Dollars, dollars, dollars.

Everybody wants them, everybody loves them now and European traders have been encouraged to dip back into US currency after Obama’s little trip there as bets are being placed in advance that his policies will get the US economy under some semblance of control if he is elected.  The dollar has gone straight up since Obama’s July 23rd speech in Berlin, not so much for what he said there but because the Kennedyesqe reception he got tilted the bets by EU traders that he would be the next President (he is the 2:1 favorite), meaning his policies are the ones traders are betting on and that would mean a return to fiscal responsibility and a stronger dollar. 

Dollar strength is an act of faith in our country and faith was getting to an all-time low this year but let’s be wary of this bounce off the bottom as it does seem to be based more on sentiment than change of policy.  As David Fry notes in this chart, we are just breaking over the rapidly declining 50 dma and are still vulnerable to a correction and a lot can happen between now and November to spook the currency markets.  Without THIS administration doing SOMETHING concrete to boost the dollar, 76 may prove nothing more than a 5% Rule bounce off the 20% decline we’ve had in the dollar since 2006.

Tomorrow I’m worried about our Trade Balance report at 8:30, which is for June and will reflect the highest average oil bill ever ($135) just before demand fell off the table.  We also get a horrifying Treasury Budget at 2pm, possible reflecting a $85Bn deficit for the month of July alone, a reminder that the reality of this government is that spending is a runaway train that has left the tracks and is now gathering speed in free fall at 32 feet per second squared!

$85Bn a month is over $1Tn a year worth of debt, that’s enough to chase a few people back to gold, and even oil, which gives off more heat than the dollars we may have to burn in the winter if we keep running up debt at this pace. 

While it’s unlikely hyperinflation would happen here, it’s not impossible as the neocons are already licking their chops over the prospect of opening additional war fronts in Iran and now Georgia, who we would have been obligated to defend if they had joined NATO, as was recently being discussed. 

German was a leading industrialized nation in the 1920s and their WWI debt pushed their currency to $1Tn marks to the dollar.  Yugoslavia fell into the hyperinflation trap in 1993 and Zimbabwe only just last week chopped 10 zeros off their currency as they had to print $100Bn bills that became worthless on the way to the store. 

Nothing has fundamentally changed for the dollar in the past month other than international sentiment.  Asia is weak, Europe is weak and there is a war now so Obama provided a spark that reminded investors that the US used to be a good place to hold some money but anyone who has started a campfire will tell you that a few sparks are nothing to get excited about, you need some kindling and some oxygen in the form of policy changes.  So far, we have no policy and let’s hope they don’t start using our dollars for the kindling…

Today’s tickers: AMZN, MCD, EL, CRME, VRX, CCK, CNO

AMZN - Citigroup’s forecast of better-than-expected sales of its e-book reader Kindle sent shares of Amazon.com on a 10% tear to $88.66 this morning. Option traders responded with a wave of giddy and fresh action in front-month options that are due to expire on Friday. Heavy two-way traffic was observed at the August 90 calls strike, while traders also positioned readily for and against a pull back below the $85 level by Friday with volume in excess of open interest at the 80 and 85 put strikes. The August straddle is priced to reflect about 5% of Amazon.com’s share price in play between now and Friday (half the move we’ve already seen today), making this a fertile hunting ground for volatility players today.

MCD - Shares in McDonald’s continue to showcase the fast food chain’s deftness in pulling cash-strapped consumers to its value-laden drive-thrus and takeout counters. Today’s modest .69% gain to $66.10 is keeping the company’s share price right around the 52-week high. But how much higher can those golden arches stretch…or are there signs already of (forgive us) a Grimace to the upside? Today we saw activity in the options market suggesting at least one trader willing to step up and wager on a limit to the upside. This was done via a 5,475-lot fresh call spread in the January ’09 contract, in which the trader appeared to buy the 65-strike and sell the 67.50 strike for a $1.10 debit that would have McDonald’s shares trading at or above current levels into January of ’09 – but not to breach the 67.50 strike.

EL - Option implied volatility in the Estee Lauder companies hiked nearly 20% higher this morning to read 43.8% (against a historic volatility reading of 31.4%), just three days before the cosmetics giant is due to report earnings. Shares are about 2% lower at $45.51 as we report an increase in options trading volume to nearly 16 times the normal level that has puts out-trading calls by more than 6 to 1. While early volume showed option traders favoring front-month puts at the 40 and 45 strikes, the buying interest has extended at these strikes on far heavier volumes in the September contract, which could suggest new tries at the 52-week low of $37.26 for Estee Lauder over the next month. Option traders already hold more than twice as many puts as calls in the cosmetics giant.

