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Friday Already?

The Friday morning report is now over at the new site at http://www.philstockworld.com/members/ and will be available soon (as there were no picks today) on the free site at http://www.philstockworld.com/.

This site will be phased out over time but updates will be posted on a periodic basis.  Please change your bookmarks to http://www.philstockworld.com/ if you have not done so already.

Thanks so much,

 - Phil

Thursday Wrap-Up

The Thursday Wrap-Up is now over at the new site at http://www.philstockworld.com/members/ and will be available tomorrow morning on the free site at http://www.philstockworld.com/.

This site will be phased out over time but updates will be posted on a periodic basis.  Please change your bookmarks to http://www.philstockworld.com/ if you have not done so already.

Thanks so much,

 - Phil

Pro Site Subscriptions Open

Today is day one of subcriptions on the pro site.

Either tomorrow or over the weekend this link will become inactive and we will switch to http://www.philstockworld.com/ (possibly a layer deeper for subscribers).

If you pre-registered and did not get an Email from Jared linking you to a sign-up form, please make a comment here but please keep today’s trading comments in the post below.

Thanks,

 - Phil

Thursday Morning

Last Thursday was not good. 

Yesterday was not good either.  It wasn’t bad - it just wasn’t good.  Something has to perk up tech, especially the semis or it may be time to lighten up again into the holidays.  Today may be the critical day as the VIX crashes and we set a direction ahead of the inevitable rebound after options expiration.

That’s the other big factor, options expire tomorrow and you can see a lot of stocks flat-lining into expiration and we can’t trust any movement we see this week so be very careful out there! 

As of 7am, oil was up a full dollar in European trading.  Sen. Tim Johnson (D - SD) is in critical conditionand should he be forced to step down the Republican Governor, Mike Rounds, gets to appoint his successor and swing the Senate back to the Republicans!

OPEC did nothing but pledged to cut another 500Kbd in February, so let’s keep an eye on the March and April contracts to see how real the traders think this is.  I will likely take this one last opportunity to double down Jan oil puts - if it ever stops going up!

Our prayers go out to Senator Johnson, who is just 59 but seems to have had a stroke - he is listed in critical condition after emergency surgery.

Asian markets were up across the board with India recovering 305 more points and saving my market of the year prediction (at least this week).  The Hang Seng erased yesterday’s drop entirely as Chinese leaders seemed intent on making a public showingof telling Paulson and Bernanke who was really the boss while privately  releasing “work plans for various government agencies to tackle tensions between the two countries.”

“We have had the genuine feeling that some American friends are not only having limited knowledge of, but harbouring much misunderstanding about the reality in China,”  VP Wu told Paulson and other senior Washington policy-makers at the start of their two-day meeting in Beijing.  “This is not conducive to the sound development of our bilateral relations.”

Europe was flat this morning, BP has been advised there will be formal charges related to price fixing in a widening investigation.

At home we have to switch to watching our bottoms as oil will put early pressure on the markets:

• Dow 12,300 must hold although we tested 12,200 already this week.  It still looks more ready to break up than down.
  • Transports are just sad and 2,580 is a breakdown
• The S&P has been comfortable over 1,410 and any move below will be a strong signal to tighten up our stops.
• The NYSE gave us leadership yesterday and needs to hold 9,050
• The Nasdaq must hold 2,425 and must break 2,450 or what the heck are we doing holding tech?
  • Any additional downward movement in the SOX may leave them unrecoverable short-term
• The Russell is flashing danger signs under 790 and must retake it

OPEC has managed to foster more competition in Malasyia as Wilmar buys PPB Oil Palmsto created a $4.3B biodiesel conglomerate predicted to produce 14M barrels of crude a year (2.1Bn tons) on about 4,000 sq miles of land.  ADM is a partner on this project.  Palms grow in the desert and America has over a million sqare miles of desert gathering dust…

I said on Monday I would be happy if we can hold $61.69 on oil through the end of the week - anything else will be a bonus and we’ll have to let the chips fall where they may.

There was not much out of China to indicate the dollar should be firming up while there was not much out of OPEC to indicate there will be any major changes there so we’ll see how many barrels are really needed for January delivery at the end of the day.

There are currently 158M barrels scheduled for January delivery and 255M barrels on tap for February with 101Mb open in March at $62.92.  March is the contract I will watch most closely as they will take a hit on any real OPEC cut.  This March oil was at $62.50 (avg).

Let’s watch gold to see how it’s going in China but I’ve made a lot of bets this week on Super Banker and Chair Man pulling our fat out of the fire and slaying the Chinese dragon this week - if today isn’t payday I’m not sure how I will feel about taking it into the weekend….

Bush actually managed to find 23 people who approve of his Iraq Policy in the latest pollsbut 6 others out of 100 were “not sure” so congrats to the President for keeping 6 people baffled with BS!  The poll has record lows across the board after just 6 years on the job.

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Needless to say I have little appetite for new picks as today is a good day to catch up and manage our existing trades.

I’m hoping for a nice spike (as opposed to a run) in oil to give us a nice entry on one more round of puts (same as yesterday and on our sheet) but I may get more than I wished for if I’m wrong and traders are willing to roll those January contracts forward into a February cut.

If we can get a big down spike in the Dow I may want to take a stab at the DIA calls today, we had a quickie with the puts yesterday but it was far easier to see the bottom than the top.

Hopefully we’ll just get, at worst, a whole lot of nothing into the weekend but let’s be careful out there because, as I said last week “I could never get the hang of Thursdays!“

Wednesday Wrap-Up

Wow - how low can the VIX go?

So low, it seems that I’m not even going to discuss the non-movement of the indices other than the SOX (the HORROR) who are assassinating the Nasdaq.  Actually, the Nasdaq was amazing against a 1.23% SOX drop but I don’t see them keeping that up for very long - one has to snap soon.

Just be warned that the last time volatility bled this low was Thanksgiving weekend and we got a heck of a drop(300 pts) as the VIX came back up.

Oil didn’t do much either today (up .35) which you would think is surprising against a 4.3M barrel draw that was 3x analysts estimates but as long as we hold $61.69 through Friday, I’m happy.

 I’m going to wait to hear what OPEC has to say but I am going to blow the whistle on the myth of Chinese demand this weekend (sneak peek in comments the other day) as this is the most overused excuse since hurricanes to pump up the price of oil!

I do have to say WOW to oil pumpers though.  It takes a lot of guts to shove 21M additional barrels into February at $61.99 when March is Just $62.92, having fallen from $66.50 in just 8 sessions! 

The dollar closed flat and gold gained a buck so there was not much point for showing up for anything today!

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At this point I feel like I was robbed taking a .15 gain on the first half of my DALRQ Jan ‘08 $2.50s, now .80 (up .75!).

HD May $40s finished the day at $2.25 (up .30).

HPQ Jan $40s came in at just a buck.

LVS had a rough day, giving up 3 more dollars.  The Jan $95 puts are now $6.20 (up 30%) and I’m taking them off at the first sign of trouble and looking to enter the Feb $80 puts so I can take half off the table.

