Options Trader: Monday Morning Ideas

by: Philip Davis

What a week this is going to be! We get OCTOBER wholesale inventories today which should be weak(ish) as was most October data, if this (10 am) in any way bothers the markets that's a very bearish sign as it is just plain silly to worry about this very stale number.

There is almost no point trading today because tomorrow we have:

  • 7:45 UBS Store Sales Index (should be up 2%+)
  • 8:30 Retail Sales Index (BETTER be up!)
  • 8:30 Trade Deficit (is $60B too much to hope for?)
  • 10:00 Q2 Manufacturing Profits (Q1 7.7%)
  • 2:15 THE FED!!!
  • 5:00 Consumer Confidence 12/10 (better be up!)
Holy Market Moving Data Batman! What joker thought this day up? They only thing I'd be confident about tomorrow is the VIX going up...

At least on Wednesday we can sit back and... What? 7 am is the Refinancing Index (was up 13% last week). Then a Sunoco analyst meeting (ahead of oil inventories) and the Nov Retail and Food Sales (I've been eating and buying!) including the dreaded auto numbers! 10 am brings us business inventories that hopefully will be leveling off.

Tech Purchases Chart 11 12 06There was a very, very, very (did I say very?) bad report in the NY Times this weekend from Forrester Research indicating, "businesses are expected to be less willing to open their wallets for new technology in 2007."

As you can see from this chart, that would be bad in so many ways!

I don't see it and I think the flaw in Forrester's report is that they talk to executives and not to IT guys who have 12 full months to convince the boss that they just have to have Vista and all the other cool stuff that goes with it like quad processors and terrabyte drives, 8G of RAM and a Nvidia 8800 GTX card (ok, that one's for me...). I'm sure real CEOs are a little tighter on the purse-strings than I was (I was very indulgent of my tech department), but there's not much you can do when they come to you and tell you, "things could start, you know, breaking."

What I see in Forrester's numbers is that it's been 3 years since companies spent big on tech -- and that's really pushing the limit!

So I would be buying tech on a big dip, but it's only Wednesday and, as we discussed over the weekend, Hank Paulson aka "Super Banker" is headed to China with his trusty sidekick Chair Man (of the Fed) to change the course of falling currencies and bend the steel-will of the Chinese with his bare hands in order to disguise America's brewing economic crisis for another year or so as a mild mannered "soft landing."

Thursday we have a natural gas drawdown that is as good as it's likely to get for the next two weeks as warm weather is dashing traders dreams of a white Christmas. We also have an Advanced Micro Devices Inc. (NASDAQ:AMD) analyst meeting along with 12/9 Jobless Claims (according to Fridays numbers, everyone is working), November import prices (which better be down), and the DJ Business Barometer for 12/9 -- an early shopping report.

At some point around here we will hear from OPEC.

You would think after all that we would be able to take Friday off, but they're going to wake us up with the CPI numbers (up slightly), the NY Mfg. Index, Industrial Production (down slightly), Cap Utilization and, at 4:30, they are again promising the Money Supply!

So, like I said last week, VIX calls are the way to go!


Only 2 weeks until Christmas folks!

Asia was generally up this morning but India took a 3% hit today as a hike in their CB's Cash Reserve Ratio took down the banking sector a full 6.5%. According to the Finance Minister: "Inflation is unacceptably high. It should be below five per cent and towards four per cent," he said, adding more measures would be taken to curb inflation. India did recover 130 (out of a 530 point drop) at the close, but bears (oops -- don't say bear!) close watching.

Meanwhile China made it's opening conciliatory gesture to Super Banker by sopping up $20B in loose cash that has spilled out into the economy. It's a nice start!

Europe seems to be in a good enough mood this morning, and why shouldn't they be -- they've got the World's strongest currency! This makes oil cheaper for them, imports cheaper for them, this makes people want their money and floods their markets with liquidity. Now that the Euro covers 31 territories, it doesn't even hurt tourism for them to have a strong currency.

Putin 11 12 06 1By the way -- have you noticed how if a Muslim were to come into a country with radioactive material it would be (rightly) seen as Nuclear Terrorism, but if a Russian does it, it's called spying!

The silence on the part of our "leaders" is truly deafening! Do we really stand for anything as a nation anymore or does political expediency rule every decision we make?

Anyway, getting back to our markets:

We can expect a little whiplash ahead of the Fed following all sorts of nonsense surrounding the OPEC and China meetings so I'm pretty happy with my decision to start taking up positions in some relatively safe insurance plays, but I still need to see a little more from the markets before I wade back in.