CRME - News this morning that the US FDA was requesting additional safety information from the company’s lead pipeline drug, arrhythmia treatment Kynapid, wiped out a month’s worth of gains in Cardiome Pharma. Shares are down 27% from Friday’s closing level to $8.73, and while its options volume has swelled to 9 times the normal level, there has been little to no patch-through in implied volatility. Most of the volume today appears in a 2,000-lot call spread between the September 10 and 12.50 strikes. We have no confirmation as to the direction of this trade, or if it were a closing transaction. Assuming the position were freshly opened, a buyer of the spread would have paid a 55-cent debit in the expectation that the FDA’s request for more info would amount to little more than a blip on the screen for Cardiome. A seller might take advantage of the 55-cent premium to wager on a struggle into the fall.

VRX - Shares in Valeant Pharmaceuticals, the maker of Kinerase anti-aging products and the migraine treatment Migranol, advanced 6% to read $19.31 over the noon hour, after reporting a loss for the year’s second quarter but disclosed revenues that came in above median analyst expectations. Valeant set its 52-week high of $18.47 last Thursday. Implied volatility at 45% continues to show an elevation above the 34% historic reading on the stock – a comparison of these two figures suggests that even with the numbers already out option traders continue to price in one-third additional risk than shares have shown historically. While options are trading at about 5 times the normal level today, much of this appears centered in a 2,000-lot short call spread between strikes 17.50 and 20. Here it looks as though the trader took a $1.55 credit, availing him- or herself of richer call-side premiums given today’s price action, and betting on a drop below the $17.50 level by mid-September.

CCK -Traders may be positioning for a break of multi-year highs in Crown Holdings, the maker of aluminum cans for soda. Shares are currently .07% lower at $26.65, about 80 cents off its 50-day moving price average. An increase in options trading volume to 7 times the normal level appeared in confident buying at the October 30 call line. Because the roughly 8,500-lot volume is within the existing level of open interest, we can’t confirm that this is opening positioning – but a fresh buyer of this strike would be looking for a break of the $30 line that would bring Crown Holdings past the 52-week high set back on July 21 and into multi-year highs. The 30-cent price tag on that option position reflects only about an 18% probability of that occurring. Crown Holdings shares currently trade at 8 times the company’s earnings.

CNO - – Conseco Inc – Shares are up 9% to $9.37 one day ahead of earnings, as options trading at more than 17 times the normal level due to some heavy and fresh call volume in the August contract at strikes 7.50 and 10. Implied volatility on all Conseco options is elevated at 75.5% versus a 53.4% historic reading on the stock – up 20% since Friday. Shares have lost 30% of their value so far this year.

Which way will our manic-depressive market head today?

Georgia signed a cease-fire over the weekend but Russia is still attacking them.  I think the word Georgia is looking for is surrender, not cease-fire and Russia wants to hear the magic word before stepping down.  There’s nothing like the possibility of World War III breaking out to make investors nervous.  Georgia fighting a war with Russia is about as foolish as if the state of Georgia fighting a war with the US - it’s over before it starts and the real danger is who else gets dragged into the conflict.

Georgian officials said their only way out of the conflict was for the United States to step in, but with American military intervention unlikely (we hope!), they were hoping for the West to exert diplomatic pressure to stop the Russian attacks.  "Georgia is a sovereign nation, and its territorial integrity must be respected,” President Bush said at the Olympics in Beijing. “We have urged an immediate halt to the violence and a stand-down by all troops. We call for the end of the Russian bombings.”   Georgia is one of the last members of Bush’s "coalition of the willing" with 2,000 troops in Iraq and the government has already requested they be airlifted back to Georgia to aid in the fighting at home.

I’m expecting this to be resolved early this week and it should provide a good excuse for a market rally so we’re going to keep our eye on that one.  We have a lot of economic news this week starting with tomorrow’s Trade Balance and Treasury Budget followed Wednesday by Import/Export Prices, Retail Sales, Business Inventories and, of course, Crude Inventories.  Thursday we get the always misleading CPI report along with Jobless Claims and Friday we have the NY Empire State Index, Industrial Production and Capacity Utilization, Michigan Consumer Sentiment and Net Foreign Purchases, which hopefully match our monthly deficit of $70Bn (see tomorrow’s Treasury Budget).