I hope I was right about GSF giving  me a top on the OIH.   We initiated the Apr $140 puts for $6.40, hoping to sell the Jan $140 puts for $5.50 or more.

OII went nowhere, despite the huge morning rise in crude - very interesting!  The Apr $40 puts finished even at $1.60.

I took another stab at OXPS with the Mar $25s for $1.80.

RDS.A $70 puts finished at $1.10 (up 10%) despite an up day indicating probably more hedging into OPEC than real bearish sentiment.

XLE Jan $59 puts seemed cheap at a buck but we’ll see….

Do not try this at home but I took a craps bet on the XOM Dec $75s for .15, my goal is to take .30 off the table (if offered) and let the rest ride, but almost certainly out at the close.

I got back in YHOO Jan $27.50s for .75 and they gained a dime.

Well, pretty flat trading for a pretty flat day - very appropriate!

Which Way Wednesday?

See Trader Mike’s Nasdaq chart on the previous post to get an idea of what’s going on in the market today.

I’m still bullish but the Hang Seng disagrees with me but India recovered 186 out of 800 points and the Nikkei posted a small gain despite the fact that the BOJ is almost certain to leave rates flat in order to prop up the dollar.

This hurts our MTU Jan ‘08 $10s, but they are way up at $3.50 (up 25%) and we only just got them so I’m going to give it a little slack.

I think the general consensus in Hong Kong is that they’re not sure what’s going to happen this week but with two of the world’s most powerful bankers en route, they are pretty sure they are going to get screwed somehow…

Obviously our lower trade deficit lowered their trade surplus somewhat, so that’s kind of a drag as well.

Also of note in Asia is HD signing an agreement to buy Homeway, China’s DIY shop with 6 stores in 12 cities.  It’s not about the company they bought, it’s about the fact that China’s letting them in!  HD May $40s are $1.95and it’s a good entry but I was waiting for them to come down to $37.  With this news a small entry is called for but it is very possible we’ll be taking the bulk of our entry lower.  BBY may make a China announcement as well ahead of Paulson’s visit, we have 2 positions in that one…

Europe is in a pretty good mood this morning and they are exercising their economic might to further crack down on industrial pollution with some strict restrictions on chemicals used in manufacturing as well as cracking down on price gouging by energy companies.  This may have a very nasty side effect of damaging the global natural gas cartel as the EU has been after Germany for some time to free up that market.  Formal charges have been filed against Germany!

“Other countries charged are: Austria, Belgium, the Czech Republic, Estonia, France, Greece, Ireland, Italy, Lithuania, Latvia, Poland, Spain, Sweden, Slovakia and the U.K. with violations, ranging from setting electricity prices so low that new entrants can’t compete, to not enforcing orders aimed at separating energy supplies and network operations.”  This is like the the US government charging 45 states!  Perhaps this is a preview of Nancy Pelosi’s first 100 hours for the US oil companies???

We need to get used to being #2 in the world and hopefully we won’t slip to #3 but we’d better get used to China having a seat at the table!

We’ll see if the US markets can show their muscle now that we have the Fed out of the way.  We get the November Retail and Food Sales Report this morning and, of course, oil inventories.

We are back to looking for the same old breakouts but it’s the SOX and the Transports that need to step up to the plate - they are holding back the broader markets:

• Dow 12,362 is still our goal and holding 12,300 remains critical
  • There is nothing impressive about the transports below 2,800 but there is something dangerous about them below 2,600 
•  S&P needs to break and hold 1,420 and is close to parabolic! 
• NYSE 9,100 is a MUST
• Nasdaq 2,475 is where we pin our hopes and dreams as it can be the key that unlocks the markets!
  • The SOX are in worse shape than the transports and we may have a long wait for a recovery if they break down any farther.
• The Russell needs get serious above 800.

I was thinking about oil last night (big surprise!) and it occurred to me that February is a short month.  If February is a shorter month than January and there are (coming into the close of January’s contract period) currently just 189M barrels on order for 31 day January - why are there 234M open NYMEX contracts for 28 day February?

I’m not trying to cause any trouble, just asking!

As John Belushi taught us, when the regular stuff ain’t working you can always hold off the angry mob with a little Rollin’ Rollin’ Rollin’!

“Keep movin’, movin’, movin’,
Though they’re disapprovin’,
Keep them doggies movin’ Rawhide!
Don’t try to understand ‘em,
Just rope and throw and grab ‘em“

Good luck to the oil bulls this week, I think you may need it!  We do have inventories out today and MAYBE we used 10M extra barrels to reduce our total inventory down to 330M barrels - that would “only” be 15M barrels over the top of the normal range for this time of year.  Yeah, that’s the ticket!  ROFL! 

We currently have 19M more barrels of crude than we had this time last year, the weather is warmer and demand is trending down.  Crude is $5 above last November’s low of $56 but XOM is $20 higher, flying on $117Bn worth of roach money that fell into that trap this year.

Oh wait, maybe OPEC will actually cut what they said they would this time!  They could take another 7M barrels a week off the markets!  That would reduce our crude supply down to 275M barrels (the low end of the band) in just 10 weeks!

What?  Oh it takes 6 weeks for the tankers to get here?  OK - in just 16 weeks then!  Then you will all be DOOMED - $100 oil is just…  What?  The US  only absorbs 25% of that production cut?  OK, OK - in just 46 weeks then!  DOOM!  Peak oil!  Mu ha ha!

I really don’t know who’s sillier, the people who buy based on this logic or the analysts who support them…

So I’m not going to worry about oil today despite CNBC’s emergency pumping reports.  ZMan points out that tanker rates are down 10%, possibly indicating OPEC is serious about some kind of cut but that brings me back to the main premise - we don’t need the amount of oil they can ship!  If we needed the oil, we’d buy it and tankers would be busy.  We bought too much (like 234M barrels for February) and it’s time to cut back.

We’ll see what the dollar does today as it is just .5 above that 82.5 bounce or, more properly called, “it better bounce!” zone.

Gold is struggling at the $630 line and will not be able to hold it on any dollar strength but that’s not going to stop me from picking up a few GG Jan $30s for $1.40 just in case our China trip goes badly.  This is a protective play with a tight stop and the 200 dma is $28.50, a clear sign the party is over.

The party is not over yet with retail sales (including autos) up 1%, a nice Goldilocks number.

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Trader Mike, is sort of on-board with our TXT trade but he does point out some critical junctures we need to watch closely:

We’ll see how they handle the critical $95 mark but $94 was my buy target.

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I’m not taking too many new positions today as we have to concentrate on managing our oil plays.  After taking a lot off the table in the past week, we are ready to pounce if the market makes a nice down move.

We’ll be watching for some real strength to jump on the calls we’ve already made and, of course, following energy plays in strict accordance with the Valero Rule!