We'd like to see the following:

  • Dow holding 12,300 but needs to break (and hold) a new high at 12,362
  • Even if it does this, it will be hard to love without the transports getting back to 2,700
  • S&P needs to break and hold 1,420 -- a tall order!
  • NYSE 9,100 is a MUST
  • Nasdaq 2,475 will not be that impressive but is absolutely necessary for escape velocity
  • The SOX are likely to have a tough week and are most likely to lead us down, just getting over 480 would be a help
  • The Russell needs to retake 800 to prove there is some positive rotational spin in the markets

Options Trader 12-11-2006 00

Oil has to face several negatives this week:

1. Warm weather
2. A chart that is breaking down -- thanks Tom!
3. Record global storage levels
4. Record global speculation
5. Record global supply
6. Flat to declining demand (believe who you want)
7. A rising dollar (hopefully)
8. Falling bullish sentiment in energy
9. Narrowing contango spreads
10. The end of the January contract on Friday

Other than that its BUYBUYBUY (I can't even type that with a straight face) and I anxiously await the top ten reasons oil is going to $100 that the bulls are sure to post in comments and I promise to print the best one.

Can crude hold our old $61.69 level? If not, we are back to testing $58.50 (-ish, as I haven't run the dollar adjusted numbers).

Let's keep a close watch on gold as it will have a tough time turning without some pretty weak dollar demand, but it should be a little bouncy at $630.

Don't get too excited about the dollar bounce yet. Paulson is not a dummy and he timed his remarks to coincide with the 5% rule as the dollar was down to 82.50 from a median high of 87 in October. We can expect a 33% retracement to just under 84, but if we don't break that, we haven't changed our trend at all.

Options Trader 12-11-2006 01

In an emergency, Super Banker can always call on The Plunge Protection Team!

Plungeprotectionteam 11 12 06We've spoken in comments about the possible existence of a covert government "Plunge Protection Team," headed by our man Paulson, that swoops in and floods the markets with those phony baloney dollars at will. Well who knew there was actually a study on it? There's a serious report by Sprott Asset Management who have 40 pages of evidence (.pdf) that the market is being manipulated. OK bear boys -- now tell us something we don't know...

Meanwhile back in Iraq (no, it didn't go away), the cost of the war is completely out of control according to the WSJ who says the Army's (just the Army) $168B 2007 budget is woefully inadequate to continue the fighting with just this level of troops!

There are only 20M people in Iraq -- we're spending $35,000 per Iraqi citizen so far to take over their country (or free them or search for weapons or whatever the reason is/was this week). Couldn't we have just bought the damn thing?

Oh wait, someone did suggest that. I seem to remember being warned at some point -- what was it? Oh yeah: "You break it, you own it!"

Pottery Barn 11 12 06


We have a very choppy ride in store for us this week.

Getting back to the old escape velocity concept, we're going to need a lot of dollars to throw on the fire and get this market engine in gear to break orbit.

U.S. corporations are worth about $20 trillion so we need to find another $1 trillion of new money to push this market up another 5%. As I've often said, the only place we're going dig up that kind of change is in commodities.

Money must come out of oil and metals and continue to come out of housing (where most of it is) in order to sustain this rally. There's a very fine line with the dollar between pushing investors out of commodities and collapsing the entire market, and I will say again that Paulson and Bernanke are the perfect dynamic duo to pull this off!

It will be a great trick, but I'm not going to make a big bet on it just yet -- let's see how the week goes...

In addition to the insurance plays from the weekend let's keep an eye on the following tech plays if the markets (and the SOX) can stay positive. I'm hoping for a pullback and I'm certainly not chasing:

  • Goldman Sachs Group Inc. (NYSE:GS) is just daring you to short them. They're doing so well they're going to put billions of dollars into the hands of the Amaranth guys! Go on short them -- they dare you!
  • Intel Corp. (NASDAQ:INTC) is going to make or break the SOX and I'm going to start accumulating Jan $22.50s for .25 in case it's a make.
  • Infosys Technologies Ltd. (NASDAQ:INFY) is being added to the Nasdaq and would be opening up higher but India crashed (see how it's good to track these things!). I'm going to take the July $55s for $5.65 and wait on selling the Jan $55s, hopefully for $3 or more.
  • Software was the bright spot in the Forrester report and there is no software without Microsoft Corp. (NASDAQ:MSFT)! Apr $30s are $1.15 and I will love them if I can get them a little cheaper.
  • Nuvelo Inc. (NUVO) found "nothing encouraging in the entire trial" and is down 80% in pre-market. This is why I don't play a lot of biotech!
  • If the NASDAQ 100 Trust Shares ETFs (QQQQ) break up there will be quite a squeeze but I'd rather jump on the mo there.
  • AT&T Inc. (NYSE:T) is playing the China card and we can play the story with the Jan $35s at .80 as it may be just being held down for options expiration.
  • Texas Instruments Inc. (NYSE:TXN) is another one that can move surprisingly fast and the Apr $27.50s for $3.50 give us a shot at earnings and have just a $1.60 premium versus a $1.40 premium for just the Jan $30s.
  • We had a very detailed discussion about Textron Inc. (NYSE:TXT) in last week's comments and I'll be keeping hoping for a deal on the Mar $100s, hopefully for $2.50 or less.
  • Sears Holdings Corp. (NASDAQ:SHLD) Jan '09 $190s for $30 may make a nice income producer if this stock breaks up. It's risky into the holiday season but the 50 DMA is at $172 and provides an obvious exit point.

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