Will It Happen Wednesday?

December 20, 2006

476

Can we turn this thing around already?

That was hardly a dip in retrospect and we are getting to be very experienced astronauts, able to ignore those little shakes and rattles as the market ship lurches forward into uncharted territory.

This is the one week anniversary of our physics lesson where we talked about how difficult it is to break orbit and, more importantly, about the periapsis – the point at which the market, no matter how high the orbit, comes perilously close to reentering the atmosphere of bearishness!

Ironically, the larger the Apogee (the point at which the market is furthest above "normal") the more terrifying the drop back to the Perigee (underperformance) will seem, even though there are literally trillions of astronomical bodies that go through this cycle every single day without crashing!

In fact, in order to break an orbit, a spacecraft may purposely throw itself into a very close orbit around a planet in order to utilize the gravitational pull to its advantage as it picks up speed for that final thrust into deep space. This is what the Nikkei did today as it dove down to 16,776 yesterday, perilously close to a breakdown before "slingshotting" back over 17,000 this morning!

As we said last week in the parachute article, the perigee is a good time to eject excess mass (nervous investors) as you prepare to leave them, and previous market highs, behind.

All of Asia had a pretty good rebound, led by Thailand which jumped 11% (yes, in one day) as investors poured back into the market – proving once again that a sincere, quick apology is the best way to save a relationship. I'd love to see the VIX for that exchange! "Yesterday, after the market closed, we got together with stock market brokers and the private sector to discuss how to prevent flows from the stock market to bond market instead," Finance Minister Pridiyathorn told The Wall Street Journal in an interview.

When in doubt, let Goldman Sachs run your economy… What kind of crazy little banana republic would come up with that solution? — Oh, never mind!

The Hang Seng rose to 19,240, "just" 165 points below a new all-time high. We'll see if they picked up enough momentum (or shook off enough excess mass) to break out this week. Our pals at CHL added 4.67M subscribers last month, a very nice report after hitting our double down target of $1.10 yesterday!

China is putting in some tough new trade restrictions to curb the exports – of babies! That's right, you can no longer adopt a Chinese baby if you are old or fat, single, medicated or poor! China says its rationale for a change in rules is simply that it cannot meet the demand of prospective families. Perhaps energy traders can switch to Chinese baby futures as it sounds like supplies will be drying up fast!

As we mentioned in comments yesterday, the dollar dropped as the US Treasury (cough, Paulson, cough, cough) "declined to designate China as guilty of currency manipulation… noting the government in Beijing is moving steadily, though slowly, toward a flexible foreign-exchange regime." Well isn't that special?

Also going on in the worlds most important economy – Taiwan has given approval to 3 semiconductor companies to invest $825M in China! In case you are young I will sum this up by saying these guys REALLY hate each other and this is a truly amazing sign of how important China is becoming.

Meanwhile the world's strongest economy (nope, still not us!) is cracking down on corporate tax evasion, cleaning up the environment and stepping in to head off the crisis in Somalia. There are so many responsibilities for a real world power…

Let's keep in mind that last Wednesday was a big disappointment ahead of Thursday's big gains so no going all crazy! As with yesterday, please remain seated until the captain has given the all clear signal and we can safely float about the cabin…

We will go back to looking up, as we covered down in yesterday's post:

Dow 12,500 is so close!
- The transports are still very weak as we wait for FDX and can still kill the rally if they don't get back over 2,600!
S&P 1,432 would be a new high.
NYSE 9,175 will be a new record breakout
Nasdaq is still a very sick canary and MUST break 2,450 this week!
- SOX 480 is mandatory for Nasdaq to recover.
Russell 790 will put small caps on the road to recovery

Oil may be the villain of the day, as it was last Wednesday with an early morning pump that faded fast. Tune into comments today as the situation is liquid and slippery with all sorts of shenanigans taking place in the energy sector. March contracts are up $1.38 from last week and I will be watching those more closely than the manipulated front-month contract.

Any downward pressure on February, with 300M barrels on order for delivery at $63.46 will be bad for the energy sector but there is very likely to be a bigger than ridiculously low expectations (1.8Mb) draw on crude so we will make our energy plays after inventories today.