The pre Chrismas sale may already be over for AAPL, up $1.21 in pre-market.  HPQ gave a rosey forecast and all they do is sell computers and this idiocy about ITunes sales heading south are nothing but media fodder as Apple doesn’t make the bulk of their money on the songs.

BP looks like it’s being held up into expiration as it skims along the 200 dma. 

CAL and UAUA are now in merger talks and that will lift the whole airline industry.  Our DALRQ Jan ‘08 $2.50s are already .40 (up 350%) and please try to remember they are almost certain to end up worthless so take some off the table.

Let’s keep an eye on GSF, who have been the strength of the OIH.  Tom made an excellent chart for watching that ETF and let’s be very aware of the components that make it up!

HPQ is likely being held down for expiration - the Jan $40s are $1.15.

OII’s  EVP sold 10,000 shares on Monday, is it the start of a trend for a stock that practically doubled since October 1st?  Apr $40 puts are pricey at $1.60 but maybe they know something…

I think RDS.A will be affected by the EU actions and I’m hoping they get a nice pump ahead of inventories where I’ll be looking for the Jan $70 puts for under $1.

With XLE still looking like a buy to the chartists (sorry Tom) the Jan $59 puts for $1.25seem very attractive and I will stand ready to cover with the Jan $62 calls if they hit the same price but that’s only because I already have the Jan $58 puts as a pre-roll.

A big oil rally can still tank the markets and don’t take anything seriously unless the SOX and the Transports start coming around.

Be careful out there,

- Phil

Stock Market Physics

One of my favorite chart guys, Trader Mike, does a far better job with a picture than I can with words of showing you where we are in the markets with this Nasdaq chart.  This is the same kind of triangle squeeze we pointed out in weekly chart of the transports back in September just before they exploded up.

The Nasdaq weekly chart also has a bit of the same formation but, like I said on Monday: “Nasdaq 2,475 will not be that impressive but is absolutely necessary for escape velocity.”  You can see from the wedge above the daily how 2,450 just isn’t going to do it!

The Nasdaq, like all stocks, is governed by some pretty simple physics.

What we have in this chart, along the dotted line, is an actual picture Kepler’s third law of motionin action as the Nasdaq forms an elliptical orbit as it attempts to escape.  By simply applying the following formula we can see where the Nasdaq is going:

 

• T = time since the last crash 
• a = total number of points gained
• G = bearish sentiment + bad news 
• M = total value of the global market 
• m= total value of the Nasdaq

In absence of new fuel (inflows), we can expect some sideways drift - something has to change in the formula (kidding about being able to predict where we are going by the way!) for us to break orbit.

Time acts as a pull, the longer it takes the more points you need to gain to make it impressive.  We already know bearish sentiment is very lowso we are unlikely to make progress there and as the global markets and the Nasdaq expand (M+m) it means you need A LOT more inflow (a) just to maintain your ellipse.

To help explain this further I will liberally plagiarize Wikipedia’s excellent article on Plantetary orbitsand change it to apply to an IPO:

As an illustration of the orbit around a planet (eg Earth), the much-used cannon model may prove useful (see image below). Imagine a cannon, which we will call Goldman Sachs, sitting on top of a (very) tall mountain (their money and influence), which launches an IPO. The price needs to be set (height) with enough play left in the stock to give it a strong start (trajectory) but it all comes down to how much fuel (inflows) you have as a miscalculation can cause you to crash at various levels.

While a company launch is very much under their control at the outset, once they fire, and at that point the best they can do is give it some occasional spin as it goes by.

If the IPO is launched with insufficient funding + earnings, the trajectory of the stock will curve downwards and crash(A). As the firing velocity, which, for an IPO comes in the form of more cash, better press, Cramer pumps, strong fundamentals…  is increased, the stock will hit the ground farther (B) and farther (C) away from the time of the IPO, because while the ball (in the cannon example) is still falling towards the ground, the ground is curving away from it (see first point, above).  Think of this as the rising tide of the market lifting all ships away from zero.

If the stock is launched with sufficient velocity, the ground (zero value) will curve away from the stock at the same rate as the positive inflows stabilize — it is now in orbit (D). The orbit may be circular like (D) or if the velocity is increased even more (through better earnings, a successful secondary offering, more spin ad pumps), the orbit may become more (E) and more (F) elliptical. At a certain even faster velocity (called the escape velocity) the motion changes from an elliptical orbit to a parabola, and will go off indefinitely and never return. At faster velocities, the orbit shape will become a hyperbola.

An example of a stock that went pretty much hyperbolic is Google as it gained 200% it’s first year:

Obviously this does not happen very often and one of the reasons is that Goldman’s job is to calculate the load (IPO revenues) that can be carried and try to load up as much as possible while leaving just enough room in the price to achieve a good, solid orbit.

And you thought they just make these prices up didn’t you?

We can see from Google how a stock moves from one orbit to another but, if you look at the earth image you can see the danger in the higher orbits.

As you move up from one orbit to the next, you may not realize it but at some point, called the periapsis, you will get just as close to the bulk of the market (the earth) as you did when you were in a lower orbit!

We all know the axiom, the higher they climb, the farther they fall and that is very true for us as we rarely leave the earth but most stocks do achieve a fairly comfortable orbit and can remain above zero forever.

While that may seem like an obvious statement, think about how much of your thinking is clouded by the belief that things MUST come back to where they started..

When you are in D, where most stocks are, you will tend to move along with the markets (the curve of the earth) unless you are affected by an outside influence (changes in the business, sentiment on your company or sector, Cramer…).  This is part of Newton’s first law of physics: ”A body in motion tends to stay in motion.”

Positive market news, a mad money pump or (heaven forbid) actual fundamental improvements in the business can give you the fuel to get into a higher orbit while negative news, declining fundamentals, a mad money dump…  can drop you into a lower orbit.

While few stocks crash and burn, the heat that is felt by the investors as the orbit takes you closer to the atmosphere of below average market performance is more than many people can stand so they bail out.

When we see people bailing out we have 3 basic choices:

1. We lose faith in our ship (stock) and our captain (the CEO) or we can believe the pull of the earth (the whole market going down) has become so severe that we decide to jump with them.
2. We can maintain our faith (or maybe we are just scared of not getting a refund for our aborted ride (taking a loss)) and hold on tight.
3. We can trust our ship and our captain and buy the other guy’s empty seat (doubling down or accumulating on the dips).

Before we decide we’d better be sure of our physics!

Tuesday Wrap-Up

Wow, that was a whole lot of nothing!

• Same store sales were up 1%, kind of weak.
• Retail sales were up 3.2%, not bad
• The Deficit was a winner, down 7% much BTE
• Manufacturing profits up were up nicely!
• The Fed did NOTHING

 

Oh my gosh!  What an economic crisis - SELLSELLSELL!

I mean really folks, what is it you people want?  That little uptick in Q3 Manufactures Profits is $15.3Bn higher than the $109Bn last year (up 14%).  Run away (I hear Venezuela has cheap gas)!

