Options Trader: Friday Morning Ideas

by: Philip Davis

Wow, these short weeks really mess with your schedule!

We have jobs numbers today, but the real deal is earnings season next week. I won’t put much stock today’s action, therefore, until we see what follow through we have in the next few sessions.

8:30 Update: Hourly earning are up a reasonable 3.9% for the year, the workweek ticked up slightly and non-farm payrolls grew 132,000, a "good" number but were adjusted up to 190,000 in May and 122,000 in April. This means the "good" numbers originally reported by the government of 157,000 in May and 80,000 in April were off by staggering amounts, indicating the market reactions at that time (both positive) were dead wrong and based on faulty data.

Rabbit Season

It is amazing that the markets even bother with this junk as this is not the first time the jobs numbers reported have been found to be off by 50% or more. ADP sees a much hotter hiring environment and I think they have a little more credibility than the Department of Labor at this point. Unfortunately, we are not producing "quality" jobs. Service-sector employment rose 135K, Leisure and Hospitality were up 39K and Education and Health Services added 59K. Business and Professional Services fell 9K and Retail lost 24,000 jobs. Real earnings dropped .2% for May as the WisdomTree Intl. LargeCap Div Fd (NYSEARCA:DOL) apparently didn’t get the memo to ignore food and energy prices when pretending how great things are.


Asia looked good this morning, with Shanghai taking a 40% bounce off yesterday’s huge drop and Hong Kong continuing to act like pullbacks are something you only read about in textbooks, as that market tacked on another 278 points to finish the week over the critical 22,500 level (not reflected on this chart).

There is a hostile backlash forming against foreign direct investments, as governments from Canada to China have imposed or are considering restrictions on foreign purchases of companies, factories and real estate in their countries. The The US received $99B in investments in 2005 while US companies spent a net of ZERO (yes, $0) acquiring foreign assets, down from 222B in 2004. This is NOT a good trend!

European markets were doing well until they saw our jobs report but have turned down a bit. Brent crude shot through the critical $75 level, but the effect is slightly muted there. Meanwhile, the Euro rises to another record against the dollar, which is the near-worthless currency they get to trade for oil.

Oil and Dollar

Microsoft will put a damper on the Nasdaq today as they take a $1B charge for Xbox defect repairs. Newmont Mining Corporation (NYSE:NEM) is discontinuing its merchant banking division, eliminating all hedging at a cost of $531M and a $1.7B non-cash charge in Q2 in a MAJOR bet on higher gold prices. "With the elimination of our gold hedge book, we have renewed our commitment to maximizing gold price leverage for our shareholders," CEO Richard O’Brien said in a statement. Braddock Financial’s $300M Galena hedge fund is liquidating "after concerns of subprime mortgage exposure triggered investor redemptions."

We’ll see just how good the markets are at ignoring this news going into the weekend, but don’t expect much:

US Markets

I said yesterday in the members chat room that we need to watch Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) closely because, if they capitulate, it is very likely to be over in the short run. We’ve still been picking up some longs, just in case the madness never ends. However, it’s getting close to expiration and it’s time to get those July contracts off the table, so we’ll be reviewing our positions over the weekend and keeping good covers on our open calls.

NYMEX Holdings, Inc. (NMX) Aug $140s, now $3.10 were a Happy Trade yesterday and I like them a lot if we can get over $127.50 today. Volume at the NYMEX has been huge and 7/31 earnings have a fairly low estimate of .61 per share with the stock trading $20 below its June high.

We get a natural gas report at 10:30 and ZMan and I think there will be a large build. If that doesn’t finally kill the oil market, then it’s time to throw in the towel over there - but I am determined to short them through next week. My main economic concern de jour is rates, so let’s keep an eye on the 10-year, currently at 5.18% and see if it hits 5.20%.

Have a great weekend,

- Phil