The dollar looks stable (stable being an odd way to describe something that just doesn't happen to be actually falling off a cliff at the moment) and perhaps we'll get a chance to see how gold performs on a flat day. $630 has been a major block for gold on the way up and, so far, we have nothing more than a weak bounce off $620.

Let's be very careful out there today!

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7:52 Update: FDX earnings look good to me but it's getting killed on lowered guidance! But these are very good numbers against a fabulous year last year and I likely will be dumping my puts and adding to my longs on this wrong-seeming reaction!

FDX already announced a 5.5% price increase for next year, that’s $1,900M more money for doing the same thing they did this year! Let’s say that costs them 10% of their clients – that’s the same money for doing 10% less than they did this year. Even if they fail to scale back 50% of what they should reduce in order to cut back – that’s still $500M+ dropping to the bottom line (currently $2B).

Perhaps FedEx is so busy and the labor market is so tight that they don’t want any more business and raising prices is simply an exercise in pricing power (I ran a service business and made this choice at one point as it made more sense than expanding).

The FDX play we ended up making pre-earnings should do all right. We have the Apr $110 put for $1.40, which was already well in the money yesterday and protected our the nice cheap (or maybe not!) July $120s that we picked up for $7 and protected further by selling the Jan $115s for $3.50.

I'll be looking for a chance to buy out my caller and abosolutely taking 1/2 of the puts off the table on the early drop as they more than pay for all the remaining postions! This gives us a free(ish) look into the next earnings!

Meanwhile, these are strong numbers and generally good for the economy, making me want to take a look at UPS as well!

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Speaking of space: This is very cool and not a joke – it's how we will be building massive space stations in the not so distant future!

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Forget taking UPS early as the reaction to FDX is terrible! I think the traders are crazy but this is the classic example of my favorite mantra, which applies to stocks and the market as a whole:

It is not my job to save the markets

I am not the guy who calls the bottom!

Think of the markets as a $22T train that you desire to ride in a certain direction.

You can get to the station and the train may be there or it may not be there – if you haven’t checked the schedule (done research) you may consider this to be a random event.
If the train is there, congratulations – you are in the right place! Now, is it the right time?
Again, you should be checking your schedule but I know some of you insist on boarding and will sit there for hours waiting for it to get going.
Others will push which, not surprisingly, doesn’t work well…
The ones I am really, really worried about though, are those of you who get to the station, see the train isn’t there (at a bounce point) yet but insist on jumping on the tracks with all your money and predicting “it’s going to stop right here!“

Squish is an understatement for most of those people! Please don’t try to be a market hero, there will be plenty of chances to board the train once the whistle blows and it gets moving again. It remains to be seen whether this week’s action is just a sharp curve on the way up or a real long-term change in direction.

I've posted this before and I will find a home for these tidbits over the weekend but I want to make sure everyone is up to speed on this one!

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Let's stay light on our feet today but I see a lot of fear of global slowdown brewing and we need to have our finger on the trigger of DIA Jan $124 puts for $1 – especially if we see a transport failure in the making!

Looking at my virtual portfolio balance, I think I will take a chunk at the open and then decide if I want to turn it into a full cover or take my chances.

Meanwhile, the price of big-screen TV's is down 40% this year but sales are up 10%. I'm no math wiz but doesn't that mean more units must be being sold? If that's the case – and I don't know much about engineering either – but aren't TV's made of stuff? Who do we know who makes stuff that goes in TVs? TXN Apr $27.50s are still a buy at $3 (down .35) and GLW May $20s were picked up yesterday for $1.60.

NKE reports later and we can take the Feb $100s for $2.20 and sell the Jan $100s for $1.35 while protecting with the $90 puts for .80. I think even if they have good earnings they will take a dip after gaining 30% since August. You could take the spread without selling the Jan but I'm still very concerned about a big market correction if the transits tank. The estimates are not really high ($1.12 vs. $1.14 last year) and they've beat 3 out of 4 quarters, it's possible an extended fall was good for their clothing line (I'd better stop now I'm talking myself out of being cautious!)

Is it safe to get back in the water with DELL? That's one train I'd hate to miss so I think we should at least pick up the May $27.50s for $1.65 to test the water with the new management moves – I don't think it solves anything but what matters is what investors think and the stock is running right into the rising 50 dma at $25.50 which will give us a cheap exit signal if it fails.