Forget the fact that this is a 200% increase since 2002 or a 50% increase from 2004.  Forget the fact that another 50% increase in 2 more years would add the total value of all manufacturing companies of 2004 to the the market in 2008 (that would be Dow 15,000 for those of you playing the home game).  Just ignore that because they want you to stop buying now.

That’s why they just raised the limits on the minimum net worth for you to invest in a hedge fund to $2.5M.  They didn’t set them up for you!  At the same time, Elliot Spitzer is suing UBS for steering customers into fee-based accounts while all of a sudden CNBC wheels out a bunch of analysts who say there is no Santa Clause.

Thank goodness they are protecting us now, after we’ve traded and paid UBS those fees and given the rest of our money to Amaranth!

What’s going on is that we are indeed very close to escape velocity but we don’t have quite enough fuel.  All the “pro” investors are long on the market and there’s no one on the short side anymore.  There is still, in theory, another $200Bn pouring into funds of all types this year that have yet to be deployed and a declining dollar can inflate our stocks another 10% but the “pros” are too savvy to let go of their shares cheap…

Ah, you’re catching on…  When a rocket ship doesn’t have enough fuel to make orbit you can do two things - you can get more fuel (as we said, kind of hard to come by up here) or you can reduce excess mass!  Guess who’s looking like dead weight to the pros?

Like a used booster rocket, you’ve served your purpose, you dropped your money into the till and, if you are fully invested, you are of no further use to them so they will try to eject you! 

You’ve seen this joke before, they want to get the annoying guy out of the plane so they tell him it’s going to crash, maybe they rough up the ride a little for effect.  Then they give him a chute and say “You go, we’ll go down with the ship.”  After that it’s “sayonara sucker!” as they fly off into the sunset.

Much like a bad broker (many come to mind) they churn and churn until you can’t take it anymore and are forced to bail out.

Is this what is happening right now?  I don’t know but let’s be aware of the possibility.  The movement of the market has turned choppy but is still fairly bullish and, while there is no way I would advocate going down with the ship, I’m also not going to be the first guy out the door and I certainly want to check my parachute before I jump!

We did this back in July and August, when I didn’t trust the markets and turned a little bearish and we were not that well positioned for September’s big gains.  Although we averaged 92% for the month we left a lot of big gains on the table by taking early exits.  My bad…

So I’m not going to be overly optimistic but I am going to try to keep things in perspective and try to make some plays that have some coverage in any direction - it’s tricky, but fun!

In the tradition of perspective I’m going to activate the Wayback Machine and take us all the way back to —- November 30th!

Just a week after Thanksgiving we were very worried about the markets and we set some modest goals:

• Dow MUST hold 12,200 and needs 12,300 to be taken seriously <done and done>
  • Transports can NOT go below 2,650 <oops>
• S&P MUST break and hold 1,400 <done>
• NYSE MUST hold 8,900 but needs 9,000 to impress <we should be impressed!>
• Nasdaq needs to get back over 2,450 fast! <waiting>
  • SOX MUST retake 480 and 490 is no big deal <oops>

Much like my concerns in July, we don’t have our SOX or our Transports - everything else is doing great!

The SOX held up pretty well in the face of several tepid outlooks while the transports have been weak but are coming off a 400 point increase since 9/11 and have pulled back a total of 100 points from resistance at 2,700.  The transports should point the way for us as they are squeezed between a rising 50 dma at 2,615 (today’s high) and 2,581 (today’s low).

So we’ll keep the chute strapped on and make sure we’re aware of the emergency exits but I’d hate to miss the rest of the ride just because of a little turbulence.

Speaking of turbulence - how about that oil market?  After an early run at $62 crude fell to $60.50 and it took a lot of work to close it at $61.02 (that .02 has a lot of psychological value!).  As usual, the contracts you can’t see dropped considerably more than the contracts you can!

There’s still 188,951 open contracts, down 24M barrels from yesterday and it will be interesting to see how many try to roll into February’s 234 Million open barrels (at $61.88).

The dollar had a down day as the $700Bn trade deficit didn’t inspire quite the confidence one would have hoped but oil dropped .20 in the end and gold finished down $3, just holding $630.

The VIX actually sank further and looks (if you can say this about an abstract index) weak.

So we are drifting sideways with very little volatility - this is simply not a time to panic…

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With the choppiness of the market there was a lot of hitting and running in today’s trades:

AXP Jan $60s came in at .90 but stayed there.  The basis on the original play is now $1.10.

$2.75 was the best we could do on the BBY Mar $52.50s which finished at $3 (up 9%).  We took out the Dec $55s we sold for a nickel and the Jan $55s finished at .70, up 55% from our adjusted basis.

We took out our CC Jan $25 caller for .90 (up .60) and bought some for ourselves but the finished flat.  Earnings are on the 19th…

CHL seemed like it might be done dropping and we took a few Mar $45s for $1.30 with a stop out at $39.50.

CVX Jan $70 puts seemed interesting at .55.

We took a DD on the DOW Mar $45s for .20 (basis .28, down 30%).

We did a 2nd round of EBAY Jan $32.50 at $1. 05 (basis $1.15 - even).

I guess I wasn’t the only one underwhelmed by GS’s earnings as they lost 1% on the day.

T was doing so well with the Jan $35s at $1.35 (up 35%) that we sold the Dec $35s for .65 rather than take them off the table.

TXT Mar $100s came in at our $2.50 target (Monday), I hope I don’t regret it!

VLO $55 puts were taken off the table for a .80 average (up 38%).

We added more XOM Jan $75 puts for $1.20.  Also I sold the Jan $75s for $2.85 against the April $80s, now $2.50 (up 12%).

Testy Tuesday Morning

Tuesdays have been a real gauntlet for the markets.

They tend to have a lot of data as everyone shakes the sand out of their shoes and gets back to work on Mondays.  Today looks like it’s going to be a monster!

Most Asian markets took the day off with generally flat trading other than India who lost 400 points for the second day in a row, totally ruining my “Market of the Year” pick from January after a nice 45% gain!  Japanese traders made a strong dollar bet and boosted export comanies with SNE leading the way.

I got a report from Joan in Holland last night who says retail sales in Europe are robust, which does make sense so stop thinking disappointing US retail sales will bother multinationals - we’re just not that big a deal anymore!

Europe is also tentative, waiting for the rash of economic data we will be hitting the world with today so we’ll just move on…

Lets not be greedy today, anything not down will be good but it’s all about the Fed this afternoon so trade at your own risk!

• Dow must hold 12,300 but needs to break (and hold) a new high at 12,362
  • There is no excuse for the tranports with oil under $62 - it’s 2,650 by Friday or the Dow goes bust!
•  S&P needs to break and hold 1,415 - we’ll work on 1,420 later the way things are going, under 1,410 is trouble. 
• NYSE 9,100 is a MUST, 9,000 is big trouble! 
• Nasdaq 2,475 will not be that impressive but is absolutely necessary for escape velocity 2,425 is trouble. 
  • The SOX are having the tough week I expected so far with more bad news from TXN and the IRS, let’s just hope they can hold 465.
• The Russell still needs to retake 800 at some point!

