The DOW should be on fire today. Productivity is up 4.7%, an incredible number that will be digested and lift the markets no later than tomorrow! Unit labor costs are down too, even GM should benefit from this report…
The Greenspan effect will wear down towards the end of the day today and, as long as the Fed stays quiet, could be completely forgotten by Wednesday. Also, time is getting tight for the Wall Streeters who need to boost their earnings by 12/31. You may have heard the term “Santa Clause Rally” but what people don’t realize is that Santa is visiting the traders whose bonuses depend on that year end percentage gain on their funds. If your bonus depends on making sure my stocks go higher, you are really going to buckle down and do it aren’t you? The entire 4% gain in the DOW last year occurred in the month of December!
The Nikkei and Hang Seng took big hits today, bearish behavior in the Asian pool causes money to flow into ours. Stuff like this used to take weeks or months to happen, with worldwide electronic trading the only delay is waiting for the next market to open. There is only so much investment money out there and it is amazingly fluid these days. One of the reason the financial media relentlessly attacks the housing market is because it ties up enormous amounts of non-fluid capital.
If you choose to invest $100,000 in a second home because it will appreciate by 25% a year, that means your stock broker misses out on $500 in commission or a mutual fund can’t play with your money and get 1% + 10% of your profits… Remember that when you are watching the “financial experts” telling you that there is a housing bubble and it can’t last. These are the same people who told you that there was no stock bubble in 1999!
Tomorrow we get earnings from HOV, an northeast home builder and Thursday we get TOL, who crashed the home market with lowered guidance by about 6% on November 8th. I think way too much weight was given to the lowered guidance as it compares to the 50% rise in sales and profits this year. The most conservative value I can apply to TOL is its 200 dma of $44 so at $36 I feel strongly enough about it to take a January $32.50 call for $4, a $1 premium.
On HOV I like the look of the spreads since they could go either way. The DEC $55 call and $45 put are both .25 but very risky as they expire in 10 days but a surprise either way could move this stock right past them for a huge gain. A safer bet is the Jan $55 call for $1.15 and the Jan $45 put for $1.10, a $5 move in either direction should net $3+ for a 30% profit minimum, if the stock remains dead flat at $50, then the positions can probably be sold off for a 30% or less loss before the month’s end.
Oil is pulling back on fear of inventory builds, a stronger dollar and predicted warmer weather for next week. I believe there will be a much bigger draw than expected either this week or next as industries have rushed to fill their storage tanks on the (relatively) cheap $56 oil we had last week. Another draw factor is airline travel season with many airlines already scrambling to get AvGas from the refiners which puts pressure on other feedstocks. Factor #3 is that oil is sitting on a trendline it hasn’t crossed below since 2003.
My only oil position atm is a call on COP (thank you Cramer for screaming about it yesterday!) to break $65 because most of the sector is looking short-term overbought. If oil bounces back above $61, we could be in for another nice run in the first quarter (and another bad run for the industrials). If oil hits $55 we will have a big short party but I think that’s a long shot.
The recent drop in oil from $70 has been on significantly lower trading volume than the run-up to $70. Although there is still plenty of oil, there is not plenty of refining capacity (hence the Valero rule) but OPEC is meeting on Monday and I can’t imagine they’re going to say “Hey, let’s see if we can push oil back down to $40!”
I predict a minister’s statement along the lines of “We are concerned about our ability to meet demand in…” or “We are straining production capacity in order to assist..” These are the kind of passive/aggressive tactics that are used to goose the price. Now that they know the world economy can survive on $55 oil, they are not going to give up the price point without a fight.
Today I like NBR but I think I will make CHK my Trade of the Day! Chesapeake Energy has a lot of Nat Gas which has doubled this year and is rallying again into the winter. It has mostly land based production so it doesn’t suffer the Hurricane season and it is small enough to get a nice pop. Forward p/e will be 9, down from 16.4 this year which is down from 24 last year. The stock won’t really turn until we have a good cold snap or a storm so I’m going for the April $27.50s for $6.50 or less (a $2.80 premium) looking to exit at $8. This one may take some riding out and can turn ugly – rather than pick a stop I will bail if VLO goes back under $100 or oil drops below $57.
SHLD numbers sounded great to me. Have you even seen a Sears ad lately? They are retooling, they are not ready to be busy but Crazy Eddie Lampert is cutting costs like crazy. Apparently he is so happy with the way things are going he’s going to put in another $1Bn to buy out Sears Canada before they see how profitable he can make that business.
One thing I also like about this stock is that, on 11/11, Director Julian Day exercised $2.5M worth of options for a $12M gain and didn’t sell any! All in all, insiders bought 172,000 of the pricy shares this quarter. Institutions have added 4% to their positions during the same period and the trendlines look strong so I am going to hope for an early pullback and look to pick up Jan ’07 $105 calls for $29 or less(assuming the stock stays up $5) and sell the Dec $135 calls for $3 or more when it starts to run up. I will not chase this stock, it is far too rangy…
UBS upped the target on Apple to $86 giving folks the all clear to to buy it up to at least $75. This is the most technically overbought that AAPL has been since last November when it went up 50 more percent over the next 3 months anyway. Apple is another stock that you can do well with a leap against call selling but I would rather get it at $70 if there is some kind of pullback. With Apple at $75 it will be at $10 above the last option expiration and will become an attractive put next week.
I have been an unhappy holder of LNUX for a year now. Today I am happy again but I expect to be happier – that is as much of a recommendation as I can give this frustrating stock…
BOOM is a super great stock, no options but a nice buy and hold.
TWX is finally back on the AOL deal bandwagon. I don’t care whether they sell it or not as long as analysts keep speculating on whether this written down asset is worth $10Bn or $20Bn!
XM and Siri are back in favor today.
T (AT&T) is back. They have airisen from the ashes and will be popping shortly after it takes a pullback to test $25 (up from $22 mid-October).
