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Friday Morning

Well, we’re up 200 points for the week so far.

Keep that in perspective if we drop 50 points and Don’t Panic – it will take a drop of more than 100 points to erase the week’s very bullish tone.

Oil is printing (at 5:30) $55.79 in European trading but Brent crude is still higher ($58.23) and I imagine there’s a difference in the contract.  The Brent contract fell $3.07 yesterday as it was much higher than ours ($61.30). 

It was 60 degrees in NJ last night and the 15 day forecast says no freezing temperatures until December 1st but the warm weather IS breaking and we know how shocked energy traders are when it gets cold in the winter!

Of course today is options expiration day and only a fool tries to guess the markets today so here goes:

There’s only 2 levels to watch today, amazing (almost any gain) and uh-oh, the point at which some panic will occur:

  • Dow 12,300 plus is great but below 12,200 will create doubt that we can’t afford as we try to achieve escape velocity.
  • S&P cannot be expected to break 1,400 on no news and doing so would be a major bull signal but we’d really hate to lose 1,390 and even 1,395 will be a concern.
  • NYSE is losing its leadership and will be weighed down on commodity weakness as well.  If 8,850 holds it will be a very good sign.
  • Nasdaq needs to take the lead and break 2,450 and 2,425 will be a problem already.
  • Russell must hold 790, and that’s a lot to ask as it just got there and needs a rest but the floor is too weak to test.

The SOX are free to retest 480 without looking weak while the transports have earned themselves a free pass all the way to 2,675 (down 45) after gaining 150 points in 5 sessions. 

I hate to repeat myself but I will just reprint what I wrote on Wednesday which was a reprint of what I wrote the week before as it was exactly correct:

“You have to ignore the dollar amount on this chart as it’s based on a continuous contract price but the moving average is fulfilling my prediction of last week:   ”Oil could go either way today but showed real weakness at the $60 level of late as the rapidly falling 50 dma races down towards it.  My downside target remains $57.14 but first we have to get a close back below $58.56 first.””

Of couse, during this week I ran a dollar adjustment on that $57.14 level, but we blew through $56.89 too and that is because the dollar rose .50 since then.  That is a .5% gain which takes an additional .33 off our target to bring the true 5% number down to $56.56.

  That makes a new watch point for us there while $57.14 still holds as a break point as we’ve noticed that many US traders don’t seem to adjust their programs for dollar changes, which is ridiculous but great for us! 

The next 5% level down for crude is $53.72 while the 2.5% way-point is $55.14 – couple that with the psychological value of $55 and we can expect a bounce there, likely back to $56.56 which has to hold if we are to get a real down move.

Of course this whole contract goes out the window this weekend so stay tuned for a new set of numbers!

Gold is going back to $600 so I maintain my tight stops on MRB and NAK despite the fact that they refuse to trigger!  I almost got out yesterday but they remain good terror insurance into the weekend.

Earlier this week I said to watch platinum for a danger sign and today we should get it as platinum tests $1,160.  Copper has already failed its 200 dma at $315 so the PD Dec $90 puts are fun at $2.55 with tight stops.

If the markets do not fall below our levels then (putting on my international currency trading hat) I do not short the dollar into the weekend because it is far, far safer than oil or gold at the moment!

As commodities collapse what do you think they need?  That’s right, they have to convert all those shiny bits of metal and all that black gooey stuff into something you can put in a stripper’s g-string and that, my friends is a US dollar!

Hopefully I’ll get around to expanding on this over the weekend but the short version is that there are ”just$6.8 Trillion dollars floating about and there are $4T “worth” of shiny metal and black goo stocks that want to be traded for some of those $6.8T too.  This could get messy!

Speaking of messy, who let the President out?  He’s in Vietnam for one day and he already has to bring up the war!  If I have learned one thing from John Cleese it’s Never Talk About the War!

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

It’s a sideline day for the most part so don’t worry, be happy and let’s try to enjoy ourselves into the weekend as oil hopefully gives us our long awaited Trading Places” moment! 

I’ll scout up some quick oil puts in comments but it’s a monkey with a dartboard kind for market if oil breaks below $55.

HPQ is now under “formal” investigation for that whole spy scandal with the board so the 300% gain in earnings (.04 beat) and the 7% rise in sales will take a back seat for a while.  Their guidance left a bit to be desired but I think everyone, except for the manufacturers stockpiling motherboards and chips in Asia, is underestimating PC demand next year.

Harvard says backdated options pad CEO pay by 10% on the average so either the average CEO cheats or some of these guys are just raping the shareholders!

BIDU won a case in China against the recording industry, who were trying to stop them from linking to copywrited material with its MP3 search engine.  Let’s hear it for home-field advantage!

It will be interesting to see how much is made of the John Edwards’ staff person trying to buy a PS3 at Wal-Mart.  Here’s a fairly balanced account of the matter from Houston’s Chronicle.   Expect a very different take on this from Fox news and the financial networks who are on the attack against any Dem.

One of my favorite people, Milton Friedman died yesterday.  He was, of course, a great economist but he also had a great gift for explaining complex economic issues in very simple terms.

 


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  1. Housing starts were a catastrophe. I guess TOL will go up!
    8-)


  2. lol phil


  3. Phil, do you see XOM dropping below $70?


  4. Hi, do you think JPM is a buy today based on the NMX IPO?


  5. Reality in the housing stocks, I hope it is an idea whose time has come.


  6. phil, with this pull back do you still thinking that the dells jan 27.50 now for .45 I think we may get it for less still a good play . thanks juan


  7. Phil,

    I have the Dec PD 90 puts, your thoughts on selling the Dec 85′s to create a spread and take some of the cost of the 90′s out?

    Thanks for the time you put into your website, it is great I enjoy reading it.


  8. XOM – I can’t believe it went above $70!

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

    JPM – NYMEX should be baked into the cake but if it flies up then JPM may benefit. They do have $47.50s which could make a fun day trade but the market will have a very nervous open.

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

    Gotta watch Dell at the 200 dma at $25.15.

    I’m going to be checking out the DIA $122 and $123 calls if the market takes a nice dip. I’m looking for a bounce at $122.70.

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

    People are rioting for PS3s!

    http://www.kotaku.com/gaming/ps3-launch/more-ps3-line-violence-215292.php


  9. I didn’t get out of SBUX yesterday. I sure hope the market doesn’t toallty over-react. But since its down 2.38 (and dropping) in pre-market I think I’m pretty much screwed.


  10. PD – after that HB report I’m thinking about the $85 puts too!

    If you’re in with a profit and the $85s go up to $2 and you want to lock it in against a potential $2 additional gain that’s a smart, conservative play – it would be amazing (and a global catastrophe) if they break the 200 dma at 85 in the next 30 days.


  11. Phil what do you mean with the NYMEX comments “JPM – NYMEX should be baked into the cake but if it flies up then JPM may benefit. They do have $47.50s which could make a fun day trade but the market will have a very nervous open.

