Options Trader: Friday Morning Ideas

by: Philip Davis

Now we get the big test:

A "miss" by Google (NASDAQ:GOOG), a BIG MISS by Caterpillar Inc. (NYSE:CAT) (on record sales and profits), a big beat by Schlumberger Limited (NYSE:SLB) [which should rocket the Oil Service HOLDRs (NYSEARCA:OIH), so let’s look at the $185 calls out of the box], a big beat by Whirlpool Corporation (NYSE:WHR), a mixed report from Microsort Corp. (NASDAQ:MSFT) and nice earnings from Citigroup Inc. (NYSE:C) and Bank of America Corporation (NYSE:BAC).

It’s oil day with Criminal Narrators Boosting Crude as they had our man Phil Flynn live first thing in the morning and hourly updates on T Boone’s China trip. They actually tried to explain that China’s Three Gorges Dam, which came in 10% under budget at $22.5B and will pay for itself in 10 years while generating 100 Terrawatts per year, isn’t such a good idea. The energy generated by running water through a turbine with zero pollution is saving 31 Million tons of coal per year and cutting the emissions of 100M tons of greenhouse gas.

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Three Gorges

While some people (1M) were relocated to build the dam and some environmental damage was done to the surrounding region, the fact is that the project controls downstream flooding and protects over 50M acres of farmland in areas that millions of people have had to abandon on several occasions. While T Boone and the CNBC crew seek to highlight hydroelectric’s problems, the fact of the matter is that this profitable government venture will supply the electricity needs of 90M people. Plus, four more dams are in the works that will supply another 180M people’s needs with another (and I’m not kidding) 16 dams in early stages. This project began in 2003 - while we were marching off to war for oil, China began a war on oil consumption and pollution that could meet the electricity needs of the entire United States for less money than the latest "troop surge" cost us…


What is making T Boone and Phil Flynn so nervous? Perhaps it’s the fact that China is now exporting this technology, with a project already scheduled in Burma that will produce 4B kilowatts annually. If this catches on, they’ll have to switch from crying "peak oil" to "peak water!" Don’t worry boys, this solution will only work in countries where they have rivers.

Speaking of Mr. Flynn, apparently he now feels the need to directly address whatever Zman and I say in the mornings as his 321 Energy Report yesterday responded to our bullish take on oil, saying:

Don’t fall for the line of some energy guy who is a bullish come lately. Call the guy who was bullish before bullish was cool! Call Phil Flynn at 800-935-6487 or email me at pflynn@alaron.com and get hooked up on my daily email blast which will include expanded coverage of all the different commodities markets as well as more strategies on oil and intermediate profit taking areas as well. We will be adding option plays too!! Also you will get a free trial to the much beloved Alaronenergies web site that includes natural gas and weather futures as well as breaking energy news!! What are you waiting for… Peak oil, for heaven's sakes?!

Personally, I can’t wait for these option plays!

While you can spike oil to whatever price you want, the fact is that it not sustainable at these levels unless we can maintain a constant state of war and terror with 10% of our refining capacity off-line and close to 10% of the OPEC’s global production being held back in order to squeeze us for every last declining dollar. Hmmm, maybe Phil is right…

Will that matter to the markets today? Probably of greater concern will be China’s Central Bank’s swift action in raising rates after getting a read on yesterday’s 4.4% Q2 inflation. Unlike our Fed, they don’t need no stinking meeting to take appropriate action when economic readings clearly dictate it. "This rate adjustment will help guide the reasonable growth of credit and investment," the PBOC said in a statement. "It will help adjust and stabilize inflationary expectations and maintain the basic stability of prices." The third rate hike this year and fifth since April 2006 brings the one-year yuan lending rate to 6.84% from 6.57%. The one-year yuan deposit rate will stand at 3.33%, compared with 3.06% previously. The move came after the markets closed in Asia, so it’s a good time to take our iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) $136s off the table as they should get a nice pop at the open from the morning gains but I don’t trust them past that.

Asia Rising

On the whole Asia had a great morning, celebrating the headline of Dow 14,000 and seeming to ignore the trouble in techland. The Nikkei took a sharp turn down after lunch, dropping almost 100 points from the morning high and finishing up 41 for the day. The Hang Seng went the other way, jumping 150 points into the close, up 275 for the day. Once agai,n one of our favorite "Duh" stocks, the Shanghai Pudong Development Bank, went limit up (10%) for the day ahead of what are expected to be great earnings.

Steel stocks made a nice comeback in Korea and we’ll see if we get follow-through on this side of the world; X et al. have taken senseless beatings the past two days. I’m looking at X, who we picked back up yesterday with the Aug $115s at $2.75 in a pretty good bottom call (I hope). I’m also liking the Nucor Corp. (NYSE:NUE) $60s as a momentum trade if they can still be had for $1.50 or less. Otherwise the Aug $65s at $1.10 should be good for a nice pop. These are not market independent, though, and if we go below 14,000 no calls will be safe.

Without a pullback in crude, I don’t see the markets getting it back in gear. However, we have gained so much in the energy sector this week that the pullback would hurt us too. Backwardation has gotten worse all week at the NYMEX and the barrel rolling has left just 59M barrels scheduled for August delivery in this last day of trading with 381Mb jammed into September and 102M lined up for October. This is 30M more barrels than we started this contract period with and November already has 58M barrels under contract so where they are going to stuff these things is anyone’s guess.

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US Markets

It is now $3 cheaper to buy a barrel of oil next September than it is this one. Meanwhile, the Dec 2015 contracts I challenged Phil Flynn to buy on July 9th, when he was spouting off about $80 oil, are back to $71.60 - 7 cents lower over the past two weeks while the front month contract has climbed $4. I’m sorry, people, I can’t stop this nonsense all by myself! If you just sit here and read this without sending it to a politician and asking them what’s up, nothing will ever change.

Oil and Dollar

Ah well, off to play the Google - I mean the markets. No, who am I kidding, we’ll be playing Google all day!

Have a good one!

- Phil