Options Trader: Thursday Outlook

The dollar is challenging its lows again.

This morning the BOE lowered rates by just .25 to 5% while the ECB left rates unchanged at 4% while Iceland RAISED their rates another half point to 15.5%. The ECB has a mandate to keep inflation in check. In the Frankfurt-based bank’s view, concerns about the credit squeeze are no match for inflation running at 3.5% and recent wage deals in Germany — the largest economy in the 15-nation euro area — that could send it even higher.

Euro-zone inflation is well above the roughly 2% level preferred by the ECB, which sets monetary policy for the bloc of 317 million people that accounts for some 15% of the world’s global domestic product. ECB President Jean-Claude Trichet underscored his bank’s tough stance on interest rates last week, saying that "price stability is something which is essential for the poorest and the most vulnerable of our citizens."

Note that oil is NOT making record highs against the Euro or the Yuan for that matter, which just set a record at 7 Yuan to the dollar, up 13% since last year. The Yuan is still down more than 11 per cent against the euro, 11.2 per cent against the yen and 6 per cent against the South Korean won, indicating they are still artificially keeping the currency in check against the dollar. Should China stop doing this, the dollar could snap sharply lower still.

We get our trade IMbalance report today and the rapid Yuan inflation should sting a bit. We’ll have to see how that turns out but, as I said in last night’s post, my main concern is today’s treasury auction, where we need to borrow another $50Bn worthless dollars from our foreign masters.

The Nikkei fell below 13,000 again, dropping 166 points with a weak finish, but the Hang Seng broke over 24,000, gaining about 1% in a strong overall day as China’s economy grows in size to rival Germany’s for standing as the world’s third-largest economy at around $3.8Tn. China’s GDP grew at 11.9% last year and is projected to be about 9% this year but inflation is pushing 8.7%, so China will have some tough choices to make this year, one of which may be to stop wasting money propping up the dollar…

European markets are off about 1.5% this morning as investors there were hoping for more monetary easing. The IMF is predicting a "mild" recession for the US, which is also dampening the mood of the export companies.

8:30 Update: The trade deficit came in at $62.3Bn, much higher than expected by analysts but right in line with our expectations, as it seemed kind of obvious for a country that imports 10Mbd of crude with a currency that is falling apart. That’s a 5% increase in imports offset by a 2% rise in exports - yet another really bad plan by the White House coming to fruition! Perhaps the flaw in the Bush/Paulson plan to weaken the dollar to boost exports is that WE DON’T MAKE ANYTHING ANYMORE! 1.2M manufacturing jobs have been lost since last year with plant closings running rampant in the few industries we have left, and the military just awarded $100Bn of your tax dollars to EADS - if our government won’t buy from US companies, why should anyone else?

And now for the BAD news: Despite the 12-week-in-a-row drop in demand for gasoline (the biggest drop since 1991), gasoline was speculated to record highs in some perverse new economic law of oversupply and decreasing demand leading to higher prices. As I’ve been saying, THERE IS NO MORE MONEY. That gas money was taken out of the hides of the retailers, with Saks (SKS) announcing a 2.9% drop in sales (and they are high-end, supposedly immune). JC Penney (JCP), a more middle-class outlet, dropped 12.3% with overall retail sales getting smacked down 4.7% in March, the biggest decline since last April, when Q1 saw oil prices climb from $51 to $67.

The declines would have been worse if not for a "surprising" jump in men’s apparel sales, but as a kid with family in the business, I can tell you that that’s a sign of a recession, as looking for a job often prods men to finally go out and get a new suit and a couple of shirts. Jos. A. Bank Clothiers (JOSB) has low expectations and the May/June $22.50 spread is a good $10KP and $25KP, so let’s grab 10 of those at no more than .60. No store escaped the carnage; even usually strong Target (TGT) dropped 4.4%, and Gap (GPS) was a disaster with an 18% drop in sales.

Now AOL and Yahoo (YHOO) are talking about a merger of equals (equally hopeless) and now Uncle Rupert (NWS)is teaming up with the Evil Empire to strengthen Microsoft’s (MSFT) bid; this will be fun but I’m staying on the sidelines. The Journal has a great interactive chart comparing YHOO and MSFT, who were both priced at $40 a share in 1999 and are both priced at $28 today, which only serves to highlight how one share of Google (GOOG) really is worth 20 shares of either one of these jokers!

We’ll see how much of this news is baked into the cake already. Despite all the awful news I think I’d have to say "What did you think a recession was going to look like?" On the whole, this is pretty mild-looking so far and can be blamed 50% on oil prices that have no basis in reality and 50% on a mortgage crisis that isn’t getting any worse. Thus the bottom creates investible opportunities - it would just be nice to be sure of exactly where that bottom is!

Let’s see if we can retake and hold our levels for the week, that will make me happy.

Comments

[tachyon]

"and 50% on a mortgage crisis that isn’t getting any worse", do you honestly believe this? Get a job.

[tachyon]

your site is almost as appalling as this post

[CNG]

I do not think insults are helpful in the spirit of this board.
Particularly, since you offer no support for your comments.
We all have different opinions and I'm sure some readers
appreciate the authors views.

C

[Gajonka]

Funny- you'd think the article would be about options - since it's titled OPTIONS TRADER. Should be called: "General News"

[Philip Davis]

Thanks CNG! Actually my site is all about options, what Seeking Alpha uses are just my morning posts, where I give a macro view of the global economy. It's much easier to spot good trades if you know what is going on in the world...

I did pick an option on this post, it was JOSB May $22.50s which opened the day at $2.40 and finished the day at $4.50 (we also sold covers and rolled them during the day on the member site). If you read what I was saying, I came to the conclusion that JOSB would beat earnings DESPITE the poor retail report because of the poor economy driving men to buy suits to look for jobs.

This is how fundamental traders pick stocks, by studying the market and the news that affects the market. I'm sorry that bothers some of you but it's our system and it works for us.

[User 6790]

A comment on this line in the article
"MSFT and YHOO who were both priced at $40 a share in 1999 and are both priced at $28 today, which only serves to highlight how one share of Google (GOOG) really is worth 20 shares of either one of these jokers!"

Ure comparing apples and oranges...MSFT has split its stock 8 times since inception. Unsplit, one share of MSFT would be worth $8600 now, compared to Googs $460. Not that i am a big fan of MSFT but just wanted to point this out.

If the seeking alpha guys could pick up the options part of your report and not the macro view, it would be much more useful to read. Enough places to get everyones 2 cents on the general economy.

[jcollins01]

I think your posts are great and you're on my "read daily" list.