Options Trader: Tuesday Outlook

Includes: C, DIA, GLD, QQQ, SPY, XLF
by: Philip Davis

We set our levels early yesterday and let’s hope we hold them!

Dow 12,500, S&P 1,385, Nasdaq 2,475 and NYSE 9,300 - that’s what we need to be watching and, as I said last night, it all hinges on oil $125 because if we can’t get back below that modest goal, there is really going to be little hope for the broader economy where signs of consumer destruction are everywhere.

I’ve noticed a new trend by the oil apologists, trying to say that $130 oil is good for the economy.  One of the bubbleheads on CNBC actually had the nerve to say that local storeowners should be loving the high gas prices as it’s keeping people from going away on the weekends so maybe they will spend more at the local shopping center.  THAT IS JUST PATHETIC!  I’m thinking of running for office just so I can demand equal time to debate these numbskulls…

The chart we most have our eye on today is the XLF/BKX, which, as David Fry points out, has retraced all but 10% of its gains of the past 10 years.  Note also the volume conviction on this sell-off, which we are currently playing as a great opportunity to get into the banking sector as we picked up XLF calls on the 23rd (the $25s). But they’ve dropped in half since then and we’re not buying more or rolling, as the movement in the banking sector has been downright scary.  Also, we’ve been tracking that bad news over in Europe and it is now getting to the point where we either get some positive movement in the financials or it’s time to go to cash - and by cash I mean gold as the dollar can go straight down the toilet if the BKX falls below 70 (now 74.48).

Unfortunately, our premise for a turnaround in the banking sector was based on our government getting their act together and taking positive action to shore up the dollar, rein in commodity (especially oil) speculation and do something constructive to actually help the people being thrown out of their homes at a rate of 7,000 families a day.  We have, in the past, discussed very simple plans for accomplishing each of these goals, but this administration has done absolutely nothing but jawbone the economy in order to protect their legacy.  Clearly from the chart above (click to enlarge), the only legacy this administration has to look forward to is the top of the worst list!

Perhaps that’s what they are shooting for, perhaps nothing short of a full-blown depression will satisfy GW Bush, whose approval rating is already lower than Herbert Hoover’s. Eight out of 10 people now say this country is headed in the wrong direction, and the Democrats now hold a 21-point lead over Republicans "as the party better equipped to handle the nation’s problems."  George Bush did not just destroy America, he may have also destroyed the Rebublican party!

Hillary is likely to step aside tonight, and while McCain romps against Obama among the 16 percent who think the country is headed in the right direction,  among the near-record 82 percent who hold a pessimistic view, Obama runs more than 20 points ahead of McCain. Similarly, about seven in 10 of those who disapprove of Bush said they would back Obama over McCain, while McCain picks up most of those who are still behind the president who, unfortunately, were all able to fit on the same bus last week.

Asian markets took our little dip very hard this morning and the Hang Seng dropped 455 points while the Nikkei fell 230 points, both about 1.75%.  Financial stocks led Asia lower and exporters, who had been on a roll, pulled back with the dollar, which was once again rejected at 73.

EU markets stopped falling this morning and are flat ahead of the US open.  Food prices are outpacing the EU inflation rate and the UN is warning the World food production must increase by 50% by 2030 in order to meet increasing demand, putting more pressure on food prices and starving millions of more people - some things are better left unsaid and you would think the head of the UN would have more sense or, at least, better timing.

The latest banking bomb to fall on Europe is one that will splatter US banks as well as loan delinquencies originated by GMAC-RFC’s UK branch rose sharply this year,  potentially putting a host of U.S. and European banks at risk of losses on GMAC-RFC loans that they have purchased.  These are supposed to be "prime" loans but data from Moody’s show that loans originated by GMAC-RFC in late 2006 and early 2007 have deteriorated. More than 14% of loans in its most recent securitization — a £525 million transaction called RMAC 2007-NS2 transaction — are more than 30 days in arrears, compared to 11.6% at Dec. 12 and 9.16% in mid-September.  Loans more than 90 days delinquent represented 6.57% of the portfolio, up from 2.54% in September.

This all sounds terrible but let’s keep in perspective that this is only about $30Bn in loans total and it is an ex-GM division, so who really expected them not to be screwed up.  The banking sector has been under a very prolonged attack and this report is getting very close to the "kitchen sink" feel I like to have when I’m looking to call a bottom.  We doubled down on our Citigroup (NYSE:C) June $20s in the DTP yesterda, still $1.75 but I think they’ll pick up nicely as they sure look like a safer bet in the sector now.

The situation IS bad enough that Bernanke feels it’s necessary to address the nation this morning, his prepared text indicates he will be sending a message that the Fed is done easing, is focused on inflation and strengthening the dollar, all things we are looking for!  The market is also looking for the Fed to get its eye on the inflation ball and we should get a good open today - the trick is going to be to see if we hold it.

Let’s watch our levels and be very careful out there, it’s a long way to recovery.