Options Trader: Thursday Morning Ideas

by: Philip Davis

Thirteen thousand, six hundred or bust!

That’s our rally cry for the day. Do we take back our bullish posture or are we going to end this week (and possibly this rally) with a whimper? We finally get some data in this very slow week, but we’re not going to like it:

• Trade numbers we already know are dreadful, likely to break the $60B mark in monthly deficit
• The Monthly Budget should be net positive and gives traders something to jump on
• (All others are Friday)
• June Export Prices may not exceed last month’s .2% but the dollar is is now down 2% since June 30th. Oil prices are up 4.2% since June 30th too so look out for this number next month!
• Retail Sales are likely to be flat at best in the morning - only great GE earnings will offset that.
• Business Inventories were up .4% last month, if this continues we are slowing down more than expected.
• Michigan Consumer Sentiment hopefully bottomed out at 85 last month.

Next week we get hammered with data and earnings, including PPI and CPI, Industrial Production, Housing Starts, Leading Economic Indicators, FOMC minutes and the Philly Fed. Bernanke will be testifying before Congress, though, and hopefully Karl Rove’s transmitter will be close enough to work this time as the chip in Ben’s head must have misfired on Tuesday when he failed to sugar coat the economy adequately.

Monopoly Housing Bust

Jim Kingsland wrote a nice piece entitled "The Subprime Disaster: How Long Can the Experts Live in Denial?" so I can skip along and pretend it doesn’t matter today as clearly everyone else seems determined to ignore this stuff. Like I’ve often said, just because we think the rally is insane, doesn’t mean we can’t profit off the madness! David Fry says, "I have never seen so much bad news shrugged-off as have recent subprime woes. One commentator noted, "People have been programmed to buy any dip." That could translate to "dips buying," but that remains to be seen. Bulls believe the subprime mess is "contained" now that S&P and Moody’s have lowered credit ratings." Hey, come on guys - lighten up! Come on, drink some Kool-Aid and join the party…

I’d also like to give a shout out to Patrick.net, who posted a nice set of housing charts this morning, allowing me to ignore all that negative stuff myself, so we can continue to accentuate the positive.

The Kool Aid must be very strong in Hong Kong, where the Hang Seng jumped another 202 points, although they did drop 100 points at the close (sorry, I need another sip myself… ahhhh… where was I?) to finish at 22,809. The Nikkei also seemed to sober up after lunch and plunged close to 200 points in 90 minutes but also came off a very legitimate looking gap up at the open. Thus, it only posted a 65-point loss for the day. Japan’s central bank DID NOT raise rates as the Core CPI (their bankers share Kool Aid with our bankers) fell .1% in May. Bank of Japan Gov. Toshihiko Fukui has maintained that if the outlook for the economy is convincingly solid, raising interest rates is possible even if consumer prices are falling slightly. Hey, give that man some Kool Aid!

Kool Aid

European indexes got a morning infusion of something as they took sharp bounces off early drops in the morning and are now trending generally higher. London was happy that four people were sentenced to life in prison for the London bombings of July 21st, 2005. That’s right folks, England’s legal system is as slow as ours! Yield spreads on a benchmark European credit index jumped wider for the second day, raising fears that the troubled U.S. subprime housing market has dented the appetite for European corporate credit. The speed of the move took some credit-market participants by surprise. "We’ve seen some indiscriminate selling of credit risk in the last couple of days," said Jim Reid, a credit strategist at Deutsche Bank in London.

What a wimp! Thank goodness he’s in Europe so we can ignore him…Rio Tinto plc (RTP) will not be ignored as they drop a $38B check on the table for Alcan Inc. (NYSE:AL). That’s 10% more than the 50% more that Alcoa Inc. (NYSE:AA) offered them in early May, a a move I predicted could happen on May 23rd. On a lighter note, if you haven’t read about what WFMI’s CEO John Mackey has been up to, you really must as it’s everything that’s wrong with public message boards in a nutshell.

Retail Sales were mixed, at best, but the indexes are shooting up in the pre-market trading, just like they did in Europe and Asia - imagine that! Expectations for retail were very low but Wal-Mart (NYSE:WMT) had a big beat (2.4% vs. .8% expected) focused on their warehouse clubs and Costco (NASDAQ:COST) (also discount club) had a 6% increase. However, Macy's Inc. (NYSE:M), Saks Inc. (NYSE:SKS) and Nordstrom, Inc. (NYSE:JWN) posted declines. Hmm, people are scaling back on the high end and moving to discounters - it must be time to drink more Kool Aid!

So I’m very excited about the markets this morning, especially with oil back up .75 to $73.30 as refinery shut downs we reported on last week continue with the addition of a 250Kbd BP refinery in Whiting, Ind. going off-line on Monday. Fortunately we took Exxon Mobil Corporation (NYSE:XOM) Aug. $90s as covers this week. This news should have them nicely offsetting our short-term losses, as I still see this as a blow-off top. This will give the S&P and the Dow a nice kick in the morning - the question is whether or not they hold it:

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SPX

US Markets

If Happy Trading likes the S&Ps chances, we don’t argue as he’s been on quite a tear lately. Just yesterday, Happy put us in Cognizant Technology Solutions Corp. (NASDAQ:CTSH) Aug. $85s at $2.15, Millicom International Cellular SA (MICC) Aug. $100s at $3.90, United Therapeutics Corporation (NASDAQ:UTHR) Aug. $70s at $1.25 and Google (NASDAQ:GOOG) $540s at $14.50. All of these will open the day with nice profits AND ALL OF THEM WERE FREE, RIGHT HERE.

I’m going to be watching the SOX and the Russell today. If the Semiconductor HOLDRs (NYSEARCA:SMH) can break $40, it will be time to get back into the PowerShares QQQ Trust, Series 1 (QQQQ) Aug. $49s at $1.15. I’m going to pick some up anyway as a pre-emptive cover to my puts.

666

Watch rates and gold for warning signs that all is not going as well as we’d like. Rates can be low because people are dumping dollars and I predicted yesterday that World Banks will step in to bail us out here. I am concerned, however, that China has already been bailing us out to the tune of $130B a quarter, so we are putting a lot of pressure on Japan (who kindly left rates at .5%) and the EU to save our assets.

Apple (NASDAQ:AAPL) should get a fresh pop as RBC Capital ups their iPhone forecast by 13.5M units by the end of ‘08. We’re well hedged on our longer plays, so this is a good time to take a shot at the Aug. $140s at $4.45. Additionally, we will look to sell the July $140s if we get a good run or the $135s if Apple weakens there.

Gold will test $666 again this morning and a breakout there will really be a sign of the Devil as it means that the flight to quality for investors will no longer be the record cheap dollar in 5% notes. I’m not going to get into the repercussions of that as it’s just too darned depressing so let’s just hit the punch bowl for today - as we continue to party like it’s 1999!

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GoldDollar

Have fun out there and don’t forget to take the opportunity to get out of those July calls you were crying over on Tuesday!