Options Trader: Monday Morning Ideas

by: Philip Davis

This week we'll get a chance to see what happens to your leaps when a stock comes out of bankruptcy.

Delta plane 30 04 2007We've been buying and selling DALRQ (soon to be DAL) Jan $2.50s since 12/22, and have done quite well as they bounced from our nickel buys to as much as .30, but have flatlined at .05 since early February when we lost interest. There's still 62 left in the LTP, worth a whopping $310, and people often ask me about buying bankrupt stocks -- so this will be an interesting exercise for the week! This leaves NWACQ as the last airline operating in bankruptcy.

We have a busy busy data week ahead of us, so it's time for the famous Briefing.com chart:

Date ET Release For Actual Briefing.com Consensus Prior My Guess
Apr 30 08:30 Personal Income Mar   0.5% 0.5% 0.6% .6+
Apr 30 08:30 Personal Spending Mar   0.6% 0.5% 0.6% .5
Apr 30 08:30 Core PCE Inflation Mar   0.1% 0.1% 0.3% .2 (rounded)
Apr 30 09:45 Chicago PMI Apr   53.0 55.0 61.7 57
Apr 30 10:00 Construction Spending Mar   0.1% 0.3% 0.3% .2
May 01 10:00 ISM Index Apr   51.5 51.0 50.9 51
May 01 10:00 Pending Home Sales Mar     0.4% 0.7% .6
May 01 17:00 Auto Sales Apr   5.2M 5.2M 5.1M >5.2
May 01 17:00 Truck Sales Apr   7.1M 7.3M 7.2M <7M
May 02 10:00 Factory Orders Mar   2.4% 1.0% 1.0% 1.5%
May 02 10:30 Crude Inventories 04/27   NA NA 2074K +1
May 03 08:30 Initial Claims 04/28   325K NA 321K >325
May 03 08:30 Productivity-Prel Q1   0.8% 1.1% 1.6% 1.2%
May 03 10:00 ISM Services Apr   54.0 53.0 52.4 54
May 04 08:30 Nonfarm Payrolls Apr   115K 100K 180k 125K
May 04 08:30 Unemployment Rate Apr   4.5% 4.5% 4.4% 4.4%
May 04 08:30 Hourly Earnings Apr   0.4% 0.3% 0.3% .4%
May 04 08:30 Average Workweek Apr   33.8 33.8 33.9 ??
Click to enlarge

Today's topspin will be applied by the Chicago PMI, which I think will be better than expected, as should be Construction Spending at 10. After tomorrow's ISM, the rest of the data is pretty much noise other than Factory Orders, as long as there are no shockers in the group.

IBM man 30 04 2007Judging from where all the money's coming from, it's a lot more important what Europe thinks about our economy than what we think, but I think buying U.S. equities should be a no brainer for Europeans. The dollar is possibly at a low, so a rebounding dollar would buffer a good percentage of the losses they market may hand them -- especially if the market declines on Fed tightening or a run in rates that would boost dollar demand. Should the dollar continue to fall, U.S. equities (especially Blue Chips) should rise just like any other commodity to offset the dollar losses.

Picking up an international giant like International Business Machines Corp. (NYSE:IBM) who pays a 2% dividend and is buying back 10% of their shares with a forward P/E of 13.5 has got to seem REALLY attractive to someone who sees the company as costing just 6 Euros ($10) more than it did last April ($75). We got out of our May $95s last week, but I'm liking the Jan '09 $110s at $7.70, and we'll be selling calls against it later in the week. This week (assuming we keep going) we will be adding several of these conglomerates to the long-term portfolio.

China's Central Bank raised reserve requirements for the 7th time in 12 months, trying to keep a lid on inflation and speculation even as the Shanghai Stock Exchange zooms on to new highs. "The past two years of experience in China has shown that [reserve-ratio] changes are an ineffective policy tool to control monetary expansion," Hong Liang, a Hong Kong-based Goldman Sachs economist, said in a research note after the increase was announced. Such ratio increases are "simply not binding on banks' capabilities to lend," Ms. Liang said. Traders apparently agree, as this move garnered just a 1% drop in the Hang Seng today, barely a flinch ahead of a week-long holiday.

Asian duh 30 04 2007Other Asian indices were flat ahead of the holidays and Chalco (China Aluminum Corp) IPO'd with a 230% on-day gain as it joins the rank of "duh" stocks we talked about last week that can be bought based solely on their names or missions. Another duh, Capital Land, Asia's largest property developer reported a 400% increase in Q1 profits over last year, but that disappointed investors who thought they should do better (imagine how they would feel about Beazer Homes USA Inc. (NYSE:BZH)!).

While U.S. brokers don't like to mention it the Japanese brokerages are heavy into commodities, with earnings skyrocketing over there. But Mitsubishi UFJ Financial Group Inc. (NYSE:MTU) warns of a slowdown ahead, "warning its earnings this fiscal year will slip due to lower coal prices, heavier investment costs and fewer gains from sales of equities."