    ===============================
    Anyway to take advantage of this or is it going to be a free for all??


  12. Dave – are you the guy I sold those calls to?

    Sorry, I know that totally sucks, I assume you only did the $40s and you didn’t sell when they were up. I’ll keep a lookout but I think the right move might be to just trade something else, trying to use this stock to get your money back is just going to be too tricky.


  13. dave0, I have decided to not enter a play at earnings release. You pay a premium and pps can get quite irrational.

    But, I have watched the price after and said to myself, man I should of!


  14. XOM opened at $71.95 — my Nov72.50 puts won’t expire worthless after all :)


  15. Oh, its not so bad. The Dec 40 call is only down $1.35. I think I’m feeling sick. So, is it a good time to buy at .15?


  16. NYMEX is going nuts already – $80 being offered but JPM not responding so I’m staying away.

    XOM being offered at $71.94 with few takers!


  17. Is there any play to be had in SBUX at this point?


  18. where are you getting quotes on NYMEX ?


  19. SHLD, YHOO, BA, EBAY and GE fighting the markets


  20. Wow — just sold my XOM Nov 72.50 puts for $0.80 (I already gave up on these — thinking they would expire worthless).


  21. Thats great soccer


  22. NYMEX – floor talk on CNBC

    Now $100-110

    I just bought the JPMs for .40 – they must have warrants


  23. $110 Ask for NYMEX


  24. ICE going nuts!

    Lots of people coming in to scoop up oil “cheap” next week will be very interesting….


  25. Wow ICE doing well for you already Phil!


  26. To clarify JPM 47.50 calls for $0.40 Phil?


  27. bot xom $72.50 calls just now so that should be the end for oil. ;->


  28. Okay, so I may like to gamble, bought the JPM 47.50′s at 1.13. We’ll see if NMX makes it go…


  29. LNG – the company – starting to falter after that frog’s lame excuse for building 3 facilities nobody wants yesterday


  30. $121!!!! Yikes now I really am staying away


  31. Could someone pls post where crude is trading?


  32. Thanks mucho for ICE Phil, even with the lousy entry yesterday it made my day!


  33. Oil is bouncing off a pre-market test of $55 target, needs to do a little better than that to impress anyone but there is nothing to stop it from going positive other than the laws of supply and demand.

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

    Dont forget NY Crude isn’t trading yet – 5 more mins…


  34. $55.61


  35. Bought 10 SBUX 40 calls at .25. Hopefully I can salvage my original position.


  36. JPM yes Nov $47.50s but this is a very tricky trade!
    ================================
    Thanks Z – we needed a catalyst to crash the oils…
    ================================
    Crude $55.63 down .61 pre open
    =================================
    ICE – I stopped out already, might get back in if it goes way down


  37. Looking at ICE $95s for day trade – $1.50 a little steep…


  38. I guess $121 looks cheap now that it’s up at $127!!


  39. I give up! Looks like $127 is cheap now that it’s at $129….did anybody play this?


  40. Oops, that was cheap of me, up to $2.10 already – ah well, I made 30%, I should leave well enough alone…


  41. Now $135 – I don’t think I can watch anymore


  42. XOM moving higher again — what’s going on?


  43. I am holding on to my xom jan 70 puts. Anyone else holding out?


  44. X and NUE on fire- russian buyout rumors


  45. Soccer,

    I bot it. I gotta eat too ya know.


  46. anyone here playing CME options? NMX ICE effect


  47. $135! I made a killing on BIDU by shorting the top on it’s first day but this is really nuts!

    If I were the NYMEX I would be killing JPM for leaving 100% on the table (underpriced by $385M). That’s 7% of the company, giving it a $5B valuation vs. ICE ($5B), CME ($19B), BOT ($8.5B), NYX ($15B) so it’s not stunning but the multiple is now close to double the other exchanges and I don’t see how you can possibly trade more commodities.

    $145 now.


  48. December crude can be found at http://www.quote.com

    look for “CL Z6″


  49. Thanks Edro — however, those quotes are delayed. I asked for real time quotes (from CNBC)


  50. I’m entering a short on NMX here at $130


  51. LOL – it’s unshortable – nothing available


  52. ICE back at where it closed yesterday. CME below


  53. any opinion on shld? which way?


  54. Real-time crude:

    Dec. $55.80
    Jan. $58.51

    January hasn’t fallen at all as much %-wise as December.

    Nymex should spank JPM for leaving over half their money on the table.

    And Phil, I hope you haven’t learned just “one thing” from John Cleese, the man is a fountain of wisdom!


  55. Wow they assemble a whole Tundra in 52 minutes!

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

    Bah – they are flatlining JPM!

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

    XOM looks like 9.5M shares in hour one, if it’s a pump, they are shooting their wad early. There may be teams of Nigerian rebels ready to cause havok this weekend and OPEC does have a meeting in Dec so that will be a big topic soon.


  56. how about ccj?


  57. That clip cracks me up every time!

    Damn, now NMX is back at $140 and I still can’t short it – I give up – I’m going to watch something else…


  58. Phil,

    Don’t forget about BP either. They can cause an environmental catastrophe and spike oil and share prices simply by turning the “wrong” valve.


  59. Dec CL B/A at 10:30 is 56.00/56.05


  60. Dog,

    Jan fell $2.15 yesterday. Pretty close to December’s retreat.


  61. Both CCJ and FRG are back to the year’s open and I don’t know what’s holding them back.

    CCJ will miss earnings this Q due to a mine flood but we just signed broader nuke cooperation with India and GE is finanicing nuke plants on a daily basis so I do like them long term.


  62. Ok too many posts too quickly, sorry WordPress, it was an IPO, sheesh!

    NTES on the run…..finally….

    GOOG—-$495, which strike does it move to in the next few hours….my bet is $490….any takers on the 490 calls, I might sell them to you :-)


  63. XOM having lots of trouble with $72.50, come on BP, break something.


  64. Bought the Dec 490 calls


  65. 11 million of XOM shares at 10:45 !


  66. Max pain for XOM is below $72.50


  67. Soccer and all
    Oil dec price can be found on the French yahoo site… the french have it all….ask the LNG little man….
    http://fr.finance.yahoo.com/q?s=CL6


  68. Looking at the QQQQ Dec 44 C at 0.85 and the SPY Dec 140′s at $1.60….any thoughts out there???

    OP, I don’t know, GOOG may stay put at $494-ish


  69. Arnie – that’s delayed by 30 min as well.

    One can’t trade energy on option expiration day by relying on 30-min delayed quotes. Any pump or dump can move the price of crude by $0.50 in 2 minutes.


  70. BP announced transalaska pipeline was shut for 10 hours thursday. I’m not making this up, it’s like clockwork.


  71. Those SUN $65 puts are looking mighty appealing if we get a sell signal from the VGroup!


  72. VLO, DVN and APC in the green.

    I thought crude was down today


  73. iPod Phone: Rumor sites are reporting various supply chains. Several claim Broadcom has the baseband processor. They’re claiming the BCM2122. I believe that if Broadcom has landed the business, it’s definitely *not* with that processor since that’s a very limited 2G phone.