We still have that sleeping giant VIX which may be held down into expiration but I wouldn’t chance it and these indices better be pointing the right direction when it goes off!

Trade deficit is $58.9Bn, much lower than $63Bn expected (as predicted - thank you!).  That’s a little bit of dollar fuel as we are “only” losing $700Bn a year at that rate vs. the $800Bn pathe we were on…

We imported less oil (312Mb vs. 317Mb) for less money ($7) than the previous month, accounting for $2.5n of the drop so we “only” sent $17.29Bn out of the country to pay for oil last month.

Stop complaining about high gas prices and be glad you’re not a Turk!  Turkey pays the most for gasoline ($6.75 per gallon) with a $5 per gallon gas tax, followed closely by Norway, UK, Germany and France - all around $6 total.  Next time you want to gas up, you may want to consider Venezuala, where our man Hugo almost gives it away for .50 a gallon!

Let’s keep an eye on oil around our $61.69 mark but the big drop day last month was the Wednesday of expirations, Tuesday was a pump day and they’ll get to close oil ahead of the Fed so stay tuned for some interesting afternoon plays!

Our new failure line for oil is $60.40 and OPEC is all over the place in their statements but the dumbest one is that they are concerned about the weak dollar so they should cut further and raise prices.  Er, boys - that will weaken the dollar, causing you to cut further which will weaken the dolllar further and you can keep cutting until we all have stills to make ethanol if you want to but THE MARKET DOESN’T WANT TO SUPPORT $60 OIL - GET OVER YOURSELVES!!!

The Fed is not going to cut rates in order to maintain America’s ability to send $17Bn a month out of the country to pay for oil.  Expect virtually identical language today but with continued concerns about commodity pricing and a specific warning about rising energy prices reignighting inflation concerns.

The simple removal of the word “timing” from the last statement’s “The extent and timing of any additional firming that may be needed to address these risks…” would be just what we need to spin the dollar.  The only caveat here is that they may not want to firm up the dollar ahead of the China trip!

Way back on 9/11 I said about the option scandal: “The IRS may take issue with what is looking like, on a wide scale, a $100Bn plus fraud that has been perpetrated on the US public as the companies manipulated books to create long-term capital gains but the benefit should have been realized at the time.”

If oil had real value it would be kept in a safe like gold, don’t you think?  One of the reasons gold is so valuable is because a man can possess it and keep great wealth in small places.  Not so oil, you must store it on massive tankers and in vast warehouses and pay to have it moved from one place to another (see last night’s article).

We’re still watching that $630 line on gold and failure of $625 will be our first signal that the dollar is on the march but gold trading is over by the time the Fed speaks (oil too) so they may both go for a last harrah today.

The dollar needs to break 84 to be taken seriously and, even there, it’s still just running headlong into the very inverted 50 dma at 85 so Super Banker and Chair Man have their work cut out for them this week. 

Well, the WSJ is finally catching up with me, reporting today that the IRS has begun its investigations.  Consider this fair warning as I also said that this would be followed by the inevitable shareholder class action suits!

Subprime motgages continue to be a concern and our Fed may have to step in and tighten lending requirements.  This is EXACTLY what killed the banking sector in India (down 10% in 2 days)!

=================================== 

Bill Rempel posted an excellent MOT chart that confirms my view of the stock:

So this 12-month consolidation, looks JUST like the 15-month consolidation that started in Jan ‘04.  We didn’t take the Jan ’08s on 11/28 because we thought the stock was going up tomorrow!  On 11/28 the stock was at $21.70 and yesterday it closed at $21.23 and you would think the market had collapsed from the way people have been screaming about it the past few days.

Today the TXN conference call may damage them more and, if it goes down enough, I will buy more but it’s only down .15 from where I bought it so far.  In fact, MOT was one of my year’s biggest winners (500%) when we took the Aug $20s for .45 back on July 19th. 

So patience Daniel-san!  Not all stocks go straight up and heaven help us all of we enter a choppier market with this day-trading mentality.  Good things come to those who wait and the grasshopper that always jumps on the next best thing will eventually get the clap (or something like that, my Japanese is a little rusty).

I will again assign my new readers (and especially you day traders) to watch this short film called “The Man Who Planted Trees” that will teach you more about investing than all 12 of Cramer’s books.  Please give it a chance as the markets don’t go up forever and, even if they do, there are better ways to grow a portfolio (and a life) over time!

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If the markets go way up, thinking the Fed will cut, we need to hit shorts on the Qs and the DIA at 2:28 but let’s wait and see how the day plays out! 

AXP threw a fire sale yesterday and our Jan $60s dropped to $1.10 (down 15%) for those of you who missed it.  BBY says people are buying like crazy, they just aren’t making money on it…

BBY missed!  The sales numbers were great but the margins were impacted last quarter but guidance remains in-line so this will be interesting but I could not be happier about selling those calls!  This will give us a great opportunity to buy some Mar $52.50s, possibly for $2.50 or less!

GS had a 10% beat but that included $1Bn form just the ICBC deal and those don’t come every year so $203 may seem a little high to rational investors (although I said this at $155 and got spanked so I’m not touching them!).

My first impression of the CC was correct last night:  TXN’s guidance was much better than pretty much everyone is spinning it but it may take time to play out.  I’m certainly dumping my puts and hoping to make it up with my Jan calls.

Busy day, more to come later!

Monday Mop-Up

That went just fine… I guess…

Our indexes all made modest gains as no one wanted to commit ahead of the Fed and the energy sector was saved by (surprise) a MER upgrade just ahead of options expiration!  They upgraded multiple companies while the ever unbiased Petroleum Industry Research Foundation, an “industry-financed think tank” (I wish I were making this stuff up but it really is this crazy!), says (surprise) “The problem is, who expects a surprise-free environment?“

The problem is guys, it’s not a surprise if you pump oil every single time it goes down!  I have kids, the first 100 times it’s cute, after that we tell you to go do your show in the bedroom! 

There were no suprises in the indexes as they challenged no highs or lows so we’ll skip them as we all wait on tomorrow’s big data day.

The dollar did just what we thought it would do today, ran up to 83.67 and bounced back to 83.20 (down .14%) as it had no real reason to go any higher.

That gave gold a small breather and it managed to eek out a small gain ($3.90) and finished the day right at $630 after bouncing off $625 at the open.  Notice the fiendishly low volume though - that contract is toast!  The action has moved to the February contract (I don’t know why not January) so let’s keep an eye on that at $634.

There’s still plenty of action in December oil as traders are scrambling out of positions.  Oil dropped .81 today after pumping all the way up to $62.15 and settling out at $61.33, unable hold our $61.69 watch level that we set about 2 months ago.

 

The other contracts are moving pretty much in tandem today but the contango spreads starting in January (Feb $62.36-Jan $61.33) go as follows: $1.14, .90, .71, .60, .52, .47, .42, .26, .33, .20, .25…  So they’ve resolved the negative numbers but that’s not too much money to have you store a 42 gallon drum that’s tying up $2,600 of your cash is it? 

