Options Trader: Monday Outlook

Game on, it’s earnings season!

The futures are (at 6 a.m.) irrationally exuberant, it seems, up nearly 100 points on the Dow for reasons that are not clear. Washington Mutual (WM) is getting $5Bn and Alcon (ACL) is getting bought for $39Bn by Novartis (NVS), so I suppose we’re celebrating the return of the deals. Yahoo (YHOO) is still refusing to take Microsoft’s (MSFT) money, but the big news to me is that the Bank of Japan nominated acting Governor Shirakawa to be Governor, hopefully ending 3 weeks of nonsense in which the BOJ has been frozen.

That would pave the way for my much-delayed dollar bail-out by the G7, which has been on hold with the world’s #3 bank frozen since early March. Shirakawa favors a tight-money policy and will almost certainly begin to push Japan’s 0.5% rate higher, putting pressure on the carry traders who are fueling the global commodity boom with cheap borrowed yen. Fear of an unwinding yen sent oil tumbling from $75 in early 2006 to $51 in the beginning of ‘07 (along with the whole CRB index) but we can’t get ahead of this one, as they spiked it to $79.86 in a blow-off sucker’s rally, very much like the one that has being engineered last week and this weekend.

The dollar bears are already circling the wagons, including Iran, which is asking OPEC to stop accepting dollars, as a rebound in the dollar coupled with an unwinding carry trade could make 2006 look like a picnic by comparison. OPEC gave the oil bulls an excuse to run this weekend when they declared they would not be raising output and would not even meet on the subject until September.

The solution for our own energy puts is to sell front-month puts and roll ourselves back as the payoff will be huge but delayed so we will hedge for now as they attempt to get back to $110 this week or next.

It is truly beyond me how THEY think people are going to pay $110 a barrel for oil - we discussed this early last month as GS was pushing for $200 oil. Aside from the 7,000 families a day losing their home to foreclosure, 90,000 people were forced to file for bankruptcy last month. They can no longer pay the gas bill, the phone bill or any other kind of bill as their jobs get switched from McDonald-Douglas to McDonald’s in what this country laughingly calls "full employment." 90,000 bankruptcies is 1 in 100 US families declaring bankruptcy, folks, that’s up 30% from last year!

The proximate cause is, of course, the amazing amount of foreclosures and, as long as the government insists on bailing out the bankers while spitting on the homeowners, this is only going to get worse (click on image to enlarge):

Meanwhile, we’re all about the short-term (2 years or less) with our investment portfolio so let’s make sure we make enough money not to care - how’s that for an investment strategy? We had a fantastic week last week and the pre-markets still look very good (8:30 now) so let’s get ready to rumble…

The Hang Seng and the Nikkei gained a little over a point and the Shanghai jumped 5% this morning, after bouncing right off the 40% line at 235 on Thursday, so the levels we’ll be keeping an eye on are 238.50 (10%) and 293, which is just about the mid-point between 25% up from 235 and 75% down from 390. Once we get past that, we can start looking for a recovery in the mainland market.

Commodity shares led the Asian rally again, as Friday’s jobs data gave added weight to the premise that the Fed will be further debasing the dollar in order to continue to put off an economic contraction that would have been long over if we had just taken our medicine at the time, rather than spending money we didn’t have (but I’m not going to blame any particular administration for that since it’s Monday!).

Europe is up about a point ahead of our open and there really isn’t very much to report there or here other than a commodity rally, which is my least favorite kind, so I’ll be taking today’s action with a grain of salt (which itself was once a valued commodity, now worthless…)

Let’s keep our exuberance rational today!

Comments

[lgragg]

EXACTLY! I love the comment "bailing out the bankers while spitting on the homeowners". Our Country has a major problem as I see it ... We are too globally politically correct ... too globally committed. We are (or were) a wealthy nation with a high standard of living for most. We had a true "middle class" - NO MORE! Our govenment (sorry didnt mean to curse) has completly sold out our middle class in order to what? Gain favor from our global neighbors?; increase our military footprint?; Both are major flops! Oug global "partners" are laughing at us! They are using us and slowly sucking our weath and power. Is our military gaining global strenght ... NO!

Our jobs, our natural resources and indeed or future as a nation is slowing being exported by our govenment (oops cursed again). Someone is getting rich .. but not America, not Americans!

I, nor the founding fathers of this Country, would have ever dreamed America would become a third world country, but it is! Maybe not in my lifetime but it is!

Our govenment was designed to be "for the people, by the people". Who out there believes that the current govenment, or any fraction of it, is "for the people" or "by the people". Noone in our Federal govenment is FOR THE PEOPLE!!!!

[User 143167]

David, for oil to be traded over $100 may be speculative, but much less speculative than the US stocks to be traded as this level now. Every piece of your thesis to diss the oil price applies to the US equity prices as well. If you believe US economy will be down hard in near future, then sell your stock portfolio before the commodities. Cause at least some people in the other part of world will still need oil, in a way much more than the need for the US equities. If you believe the US economy will be fine SOON, then you should hold them both because we'll head for hyperinflation down the road in that scenario.

[patricsw12]

I think you have a typo: "90,000 bankruptcies is 1 in 100 US families declaring bankruptcy, folks, that’s ..." According to the census bureau there were 113,146,000 households in the US in 2005. 90,000 is hardly 1%.

[User 169675]

It's McDonnell Douglas (which hasn't existed in over a decade, mind you), not McDonald-Douglas.

And 90,000 bankruptcies in a month is not 1 in 100 families; you'd have to annualize the number (and up it to about 95k) to make that a true statement.

[AmesTiedeman]

97% of all Americans are NOT behind on their mortgage. All of this crap about 7,000 a day losing their homes is just hype. There are only about 1 million homes in foreclosure in the U.S. The recession will be mild. It is all hyped to scare people.

[User 153975]

Options Trader, could you please say something about options trading or use a more descriptive title for your next piece? It is a waste of my time to read a regurgitation of the Wall Street Breakfast column.

[hattryx]

i call fear-mongering shenanigans

[Philip Davis]

90K bankruptcies x 12 months = 1,080,000,000, just about 1% a year, should have clarified the year part.

McDonell - LOL, been so long I forgot their name!

Sorry user 153975 but I used to be the only options guy on SA and they tagged me with it. I don't like the title either. My site specializes in options trading but my morning posts are generally market overviews to set up the day's trading.

[Philosopher40]

How is 90,000 people filing bankruptcy 1 in 100 households? That would suggest there are only 9 million households in the US whereas there are well over 100 million. Aren't you off more than an order of magnitude in your excitement?