    The most likely currently announced Broadcom processor is the BCM2152 (http://broadcom.com/products/Cellular/3G-Baseband-Processors/BCM2152) which is a fairly nice 3G processor, has built-in support for a 5 megapixel camera, and supports Bluetooth, USB 2, WiFi, GPS, AAC (Apple’s iTunes format), and H.264 (Apple’s preferred video format) pretty much “out of the box”.

    Knowing some fairly senior people at Apple who would likely have been involved in this project, I’ll say this: Considering how long they’ve allegedly been working on this phone, I’d expect them to have gotten customized silicon. Apple has a pretty good working history with Broadcom although they’ve also been working with Atheros lately (but Atheros is more limited in scope).

    But, if you wanted to speculate as to an iPhone supply chain, Broadcom would be a likely supplier. Unfortunately, the BCM2152 is $30 in 10k quantity. So 12 million iPhones only adds $360 million revenue. Still, since BRCM does a bit less than 1B/quarter, it’d be a nice incremental addition. And, of course, that doesn’t show up until the Apr 2007 report at the earliest. If BRCM is even the vendor…

    reinharden


  74. Crude is dropping again. $55.70, down .53 after testing $56.

    This is what happens when you force a test, it makes you look worse if you fail.

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

    I was joking about TOL before but they took that housing report quite well. It’s confusing the hell out of the currency traders who, being an international crowd who took economics 101, traditionally assume that a massive decline in home building is bad for the economy.

    Silly foreigners!

    Now the oil traders, of course, understand that shipping 200K less homes with 200K less worker trips to those homes and 200K less homes worth of good and materials manufactured can only lead to increased demand for crude! Smart oil traders!


  75. QQQQ: I’ll mention also that the Jan 44′s are $1.30/$1.40 and have the benefit of capturing the first half of the January 2007 earnings season. As well as moving any potential income into 2007. ;-)

    I built Jan 43, 44, 45 ladder a month or two so ago. Of course, I’m looking for (hoping for?) the current rally to continue once we get through today’s expiration.

    reinharden


  76. Options traders,

    Nordstrom JWN earnings play for Monday? Any chance of a big miss like Whole Foods?

    What do you make of the huge open interest in Dec 55 calls? It seems very very unusual.

    Housing: no surprise today, we need and will pull back to


  77. Don’t bet against JWN with record Wall St, bonuses!

    All the wives head right over there to shop.

    Anyway, GS said buy them so the fix is in.

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

    Housing was only as bad as the worst case – that’s not bad enough to deter these guys. Nice call on BZH Prof, they got hit hard.

    It’ll be up the the “experts” to weigh in this weekend on what this all means.

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

    Oil is down to $55.50 (-.76) and I think that the dollar is perking up as the bears are throwing in the towel on shorting this economy.

    It’s kind of like we feel when there’s a 3.7Mb build in crude and XOM goes up – they just told us that $50Bn worth of houses would not be built and the US economy laughed!

    The problem is that every other country considers $50Bn to be a lot of money while we piss that much away in Iraq every month.

    $58.38 while I write this!


  78. Waiting for VLO to confirm group drop

    $55.24


  79. zmann: Did you notice *why* they shut the pipeline?

    “High winds at the port of Valdez and a backlog of crude oil inventory has forced a temporary shutdown of the trans-Alaska pipeline,”

    That’s right. There’s too much oil even at the Valdez terminal. They ran out of local storage.

    2006 average flow was apparently 765k barrels/day. So I’m disappointed in BP who normally seems to shutdown 400k barrels…this outage only accounts for ~320k barrels.

    I’m sure that we’ll see it in next week’s inventory as an unexpected draw down. ;-)

    See (http://today.reuters.com/news/articleinvesting.aspx?view=CN&storyID=2006-11-17T022815Z_01_N16244929_RTRIDST_0_ENERGY-ALASKA-PIPELINE.XML&rpc=66&type=qcna)

    reinharden


  80. VLO setting new intra day highs


  81. VLO setting new intra day highs w/oil down a buck?


  82. Not going to happen, they are defending $55.20 like it’s life and death!

    LOL with that switch to the ICE $95s! Doing way better than if I just kept the Decembers…


  83. why is this posting twice?


  84. $55.19 – as long as you’re not trading today’s expiration this is just fantastic!

    I’m thinking of more OII at this point.


  85. and dropping


  86. 13 million XOM shares before 11:30

    Some people just absolutely have to buy these shares :)


  87. Another thing to remember on housing. Mr. Gates’ foundation (and likely his personal holdings) are buying seemingly *every* major housing company. So they’re swapping MSFT stock for diversification constantly. And now they’re likely having to do the same thing with BRK stock. I don’t remember whether it was a billion/month or a billion/quarter, but they’ve got to buy a fair amount of stuff over time.

    Mr. Gates and Mr. Gates’ manager are definitely fans of Mr. Buffett’s investment style. And Mr. Buffett has sufficient faith in their investment skills that he handed them the keys to his personal legacy.

    See also (http://today.reuters.com/news/articleinvesting.aspx?type=bondsNews&storyID=2006-11-15T204341Z_01_N15383570_RTRIDST_0_FINANCIAL-GATES-UPDATE-1.XML)

    reinharden


  88. Flipped to the ICE $105s for $1.75 – can’t leave that kind of money on the table!


  89. Out of the Ice $95s for $9, way way too much money!


  90. $55.05!


  91. Phil

    What’s wrong with trading todays expiration??

    Edro


  92. Phil,good job on ice…

    Edro..if you can find a good trade its fine to do!


  93. As long as you don’t mind getting wiped out with no possible exit….

    Like the ICE $105s, took about 2 minutes for me to stop out with a 30% loss (of course I only did it to bookmark the sell of the $95s but still…)


  94. Whoops, the oilers just popped higher – anyone know why??

    Edro


  95. Phil…I play the decay on stuff like ice…sell the 95p for .90…and just manage it if it goes bad


  96. Oil popping on expectation that Opec will get together to craft one heck of a statement for Monday. Prices too low, it’s not worth our time to gouge you if you aren’t willing to be gouged so just freeze while we sit in our nice warm desert, etc, etc, etc.


  97. I like that stuff Paul, just too complicated to convey to other people.

    Even this day trading nonsense it tough with a group – that’s why I prefer the longer plays.

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

    Oil up because they managed to test and defend $57 for the second time today (even though the first time was pre-market).

    It WILL post $2 higher on Monday morning and millions of idiots WILL buy oil stocks thinking something happened over the weekend so it’s not an illogical play to buy things on the cheap today.

    What matters is the trading after Thanksgiving (huge demand weekend – cold weather, air and car travel).

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

    Wow, that ICE is incredible, up and down a few dollars every 20 minutes!

