Options Trader: Tuesday Morning Ideas

by: Philip Davis

Another day another $2.9 trillion!

I had to get my annoyance at the new budget out of my system in the previous article or I'd never be able to let it go (oops, I guess I still can't). If you don't think that the submission of a budget that borrows another $239B in order to escalate war spending and "extend" tax cuts doesn't affect our stocks, think again. Irresponsible fiscal management has a ripple effect that extends around the world, hurting us on many levels.

We borrow $40B a month to finance our debts and our creditors are getting nervous. Today should be a good day though as Bernanke and two Fed Governors will be speaking today, hopefully trying to explain (by proxy) to nervous foreign lenders how the U.S. has this problem kind of, sort of under control.

Budget Deficit Disorder 06 02 2007The energy pits are celebrating as Bush has gift-wrapped an early valentine's to oil traders by delivering a weak dollar and increased military fuel consumption (already 1M barrels a week are burned in Iraq and Afghanistan alone) all in the same beautiful budget box!

Other countries of the world were thrilled too, as spend spend spend allows more trade deficit dollars to flow their way, and a weak dollar means they get to pay our manufacturers less money for the same goods while pumping up commodity prices we pay to them as the American consumer (and the American government) keep spending like drunken sailors on extended rotation.

Asian stocks were up across the board with Toyota Motor Corp. (NYSE:TM) and tech leading the Nikkei to another 6-year high. TM earned $3.5B for the quarter, more money than GM earned in the past 3 years (and that's being very generous to GM) on an 18.8% rise in North American sales. 764,000 of the 2.2M cars the company sold in the quarter were sold right here in the states. Toyota is selecting a site for its 8th U.S. auto plant, but that won't stop them from being the target of protectionist rhetoric this year. Despite my idea yesterday to "get a deal on TM ahead of earnings tomorrow as they dropped 1.6% in Japan" we forgot to buy the calls (kick, kick).

IBM caused trading in Lenovo to halt as they sold off a 300M shares of the company in Hong Kong at a 4-7% discount to market. This still leaves IBM with another 1B shares which they can sell between now and 11/1.

Europe is having a fine morning led by health-care providers, who are offsetting a 2% drop in BP PLC (NYSE:BP) which seemed pretty mild since Q4 profit was down 22% on "declining retail and refining margins, falling production and lower gas prices."

We'll see how our markets weather the partisan battle that is sure to ensue following the uncompromising (to say the least) budget package that has been laid down like a challenge to the new Congress:

US Markets 06 02 2007 Chart

Oil is hell bent on retesting Zman's $60 target, and we are all patiently waiting for some nice, overpriced shares to hit the wire before we pounce. The longer they push it, the harder they fall. But we have to be prepared for the possibility that they can push it all the way to March (April I don't see happening). This is a very similar situation to the one we were in in October, where we gave up on November and rolled our puts to December, leading us to two months of very nice oil profits!

Meanwhile, there are lots of other fun stocks for us to play with and we have no trouble keeping ourselves amused while we wait.

We still need to watch copper for a breakdown, and Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX) barely bounced off the 200 DMA at $54 yesterday, weighed down by the $26B Phelps Dodge Corp. (PD) deal that is hanging around their neck. The vote on this will be March 14th and it will be VERY interesting if copper goes below $200 by then. Rather than risk our remaining PD Jan '08 $120 puts, which are up $5.70, I'm going to take them off the table and switch to a safer roll.

Oil Dollar Gold 06 02 2007 Chart

Quote of the day: "If the Republicans want to stand by their president and his policy, they shouldn't run from this debate. If they believe we should send thousands of our young soldiers into the maws of this wretched civil war, they should at least have the courage to stand and defend their position." -- Sen Dick Durbin (D -- IL) as the Republicans in the Senate blocked a debate on Iraq from taking place.


Read all of Phil Davis's articles on Seeking Alpha