Options Trader: Tuesday Outlook

Ow, ow and ow!

Those were some hurting earnings reports last night!   On a percentage basis, the misses are few and far between but when you get downside guidance from Apple (AAPL), SanDisk (SNDK), Texas Instruments (TXN) and American Express (AXP) along with misses from KeyCorp (KEY), Ericsson (ERIC) and Wachovia (WB) this morning, it’s no surprise that we are looking at a 100-point pre-market drop (8 am).  This one is severe enough for Paulson to be on TV this morning looking to calm the market as the dollar heads back below 72.

I find it funny that Paulson says we can expect problems "until the housing market stabilizes" yet the administration has done nothing concrete to help the housing market.  Bailing out banks who made inadvisable loans to people who couldn’t afford the homes doesn’t help the people who can’t afford their homes.  You can point your finger at the homeowner and say they should have known better and read subsection A of paragraph 4 on page 11 of the mortgage contract, which clearly indicated that everything the broker said was BS and they would not be able to easily refinance their loan after the "teaser rate" expired but perhaps we should reflect upon what kind of industry is proud of using a "teaser" to generate business in the first place.

We need to help the homeowners, the people who are losing their homes at a rate of 7,000 families a day and have been for over a year now.  That’s 35,000 homes a week, it’s like wiping another American town off the map every single week while the administration hems and haws around the issue, showering untold Billions of dollars on the lenders that peddled these loans while allowing the people who they were sold to fall into pits of despair. 

As we discussed last week, the only way to properly address the mortgage and housing crisis is to help PEOPLE stay in their homes. How did we ever let CNBC and Fox (and Murdoch’s Wall Street Journal) convince us this was un-American?  What ever happened to this country where we are willing to spend $1Tn "nation building" in Iraq and Afghanistan when just $200Bn spent at home could stop half the foreclosures from happening this year (more than 2.5M).  

The math is very easy: If you help a family make their $3,000 monthly mortgage payment, say by somehow helping make 1/2 the payment for 3 years to get back on their feet, that will cost $1,500 X 36 months or $54,000.  If we don’t help the people stay in their homes, we lose a consuming family from the community, the town loses a taxpayer and the vacated home loses value (dragging down the community’s values) and we end up giving the bank $400,000 for the home they wrote off their books, which they also declare as a tax loss and fail to remit 35% of that $400,000 to the government in taxes.  How is this efficient???

The more we throw billions at the banks, the further we devalue the dollar, which is what the average consumer uses to buy things with, which further reduces their spending power and forces another 7,000 families a day into foreclosure as rising unemployment (due to all those towns worth of homes being wiped out) makes it impossible for them to demand wages that keep up with inflation.  This is basic economics folks, can it really be possible that this is all "unintended consequences"?

I’m still bullish on the markets because I see a lot of things happening in Congress that should actually begin to address these problems and I think the run-up in oil yesterday was nothing more than more desperate pumping by traders who stand to lose their shirts if oil continues to drop at a rate of $10 a week, which can’t be fast enough as it only gets us to $80 by September, which will be still too high if we don’t have either a hurricane or an exchange of nukes with Iran.

That does not mean that it’s a good time to buy stocks unless you have a long-term horizon.  Things are cheap right now but, as AXP said yesterday, you can’t give guidance until this economy turns around and the economy can’t turn around until we FIX oil and housing, and fixing does not mean showering cash on people so they can keep paying outrageous oil prices and bailing out banks so they can continue to ignore the suffering of the people they wrote "liar loans" to (the banks term for them, not the borrower’s) because it doesn’t, in the end, affect them when Paulson and Bernanke come calling with bags of cash to wash it all away.

Interestingly, it was the Financials that led the NIkkei to a 3% gain last night, pushing them right back over 13,000 but mainly in one big move at the close, so we’ll have to watch that one closely tomorrow.  The Hang Seng and the Shanghai were flat and that is great after watching the US markets melt down after hours. India was positive despite the fact that the government is in chaos over a bribery scandal.  Europe is taking our news far less well this morning as ERIC reported a 70% drop in net profit and Vodafone (VOD) guided down.

