Options Trader: Wednesday Morning Ideas

by: Philip Davis

Let’s strap ourselves in and get ready for some fun!

Alcoa Inc. (NYSE:AA) earnings were pretty good yesterday and if we can make it past the Fed minutes, we should be in pretty good shape. There’s just some trade numbers tomorrow and no one expects them to be good. Friday we get the PPI, which was so bad last month (1.3%, core .4%) that it will be hard to for it to be worse. Also Friday we get Michigan Consumer sentiment, which may come in Baytex Energy Trust (NYSE:BTE) based on the Chicago Fed report and the recent jobs growth but the whole poll is based on calling just 500 people in Michigan so you have to take these "market moving events" with a grain of salt.

Dr. Evil

Speaking of manipulating the media . . . since Michigan is down to just 20 papers in the entire state (and some of those may be under the same publishing umbrella anyway), how hard would it really be to get a positive or negative headline into the papers to influence this heavily relied upon poll? The last reading was 88.4, which means consumers are 11.6% less confident than they were in 1964 (the benchmark). Of course, who would be powerful enough to get his hands on the confidential release dates dates to pull off such an evil scheme?

Last week we talked about the outstanding consumer confidence in Asia, where shopping in Hong Kong is up 11% over last year. You’d go shopping too if your stock market looked like this!

Asia posted yet another fine day and our markets have a lot of catching up to do, as we are roughly 40% behind over the past year. Are Asian companies really that much better than American companies? Companies like Canon, TDK Corporation (TDK) and LG Phillips (NYSE:LPL) (and I bet you thought at least one was American) are kicking the butts of Eastman Kodak Company (EK), Imation Corp. (IMN) and Harman International Industries Inc./DE (NYSE:HAR) (I know, but it’s a stretch just to find American companies who make stuff!).

Revved Up

Europe’s economy was old and tired before this country was born, yet they seem to have done quite well for themselves lately, despite all that free health care they just seem to toss around like it’s some kind of basic human right or something . . . DaimlerChrysler AG (DCX) says they will meet with bidders next week but haven’t invited Tracinda, indicating $4.5Bn is not enough for Chrysler. This should be good news for General Motors Corp. (NYSE:GM), who can pretend they are worth something too for another week. So far, the exciting prospect of not owning Chrysler, despite the $28B loss, has added $22B in market cap (33%) to DCX since 2/1. Given that reaction, you can be sure that they WILL be getting rid of it ASAP!

Let’s keep in mind that the Fed was much more hawkish than the market gave them credit for at the last meeting and the minutes will probably indicate that, so we may get a big damper thrown on the fire at 2pm. Citigroup (NYSE:C) announced 17,000 layoffs, which is great news if you’re not one of them as the bank says they will save $2.1B already in 2007 - talk about dead weight!

AA earnings were great but, as I said yesterday, it’s because they’re an EXPORTER, and we don’t have too many of those. But it’s "don’t worry be happy" time in the markets, at least until the afternoon, so up is good and down is bad today, and we are prepared to go with the flow:



 

Day’s

Break

50

62%

Break

Index

Current

Move

Down

DMA

Fib Level

Up

Dow 12,573 5 12,450 1,245 12,528 12,650
Transports 2,812 -2 2,736 2,817 2,889 2,983
S&P 1,448 4 1,410 1,426 1,427 1,460
NYSE 9,468 39 9,250 9,250 9,218 9,465
Nasdaq 2,477 8 2,400 2,440 2,454 2,500
SOX 476 4 470 472 477 490
Russell 814 3 790 798 803 820
Hang Seng 20,449 101 19,400 19,941 20,192 20,600
Nikkei 17,670 5 17,200 17,417 17,617 18,000
BSE (India) 13,183 -6 12,750 13,425 13,814 14,200
DAX 7,198 31 6,700 6,818 6,830 7,100
CAC 40 5,793 27 5,500 5,597 5,601 5,780
FTSE 6,442 24 6,200 6,298 6,297 6,450

US Markets

The SOX and Transports are still holding us back but both are just two decent days away from potential breakouts and it would be a shame to come this far only to create a double top.

I don’t expect much help from the oil patch as they knocked 40M barrels off the May NYMEX contracts (after trading 274M barrels), leaving the count at "just" 263M open barrels with eight trading days to get that number down to 40M. I said in this weekend’s post: "I will be truly fascinated to see how they pull this off, but notice I am now coming around to the view that they CAN continue to perpetrate this fraud indefinitely." They’ve knocked 68M barrels of May and June in just two days (now 472M) at a cost of just $2.40 per barrel, so we’ll keep an eye on which way that trend goes.

America’s #2 oil company, Chevron Corporation (NYSE:CVX) reported that they’ve been keeping up their end of the OPEC cuts by trimming production 1.7% last quarter. They are selling one of their refineries to BP PLC (NYSE:BP), who are much better at burning down refineries than Chevron and should be able to keep prices sky-high for U.S. consumers. Overall, CVX refinery operations were down 20% from last quarter, lower than they year before, when they were recovering from two hurricanes - so of course it is logical for them to be selling one of their refineries.

We’re still watching $62.50 as the breakpoint for oil, but at this point, we are unlikely to get much capitulation from the energy stocks until we can get back below $60 and, even then, the rollover differential for the June contract is $3, so we have to get the May contract all the way down to $57 to keep prices under $60 by the 23rd.

Printer

We’ve been talking about how the dollar is just getting destroyed in foreign trading and that is floating all commodity prices as no one wants to trade shiny bits of metal for newly printed bits of paper and our Treasury printed well over a trillion of them last year. We’ll get the monthly budget from the Treasury at the same time as the Fed report and we should be another $95B or so in debt by the end of the day. So keep them presses running, boys!

Oil and Dollar