Options Trader: Wednesday Outlook

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

Rather than doing a wrap-up, we did a day trade clinic for members yesterday.

There isn’t too much to say about yesterday’s action: Oil went down, the transports went up and we had a rally. As I’ve been saying for a month, it’s up to OPEC to save the market because our own leaders are incapable of handling it themselves. Even Bernanke has now broken with the Administration and is pushing for more aggressive measures to address the housing crisis.

"The current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions," Mr. Bernanke told the Independent Community Bankers of America in Orlando yesterday. With negative equity, which means a home is worth less than its mortgage, "a stressed borrower has less ability…and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure than reducing the interest rate."

I am very pleased with this as this is part 3 (Invest Back in America) of my 3-part program to end the housing crisis that members sent to hundreds of Congresspeople in January and step by step, point by point, we’ve seen various elements of the plan start to show up in mainstream discussion. Now if only they would adopt my plan (same article) to bring oil back to $60 or less we could have our country back!

Bernanke’s modification of my proposal, having the banks simply take a principal reduction to restore equity, is fine in principle but is very unlikely to be followed universally and a plan as radical as this needs to be pushed on the banks, not dependent on their good charity. Bernanke is an academic and prays that the banks will have the good sense to save themselves before $2.6Tn in mortgage debt falls into negative equity but I’d feel better if we maintain a separation of Church and State and use some good old fashioned legislation .

I’ve even got a good name for my program, it’s called ForecloseShare. ForcloseShare allows homeowners facing foreclosure to opt to force the banks to become co-owners of the equity of their home. This gives the homeowner a principal reduction of 50% and drastically lowers their effective mortgage payments, allowing them to stay in the home and pay it off. When the home is sold, the bank will get 1/2 the profits so it’s a win-win in the long term and the bank was only going to end up taking 100% of the home and selling it for a (theoretical) loss anyway so where’s the harm? ForecloseShare could accomplish with a pen stroke what a Trillion dollar government bail-out could not, it will keep all 2M people who face foreclosure this year in their homes.

Please take a moment to send this to your Congresspeople (you need to use the free site version or they can’t read it!) and tell them you support the Davis/Bernanke ForcloseShare program and urge them to also read the Jan 21 article again so we can begin a national discussion about solving the oil crisis that is choking the life out of the American (and global) consumer.

Oil is still $40 a barrel more than it was in Q1 of last year. The US uses 20M barrels of oil a day so that’s $800M of consumer discretionary income each day, $24Bn a month, $288Bn a year that can’t go towards paying a mortgage, can’t go towards buying an IPod or something as mundane as FOOD, some of which has also gone up over 100% (wheat, corn) since last year as our government’s idiotic solution to the oil crisis is to burn millions of acres of crops instead.

Worldwide we are looking at $1.2Tn a year that has been diverted to crude and that does not even include the 30% markup you pay for refined products - another $360Bn! Please note that this is $1.56Tn that comes from the amount we pay OVER $60 a barrel. We’re going to pretend, for the sake of simplicity, that the other $2.34Tn is money well spent! That’s $4Tn that this planet spends on oil every year. And what do we do with it, we burn it!

It’s $4Tn that doesn’t build roads or trains or bridges or hospitals or go towards feeding the poor or SOMETHING constructive. Oil used to cost $20 a barrel, that was just $800Bn a year back in the Clinton era. Needless to say I’m very pleased that another Clinton won her primaries last night but, for now, we’re stuck with the guys that got us here and we know what Bush’s energy policy is so I will go back to saying it is up to OPEC to save the markets.

The OPEC ministers got together in Vienna this morning and we need them to be merciful (because we have put ourselves at their mercy) and not cut production despite mounting evidence of a global production glut. This is a hard thing for OPEC to do as they "only" produce 45% of the world’s oil and they are in danger of losing market share. This gives them a good reason NOT to cut. Word is they are going to hold production steady and that will make today’s US inventory data pivotal as to whether or not speculators are willing to continue to bet $100 on black.

If the answer is no, then SU $100 puts for $1.50 will be a fun play so we’re going to go with that in the morning ahead of the inventory report.

Speculation has been rampant over at the NYMEX and ZMan points out that long positions are up 60,000 contracts since Feb 3rd but he also points out that Short positions have increased by 150,000 in the same period.

Oil transport day rates are also slipping tremendously with VLCC class tanker rates dropping 61% since 12/31. Capesize tanker rates are down 22% and Panamax rates are down 10%. Both oil and natural gas storage in the US are flirting with record highs and OPEC has over 4Mbd of spare production capacity that is already off-line.

In short, there is NO rational reason for oil to be trading at $100 a barrel. The last time oil was at this inflation adjusted price THERE WASN’T ANY. When we had and oil crisis in the 70s we didn’t have a Strategic Petroleum Reserve and more than 1/2 the world’s production didn’t come from non-OPEC nations.

At that time oil prices went up because you couldn’t get it even if you wanted it, it was genuinely scarce. This is nothing more than a speculative frenzy driven by the same rule changes that allowed Enron to manipulate the energy markets in the first place. We’ll be looking for a major bubble pop in oil and we’ll add 5 DIG June $98 puts, now $10.20 to the $25KP which we will sell March puts against later in the day.

Of course the Wall Street Journal is right with their headline "It’s the Dollar, Stupid" and I’ll go on record now saying that I think it hurts the President’s feelings when we call him that so let’s give the lame duck a break and wait to pick on the next guy… The article is so good I won’t even quote it, it’s a must read.

Meanwhile, Asia didn’t know what to make of our market move yesterday ans held flat. Wen Jiaboa called for a more environmentally freindly China but didn’t say Hu would make the changes or when they would happen. Financial ministers in Japan and Europe are freaking out about the dollar and India’s IBN disclosed $264M in losses on CDO’s, knocking all Asian financials down and dropping the Bombay Sensex 2% overnight.

France’s Credit Agricole had $5.2 BILLION in write downs for Q4 and SocGen already used the "rogue trader" excuse so the bank’s Chairman had to actually admit that it was their own fault. "Results for the fourth quarter of 2007 were severely affected by the impact of the crisis in the structured credit markets," Agricole said. "This led to the recognition of substantial asset impairment charges and obscured an otherwise robust performance."


That is my take on the global economy, other than suffering from a ridiculous commodity bubble of housing, oil and metals, the Global economy is "otherwise robust" and is likely to remain so.

We’re going to hope to break up a little today but I’d rather make good, steady progress than spike up for no reason. We went into the close yesterday cautiously optimistic and that’s how we’ll remain - fairly well covered, mainly in cash and looking for opportunities.