Options Trader: Monday Outlook

by: Philip Davis

181 Points from a record!

Our friends at GS tell us all is well (or at least better) in the credit markets and, as we discussed this weekend, betting against Goldman Sachs has not been a smart-money play this year.

Goldman had themselves set up correctly for what the market did, and their trading prowess really showed through,‘’ said Ryan Lentell, an analyst at Chicago-based Morningstar Inc. who gives Goldman three stars out of a possible high of five. “They were short mortgages this quarter, which was the right way to be.'’ GS CEO Lloyd Blankfein made a nice top call on June 27th, when he said: "“We certainly are organizing ourselves like the market is undervaluing risk, and so we are in a high state of nervousness. The biggest risk we face, and there are a lot of things that contribute to this risk, would be a very big crisis in the credit markets.‘’

This is the same Lloyd Blankfein that made a perfect call on the 1998 credit crisis and we all know what happened in late 1999-1999 so let’s pay close attention to anything coming out of Goldman that sounds bullish because, at this point, it really is their call to make. I’m still looking for tech to lead the way in a major rally, perhaps a little more subdued than it was at the turn of the century, but a very strong sector nonetheless. Let’s keep an eye on the SOX to lead the Nasdaq up or down as they work on that 505 level with 510+ giving us a nice breakout signal.

Happy and I are keeping a very close eye on the S&P as we initiate the Happy 100 Portfolio this week with 10 IMCL Jan $40s (QCIAH), currently at $5.90 being our first trade of the week. We like IMCL as they are in a hottish biotech sector and further along than many of their peers with $150M in sales last quarter that dropped $32M to the bottom line along with a very nice $34M gain on cash. While they may not keep that rate up ($1.50/share) they are solidly on the way to earning that amount in ‘08, which would put their P/E down at 28, about the industry average for a company that is well above average in the industry.

We’re not going to worry about our bullish positions as long as the S&P can take out 1,530, that’s going to be our watch point for the week.

Note the pattern We followed in mid July, right before the big fall, that’s the pattern I’m concerned about now. GM may lead the Dow to a downside surprise if they can’t make their 11 am strike deadline (although that can be extended). Last time GM et al had to "adjust" benefits, they softened the blow by paying 302,000 UAW workers a $3,000 bonus in 2003. The good news is now they only have just 180,000 UAW workers so the payoffs are getting progressively lower and the union is getting progressively weaker. A $900M bribe is just a drop in the bucket to GM who lost close to a Billion a month in 2005 and Ford beat them with a $12.6Bn loss for last year. If you combine the losses of the two companies you could actually just give 180,000 people $128,000 each NOT to make cars and we’d all be better off. Invest that money in Toyota and we’d probably all get a nice double on the deal!

Speaking of our Asian masters, the Hang Seng broke the 26,000 mark with style today, gapping open above it and adding another 500 points to finish the day up 708 at 26,551. Now these guys know how to party like it’s 1999! Commodity stocks were the leaders and I will point out here that semiconductors are an under-appreciated commodity, which is why we are watching our SOX. PTR jumped 10% on news that China’s regulators may approve their A-share listing application, giving the mainlanders a chance to buy one of China’s biggest oil companies (so much for those puts!).

DELL is teaming up with China’s Gome Group (the Best Buy of China) and will put their computers into 1,000 stores in 168 Chinese cities. This is somewhat of a capitulation by Dell but Chinese consumers are not big mail-order shoppers so the hit to their margins is a necessary adjustment. They are also opening a retail store in Moscow. China’s PC market is projected to grow 25% PER YEAR for the rest of the decade so I’m going to select 10 DELL $27.50s for the $10KP with a tight stop once we break $1.30.

European markets are mixed this morning as HBC gives notice to 750 US employees as they close Decision One Mortgage, a sub-prime unit that had NOT been a problem - yet. HBC was the third-largest US subprime originator for the first half of this year with $12.3Bn in volume, about a quarter of that coming from Decision one. It may be too late but the $90 put was just .95 on Friday and the $1Bn impairment charge does not bode well for Q3 earnings of a company that is, for some reason, trading near the all-time high!

"Clearly the risk now is that the housing-market slowdown could be far more pronounced than it looked like it would be," says Howard Archer, chief U.K. economist at consultancy Global Insight in London. "That’s likely to weigh down on consumer spending and, hence, the economy." Mr. Archer believes the credit problems could help bring U.K. economic growth, adjusted for inflation, to less than 2% next year — the lowest rate since 1992.

Back in the US of A, it’s almost time to buy MSFT as I’ve seen a BUYBUYBUY slapped on everything in computing except the company that still makes most of it run - doesn’t that seem kind of silly? We can grab 10 Apr $30s in the $25KP at $1.60 and we’ll be looking to sell the Oct $30s, now .24, hopefully for .50 or better if we get a nice run. I know I am often down on Microsoft and I think Ballmer is quite the boob but it’s kind of like a great restaurant with bad service - people still go, they just complain while they eat…

The WSJ took a fun economy poll and 90% of the voters felt we would have either a Recession (27%), Inflation (25%) or Stagflation, kind of both of the above (38%). You’ve got to love the low-expectations environment!

In looking for a real-estate bargain I came up with PCR, a large general contracting firm. If we are to see a turnaround in corporate spending, Perini should benefit and lower rates allow local governments to float more bonds for infrastructure, right in PCR’s sweet spot. The company is well off their July highs of the low $70s and I like the Apr $55s at $9.60, hopefully we can hold off on selling the Oct $55s, now at $3.45 but we don’t want to let them go below $2.50.

Another play on corporate spending is SYX. Systemax is a little-known major supplier of Tech products to corporate America with surprisingly little coverage for a company that is growing top-line at 10% with great cost control and good cash flow. Since May, all insider transactions have been buys and 8/8 earnings were good - they’re just having a spot of trouble at $20 but I think it’s just a retracement point after a wild ride from $8 to $30 that lasted from Sept-Feb. Dec $22.50s are $1.35 and we will risk 10 of these in the $25KP with a stop at .35 rather than selling anything against them.

Oil may pull back a bit. At this point, if we’re going to be bullish, we DON’T want that sector to collapse so rah-rah $85 a barrel I guess… The same can be said about gold, which is over $740 so let’s see if that holds up this week and we will, of course, be watching for a floor on the dollar as it tests 78.5. Perhaps the lowered outlook for Europe will send a few Euros our way but more likely they will be turning Japanese as the Yen can really fly if they stop supporting us, which would unwind the carry trade and cause us to drop further so the safe money play for European investors is Yen, not Dollars.

Let’s watch the S&P and the SOX and make sure we do break free before we all go on a buying binge but those levels will put us in a MUCH more comfortable position if we can get there.

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