Now try buying them in lots of 1,000 and see how well you sleep at night (especially with global warming giving us t-shirt weather in mid December!).  There are still 213,011 open contracts for January delivery.  At 1,000 barrels a contract that’s a lot of oil heading to Oklahoma next month - I hope you guys are thirsty!

Meanwhile, it looks like we could have saved you the trip from the Middle East as APC and DVN just made another major find in the Gulf!  That’s 9 out of 12 drills this year that have come out positive with this one having “more than 250 feet of net oil play.”  That’s Green Canyon block 955 for those of you marking your maps - wont it be funny if 75% of them continue to yeild oil? 

As the markets didn’t do much today, we didn’t do much either but we did manage a few trades to pass the time.

At 9:49 I said “VLO knows something - watch your puts!” and taking December off the table was fairly good idea for the day.

I thought AFL was doing great but it ran out of gas at 11 and the May $45s finished flat at $2.10.

ALL went the wrong way. 

AIG flew out of the box but the Jan ‘09 $70s came in at a comfy $10.60 and were offset by the Jan $70s sold for $2.20.  The Feb $75s opened too high to trade but should be picked up on a pullback.

We covered our BBY Jan $55s into earnings by selling the Dec $55s for $1.20, reducing our basis to just .40 ahead of earnings.

CB went nowhere and neither did the Jan ‘08 $52.50s which filled at $4.60.

GNW went up nicely but the Mar $35s held .75. 

INFY was weak all day and we passed.

INTC was a pass on weak SOX action.

MSFT Apr $30s came in at $1.25 and finished at $1.50 (up 20%).

OIH Dec $145 puts were done at 1.75 (up 75%)

Our PD Dec $120 putter came off the table at .60 (down 90% - for him!).  That left us with a basis of $3.20 on the Jan ‘08 $120 puts, now $8 (up 150%).  I left them on the table for one more day as I hope a dollar move sinks copper too.

I picked up some QQQQ Jan $45s, already down to .60 (down a dime).

T Jan $35s finished at $1 (up 25%). 

PGR Jan ‘08 $25s came in at $2.

We are waiting on the SNDKs, currently watching the Jan $45s, hopefully for $1.50 and we discussed a spread with the Dec $45s if it starts to take off.

SHLD Jan ‘09 $190s finished at $34 (up 13%).

SUN Dec $70 puts finished at $3.70 (up 111%).

TWPG Jan $35s held .85. 

I felt brave and grabbed the TXN Apr $27.50s for $3.30 ahead of the CC (wish me luck after that one!).  I did protect with the Jan $27.50 puts for .35 but I also took the Jan $30s for .60.  On the whole, could be trouble… 

As I still had my covers in place (XOM and CHK) I took some VLO $55 puts for an average of .58, now down .18.

XLE $60 puts came down at .80 (up 23%).

Just Another Manic Monday

Sorry about the confusion of having 2 sites up but I’m still putting my new posts here at http://philstockworld.wordpress.com but that will stop soon - so make sure you have http://philstockworld.com bookmarked for the real deal! 

It’ll be Chaos this week as we tried really hard to have all the bugs out this weekend and decided last night that they were still there so we’ll continue to be here until we are not.

This site will continue to function as the back-up site for a while but we will likely turn off the comments here as soon as we move as we already have different comments on each site.  Please make comments here until they are off.

I also apologize for some of these lengthy articles but the new site will be carrying a lot more in-depth analysis and has better multi-page capabilities and the last few articles were originally planned for there!

Thanks, and sorry about the delay!

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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 $60Bn 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.

There 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 itlike quad processors and terrabyte drives, 8 Gig 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 heading 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 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 will 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!

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Only 2 weeks until Chistmas folks! 

Asis was generally up this morning but India took a 3% hit todayas 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 - dont’ 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, this makes 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.

By 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 really rule every decision we make?

Anyway, getting back to our markets:

So 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 realtively safe insurance plays but I still need to see a little more from the markets before I work 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

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 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.

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

We’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 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) $168Bn 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!“

===================================

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. 

US 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:

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!

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.

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 MSFT!  Apr $30s are $1.15 and I will love them if I can get them a little cheaper.

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 QQQQs break up there will be quite a squeeze but I’d rather jump on the mo there.

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.

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 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.

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.

A Business Proposal for Google

I have an idea for Google.

My dillemma is that the idea is so simple and so obvious that, if I so much as hint at it, it will be gone and it is an idea that is worth (to Google, anyway):

One Billion Dollars!

I could do all sorts of silly things to patent it, protect it, bring in heavyweight partners, negotiate in tandem with Yahoo (viable 2nd choice) or MSN (kind of like having a Heisman Trophy and having to play for the Raiders) to put the squeeze on them etc. but, frankly, I’m very busy and that would take a lot of time and effort.

Also, having started several businesses from scratch, I would rather just give them an idea and collect a fair percentage of the revenues for doing nothing and Google certainly has the wherewith-all to do that for me. 

So I decided to take a leap of faith and reach out directly to Google figuring, at one point, all Sergey and Larry had was an idea and a dream and they could probably relate.

Google has, on their web site, a place to submit ideas.  I suppose they hope you will call it a suggestion you want to “share” but I clicked the button marked “patent.”

Luckily I have another idea that is also very cool but probably isn’t worth too much money so I filled in the little boxes and I told them I’d meet with them re. the first and we’ll see how it goes before I tell them the second.

This is what I got back: 

“Thank you for your note. While we are not able to personally respond to all proposals, please be assured that we review every email we receive. If your proposal matches our current business and technology development needs, a Google representative will be in touch with you shortly. If your email is not related to business development, we encourage you to submit your message through the online contact form at http://www.google.com/support/

“We appreciate your interest in Google, and thank you for taking the time to write.“Regards,
The Google Team”

Come on guys, don’t ask for ideas and then give your customers such a cheesey response!   I’m sure they get a million suggestions but this response really puts me off…

When I ran a company we got all of our best ideas from listening to our clients - they are your most valuable resource!

Still, I’m waiting until after the holidays as I’m too busy until then but I thought it would be interesting to keep you in the loop as I am fairly positive that, one way or the other, I will be commercializing this idea by next year.

I’ll take you through the process, It’ll be fun!

Portfolio Insurance

This is an article I was saving for the private site but news has forced my hand so I’m going to start picking up some of these next week.

Insurance companies are always good in times of trouble and should hold up better than the Dow in a plunge (but will not be immune to it so we sell calls against or get out in a downturn).  Currently the IYF insurance ETF is 10% behind the Dow’s rally but usually outperform the Dow (move the time-line further out, resting neatly at the 10% rule.