We had our political postings over the weekend so I won’t comment on the chart on the left - you can blame whoever you want and elect whoever you think is most likely to do something about this before our debt exceeds our $13Tn GDP (assuming that doesn’t collapse), I’m certainly not here to place very obvious blame or point fingers at people who’s policies would be more of McSame (oops, Freudian slip there!).  Even if you don’t like politics, please check the end of the Weekend Reading Post as candidate McCain did inspire me to run a PSW contest in which the most shameless readers will be able to win a free year’s subscription.  Mainly I’m curious as to how well something like this works as I’m trying to get an idea of how much of McCain’s apparent support is legitimate and how much is the result of bribes…

The Nikkei flew up 262 points this morning as the strong dollar boosted exporters (that’s pretty much everyone in Japan) and oil was still down around $115 during their trading but has creeped up as the war concerns European traders.  The Hang Seng was flat but the Shanghai Composite fell to the 5% rule, making a 19-month low as Stagflation replaces Olympics as the biggest concern in China.  Nonetheless, China’s trade surplus was up, hitting it’s best level in 8 months but it’s possible that the economy has grown to the point where it can no longer thrive on exports (+$25Bn, up 4% from last year) alone.  China’s PPI was up 10% in July - 4% growth and 10% inflation — not good!

Europe is improving as the morning goes on, now up about half a point (8am) and generally at 6-week highs.  Unfortunately, oil companies are leading the markets as they bounce off their bottoms and oil goes back over $116 on war concerns - not exactly the sectors we were rooting for.  House prices continue to plunge in the UK and, unlike the US, earnings expectations have not been so pessimistic for EU companies so beware of adjustments as Europe enters into its own housing crisis.

I mentioned in the weekend post that 8 people paid $1,000 at the IPhone Store to display a picture of a ruby on their phones.  We figured if 8 people were doing that there must be millions of people buying other programs and it turns out that AAPL users have already downloaded 60M programs for the IPhone in the store’s first month.  The average daily revenue for Apple’s latest success is $1M per day, on pace to make $360M but, if we assume people buy more and more IPhones, we could be looking at yet another $1Bn a year dropping to AAPL’s bottom line down the road from yet anohter source of revenues that is not factored into the estimates.  The company "only" made $3.5Bn last year so another $1Bn would be pretty significant, as would the rumored 40M IPhones that are in the production loop already, over 3 times the sales estimates!

Sega sold 300,000 copies of it’s $9.99 Super Monkeyball game in 20 days.   "That’s a substantial business," says Simon Jeffery, president of Sega’s U.S. division. "It gives iPhone a justifiable claim to being a viable gaming platform."  Another hit comes from Epocrates Inc., a maker of electronic reference guides for physicians that has developed a free drug encyclopedia for the iPhone. More than 125,000 people have downloaded the software, including 25,000 doctors.  It will be interesting to see how long they can hold this stock down, most likely it will take off after Friday’s expiration day next week.

My current favorite AAPL position is the Jan $170s at $19.80, selling the current $170s for $3 and then selling the Sept $170s for $8 on Friday which offsets more than half our January premium in 5 days with 3 more months to sell after September 19th expiration. 

Speaking of expirations, September NYMEX contracts expire on Aug 20th (next Wednesday) and the crooks still have 235M barrels to dump between now and then.  There are 175M barrels open in October and 85M open in November but December is already swelling with 177M barrels and if oil prices continue to fall, that will not be looking like a very sexy roll.  Already 235,000 contracts is low for this early in the month but there are still over 650M barrels rushing to Cushing between now and the end of the year and those contracts average $115.60 so that’s $75Bn worth of oil that needs to be dumped before they end up in inventory and drive the prices even lower.  Let the shenanigans begin!

The dollar continues to gather strength as the Euro dropped the most in 3 years last week. “What we have seen over the last few days is the recognition in Europe, in Australia, all around the world, that growth is slowing everywhere,” said Mohamed El-Erian, co-chief executive officer of Newport Beach, California-based Pacific Investment Management Co., in a Bloomberg Radio interview. “The euro is no longer as attractive as people once thought.”  In other words - The US now sucks less than Europe, that is mission accomplished for my market predictions for the year as clearly Asia already sucks, which makes US equites not great, but the least sucky place to put your money in the second half of 2008!

So happy Monday to you - it’s going to be a fun week and all we need to do is keep oil low and I have a good feeling the markets will take care of themselves…