Options Trader: Thursday Morning Ideas

by: Philip Davis

Are we ready for takeoff?

I’ve written several articles outlining my theory of stock market physics and we do indeed seem to be approaching escape velocity as the Paulson/Bernanke plan that led me to make my Dow 15,000 call in December bears (oops, don’t say bears!) fruit.

As I predicted yesterday when we bought iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) calls on the member site, Asia responded well to our minor dip and the Hang Seng jumped 174 points to close back above 23,000, now outpacing the Dow by 9,000 points since both indices stood at 8,000 back in April of 2003 (hey, isn’t that around when we went into Iraq?).

Guns and Butter

Well, we’re still over there, but the Hang Seng (and the rest of the world) decided not to wait and started a global party without us. As we discussed on Monday, there are very good reasons for China to be enthusiastic about their decision to choose butter over guns in the new millennium.

"We can do without butter, but, despite all our love of peace, not without arms. One cannot shoot with butter, but with guns." - Joseph Goebbels

"Guns will make us powerful; butter will only make us fat." - Hermann Goering

China announced this morning that Q2 economic growth accelerated to 11.9%, up from 11.1% in Q1. This is what Cramer likes to call ARG, or Accelerating Revenue Growth and it’s his number one reason to invest in a company. Costs (inflation) are running a little high at 4.4% over last year, but sales (exports) are up 28% with "continued heavy investment in new factories and infrastructure." It’s amazing what can happen when the government and corporations work together to build an economy rather than their balance sheets, isn’t it?

General Investor Psychology

It’s not just China, Bessemer Venture Partners are earmarking 1/3 of their new $1B fund for India, while other US venture capital firms are setting up specific funds for China and India. So we gather money from US investors and invest in foreign corporations, where all the real growth investments are being made. This is the beginning of the Dollar Carry Trade I talked about yesterday and, while it’s not exactly great news for the US, what do you expect investors to do - give their money to Exxon Mobil (NYSE:XOM) so they can buy back their own stock - where’s the future in that?

The future is so bright that Asia’s gotta wear shades and Europe (also a butter economy) is not far behind them with the DAX also outpacing the Dow by close to 100% over the past four years. The business environment is so hot in Germany that they are seeking to have the EU put the brakes on foreign takeovers as free money from Japan, and now America is being used to leverage corporate buyouts. Britain is already at the tipping point with 40% of the shares in British listed companies owned by investors from outside the UK. Europe gapped up at the open to erase half of yesterday’s losses and continues strong into our open.

Fortunately, for us it’s a true global economy and a rising tide is likely to lift all ships and our record-low currency makes US equities the literal bargain basement of the World. If you want to call that bullish sentiment, you can - but just remember it’s based on a different type of bull before we go getting all irrationally exuberant.

As I said in the wrap-up, Happy Trading and I were very pleased with the action on the S&P yesterday and that led us to maintain a slightly bullish bias going into today’s trading:

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US Markets

My top concern for the day is the Nasdaq, which needs to show some strength over 2,700 but, so far, earnings in tech have been fairly good but nothing matters until we hear from Google at the day’s end. I dropped our Google positions from a 2:1 spread to an even spread, mainly because our calls had simply made too much money to risk, especially with the certainty of a volatility crush right after earnings.

Some people may be concerned with oil over $75, especially, as Zman points out in his excellent morning report, when it’s THIS time of year:

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Zman lists the usual suspects in the morning post as possible calls and we purged a lot of our oil puts yesterday. I haven’t changed my opinion that this is a blow-off top in the oil bubble, but I’m not going to suffer the fate of people who fought the housing bubble for three straight years.

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Oil and Dollar

"The market can stay irrational longer than you can stay solvent." - John Maynard Keynes

So let’s enjoy the ride while we can but let’s also take a little off the table on the way up. If the market is going to go up forever, then we can reinvest our cash and make more money but if we get an earnings shock that drops the market, you’ll be glad to have a little cash to pad your mattress.

Have a great day,

- Phil