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

    GM sneaking down on us – maybe just max pain at $35


  98. $55.57


  99. Hows does Best Buy look for a possibile entry point?


  100. If you buy crude today, you have to take delivery


  101. Soccer-

    Check out chart CL Z6 on quote.com, not the quote

    The timestamp reads real-time and the quotes are in line with Phil’s quotes.

    Note – the chart, the chart ……

    Edro


  102. Which way will goog close
    it always / mostly… closes on strike 490 or 500???


  103. quote.com is 15 minute delayed and yes, the chart looks like crap.


  104. what am i missing with uso today? why is it up?

    thanks


  105. Europe closing – possible pump number 1

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

    GE looking good though, makes me happy.


  106. XOM turned green


  107. Just out… Judge Weinstein’s ruling in Schwab, you know the out-of-left-field ruling last month that hammered MO, permanently stayed and the appelate court will review class certification. This is big news, as Schwab is really the last remaining major legal case. I expect the class will eventually be decertified. This would not have any impact at all on the KFT spin announcement next month – that would happen regardless – but it is big, positive legal news and it just came out.


  108. They have the NYMEX to themselves now so it’s time to pump that oil!

    We’ll see if they can test $56 again but how ridiculous it to say they have to get back up to $56 while XOM is still at $72.75?

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

    Those DIA’s are doing nicely though!

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

    At this point, for the most part, it’s no longer worth playing anything this month, you are just giving away premium, tempting though it may be.


  109. Phil,

    When does this oil bubble burst? It seemed yesterday as if the dragon was slayed only to be rising up again. What gives here?

    Gary


  110. Phil,

    I enjoy reading all of the comments on the site.

    Quick lesson on what you do to DD (double down). If you bought 10 contracts for $1.00, and now they are at .50. Do you:

    1. Buy 10 more @.50, doubling your contract positions, or do you

    2. Buy 20 more @.50, doubling your investment?

    Grant


  111. Any thoughts on CIEN out there?
    The hairy guy on CBOE says A LOT of buying of the Dec 25s – at $1.55 now with the S=$24.60 I’m thinking they’re a bit rich..?

    Big 1130 oil pump – straight up – from 55.05 to 55.95 while the January contract went from 58.15 to 58.65.


  112. MDC is one of the better managed builders, but not 18+ P/E forward-earnings good!

    I’m shorting above 54, but with a tight stop in case it is truly breaking out above its 200-MA. Doubtful, IMHO.

    I think it’s a false breakout on low volume, and will settle back down to its 50-MA around 48-49 as early as next week.

    - Prof


  113. Soccer,
    The quote is actually 30 minutes behind the chart. If you set the chart to a one minute refresh you can see CL Z6 in real time. here is a URL to do that for you.
    http://new.quote.com/futures/adv_chart.action?chartUi.studies=&sym=CL+Z6&chartUi.bartype=
    CANDLE&chartUi.period=V&chartUi.minutes=1&x=7&y=12&chartUi.size=
    800×550&chartUi.bardensity=LOW&chartUi.overlay=&ref=60
    Edro
    (Sorry, don’t know how to make the URL smaller)


  114. phil,

    how about mo jan 85′s. spin off of kraft to be announced in jan. does mo go to 100?


  115. GOOG looks goog for 500 or higher.


  116. Oil burst – Gee $78 to $56 in less than 90 days is pretty burst – the problem is its’ a secret from the Oil Co’s, just like the 20% drop in housing seems to make builders happy.

    When the market is in the mood to spen everything positive you can’t stop it – just ask anyone who shorted .coms back in 1997-2000.

    Fundamentals were out the window then, companies had no business at all and little prospects but raised $100M which they would burn through in 6 months.

    These companies (oil and HB) do make money and do have value, it will take a while for them to settle at realistic levels.


  117. Anybody interested in subscribing when the new site launches should sign up early here:

    http://www.jotform.com/form/63203852512


  118. Edro’s right, the chart is up to the minute. Just press the “go” button.


  119. DD – grant that depends but USUALLY, I just buy 10 more contracts. Only if I really love the position and think the new price is a great deal do I DD cash (giving me 3x the first batch of shares).

    Read “My Trading Policies” for an idea of how I enter positions and where I take my second, third and fourth rounds.

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

    MO, probably a good move. They are doing a real rush job before the Dems get ahold of them! I won’t play it though, this is the 5th time they’ve traded up on the pending deal this year.


  120. Phil, could you confirm/deny jaredwoodard’s post?

    I’m always paranoid about giving away any information on otherwise random web sites. ;-)

    reinharden


  121. Ah yes, everybody here please make sure you sign up asap as there will, of course, be better deals for regular readers and we will also have a cut-off in the first round.

    http://www.jotform.com/form/63203852512

    There are 4K hits a day here and way more on the feeder services and I’m probably going to keep the inside section to 2,000 the first 6 months until we staff up.


  122. test


  123. Hey Phil

    when the last week of options expire
    that seems to be the best time to do an earnings strangle

    like ann adsk beas and dks
    if you get a big move


  124. Here is an up to the minute site with oil prices

    http://quotes.ino.com/exchanges/?r=NYMEX_CL

    Edro


  125. Phil,

    Housing bears just can’t catch a break this week!

    How in the world are HB’s heading back up today? Because of OE?

    Will fundamentals EVER catch up with stock prices again?
    Are we ever going to see a -1% daily drop on the S&P 500 again?

    From reading other blogs, many people seem to be giving up on the legitimacy of the stock market. How long can it stay this irrational?

    Very frustrating.

    - Prof

    p.s. I just signed up for your new website!


  126. Great oil link Edro!

    Here’s the Jan contract all the oil bulls are pinning their hopes on:

    http://quotes.ino.com/chart/?s=NYMEX_CL.F07&v=dmax

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

    Irrationality can continue pretty much forever but I think all you guys (oil and housing bears) are a little greedy from a time perspective.

    Things come down, but perhaps not when you want them to. There is huge pressure on home pricing etc but you may have to wait a quarter or two for things to pan out.

    That’s why I just kept rolling the oil puts forward, it will happen eventually – it almost happened today but they got saved again by something stupid (technical considerations of the contract rollover) which we expected yesterday.

    For XOM to gain .10 after losing $2.28 yesterday is not exactly a shocker.

    TOL is down 50% from it’s high – it’s not going down 50% from here and, if it did – I would just buy it and retire.

    When XOM goes to $55 I will be done with it – I’m sure by then RIMM or LVS will be $150 and make much better shorts!


  127. I signed up Phil. :-)


  128. Thanks Edro!


  129. change cl to ng and you get gas. edro, is that a live chart? thanks

    why is nat gas exploding to the upside today? anyone?


  130. Phil said:

    “TOL is down 50% from it’s high – it’s not going down 50% from here”

    I’ll bet you $1 it will …

    - Prof


  131. Hi Phil,

    Can you explain this and perhaps give an example of how we could benefit from it: “Oil up because they managed to test and defend $57 for the second time today (even though the first time was pre-market).

