Fourth Week of March 2009 Options University's Week Ahead

Weekly Comments:

This week’s already off to a rousing start as we write.

The futures are indicating the DOW will open to the upside by nearly 200 points.  Part of this probably has to do with the post-expiration reversal that can often occur, but the real driver of the surge is that the Toxic Asset plan has finally been released… including at least some details… by the Obama Administration.

We don’t have all the details as of yet, but this sure seems to be eerily similar to Hank Paulson’s plan of oh, 6 long months ago.  The difference though appears to be timing… and just the mere fact that something was finally delivered.  There’s been uncertainty in the air surrounding many issues, but was has really troubled investors is that the new administration was unable to announce a coherent plan to deal with these troubled assets… despite being given unprecedented access to the fiscal reins of government right after the election by the outgoing administration.  This could almost be called a “relief rally”.  Investors seemed to be momentarily relieved there is at least a plan up for discussion.

The plan itself, with what we know of it now, seems like a very good one… if you’re a wealthy speculator.  That’s right; the populist thrust seems to have taken a back seat on this deal.  Additionally… this plan seems to insult our budding socialist majority in another way… by trying to use free market principles to provide greater benefits to all.  All in this case would include the FED and their member banks, or in other words… all connected bankers or “banksters” as they are now fondly referred to.

Our “nutshell” take on this plan is it appears to allow private investors to speculate on these troubled assets at bargain prices… and that the US taxpayer effectively provides margin for these speculators while assuming the real risk.  If we’re reading this scenario correctly, it appears to be a plan designed to subsidize wealthy speculators so that they can “take the bad assets off the books” of the troubled banks.

In this scenario, the foolhardy bankers are saved, the speculators effectively get cheap call options with huge upside via margin, and the U.S. taxpayer gets the _ _ _ _ _ (I think you can fill in the blank).  The remaining question though is “What else could a reasonable person have expected?”  This has been the trend for the longest time… and traders know to trade the trend.  This trend isn’t our friend this time around… but it has been a powerful trend nonetheless, and it shows no signs of stopping.

We’re not alone in this camp… but looking at it from the taxpayer’s perspective, we’d prefer that if the taxpayers are taking the overwhelming majority of risk, then they should stand to gain the most.  Washington has recently gotten even more exponentially ridiculous in throwing large sums of money around that the country really can’t afford.  Why stop now?  Why do we need these private investors?  Why not allow the taxpayers to have all of the potential reward since the taxpayer ultimately has all the risk?

Subsidies, risky speculation, the constant creation and reinforcement of moral hazards, and the heavy use of margin all greatly contributed to the current sad state of affairs… but just like the fact we’re spending even more now (even though we can afford less), we’re repeating the same mistakes on the bailout side of the equation.

Moving on…

Retail and housing numbers haven’t been as bad as expected of late, and that’s helped to add some fuel to this bullish dynamic.  The President will be making more prime-time appearances this week… and the administration will also be providing more details on a variety of other issues.

Next week. the beat will continue at the G20 meetings President Obama will attend.  Announcements coming from those meetings could serve as additional propellant if market watchers believe the world economies are finally getting a hold on these problems.

Overall, the recent bullishness we’ve seen has to be considered the intermediate trend for the near future.  One cautionary note is, as technicians, we do not like to see obvious gaps left in charts.  Runaway gaps are often good for quick trades… but aren’t ideal for long term recovery patterns in our experience.  This rally has many hallmarks of the short-lived kind that give a lot back in a hurry once they become exhausted.

So stay tuned…

The Technical Picture:

We’re presenting the DOW again this week because we’ve been working with it since just before the recent bounce.  In trying to answer requests for simplified charts, we’ve removed virtually all indicators and have left a self-explanatory chart.

Earnings Highlights & Economic Releases for the week:

March 23 – WAG - Walgreen Co. operates a chain of drugstores in the United States.  WAG has gapped up with the market being up today.  Look for resistance at $28.39.

March 24 – CCL - Carnival Corporation operates as a cruise and vacation company. It also markets and operates hotels or lodges in Alaska and the Yukon Territory of Canada.  CCL has had a nice move from the low of $16.80.  If you think people are going to start spending a lot of money in a recession on nice vacations, then it might be time to get in.  This would be one we would avoid.  Currently trading at $22.23.

March 25 – PAYX - Paychex, Inc., together with its subsidiaries, provides payroll, and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.  PAYX has jammed from the double bottom at $20.43.  Currently trading at $23.82, it could be starting to hit resistance from the lows back in January and February around $24.

March 26 – BBY - Best Buy Co., Inc., together with its subsidiaries, operates as a specialty retailer of consumer electronics, home office products, entertainment software, appliances, and related services primarily in the United States, Canada, and China.  BBY has launched from a nice base after making a low November of 2008.  Earnings could be better based on reduced competition from bankrupt Circuit City.

March 27 – KBH - KB Home constructs and sells homes in the United States. It also offers mortgage services in a joint venture with Countrywide KB Home Loans.  KBH has been forming a nice basing formation.  It is still in a descending triangle which is a little concerning.  Recent low of $7.85 remains support.  Hopefully the housing market will get a lift from seasonality.

Earnings with volume > 500,000 and Price > $2.00

Economic

-- OU Staff