Options Trader: Tuesday Outlook

 |  Includes: C, DIA, QQQ, SPY
by: Philip Davis

Things are not looking too good in the pre-markets.

Dubai (who has become so important in George Bush’s America that they can now move our markets at will) has said that the $22Bn Citi (NYSE:C) recently raised from various sovereign wealth funds "won’t be enough to see it through the credit crisis… It will take a lot more than that to rescue Citi and other financial institutions,” Sameer al-Ansari, Dubai International’s chief executive.

Forget the fact that Al-Ansari’s fund is an investor in HSBC Holdings (HBC), not C or that this comment was perfectly timed for the day CitiGroup announced a 10% reduction in their workforce (30,000 jobs). Also on the attack is Merrill (MER), who predict C will take an additional $15Bn in writedowns, leading to a loss of $1.66 a share. Also attacking C with exquisite timing is a small hedge fund called Special Opportunities Master Fund of Florida, a fund with $58M in capital that is suing C and Wachovia (NASDAQ:WB) for technicalities involving CDO payouts but the headline in the WSJ is: "Citigroup and Wachovia face Lawsuits from a Hedge Fund."

Hyenas attack in packs and the bigger the prey, the more the hyenas need to coordinate in order to bring it down. At $25, C was the wounded animal falling to the back of the pack and the smell of blood has led to an attack frenzy as they are now throwing everything but the kitchen sink at the bank to force a bottom. I am not saying that CitiGroup can’t fall further, even though it is already down 60% from last year, but I am saying that C IS worth more than 1x Book Value, and that’s where $22.50 brings them to.

The forward p/e on C is 6.5, about 1/2 the sector average and while $15Bn sounds like a big write off, keep in mind that the company has close to $2,000,000,000,000 in cash and investments so if we throw out the $15Bn that’s going to be $1,985,000,000,000 in cash and investments along with $15Bn worth of mortgages that they have written down to ZERO, as if they won’t recover a penny of value on the home. We predicted back in November that Rob Rubin would write down everything he could so they could put it all behind them (and blame Chuck Prince) so NONE of this is unexpected and should not be moving the markets.

In other news that shouldn’t be moving the markets but is, Intel (NASDAQ:INTC) is falling as it forecasts lower margins… ON NAND MEMORY! These are NOT processors people, it’s NAND chips, they are a basic commodity. We have known about a glut of NAND memory since last summer, yet here it comes again to take down the markets and here goes everyone falling for the same old, same old one more time. Overall, intel is lowering its gross margin outlook for Q1 from 56% to 54% and the stock is down 25% since Christmas.

These are buying opportunities for long-term investors!

You don’t have to call it a conspiracy but you can certainly see a MASSIVE confluence of events combining to take the markets down but there is still nothing NEW in all this news. Banks are writing down $400Bn worth of debt so it seems logical that the World’s largest bank would have write-downs. There is a glut of memory chips and the world’s largest chip maker is affected, although I would put it to you that a 2% drop in gross margins WITH NO CHANGE IN GUIDANCE hardly seems recessionary to me. Gas is $3+ per gallon in the US and $6 in Europe and big American cars aren’t selling - SHOCKER!

It’s a big world out there and if you dig around you can find "evidence" of anything. I’m not saying things are great but I am saying that the markets should not be retracing 2 years worth of gains - it’s just too much! Still, it is not our job to save the markets so we will continue to sit this one out and watch for a nice bottom to get in on.

Bernanke speaks again today and he tanked the markets on Thursday so let’s see what he can screw up this morning. He’s speaking on the foreclosure situation, not a happy topic and is expected to discuss the need for more direct aid to homeowner, which would be nice if the Administration and Treasury weren’t so against it.

Bernanke will be laying out a modified version of my plan, based on principal reduction for the homeowners that will serve the dual purpose of decreasing foreclosures and reducing inventories that are crippling prices.

The Nikkei went up, then down 100 points but the Hang Seng went down all day, finishing off 465 points but still above 23,000 at 23,119. The Australian CB rasied rates and China is boosting military spending by 18%, which somehow concerns people even though Bush just got an EXTRA $187Bn for Iraq and Chinas ENTIRE boosted budget is $58.7Bn. The 17% increase is necessary for China to keep up with inflation to support their 2.3M man army and is in-line with their 17% nominal growth in GDP so keep this in mind when you hear blow-hard pundits acting like it’s a big deal.

Europe looks like it’s going to be off another point and a half but I think we hold 12,200 for the day and that will be meaningful as THEY are running out of bad news to throw at us at this point. We are certainly going to open very low but the test for the day comes with how we finish. Another day like yesterday, where we shake off the morning panic, may be enough to bring some real buyers back in but if we fail to close positive today, we very likely face a retest of the January lows.

Let’s be careful out there.