    It WILL post $2 higher on Monday morning and millions of idiots WILL buy oil stocks thinking something happened over the weekend so it’s not an illogical play to buy things on the cheap today.”
    thanks


  132. You’re on Prof – in fact, if TOL hits $15 I’ll buy you a share!


  133. phil, cramer says to sell the oih. Iam looking to buy some put around here. what would you recomend? wait until monday or get some now. thanks juan


  134. This market reminds of the Cyclone roller coaster in Coney Island and we’re right at the top and im looking over the side straight down wow what a RUSH!


  135. Oil $58+ – assuming they hold $56, the Monday contract will be January, which carries an additional $3 premium right now as it’s essentially an option that expires a month further out (on a pretty volatile stock).

    So while that Jan contract graph I just posted will not change at all, the screen on CNBC will say $58-59 and people rarely go beyond the headline they see (and you can bet CNBC won’t explain it to people).

    If they time that with a statement from OPEC or a Nigerian Rebal attack or if BP faxes themselves another bomb threat – they knock any explanation out of the headlines and can say “Oil crosses $60 on (fill in a crisis)”


  136. OIH – There’s a very good chance that what I just said will happen. I’ll be using it as a chance to buy out my OIH caller so maybe I’ll sell them directly to you!


  137. I think you mean your “putter” not your “caller” :)


  138. Thanks Phil, if you want to wait to monday to take advantage of the situation, would you short the oih in the morning if it’s artificially up?


  139. Phil,
    I signed up


  140. If GOOG doesn’t kiss 500 today, I hope it will next week.


  141. Wow – you want to know what’s killing the dollar and the the markets and raising crude?

    The military says they need ANOTHER $130-170B for next year’s “Special War Budget” That’s over the $70Bn they said they would need!

    “There is a lot of pent-up, backed-up demands. A lot of it is equipment. A lot of it is redeployment,” Hoaglahd says. “At a minimum, they were looking at $130 (billion). If it goes higher than that, I’m not surprised.”

    Between that and Murtha losing the nomination for Majority leader – I guess we look like Vietnam all over again to foreign investors.

    http://www.airforcetimes.com/story.php?f=1-292925-2365483.php


  142. Picked up VLO 52.50 puts for $0.05 — just $0.24 cents over strike — viva Las Vegas :)


  143. To further expand on Phil’s answer since this question was asked last month…

    Ilene, wasn’t it you who asked almost the same question last month? When the previous month’s oil contract reached expiration and we rolled over to this months? ;-)

    I suppose it is perhaps confusing that they aren’t actually quoting the price of oil even though the media always uses the current month contract as the basis of their “a barrel of oil costs X” statements. Instead they’re quoting a futures contract on oil. If you buy and hold the contract through expiration, you actually have to accept delivery of the oil!

    To further complicate things, the Dec contract stops trading in Nov…even though first delivery on that contract isn’t until 2006-12-31. I believe that this reflects the fact that it sometimes takes a lot of time to deliver 1000 barrels of oil (which might have started life in Saudi Arabia).

    Traders balance their account by the end of the month. Which is why you get great volatility the last few days of the contract period.

    Anyway, today is the last day that the December contract trades and, as Phil said, on Monday, they’ll be quoting the Jan contract come Monday morning. And the Jan contract will have a time premium of 2+ dollars. Which will make it look like the price of oil jumped over the weekend.

    reinharden


  144. Crude dropping again $55.65 at the moment


  145. Picked up XOM 72.50 puts for $0.05 — only $0.17 out of the money — viva Las Vegas


  146. Crazy plays soccer! Anything can happen in the next hour, that’s for sure…

    Poor Dow keeps trying to go positive but none of the other indexes want to come play!


  147. Phil, I just signed up at your new site.


  148. Any thoughts on NMX as a momentum play? I think it might go a lot higher in the near term.


  149. Thanks Rein, Phil. Definitely these nuances are pretty subtle that normal traders dont understand.

    Good to know!


  150. I think XOM will finish within pennies of 72.50
    but thats just the free market deciding the price.

    just managing to wipe out 22000 call and 15k put contracts.


  151. One problem with oil at $55 is you have airlines who hedged at $70 and fuel is 30% of their cost.

    So the airline DDs on oil at $55 to bring the basis down to $61.75 and raise earnings 4% for next year – it’s a no brainer! If oil goes down to $45, they can do it again and get the basis to $53 with another 3% gain.

    Since they are options, they can leverage out 5 years if they want to and, once oil goes down to $40, it is only 17% of costs and no longer a make or break item anyway.

    That’s why you have such a hard time with certain barriers.

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

    CNBC is trying to expain away the drop in oil as being “contango” issues but lower is lower.

    Like Rein said (and very well thanks) it’s like talking about the price of XOM options and never talking about the actual stock price, the contracts exist in a fantasy world of speculation and are being bought by people who can’t even afford to take delivery.

    The S&P is fighting its way to positive, would be huge if they do it!


  152. I doubt they’ll want to pay those 22,150 XOM call holders at 72.50. :)


  153. Thanks Reinharden,

    “Ilene, wasn’t it you who asked almost the same question last month? When the previous month’s oil contract reached expiration and we rolled over to this months?”

    Ha – yeah probably, it just shows how fast I learn and remember things from one day to the next, esp. when it’s all very new…. :-(


  154. You’re in luck I2 – Cramer is about to come on CNBC and tell you how to trade NMX!

    First he will tell you how much money he made you (as I’m sure all our brokers got us the stock at $40)


  155. But this time, I get it.


  156. Phil, the only airline that hedged oil (that I could find) is Southwest. Do you know of any others?


  157. NMX dropping did Cramer say sell?


  158. GOOG…Her come 500


  159. That’s OK Ilene – we’ve been looking at the visitor numbers and it turns out that for every one person who puts in comments, there are 100 lurkers so I am sure you are just the vocal advocate of a large constituency!

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

    Here’s Cramer – 140% in one day but he says, buy it when it “pulls back to $120 or $110.”

    He says NYX is way undervalued based on NMX

    Recommends BSX based on JNJ and I agree with that very long term.


  160. A couple of other things that’s important to remember about the people playing the oil futures market.

    Each contract covers 1000 barrels of oil. That means that when they bid $60, they’re on the hook for $60,000. But, if one is a member of NYMEX, one only need to have $3,000 in one’s account. In other words, you can have 20-to-1 margin.

    So long as you never hold a contract into expiration, that leverage really does give you the equivalent of buying options. Unless, of course, you get it really wrong and get margin called. :-(

    reinharden


  161. Ilene, the trick is that next month we expect you to answer the question for the person who asks then. ;-)

    Anyway, it’s not like any of us woke up knowing this stuff. We all have to learn it somehow.

    #####

    For example, I didn’t realize that DIA was going to trade +$0.20 to +$0.30 out of sync with the index all month…and then trade -$0.10 to -$0.25 all day today. Which is really screwing up my Nov DIA 123 options. :-(

    reinharden


  162. Anybody want 10% in the last trading hour?

    Anybody?