I’d like to give a shout out to my man Warren Buffett who took the time over the weekend to pump my beloved BRK.A, saying “you ain’t seen nothin’ yet” (I may be paraphrasing) while at the same time  jumping on our bandwagon and taking a stab at Exxon for sqandering Billions on buybacks and dividends.  Berkshire Hathaway was my stock of the year selection for 2006 and, although it was outperformed by some, there were none that made us feel safer through thick and thin!  This puts a lot of pressure on my 2007 pick…

I think that Warren Buffet taking the time out of his busy day to tell you his company is still a good 30% undervalued at $107,000 a share should tell you something about the markets, especially the insurance sector.

AIG comes to mind as a possible play, with 2007 earnings projected at $6.26, up a mere 8% from 2006.  “Yawn”you may say, but then you would be sleeping through the story!  AIG only earned $3.33 a share in 2005, which was it’s best year ever, but still fell from 2004 highs of $77 a share down to $49 during “the scandal.”

That was then, this is now, AIG is so similar to Berkshire that they co-insured deals and poor Mr. Buffet was even slightly tainted by that nonsense back in ‘04  but he’s moved on and so should we with the AIG Jan ‘09 $70s for the “I’m Not Kidding Price” of $10.40.

You can produce an income against them by selling the Jan $70s for $1.70 AND covering yourself with the Feb $75s for .40 but I would just do half as long as the stock holds $70 because you don’t want to miss a nice pop.

Now here’s a freebie for my hedge fund buddies (as you need a lot of equity and patience to play this one).  Buy the Jan ‘08 $70s for $6.70, sell the Jan ‘09 $80s for $5.60 AND the Jan $70s for $1.70 AND cover yourself with the Jan $75s for .20.  That gives you .60 in cash on a $0 investment.

The strategy is very complex but generally, you hope it stays flattish but you are playing to sell for the premium each month but with some protection.  If it goes up, you can roll it, if it goes down you don’t care once you get past the first month.  As a reference, the Jan ‘08 $80s are just $2.40 so your goal is to make another $1.80 (you made .60 taking the position) to cover your eventual buyout of the ’09’s but everything else is pure gravy. 

This allows you to play the insurance game while laughing at natural disasters! 

If Mr. B’s comments boost Berkshire, then there are several other nice companies we can take a look at:

Insurance is a game of inches and the whole sector has been very out of favor in the latest rally as sexier stocks have gotten all the attention.  Just like an old boyfriend, investors will come running back to these old reliables as soon as they have a fight with their new squeeze.

AFL is certainly famous enough and trades right in line with the industry in p/e (14.72) but is growing about 10% faster than most.   May $45 are $2.05.  If they ever stop spending money on advertising, their cash flow should skyrocket!

I meant to write this last week and there’s a post-it on my screen with PGR (car insurance) written on it.  They got a Bernstein upgrade last week (c’est la vie) and stopped at the 5% rule at $24.  These guys are NOT doing a good job of growing but they have been unduly punished for it and have fallen way behind the sector.  Jan ‘08 $25s are $2.05 and I’m not selling against them until they test $25.

PRU got away from us last week but CB has made such a mess of their year that they are getting no respect, despite trading at a 20% discount (p/e 10) and, at $20Bn, being a more attractive takeover target.  They are buying back 5% of their stock so the Jan ‘08 $52.50s for $4.50 seem safe(ish) but I won’t rest easy until they break the 50 dma at $52.75.

I am dumbfounded that GNW is still at $32!  They added 13% to the bottom line this year and project another 10% next year on about 8% more sales.  They missed last Q and I sometimes wonder if my love of this old GE division clouds my judgment but I have to take the Mar $35s for $.75. 

They should have  a tough time at the 200 dma with a death cross 50 dma at $33.75 but there are 9M shorts who will be in a 5 day “House of Pain” if they break it.  According to Yahoo, this stock is 101% held by institutions.  Good luck to the retail shorts getting out of those positions if it takes off…  I’m in no hurry on this one as I will happily get other $35s once it breaks out!

TWGP just came down to where I want it with the Jan $35s at .85 that were $2 just 2 months ago before a 48% increase in earnings caused the stock to drop 20% as the company lowered guidance by a penny (I know, people are idiots!).  I’m very sorry I missed it then!

 

ALL is being probed in CT for pulling new policies in CT, NJ and DE as they are looking to get out of the storm business.  Don’t they have the right not to insure?  Well the way they are doing it is sneaky - they are requiring Connecticut homeowners to install hurricane shutters to maintain coverage.  That way they get to say you left them, they didn’t kick you out!

As an insured I say Boo! to the evil corporation but, as a shareholder, I say “why insure people we might have to pay?“  If they come down closer to $63 I want the July $65s, hopefully for $1.50.

Burn Dollars to Fight Gravity?

While I respect and use the “bullish sentiment” indicators and, in fact, just commented on it last week I’ve also started thinking about the “herd mentality” as it applies to rational decision making.

Please do not take this as a BUYBUYBUY opus, but let’s think about where we are in the universe (see Tuesday’s post).

Starting with our spaceflight motif.  I see the market as skimming along the upper atmosphere, the bottom of the ship buring red hot as we pick up speed but with the pull of gravity and the resistance of atmostphere slipping away.  As any rocket scientist will tell you (and I know some), physics are a real bitch if you ignore them.  So cutting the boosters, or running out of fuel, when you still have .001% of the Earth’s gravity to fight off may feel good for a while and you will float - but you will also EVENTUALLY, INEVITABLY experience ORBITAL DECAY!

So here we are in our shuttle craft and the thrusters are easing off a bit and we’re starting to feel a little weightless and some people want to get up and mess around but some people are still clinging to their seats, still thinking we could come back down at any minute.

Now the physicysts (analysts) are debating whether we can coast into orbit or do we need more fuel and, as you can tell from the padded walls, it’s a well known fact that gravity can catch you by surprise if you miscalculate but, at some point, probably after a few people (bears) throw up - everyone may have to admit we have finally left Earth orbit.

That’s where I see us now, right at the outer end of Earth’s gravity well, ready to head off into space on a quest to go where no market has gone before (Dow 15,000).  It just so happens we are launching a shuttle mission this week and, while it is now fairly routine, those of us who still watch such things still get the same feeling that any bear might have watching the markets take off.

They pick a launch time, they delay it.  They pick another launch time, the weather is no good.  They pick another launch time, there’s a stock option scandal.   They pick another launch time, Microsoft delays Vista…

Finally, the rocket is on the launch pad, the countdown is ready to go, the engines fire and it takes off.  Those of us who have seen a few rocket disasters (and market disasters) know that queazy feeling that lasts all the way until those rockets finally go off and the small ship that was sitting on top of those big rockets finally separates and heads off into space.  At any given point, something could still go wrong…

I asked on Wednesday “Are we there yet?” and it turns out we weren’t but we sure don’t look like we’re crashing yet either.  Ever since man first learned to fly (and, I’m sure, invest) there have always been bears standing on the ground with 1,000 reasons why it will never take off!

