Options Trader: Wednesday Outlook

by: Philip Davis

Is the dollar dead?

As I mentioned in last night's post, we were at an all-time low against the Euro and our worthless currency provided a short-term boost to stocks but now traders will take a closer look at US companies to see which ones do well (exporters) in a dollar collapse and which ones do poorly (importers).

We’re at a breaking point for the dollar and will be heading into uncharted territory if something isn’t done to rescue our currency. The question is, does our government want to rescue the dollar in the first place? I laid out the strategy of burning dollars to fight gravity as a national policy back in December and I predicted at the time that it was for that purpose that Paulson was selected as Treasury Secretary. At the time Mr. P was jetting off to China to explain my Roach Motel Theory to them as it applied to the then $1T they were threatening to dump and we explained to them why they would keep taking our currency and loving it. China now holds $1.3T dollars…

Stage two is coming as China is being forced to ratchet up their own currency to fight inflation at home, which will further deflate their dollar reserves, making it an even worse time to dump their holdings - that is one trapped roach!

At the time I said: "So we will keep printing dollars and China will keep buying them, as will everyone else and, now that we have pushed commodities to the limit, they will start using those dollars to buy other American goods and services - maybe even an IPod!" I used this logic to set us up for a bullish year, despite the poor economic conditions but, after a 15% run by mid-July I turned a little more cautious and now we have to wonder if we’ve pushed things too far as the Dow is up from 12,243 since I wrote that article.

13,000 is our 50% retracement line off those gains and the dollar has given about all it has to give at this point. Right now, the dollar is pricing in a 1/2-point Fed cut next week and we could have a snap recovery back to 81 - IF Uncle Ben does the right thing and leaves things alone. Paulson said he is "quite confident we will worth through these issues" yesterday, possibly as a nod to the markets that he’d like to keep the dollar around here.

The Shanghai loved Paulson’s comments and jumped 357 points overnight but the Nikkei fell another 80 as Shinzo Abe stepped down as Prime Minister as many years of following the easy money policy espoused by Cramer has destroyed that country (but enriched its corporations!). The leading candidate to be the boss of BOJ Governor Fukui is likely to be Secretary General Aso - John Stewart’s writers should be having a field day!

John Howard (Bush’s new, possibly last buddy) is trying to hold onto power in Australia by a mile and is running on the interesting platform: "If re-elected, I will retire." "I would … certainly form the view well into my term that it would make sense for me to retire," Mr. Howard, 68, told Australian Broadcasting Corp. television. "My view is … making a change now would be seen by the public as a sign of panic," he added.

"Don’t panic (except for the things we tell you to panic about), stay the course, all is well, just give us more time." It all sounds so familiar doesn’t it?

So the sell off in Japan is nothing to worry about unless the next cabinet decides that bankrupting their own country by funding our deficit isn’t in Japan’s best interest anymore, then perhaps a little panicking may be in order. If our friends in the carry trade even THINK that they are going to need their Yen back while the dollar is falling, we may see some really fast dips as assets get dumped on the open market.

Speaking of Cabinets, Putin just dumped his in a very unexpected power move ahead of the "elections." I try not to say anything bad about my Putin as I am allergic to Polonium…

Europe is pulling back slightly despite the ECB putting $103Bn back into the markets this morning. Now they are starting to look silly as they just took $82Bn out yesterday. Record dollar weakness combined with uncertainty over whose finger is on the trigger of 3,500 nuclear warheads on their border caused a general sell-off in the EU. The EU also cut growth forecasts slightly from 2.9% to 2.8%. "Uncertainty is unusually large in regard to the second half of this year and especially in the fourth quarter, when the impact of the turmoil in the financial market could influence confidence and growth to a greater extent," the commission said. Concerns about the U.S. subprime-mortgage market have triggered turbulence in global stock markets in the past two months.

Back home, anything less than a 50% retrace of yesterday’s gains will be a good thing but giving it all back would be bad, bad bad so we will remain watchful and ready to switch sides as we get back to James Bond Investing Mode.

Wheat hit $9 per bushel today and, once again, closed limit up right after the market opened and it simply blows my mind when people ask me what my morning posts have to do with option investing! Food is at record highs, energy is at record highs and Jim Cramer has the nerve to say the problem is the Fed is too tight!?!

It’s madness I know but all we can do is watch and wait. 80% cash with a balanced portfolio is the best recipe for our current market conditions. We have had opportunities every single day to make good money on momentum plays and I’m thrilled to add just a few percent per week to our portfolios while we wait for a better opportunity to deploy our cash.

APPL with a huge and correct price upgrade $180, so let’s watch our callers there…

Let’s be very careful out there, hopefully we’ll hold 13,250 and regain a bullish chart as it’s more fun to play the upside, silly though it may be!