    Anybody?

    GOOG long calls in Nov at $490….stock will finish at the 500 strike is my bet!


  163. Airlines all hedge, Southwest is the only one that timed it right!

    http://www.thestandard.com.hk/news_detail.asp?pp_cat=22&art_id=32022&sid=10917121&con_type=1

    Here’s the trick. Hedging is just like a massive placement of options orders and it is done through brokers like GS. Since an airline like CAL buys $3Bn worth of fuel a year, these are pretty hefty orders.

    The brokers want the airlines to hedge. The premise of hedging is that you think the price will be higher in the future.

    So the brokers, far from being objective, have tens of Billions of dollars of business riding on keeping airlines, utility companies, manufacturers and chemical companies in a constant state of fear that drives them to buy “oil insurance” in the form of hedging.

    This is a fairly new and hugely lucaritive business for them that would disappear if oil either falls sharply or stabilizes.

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

    Cramer effect, I imagine, is people are disappointed he wasn’t more gung ho and are worried he will not be telling his listeners to buy at any price, if you are buying in at $145, you have to count on a bigger idiot to buy at $160.


  164. S&P 1,400 we may confirm escape velocity next week!


  165. 136,734 MSFT Nov $30 callers down the drain.
    I’m one of them.
    Hopefully Dec $30 will do better. 8O)


  166. … I am sure you are just the vocal advocate of a large constituency!

    Phil, I have that habit, not sure if it’s a good thing.

    Rein, “For example, I didn’t realize that DIA was going to trade +$0.20 to +$0.30 out of sync with the index all month…and then trade -$0.10 to -$0.25 all day today. Which is really screwing up my Nov DIA 123 options.”

    I have no idea why that would be,.. but sorry, it sounds like it’s not working out as planned. You know, I get the feeling that there are lots of rules and tricks – which could be useful – but I don’t know them.

    “the trick is that next month we expect you to answer the question for the person who asks then.” — I can both answer old ones and think up some new ones if you like.


  167. Valero group chart is good to keep today’s action in perspective.

    http://finance.yahoo.com/charts#chart4:symbol=vlo;range=5d;compare=
    xom+uso+cvx+su+xle+oih;indicator=volume;charttype=line;
    crosshair=on;logscale=off;source=

    They gave up all gains for the week, and only VLO, the XLE and OIH ended positive which indicates money being parked in the indexes as it transitions out of specific stocks.

    Check out OIH 5 day volume, which supports that theory:

    16-Nov-06 13,178,600 135.76
    15-Nov-06 11,230,400 140.82
    14-Nov-06 7,863,700 138.15
    13-Nov-06 8,476,500 137.08
    10-Nov-06 9,584,300 137.50


  168. Mike_C: I had about .4% of those worthless MSFT Nov $30′s, so I feel your pain. ;-) Fortunately, they were pretty cheap. And, thus far, my Dec, Jan 07, and Jan 08 $30′s are making up for that pain. I’m hoping for $32.50 or so for Dec and a bit more for Jan 07 (assuming that we continue our rally and the Zune doesn’t turn out to shutdown pacemakers). After a year of Office 2007, Windows Vista, Exchange Server 2007, *and* another year of Xbox 360 plus new releases of Microsoft SQL Server and IIS…well…Jan 08 I’m “planning” on $35 and hoping for $40+.

    As always, barring major macroeconomic events. Or just major MSFT screwups. ;-)

    reinharden


  169. reinharden, you had 54,000 MSFT contracts? Wow!!


  170. Hi Phil,
    AMAG had a 30% run today. Earnings are due Monday and analyst estimate is a loss of 0.53 . What do you think about December $55 Puts.


  171. No, no, no. point four percent. 54k contracts would have been forty percent. ;-)

    But I was going to say one more thing about MSFT anyway. So thanks for giving me an excuse.

    Given that MSFT next reports on Jan 25, 2007, the first thing I’m doing after the market opens on Monday is check out the February MSFT contracts (although I’m really more interested in May since I want a full quarter of Windows Vista).

    If MSFT performs, I expect a lot of analysts to have to bump their 2008 forecasts. The current forecast is $1.45 for year ending June 2007 and $1.68. I think MSFT should be able to turn a full year of every one of their major profit centers into more than 16% increase in profits. And if they can bump up to 20% growth, I think they’ll get a PE expansion as well.

    Anyhow, that’s my thesis.

    Of course, at the same time, by 2008, I expect AAPL to make a push towards 10% US marketshare. Which will complicate things. ;-)

    reinharden


  172. Go so busy thinking about MSFT in 2008 that I almost forgot to unload the last few “in the money” and about to expire today contracts…whoops.

    reinharden


  173. AMAG – Way too speculative for me after a 30% jump, I hope someone know somethng because they lose $7M a quarter and only have $15M left!


  174. TSM ($10.00) and TXN ($30.00) nailing the nice round numbers. Within a nickel ruins the calls and the puts. ;-)

    reinharden


  175. Finally managed to eek out $0.25 for the DIA $123′s. With all of 2 minutes left in the day. ;-)

    reinharden


  176. MSFT – they have to gain $1B in cap for every dime of movemnent in share price.

    In order for them to go from $29.45 to $30 on a sustainable basis, they have to have $5.5Bn in positive inflows.

    At $29.45 a share, that’s 186M inflow purchases against an average daily volume of 57M so you have to have realistic expectations of how fast it can move without a serious catalyst.


  177. Yet another record high on the Dow (yawn), but the S&P 500 closed over 1400 for the first time ever. That makes me happy. Too bad the NASDAQ didn’t come along; however, I’ll take a 3 point drop.

    I don’t see anything yet that invalidates a near mythical market melt-up. Which would be a nice way to spend the rest of 2006.

    reinharden


  178. TXN – I like that .04 close, it means that the call sellers don’t want to be called away!

    TSM flying the second it closes, also held down to make sure no one calls them away. I’m really mad that I didn’t reenter that one on 11/7, when they spiked below my buy price…


  179. Very interesting article about how the Feds will get rid of all those $ Phil talked about this morning.
    Entire article: http://www.safehaven.com/article-6324.htm
    A First Sighting? by Mick P
    “We know that to mop up liquidity, someone needs to give the markets something that they are willing to part with $’s for. That’s the job of the Tsy, bond issuance is about to reach its maximum over the next few weeks, I hope you all noticed that rates have dropped? How unusual is that, a commodity hits the market and it becomes more valuable? The Tsy are seeking to soak up $’s from overseas first and then, through the primary dealers, soak up some domestic liquidity. Now this has 2 effects, it strengthens the $ and helps to curb credit creation, money given to the US Tsy cannot be lent out to, or by, private or commercial borrowers. Next is the Fed. It too will sally forth and fight this unbacked credit creation. Firstly it will start to make noises and then enforce lending practises to make sure that the standards are strictly applied, this has already started. It will also slow the repo machine. This too has already begun, forcing banks to ensure that short term shortfalls in reserves become less frequent, stopping excessive lending.(*DJ Fed’s Poole: Not Fed’s Responsibility To Bail Out Housing) These measures, when combined, will slow the economy by decelerating the velocity of money. With less liquidity around but demand still high, rates will go higher until the payment on the borrowed amount cannot be covered by the return on the relending (all money used is lent to someone) of the principal. Lending stops, or at least, slows down drastically. The $ keeps its strength, excess liquidity is drained. Inflation is controlled.”