Now here’s where it starts to get interesting:

 This isn’t an article about market gravity, we’ve done those, this is about the herding instinct.  The biggest bear case at the moment is ”if so many people are positive on the markets - they must be wrong.“  You should be insulted by this attitude!

What the analysts are actually saying is “if you don’t listen to me - you must be wrong.“

Analysts, fund managers, brokers etc. want you to be good little sheep and let them tell you when its a top, when to start and stop buying, what to buy, what to sell…  If you don’t listen to them then IT’S CHAOS!

Chaos for them anyway, chaos for GS who make Billions and Billions of dollars telling you what to think.  Goldman said buy oil, buy more oil and, when in doubt, buy more oil - HOW DARE YOU STOP BUYING OIL! 

YOU are not supposed to stop buying oil until after THEY stop buying oil, get out, get THEIR friends out, put out a private letter to THEIRclients and THEN go on CNBC to tell YOU to get out.  If you jump the gun you’ll ruin everything!

But this isn’t an article about oil (actually it’s starting to sound a little like Alice’s Restaurant but bear with me, I’m on a roll), this is an article about the the dollar that I promised for the weekend.

So there’s no inflation right?  The government tells us there’s no inflation and they’ve never lied to us before so there must be no inflation.  It is true that a lot of suff costs less, IPods, TV’s, Computers, Telemarketers (as long as you don’t mind the accent), your salary, SS benefits (adjusted for the inflation that doesn’t exist) and therefore anything you may be paying more for is just a function of your questionable negotiating skills.

In fact the same Goldman analysts who tell you inflation isn’t a problem are also telling you that the price of oil isn’t a problem if you adjust it for inflation.  I try to stay on top of all this BS but they just keep piling it on!!

Oh yes - the dollar!  So Hank Paulson, my nominee for the Mr. Potter look alike contest AND former head of Goldman Sachs, is off to China next week to prop up the dollar and, after much discussion, I’ve decided to let him use my Roach Motel Theoryas a Weapon of Mass Dollar Destruction (WMDD) against the Chinese.

You see all these non-inflationary dollars that have been flooding the markets for the past 10 years have to be going somewhere.  We created(and this is estimated now because they stopped reporting it) $1,200,000,000,000 brand new dollars last year and not many of them ended up in your wallet (unless you are in the top 10% of the country in which case you got 85% of it).

So we didn’t get the money as salary which means that retailers didn’t get it either.  The auto companies didn’t get it.  The airlines didn’t get it (see a pattern) - none of the things we (The People) like to do got it.  So who got it?

Why the rich did silly!  The bankers, the brokers, the doctors, the lawyers, the traders, the CEOs…  The top 1% of the income earners (oh sure the “other” 9% got some too) got pretty much all of it.  It’s not just here in this country, this is a global fad.

All that money has caused inflation of all the things you don’t want to spend money on: Drugs, Health Care, Housing, Commodities, Legal Bills and, yes, stocks!  You like it when your stocks go up, but HOW are they going up?

Has anyone built something new and cool that makes your life better?  Are there any great scientific and medical advances that have actually cured anything (rather than put you on a pill popping treadmill for the rest of your life)?

Did American companies hire millions of high salaried workers or did they cut back on the blue collar jobs and cut out the white collar jobs entirely while executive salaries tripled in the past 10 years?

Nothing has been built, no major projects have been undertaken, no one is looking for oil or creating better means of transport or really doing any damn thing to improve the quality of life for the bottom 90%.  And, no, I’m not going all communist on you but the number one investment made by corporations last year was in buying back their own stock!    

Is this really what we pay them to do?  This is not a good thing for anyone but the current shareholders who, coincidentally, happen to be, in large part, the Management!  That’s right in 1995 you paid your CEOs just 1/3 of what they make today and they said “pay me a bonus based on performance” and that sounded fair so we said “sure.”

Well they got us good!  We thought Exxon was going to open up vast new reserves, explore deep sea drilling, find alternative energy, give America a wonderful, energy independent future…  So what did they do instead?  They bought out the competition, cut back production and bought their own stock, driving the price into the stratosphere!

This is not because they are a better company, not even because they will make more money next year (they project 0 sales growth and a modest decline in profits), the shares are up because, much like oil, they have created an artificial scarcity of them.

On the average one out of 10 shares of XOM you are bidding for is being bought by — XOM!

“So“, you may say, “companies plowing record profits into buying their own stock accounts for $400Bn of the $1.2T we flooded the global markets with last year - where did the other $800Bn go and may I have some please?“

No.

Perhaps you weren’t paying attention.  They’re not giving it to you.  In fact, if you work there they are likely to tell you how tough things are and how you’d better chip in more for health care.  Don’t worry, it’s very fair - the CEO has to chip in the same $500 a month that you do to pay his medical bills - so we’re all in this together!

They’re not going to give it to you and they’re not going to spend it on any other part of the economy either: ordering new computers, upgrading infrastructure, research and development…  Nope, not going to do it.  Exxon made $40Bn in the past 4 quarters and about the only thing they could think to do with it, other than compensate the executives who came up with this plan, was to buy back $24Bn of their own stock.

That other $800Bn is being spent, in recycled dollars, on more stocks and bonds and the $1T our government has to borrow this year to keep the lights on in this country.  That situation is getting so nasty that Mr. Paulson has to go to China to make sure foreign investors keep giving us $100Bn a month or they may have to eat that White House turkey after all!

That’s why Paulson is the perfect man to mount this attack against China, he’s a CEO Banker/Broker Billionaire - he’s like an economic superman!

He flys off to China (under his own power - of course!) and reads them the riot act.

Why will they listen?  Ah, that’s where the old Roach Motel Theory kicks in  - not as it applies to oil, but as it applies to dollars.  The Chinese have a Trillion US dollars!  While they may threaten to diversify them into something more stable Mr. Paulson is going to point out to them that they are not the only roach in the motel.

Japan also has a Trillion of our dollars, we send them more every time we buy a Toyota but the biggest joke of them all is that we’ve been shipping these ever devaluing dollars to OPEC and every other oil producing country at the rate of $165Bn a month (what, did you think Jihads just fund themselves?).  Oil is traded in dollars, people who want to sell oil must accept dollars, people who want to buy oil need dollars to buy it…

Ha ha!  So the devaluing US dollar will hurt China, Europe (the least), OPEC AND every one of that top 10% of the world’s richest people who have 85% of the dollars that are floating around.  I challenge you to find a government, no matter how communist, that can afford to ignore them!

So we will keep printing dollars and China will keep buying them, as will everyone else and, now that we have pushed commodities to the limit, they will start using those dollars to buy other American goods and services - maybe even an IPod! 

Hopefully some of those dollars will find their way into some actual infrastructure improvements and will accidentally make some of the poorest 1% of the world’s (3 Billion people) lives just a tiny bit nicer.

Meanwhile for us investors, that ever expanding money supply has to go somewhere and we may be heading into a very, very soft landing on a very big pile of US dollars!

So let’s throw those dollars onto the fire and light up those market engines - we’re taking this baby to the moon!