Options Trader: Wednesday Morning Ideas

by: Philip Davis

What’s up today?

Well, the Dow will be up this morning as $75B component Home Depot (NYSE:HD) announces a $20B stock buyback fueled by the $10.3Bn sale of Home Depot Supply to several private equity players. The timing could not have been better if they had planned it to almost guarantee a new high for the Dow.

Morgan Stanley (NYSE:MS) had fantastic earnings and will reverse their downtrend, likely boosting the broker sector, while FedEx Corporation (NYSE:FDX) turned in some solid, but not great, numbers.

DRI’s same store sales dropped 2.2%, causing them to miss by .04 despite increased revenues (inflation) as signs indicate that casual dining continues to suffer from an exhausted consumer. In short, the rich (MS) get richer while the economy slows (FDX) and the average consumer is forced to give up the simple pleasure of a dinner at Red Lobster with the family in order to buy their next tank of gas. By the way, early stage declining economies force more M&A activity, which means even more money for the brokers on the way down - it’s good to be the king!

Speaking of M&A, that wacky Kerkorian is at it again, this time changing his mind about MGM MIRAGE (NYSE:MGM), much the same way he did about General Motors Corporation (NYSE:GM), right after running the stock up 37%. What a coincidence! Gosh, if we didn’t know that all these Billionaires were 100% honest and trustworthy in all of their dealings one would almost be led to conclude that he concocts these scenarios to enrich himself with no actual intention of following through, but who would ever think that an 90-year old man didn’t intend to follow through on long-range endeavors like turning around GM or building a $7.4B "city" project in the market that has experienced the biggest real estate crash in the country?

Well, like the old saying goes: Fool me once, shame on you. Fool me twice, shame on me. Fool me pretty much once a quarter and you get a rotating guest spot on CNBC!

In another battle of the super-rich, Microsoft Corporation (NASDAQ:MSFT) has acquiesced to Google (NASDAQ:GOOG) (via anti-trust litigation) to make changes to Vista that will enable rival search engines to be replaced as the default search button. This is a green light for Google to test new highs and we will continue to leave our Sept. $510s naked, but with an eye towards rolling them up as they are already up 100%. A pre-roll to the Sept. $550s, now $15.15 is in order and we can sell the current $510s, now $19.80, against our existing Sept. $510s IF the stock turns down to offset the new calls. After we see how today shakes out, we will see about beginning to set up our usual Google earnings plays on the members site.

Asia was generally up this morning as $70 oil doesn’t seem to bother anyone, so we’re not going to let it bother us. Only Shanghai sold off (2%) and, as I said last week, we are bored with them and will ignore them now. Iraq’s President is in China, asking that government to invest $1.2B in oil exploration since he can’t find anyone else willing to actually look for or produce oil in his own "coalition of the willing." You know, sometimes I wish I was making this stuff up, but it’s actually happening!


PetroChina Company Limited (NYSE:PTR) is planning to issue 4 Billion class A shares in Shanghai in order to raise funds to "develop domestic petroleum resources and make overseas acquisitions." Exxon Mobil (NYSE:XOM), meanwhile, spent your future $8B buying back their own stock last quarter.

If we are lucky, PTR will buy XOM and perhaps actually turn on the taps on some of XOM’s 22.7B barrels of reserves. Exxon’s replacement rate averages 115%, so they gain 15% more oil than they pump (1.6B barrels) in an average year. That’s 240Mb of hoarding PER YEAR for Exxon alone while they choke the life out of Billions of people who are taking up valuable space on their planet.

Meanwhile, the energy inventory report will be released today and a draw of less than 150,000 barrels will probably kick oil up near $70. Thank goodness XOM isn’t using the 4Mb a week of excess oil they discover in an average year, or we might get one of those annoying build-ups!

Our Toyota Motor Corporation (NYSE:TM) calls should be rocking today as the company decides to stop building factories in the US as it is still cheaper to make the cars in Japan and bring them here. Toyota President Katsuaki Watanabe told the Journal the company’s US operations were facing rising production costs, excess capacity at some plants, and quality problems. Toyota makes mainly large cars and trucks in the US and demand for them is dropping as gasoline continues to torture consumers. Fortunately, however, Toyota’s US workers can take comfort in the fact that gasoline is not a part of our core CPI and has no effect on the economy.

We are in full-blown breakout mode today and we are going to ride those waves for the week. I am once again calling for tightening stops and aiming to take half off the table by the week’s end. If we get through next week’s major data load unscathed then there will be plenty of things to buy. I have enough trouble sleeping through the night with money in this market, though, and there’s no way I want to risk a weekend right now:

US Markets

As I said it’s 1,540 or bust this week, so I may still change my short-term bearish outlook if we get an authoritative close above that level. Happy Trading sees the strength and there is no reason not to make it with all this good news. So NOT making it will be VERY suspect:

Click to Enlarge
SPX - 3 Months - Daily

We’ll keep an eye on oil today as the Dow races to 13,700 and oil races to $70. The July crude contract expires today and there are still 57Mb scheduled for delivery (down from 350Mb at the month’s open) so we will see how they handle this over at the NYMEX. In yesterday’s action only the front-month contract held positive as every single one of the other 60 traded months went negative.

The dollar is back in decline and treasury notes are being held down artificially to lower rates, so the smart money is pouring back into gold and we need to keep an eye on that $666 level for signs of trouble:

Oil and Dollar

I was dreamin’ when I wrote this, forgive me if it goes astray
But when I woke up this mornin’, could’ve sworn it was Judgment Day
The sky was all purple, there were people runnin’ everywhere
Tryin’ 2 run from the destruction, U know I didn’t even care

Cuz they say 2000 zero zero party over, oops, out of time!

So 2night I’m gonna party like it’s 1999!

I was dreamin’ when I wrote this, so sue me if I go 2 fast
But life is just a party and parties weren’t meant 2 last
War is all around us, my mind says prepare 2 fight
So if I gotta die, I’m gonna listen 2 my body 2night

Yeah, they say 2000 zero zero party over, oops, out of time!
So 2night I’m gonna party like it’s 1999! (Yeah, yeah)

People, let me tell U somethin’
If U didn’t come 2 party, don’t bother knockin’ on my door
I got a lion in my pocket and, baby, he’s ready 2 roar (Yeah)
Everybody’s got a bomb, we could all die any day (Oh)
But before I let that happen, I’ll dance my life away

Oh, they say 2000 zero zero party over, oops, out of time!
(We’re runnin’ out of time)
So 2night I’m gonna party like it’s 1999! (We gonna, we gonna, oh!)

Say it one more time
2000 zero zero party over, oops, out of time! (No, no)
So 2night I’m gonna party like it’s 1999! (We’re gonna, we gonna)

Alright, 1999
U say it, 1999
1999 (1999)

Don’t stop, don’t stop, say it one more time
2000 zero zero party over, oops, out of time! (Yeah, yeah)
So 2night I’m gonna party like it’s 1999! (We gonna, we’re gonna)
We could all die any day (1999)
I don’t wanna die, I’d rather dance my life away