  180. But Phil, how much money will be fleeing just XOM looking for a new home?

    The indices will do their part if money rotates from oil to technology. MSFT is ~6.75% of every QQQQ dollar. perhaps ~1.75% of every DIA dollar, and nearly 2% of every SPY dollar.

    But, let’s ignore sector rotation because it’s not dependable, it’s just a possibility with some incremental help.

    The current revenue and profit numbers – about 15% for fiscal 2007 and fiscal 2008 – for MSFT almost totally discount the complete refresh of their major profit centers . 15% is roughly apace to the summation of inflation, the PC industry, and the world economy as a whole.

    With a current P/S of 6, a 5B increase in market cap requires less than 1B increase in revenue. FY 2008 is already calling for 56B in revenue. Being 2% better is enough to get you the extra billion. 10% gets you in the vicinity of $32.

    And, if you’re 10% better you get ratio expansion as well.

    #####

    Of course, that doesn’t mean that MSFT won’t waste all this on Zune. And an Xbox 720. And MSN Live.

    And AAPL and GOOG, while they deny it, are totally focused on taking away MSFT’s money as quickly as possible. Along with ORCL, SUNW, the guys working on Firefox and Ubuntu Linux.

    Still, over the next year, it’s MSFT market to lose.

    IMHO. ;-)

    reinharden


  181. TSM especially annoying to me as I was trying to get my nickel back for the last 5 days.

    Oh well…

    Phil, now that the market’s closed. Any thoughts on BRCM for early next year?

    reinharden


  182. Don’t get me wrong, I think Microsoft’s a steal at this price but they were a bargain in March too!

    That’s why I won’t own them, how can something like that happen to a stock (and pretty much 3 years in a row)? But I do play calls when it seems right but generally, like the Decembers I sold the other day, I take the profits quick and wait for a chance to get back in.

    What I don’t get is how analysts only expect them to take in $56Bn in FY08 – 200M upgrades at just $30 per upgrade is $60Bn – that’s over and above normal revenue and would only be about a 25% upgrade path.

    Even 100M upgrades (1/4 of US and Europe base) in one year is an extra $30Bn – so what aspect of their business is falling off a cliff?


  183. BRCM is way up on speculation that they are going to be involved in the new Mac phones but, on the other hand, they face delisting!

    There’s that whole patent thing with them too, that’s why I like TXN, just as volatile but not quite as volatile. I worry about how BRCM competes on the global market but I’d rather buy them after the next big pullback than try to guess direction here (with the PE heading into the 20s).


  184. any thoughts on the dec 25 CAG puts? LEH initiated coverage..any concern they will upgrade the stock as CAG starts to trade ethanol/biodiesel? why wouldnt CAG push higher corn prices onto its consumers?


  185. Delisting doesn’t seem very realistic for any of the billion dollar companies. I’m sad to say, NASDAQ delisting is so rare for large companies that it’s practically a joke.

    I will admit that I don’t much like that BRCM has announced that they’re going to have to take an additional 1.5 billion in restated expenses. Now, the 1.5 billion in and of itself doesn’t bother me because they’re are largely accounting expenses. BRCM didn’t suddenly spend 1.5 billion, so it’s not like their actual financial condition changed.

    On the other hand, what does bother me is that I’ve no insight into the tax impact of that 1.5 billion. There are two potentially major tax problems here.

    One, depending upon the type and timing of the grants under review, BRCM may have taken tax deductions for which they may not have been eligible. I believe that BRCM’s effective tax rate was no higher than 25% to 30% worse case (and in some instances was as low as 10%), so they might be on the hook for perhaps $500 million worse case (or they might have included the tax hit in their 1.5 billion number). Back in March, they had 1.8 billion in cash, so, while that sucks, it’s not going to kill them. And I’m not entirely sure that they can’t treat the expense in such a way that they still can tax benefits…so they might be able to duck any tax liability.

    Two, depending upon way too many factors to sort out with an advanced degree in accounting, it’s possible that the grants should have counted as taxable income for the employee at the time of the grant – in which case, BRCM was legally obligated to have withheld taxes on that taxable income. If the federal government decides to make an example of someone, this is likely where they’ll get hit. The government has long been harsh with people who screw up withholding…

    Anyhow, my suspicion for BRCM (and most of the stock option scandal companies) is that materially speaking, this entire thing will turn out to be a non-material event. There will be exception where there was clear, sustained fraud. But proving fraud versus mistakes versus misunderstanding will be tricky.

    Short version: I guess I don’t think that already announced stock options scandals should be viewed as long-term negatives, but as short-term opportunities. Because I believe that resolution (which will be all but invariable) will eventually lift the stocks the vast majority of the time.

    reinharden

    PS: Interesting, while checking one of the facts for this post, I read some Congressional testimony. So far as I can tell, even the SEC commissioner screwed up his explanation of how this all works. Backdating doesn’t reduce the gain to the employee at the time of exercise, it eliminates the taxable gain at the time of the option. The granting of an in-the-money option can be a taxable event in and of itself to the employee. But the in-the-money part of the expense is not a tax deductible event for the company. Anyway, you’ve got to figure that if the SEC can’t get it right, it’s going to have a hard time explaining it all to a jury.

    PPS: All this accounting nonsense is why I like cash flow and balance sheet analysis better than “XYZ announced $0.24/share earnings”. If XYZ is increasing their net tangible assets/share, I’m thinking they’re doing okay. ;-)


  186. For MSFT, I rationalize much of the three years in the wilderness by pointing at the “When will any of these products ship?”

    The Playstation 2 was beating the Xbox.

    Linux and Macs were all getting press and the next release of Windows getting further away and having features removed the entire time.

    And without Windows Vista, nobody was going to force an upgrade cycle. So you could get incremental revenue from updating Office, but for the full refresh cash infusion Office had to be synced with a Windows release.

    And without Office and new Exchange client features, most people weren’t going to update Exchange Server.

    So, MSFT was essentially sustaining itself and incrementally growing revenues. As you pointed towards, from 2003 to April of 2006, MSFT was range bound between 24 and 30 (and forays to 30 were rare…and disappeared after the $3 dividend).

    So, I argue that the business prospects have fundamentally changed. Back in April, nobody knew if they’d ever really ship Vista, Exchange Server 2007, and Office 2007. And they were afraid that the Xbox 360 would crap out and that Playstation 3 would destroy that source of revenue growth. We now have dates for the first 3 and Sony has made it clear that it’ll be six months to a year before they’ll be able to constrain the Xbox 360 growth.

