Options Trader: Thursday Morning Ideas

by: Philip Davis

Another exciting day in the markets!

We have lots of data, including the GDP and Jobless Claims at 8:30, the Chicago PMI at 9:45, followed by Construction Spending and oil inventories at 10:30. I'd say by 11 a.m. we should have a pretty good indication of which way we're going from here.

Asia didn't need to wait for our data -- the Hang Seng shot up 340 points while the Nikkei rose 287 points. But South Korea is the month's hottest market, breaking the 1,700 mark today, up 10% for the very merry month of May. Shanghai A shares rose 1.4% after taking a 9% plunge the day before, and my regular readers will take note that this is less than a 20% bounce, leaving us unimpressed. The B shares dropped another half a point, but made a strong recovery from an 8.5% drop at the open -- possibly a bottom test over there. From our list of "Duh" stocks (stocks you can just buy based on the name): China Petroleum & Chemical (NYSE:SNP) and Shanghai Pudong Development Bank rose the daily 10% limit. Industrial & Commercial Bank of China gained 3%, while Aluminum Corp. of China (NYSE:ACH) [huge Duh] jumped 7.4%.

The World Bank, in an in-credible (as in NOT credible) case of fortunate timing, picked this morning to raise its forecast for China's growth this year to 10.4%, from 9.6%, down slightly from last year's 11.1% rate. Moody's said it may raise China's credit rating (now A2), which would be a big stamp of approval for the government. The World Bank expects China's exports to rise 20.6% this year. It also raised Chinas Forex 31 05 2007its projection for China's current-account surplus to $340 billion, or 10.8% of GDP. White House economists have assured the President that running a country with a surplus is a fairy tale, much like evolution, and should not be taken seriously.

The World Bank said the current-account surplus continues to boost China's foreign-exchange reserves, and it raised its end-2007 foreign exchange reserves forecast to $1.389 trillion, from $1.066 trillion at the end of last year. In February, its forecast was $1.334 trillion. The bank said growth in M2, China's broad gauge of money supply, will likely be 17% this year, compared with its previous forecast of 16%. While saying that inflationary pressure isn't an imminent problem, the bank raised its forecast for consumer prices to a 3.2% increase this year from the previous forecast of 2.5%. Consumer prices climbed 1.5% last year.

Over in Europe the markets are chugging along this morning, but what caught my attention was earnings from Statoil ASA (NYSE:STO), who had a 27% drop in net profit and are blaming (I kid you not) "lower oil and gas prices." THIS IS EXACTLY WHAT I'VE BEEN TALKING ABOUT! These pigs have had their nose in the trough for so long that they've let costs spiral out of control to the point where $70 Brent Crude doesn't pay the bills anymore. Of course it doesn't help that Statoil is a willing part of OPEC's shadow cartel, and cut their production 3% from a year earlier... Royal Dutch Shell's (NYSE:RDS.A) earnings were another laugh riot earlier this month as net profits there rose 5.6%; a 6.3% decline in output was more than offset by higher refining margins. I mention this now because we are going to be taking a short position on them this morning, as this is one of the companies that will be most affected by a collapse in RBOB.

Subprime Past Due 31 05 2007Speaking of something that's going to collapse, the U.S. housing market doesn't seem to worry the Fed -- but it scares the heck out of me. If you have time, Mark Whitehouse wrote an excellent article highlighting the effect that the "sub-prime debacle" is having on a Detroit neighborhood. I hate to do it, but every time we have one of these rallies I end up wondering why I'm still relatively cautious and then I read a little and go "Oh yeah, THAT'S why!" I will tell you right now that we certainly could have done about 30% better the past few months if I hadn't bothered hedging (other than 2/27 when it saved our portfolio), but I also place a value on a good night's sleep -- and I wouldn't be having any of those if I went to bed with my neck stretched along with some of these valuations I'm seeing!

Nonetheless we will be ignoring that tripling of delinquent mortgages and pretending we don't know that during the same time frame (2005-7) the percentage of sub-prime mortgages written went from 10% to 65% -- 6.5 times more -- meaning 19.5 times more people (1,950%) are delinquent on their mortgages this year than in 2005. As a funny aside, since so many of these mortgages are relatively new and still in "rate lock," we are in a very early stage of the problem (What problem? Who said problem? Don't say problem and it will go away!) because only 30% of all loans face rate resets this year, but that number will climb steadily to an average of 60% by 2010.

The GDP came in now (8:30) and it's simply pathetic at .6% (vs. .8% expected). We'll see if the markets can hold onto yesterday's gains. The CPI was up 3.3% but don't worry, the "core" CPI was just 2.2% for all you consumers who don't use food or energy. In the wild world of stock insanity, we can expect this to kill the dollar and BOOST the market initially, based on my old "stocks are just another commodity" theory.

I will be tightening up on my puts today, hopefully with another helping of NASDAQ 100 Trust Shares ETF (QQQQ) puts, probably the July $48 puts if they come down below $1.20. We shifted to the Diamonds Trust Series 1 ETF (NYSEARCA:DIA) July puts yesterday, but I'm still not filled on those as there was simply no good looking entry yesterday; the Dow went up and up and then finished the day by going up some more. It's not that we're fighting the tide -- it's more like we're going with the flow but making sure our life jacket is fully inflated at all times:



Day's Move

Must Hold

Comfort Zone

Break Out

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Hang Seng 20,634 340 20,200 20,600 21,000 22,000
Nikkei 17,875 287 17,400 17,500 18,300 18,500
BSE (India) 14,544 133 13,200 14,000 14,725 15,000
DAX 7,882 117 6,900 7,000 7,400 8,000
CAC 40 6,104 62 5,650 5,800 6,000 7,000
FTSE 6,639


6,325 6,450 6,600 7,000

Despite the BIG MOVE yesterday, we added NO green boxes in our home markets, and the SOX actually moved down, so I will urge caution until we see the SOX and the Transports catch up. The Nasdaq MUST break 2,600 to be taken seriously -- Bill Gates and Steve Jobs just got together last night to tell people "It's a good time to be in the technology industry" so anything less than 2,600 will be a real sign to pack it in for the week!

US Markets 31 5 07

Merger mania continues to spill into the weekdays as Wachovia Corp. (NASDAQ:WB) agrees to buy A.G. Edwards Inc. (AGE) for $6.8B (a 17% premium), in a deal that will create the second-largest U.S. brokerage with $1.1T in client assets. None of that matters to us because we hit the jackpot again with our Dendreon Corp. (NASDAQ:DNDN) calls as the company is jumping 31% pre-market on news of confirmation that the FDA may still track them for rapid approval! Could our week possibly go any better???

We have oil inventories today, but I already think that the energy sector got WAY too enthusiastic over what amounted to a very small bounce yesterday. We'll have to keep an eye on the dollar too:

Oil Dollar 31 05 2007

Have fun today -- don't take the gains too seriously!