I don’t want to be a cheerleader because we have some very serious problems but we need to keep a little perspective as the misses by WB (which was awful), RF, PTEC, ERIC, GNTX, FCX, DPZ and ARB this morning just seem to me to be slightly offset by beats by AKS, AXE, ALV, AVY, BHI, BIIB, BJS, CP, BEAT, CSL, CAT, CNC, CME, CPO, DD, FITB, FCFS, FMER, FRX, ICLR, IMN, JEC, JEF, JBLU (yes, an airline!), JRN, KVHI, LXK, LMT, NEOG, NVR, PCAR, PNR, PAS, PCP,DGX, RYN, ROK, STI, SVU, TLAB, UAUA (another airline), UNH, LCC, USG, WAB, WAT, WBS, WU, XMSR and XTO. 

Companies do miss, you know, but 50 beats, 7 misses and 5 in-lines is hardly a reason to dump our portfolios.  What I am seeing is that a beat isn’t enough to get a stock moving and that gives us some very interesting buying possibilities, so let’s keep our eyes open for opportunities.

 

Comments

[PokerDonkey]

I don't like the idea of bailing out people who bought houses they couldn't afford. Screw them.

[BSchecker]

When Phil's stocks miss or guides below. AXP SNDK TXN AAPL to name a few. It is always the goverment's fault. And for all his excitement on BAC, he has Aug 22.5 sold against the leaps means you are in another losing trade. But keep collecting those fees.

[Yemmi]

I don't usually comment in positive terms on seeking alpha but I feel compelled to say that your spot on with this article. As long as the people who have found themselves in this housing predicament are held accountable for full loan reimbursement then I agree that they could be offered some sort of terms that would allow them to stay in their current mortages. If they could simply add years to the loan to recapture the discounted months, maybe that could tide them over. And this should only apply to people with one primary mortage. Speculators who have gotten caught with their hands in the cookie jar need not apply. The domino effect from the fall out hurts me and everybody else who meets their obligations every month and tries to live within their means. Absolutley no one should be given a free pass by the government or the banks for not being able to live up to the terms of their loans.

[Bill P]

Phil - It seems like your wealth development ideas are lost on PokerDonkey, but market exploiters play an important role too. It seems that economic sentiment in this great country wobbles back and forth between development and exploitation. Maybe our nation is finishing an exploitation cycle of screwing "them" and can back to building some wealth again for the next round of 'screwers." It seems clear that developmental investment in infrastructure and manufacturing research is overdue.

[taojones]

not every one made irresponsible decisions who have lost their homes
I went blind in one eye and could no longer work as a jeweler my wife freaked out at our new situation and bailed on the family taking an 80 thousand dollar home equity line with her in cash i spent every dime i had trying to stay in the home so my son could finish school i was making it barely till my oil bills toped 1000 dollars for a tank fill up . i was forced to sell a step ahead of foreclosure i made those payments for 15 years there are many people who are wage earners who have been nailed into this position by the ass in the white house no one dare ask for a raise in this economy we could save a lot of gas by not driving tanks around in a desert. a helping hand from the government might have saved what's left of my family what was done is criminal and i hope bush Cheny and Powell rot in hell i take real offense at the knee jerk "screw em" attitude Im seeing here these homes were hope for a lot of people and they took a stab at belonging somewhere and had that taken away by a bunch of looters. Kudos to Phillip for telling it like it might be

[contender]

Geez Phil why does it seem like more and more people are bashing you?

Seems to me you should be viewed as a hero...

The masses are asses I guess, eh ?

[junkyarddog]

I took a week of vacation and missed Da Phil's view on the economy. He doesn't have a crystal ball and he can't predict the future. So, he may make some mistakes on some calls, but I tell you... Phil's fundamentals are right on.

I really laughed when oil dropped so much last week! Reason? No one seemed to have believed Phil: the world simply can't support (afford) oil at >140 bucks. Inflation will eventually take us there, but right now it's pure speculation. Those who criticize Phil do me a favor: read his past articles on oil, just for starters.