    And, like I said earlier, some of the MSFT increase has clearly just been a money flow thing. People buying indices buy MSFT whether they meant to or not. The last US stock market money flow number I saw said $125+ billion so far this year. I’ve got to imagine that the rotation since August has been even higher.

    reinharden


  187. I don’t think CAG makes corn – I think they buy enough of it that they intend to leverage their expertise into ethanol production but that’s very much like companies who want to do business in China, you just say it because it sounds good.

    There’s something called the ConAgra Trade Group, that seems to be where they think they can be a middleman on ethanol but if they start making buying and selling commitments they have stepped over the line and become a hedge fund that can’t afford to make a mistake.

    Their meat division is flat out killing them and they have even said they want to spin it off (15% of sales). Cheese and seafood have painful cost issues as well.

    The bottom line is they got big by buying every food brand on the planet and now they end up sellign against themselves. They own Orvil Redenbacher and Act II, Parkay and Fleichmanns…

    Anyway, if they restructure they might turn it around but investors are not generally tolerant of restructuring while it’s happening. In the past 3 years (ending this June) they have dropped $350M in cash flow but bought back that amount of stock to reduce the float 3% but eps still goes down.

    So I’ll hold the puts for now…


  188. Taxable options – I think some clever congressman is going to realize the real crime in the options scandal is an issue of short vs long-term gains in which case someone owes the government tens of Billions of dollars.

    That won’t fly in a democratic congress, especially if you contributed to the wrong party! If the board and officers of your company systematically ripped off the government for many years, I don’t think it will go away as quickly as you think.

    Again, I see option scandalized companies as a bargain for the same reason you do, but I limit my exposure and don’t hold too long.

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

    MSFT – All good points but what about the upgrade math? How can they project such small impact from Vista?

    One thing nobody’s talked about is “what if Vista sucks?” It’s not like they haven’t released awful versions of windows before…


  189. Phil. I did use the link provided earlier in this blog to send the info requested for your new site. Should I have received some kind of conformation via email?


  190. But Phil, I take it granted that Vista will suck (but then we all know that I really like AAPL) ;-)

    I think that there is a drastic discount option for Vista and I think that there should be.

    In my previous corporate experience, large Fortune 100 style companies purposefully tend to run years behind operating software releases. And most decided that it was simpler to replace machines than to upgrade them. This means that a large portion of the corporate world won’t upgrade their Windows 2000 or Windows XP machines. They’ll simply replace them and those numbers will be absorbed into the normal Windows revenue stream.

    One June 2005 study found that 48% of corporate people were still running Windows 2000. Whereas only 38% were running Windows XP. To quote the study “most companies seem to be upgrading just out of hardware obsolescence rather than keeping up with the latest and greatest operating systems offered by Microsoft”.

    I believe that Windows Vista uptake rates will be somewhat faster. Upgrading to Windows Vista shouldn’t break nearly as many things as the Windows 2000 to Windows XP migration did. Many people refer to Vista as XP Service Patch 4, which means that it’ll be a lot easier to install over a pre-existing XP install. And there are some advantages from an administrative perspective, especially when it comes to containing spyware and viruses and such that’ll make it appealing to upgrade sooner.

    Also, a lot more individuals are looking to upgrade. First, there’s just more consumer computers nowadays (estimates in the US are nearly 40% sales to consumers). Many homes that had one computer in 2003 have two or three in 2006. And Windows XP broke a lot of games that worked on Windows 2000…which slowed the adoption rate.

    So, the 2006 worldwide market for PCs will likely come in somewhere between 235 and 250 million units. In 2005 (in the US which accounts for a bit less than 1/4 of the world market), that was split 29% Enterprise, 34% Small Business, 38% Consumer. But, that’s just the recurring stream…although it informs the upgrade stream.

    Accordingly to several sources, there’s about 1 billion PCs in use today. About half were sold within the last two years and therefore would be reasonably tolerable under Vista (although not necessarily capable of using all of Vista…in particular Aero).

    I think it’s reasonable to say that perhaps half will upgrade existing computers to Vista over the next 3 to 5 years. Which brings us down to 250 million upgrades.

    Spread over 5 years, that’s still a 50 million units bump versus the 250 million units normally sold annually.

    #####

    How do you get the small number? Easy, first assume that no one upgrades to Vista but instead they just buy a new computer. Second, assume that they don’t accelerate the purchase of that computer but just buy it whenever the current one quits.

    This is what I believe most analysts have done.

    And that’s why I believe that MSFT will have no problem finding at least an extra 10% of revenue if not substantially more. Which brings us back to my earlier thesis. ;-)

    reinharden


  191. Just as a small appendage to the MSFT discussion – I don’t know if any of you pay much attention to the console “wars”(!) – but MSFT’s holiday games releases, specifically: Gears Of War, Call of Duty 3, Viva Pinata and the new Tony Hawks have certainly made this Winter MSFTs strongest by a long, long way. All the discussion on the gaming forums is about finding enough cash to buy the influx of new quality on the 360. I live in Ireland and the buzz for 360 has multiplied astronomically here, and in the UK, over the last month. Added to which the PS3 has been delayed in Europe ’til March at the earliest.
    Sony may have just stumbled into an *in form* Microsoft for the first time…


  192. Actually, only non-qualified stock options, including SAR’s and restricted stock, are typically includable as income to the recipient (typically executive officers (or relatives of same in some cases)). An ESOP or ISO which is qualified ie covered under Sec 422 of the IRC does allow under strict rules and regs for the employees to receive income tax free (AMT tax may apply due to the addback reqd when exercising the stock option) Accordingly, the Corp issuing the options does not receive a deduction which is the theory of matching generally employed by the IRS.

    Nonqualified options are treated differently, to the extent the Corp does not receive a deduction for tax, yet the employee recognizes taxable income. Sar-Box requires the Corp to recognize the expense (depending on which FAS/SAS 123 versions 1,2 or 3 the Corp decides to use as guidance and whether the Corp is an accelerated filer, etc.) in its computation of book income. Previously, Corps would include the expense in its calculation of diluted EPS only.


  193. Confirmation – I don’t think there is one, we are just collecting all the info from our regular readers before we turn the site over.

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

    So we can take it as a given that MSFT is going up, the question is when is the catalyst going to come. Do we have to wait for earnings? When do they book revenues – is it on shipment to the manufacturers and retail stores or only on activation (I doubt it)?

    You would think it’s a simple business but it’s not! I think the thing to do is let’s keep on upgrade watch and jump on the first one, because it should be the first of many, especially if it’s from Piper or CIBC or someone intelligent (actually I’m already out of names!).


  194. [...] It’s been a good week for predictions in general – in comments at 9:23 I recommended a day trade on the Dow: “I’m going to be checking out the DIA $122 and $123 calls if the market takes a nice dip.  I’m looking for a bounce at $122.70.” [...]