Very unfortunately for us, our International Securities Exchange Inc. (ISE) $50 caller will be very happy this morning as the Deutsche Boerse may be making a $68 per share offer for that exchange. Luckily we have the Jan $45s with a $2.10 basis, so we won't get hurt, but I wish I would have bought out that caller for .40 on Friday! This should throw our ICE's back in play (plenty of room on those) and also means we need to get out of our Chicago Mercantile Exchange Holdings (NASDAQ:CME) puts, just to be safe! NYSE Euronext (NYSE:NYX) may make a nice momentum play this morning.

Deal no deal 30 04 2007The ABN Amro Holding N.V. (ABN) deal gets messier by the second, but merger mania continues unabated in Europe as ENI S.p.A. (NYSE:E) is forking over $4.8B (just 3.4B euros) to buy some E&P assets from Dominion Resources Inc. (NYSE:D). That works out to $18.40 a barrel in case anyone cares about what oil is really worth to the people in the industry. Meanwhile Enersis S. A. (ENI) (which is the name of E but not their symbol) had an gain but a miss supplying electricity to South America as their huge hydroelectric project runs into environmental concerns. Telecom Italia S.P.A. (NYSE:TI) picked up $5.6B on their deal, so it's a typical Monday as we wrap up another $100B-plus month of deal.

We need a happy Europe, as my theory for the week is that the shuttered Asian markets will force euros to flow across the Atlantic -- so let's watch the EU closely as either Japan or China is closed through Wednesday, and both will be down Thursday and Friday:



Index

Current

Day's Move

Must Hold

Comfort Zone

Break Out

Next Goal

Dow 13,120 15 12,468 12,600 13,000 13,500
Transports 2,882 -41 2,825 2,900 3,000 3,250
S&P 1,494 0 1,430 1,460 1,500 1,550
NYSE 9,705 -10 9,218 9,465 9,600 10,000
Nasdaq 2,557 2 2,454 2,500 2,600 2,750
SOX 498 -7 477 490 500 560
Russell 829 -4 803 820 850 900
Hang Seng 20,318 -207 20,200 20,600 21,000 22,000
Nikkei 17,400 closed 17,400 17,500 18,300 18,500
BSE (India) 13,872 -36 13,200 14,000 14,725 15,000
DAX 7,425 47 6,900 7,000 7,400 8,000
CAC 40 5,967 37 5,650 5,800 6,000 7,000
FTSE 6,464 46 6,325 6,450 6,600 7,000
Click to enlarge

US Markets 30 04 2007 Chart

Don't forget Asia had a big pre-holiday sell-off, but it's still up to our transports and the SOX, who got a mixed report as March demand increased while prices paid per bit decreased. Once again, for the 42nd consecutive year, Moore's law baffles analysts who can't figure out what semiconductor manufacturers actually do for a living.

Also confusing analysts is the fact that the U.S. is not the center of the universe (or even this planet) anymore as U.S. sales are down 10.6% while sales in Asia were up 8.1% and sales in Europe and Japan were up about 4.5%. Does that sound bad to you? Perhaps, but if we dig just a tiny bit deeper we see that U.S. sales are just $3.4B while Japan alone is $3.95B and the rest of Asia is $9.66B. Even Europe has passed us in manufacturing electronics for the first time, buying $3.39B worth of semiconductors.

Let's focus on what's important: DRAM unit sales went UP 16% but prices dipped 20% (thank you Mr. Moore). DRAM is not an end product, it's a thing they put in stuff -- I reiterate my BUYBUYBUY on Best Buy Co. Inc. (NYSE:BBY)! Here's Happy Trading's Chart of the Day as we watch how the SOX take the news today:

Sox Weekly 30 04 2007

I'm inspired to write a Phil's Law, which will state that if you stop buying so much gas they will stop charging you $3 for it, but I think it's called supply and demand. We, as a nation, have no self-control. But if it occurred to people that, rather than cutting down on spending at the mall to pay for our gas that, if we cut down on our trips to the mall, we could spend more when we get there -- then we could make some progress.

Of course it takes leadership to change the habits of the people, and sadly we have none, but that is changing fast as non-energy companies are starting to shift millions of dollars away from Republicans and giving them to (gasp) the Democrats who are now the lesser of two evils for fiscal conservatives.

Oil Dollar Gold 30 04 2007 Chart

Cheney 30 04 2007Dick Cheney's favorite commodity got a nice boost over $66 on the Saudi Terror news last week and we'll see if they can hold $65 for the week. Gold ran out of gas at $698 but took a sharp bounce off the 50 DMA at $670, so we'll see if that holds, but it would take something crazy -- like a dollar recovery -- to drop gold below that mark.

I can pretty much guarantee an interesting week, but if we can't break out on Thursday and Friday, I'm going to start selling in May and going away!

Read all of Phil Davis's articles on Seeking Alpha