Phil is human too (I think) and he's not perfect, so of course he ought to be wrong on a few things. One thing he's wrong on is to believe that this mess is all this administration's fault, although the Dems are the ones controlling Congress. Bush sucks, of course, but so do the Dems. Moreover, Dems == Republicans. The sooner people realize that, the sooner we'll move forward as a Nation with an alternative party, one who doesn't have any deals with the devil.

PS: devil == oil companies, GS, JP Morgan, LEH, IMF, and others. Utopia, I know.

[Sheherazade]

With the Dow down 100 points in the morning this is the only author today on Seeking Alpha with the guts to say he's bullish and buying and all Bschecker and Contender do is make nasty comments. Perhaps your problem with the author is that you spend more time making fun than listening but I don't see how you advance the conversation here at all.

Mr. Davis said oil was too high for quite some time, now it's coming down. He said the banks were oversold, clearly they were. Last week he said to buy the Dow components that had international exposure. I for one am up well over 150% on that suggestion alone with simple calls in the DIA.

I think its a shame that the chat board here is getting to be like the chat board on Yahoo, people with nothing constructive to say ruin it for those of us who would like to have intelligent discussions about the post.

[Oilwillpullback]

Sheherazade-Been follwing Phil since His site went as a pay site. Nov 06. He has been screaming about oil from $60. Hey is the pullback and good and correct yes. But please don't tell me has gotten it right. Even after this pullback it has doubled on him.

[Sheherazade]

I too have followed him from his free web site to here. It was his "screaming" about oil and specific puts on Exxon and others that made me my first big options win as oil went down over 30% after his pointing out it was too high in the fall of 2006. Since that time, I have followed his strategy of focus puts at times when oil runs up too fast and that has also been very profitable.

I suppose it's all in how you read it because I took it to heart that $140 would never hold after he published the article that $200 oil was not possible in this economy and I'm happy to say that this has been the best week of my trading career through simple USO puts following the same strategy.

Does oil have to go back to $60 for him to be right or do we now see Congress investigating all the things Mr. Davis has been "screaming" about as driving up the price of oil for 2 years? As Junkyarddog says, "Phil's fundamental's are right on!" I'm not here to be his defender but I do see his articles on MarketWatch, Yahoo and Google regularly and he seems to have quite a following as well as, obviously, his subscriber site, which I can now afford, thanks to his tips. I just wanted to say it's very easy to tear down and it seems to be the pleasure of people who make comments here to the detriment of the community. If they really had something of value to say, there is an invitation to contribute to Seeking Alpha on every page so perhaps they would be willing to share their own wisdom, rather than just act like wise asses.

[vishy]

I'm not sure if you even understand what you writ.e.. India is in chaos over bribery??? Huh. The issue there is about the confidence vote. If the government wins, better scope for change, better reforms, and the nuclear deal goes through. Please do some research before you talk...
Also it seems like you also are in or close to foreclosure. 55K in three years for someone who made a bad bet, or decided to flip a condo in Florida... #$*&(*&

[BSchecker]

Sheherazade- As a member of Phil's blog I am telling you not all is as great as it seems. Congrats on the USO puts. I will leave it as that.

[mtp]

agree to fix the housing solution requires keeping people in there houses not bailing out banks... if they could restructure the loans so the payback period is longer i think you could fix a lot of this

[User 138602]

the comments on this site is becoming less amnd less attractive. The emotions are running high but cool head always prevail. Can somebody tell me how constructive is it when we see such a poor choice of words in a lot of the comments? we are all losing money with this market because of greed and poor decision making.Maybe we shouldn t be in the stock market in the first place if we can t stomach it.

[secmaven]

Right now the stock market induces acid reflux disease. If we could just do what Phil is telling us to do everything would be all right.

[jjason]

Phil, What we need is a 50 year mortgage at 6.75 % for all these poor dumb folks who screwed up. Then, at the end of 50 years they will have paid off their mortgage and the US taxpayers who did not create this mess will not have to pay for it.

Call it refinancing and do not allow the banks to charge any fees for the refinancing.