $25s for $1.30, selling the May $26s for .35.

Back home, it’s time to turn our attention to the XAL (airlines), which may be falling off a cliff as itpunched below their 200 dma Friday, and may be setting up for far worse just when we were hoping things would get better. This is a big, shaky industry that employs a lot of people and is sensitive to energy - a real canary in the coal mine for the entire U.S. economy. A major problem for the airlines is that they set their rates in the world’s worst performing currency and can’t raise them as 70% of their traffic comes from price-sensitive U.S. consumers.

The breakout performance of Air France - KLM (AKH), British Airways plc (NYSEARCA:BAB), China Eastern Airlines Corp. Ltd. (NYSE:CEA) and China Southern Airlines Limited (NYSE:ZNH) against our U.S. airlines since July was an early indicator of the general underperformance of our markets six months later. So a crash here needs to be taken very seriously!

Unfortunately, I’m going to have to go back to posting danger zones on our charts as we’ve had a great run but weakness in the SOX and the Transports (blame the airlines) make it questionable whether we can sustain Dow 13,000 and S&P 1,500. Earnings are good so far, but it won’t take much to upset the applecart. Hopefully the XAL will turn it around and clear us for take-off but, until then, I will be holding onto my covers:



 

 

Day’s

Must

Comfort

Break

Next

Index

Current

Move

Hold

Zone

Out

Goal

Dow 12,961 153 12,468 12,600 13,000 13,500
Transports 2,905 26 2,825 2,900 3,000 3,250
S&P 1,484 13 1,430 1,460 1,500 1,550
NYSE 9,697 95 9,218 9,465 9,600 10,000
Nasdaq 2,526 21 2,454 2,500 2,600 2,750
SOX 487 1 477 490 500 560
Russell 828 9 803 820 850 900
Hang Seng 20,556 -10 20,200 20,600 21,000 22,000
Nikkei 17,455 3 17,400 17,500 18,300 18,500
BSE (India) 13,928 30 13,200 14,000 14,725 15,000
DAX 7,343 1 6,900 7,000 7,400 8,000
CAC 40 5,915 -15 5,650 5,800 6,000 7,000
FTSE 6,478 -9 6,325 6,450 6,600 7,000
Click to enlarge

US Markets

As long as we hold our comfort zones, we will be good to go. But keep in mind that this week is the big earnings week for Asia, so keep a sharp eye on those levels. We need them to hold record levels there to keep International investors interested in tossing a few Euros into "cheap" U.S. equities.

Filling Up

Another industry that would be doing much better if it didn’t have to accept dollars for its product is the U.S. oil industry, which is suffering from higher costs abroad (but don’t cry, they can afford it!) as well as increased demands for revenue sharing by the nations whose recourses it is tapping (imagine that!).

The disparity between WTIC and Brent crude has gotten extreme for a variety of reasons, including a large ramp-up in U.S. production and the long-reported (by me anyway) glut of oil at Cushing, OK.

"Spot WTI crude-oil prices no longer reflect international market dynamics," Edward Morse, chief energy economist at Lehman Brothers Holdings Inc., said in an April 13 report. "Rather, they represent local fundamentals for crude oil in the U.S. mid-continent, putting a question mark over the value of this inland U.S. crude as a world marker for hedging or speculation."

Unfortunately, it’s contract rollover day, and we’re back to watching crude flirt with $65 and, as usual, we’ll be looking for a trend down to $62.50 as a sign of weakness. I’m going to initiate a new model, however, that will take into account the timing of the dip; we KNOW they can’t possibly take delivery of the 325M barrels that are contracted for delivery to Cushing this month. As of this morning, in addition to that June number, we have 140Mb open for July, 51Mb for August, 49Mb in September, 31Mb in October, 29Mb in November and (uh oh) 131Mb scheduled for December. Only 19M contracts were left open at last week’s close, and if we extrapolate even 30M barrels a month as a delivered average, we still find a surplus of 548M barrels ordered over and above what can actually be accepted - talk about a speculative bubble!

Don’t worry though, as long as Criminal Narrators Boost Crude we can count on every stiff breeze to bring hurricane warnings and every scuffle in Nigeria (producing 2% of the World’s crude with a population of 140M) to be treated as a global crisis. The fact that Iran is working on nuclear weapons will continue to be a surprise at least every 10 days. We’ve already forgotten that OPEC has cut 1.7M of daily production meaning a total shutdown of Nigeria could be made up for by simply turning the taps back on.

We’ll wait for earnings this week, but we certainly stand ready to jump on top of some of these very pricey plays.

Continued dollar weakness helps gold and oil alike as we test the critical $700 mark on gold.

It should be a very interesting week, I only hope we don’t have to go back to our old chart levels . . .

Oil and Dollar