Are we there yet?

It’s hard to find a bottom in a bottomless market.  We had today what Tom2oc calls "A Frightful Blind Date - This TA event occurs when the market reverses an opening retail accounts panic triggered by an adverse news (CSCO) which is quickly forgotten."   We also had the continued hammering of FNM and FRE because FNM raised $3Bn and had to pay investors a 3.72% yield.

3.72% - why that is shocking!  Or is it?  So FNM, despite all the trouble and fear surrounding the industry, despite record high inflation and record lows in the dollar are able to raise $3Bn at just 24% above the rate of a US treasury note (which itself is at record lows).  This was a non-dillutive raise of capital so the net effect of this is that investors consider lending money to our GSE’s, whose only assets are (gasp!) mortgages, to be just 24% riskier than lending money to the US government, who pay 3% if you lend them money for 2 years.

Now we get additional hyena action as much is being made of the fact that the Bush Administration (pause, waiting for booing and hissing to stop) has made contingency plans for what to do if FRE and FNM fail (if it’s anything like the administration’s other plans, then I’m sure the "solution" is to do nothing but talk about it a lot while pushing for more tax cuts).  Seriously, this is the government, they are SUPPOSED to make contingency plans and how the fact that a backstop is in place for these agencies is spun as a negative is beyond me - this market is in panic mode and facts take a far back seat at the moment.

According to the WSJ: "The government doesn’t expect the entities to fail and no rescue plan is imminent, these people said. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily. Treasury officials are nonetheless talking about what the government could — or should — do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating."

FNM and FRE hold $5Tn worth of debt, 50% of the US housing market’s total debt.  The value destruction of these two agencies forces them to turn to private investors to raise capital, who will pick up the debt literally at 10 cents on the dollar.  This is the end game of the land grab that has been executed by the top 1% that I have been warning you about for 3 years and that Thomas Jefferson warned us about 233 years ago when he said: "If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered."

You don’t own your home, you OWE a bank for your home and, for half the people in America, that Bank is ultimately FRE and FNM who were allowed to to grow their outstanding derivatives from $700Bn in 2000 to $5Tn today despite warnings from Greenspan that they were getting to big and an accounting scandal that caused FNM not to file an annual report from 2002 to 2006.  As with our last Bush S&L scandal, these institutions were allowed to run wild, INFLATING housing prices with easy lending policies and sucking up the wealth of the nation, which transferred ownership (through lien) onto the books of these two institutions, whose values have now been DEFLATED allowing private wealth to swoop in and take possession of 1/2 of the property in our county, effectively becoming bigger landlords than the kings of foreign lands for 10 cents on the dollar.

So let’s go through this process.  Americans own homes and owe the banks $5Tn in 2000.  We double the "value" of the homes through a series of very stupid ecomomic policies and then, when housing prices are out of control we use Phil Graham’s Enron loophole to create insane debt instruments that allow them to go up even further.  Early home speculators dump homes at a protracted top that is kept alive by a Fed that keeps dropping rates to unsustainably low levels along with a government mandate to "increase home ownership" run by Bush croney Alphonso Jackson (who resigned in a scandal) and the Fed chair went as far as to endorse ARMs as to say (2/23/04) "Overall, the household sector seems to be in good shape… American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."  For Greenspan, that was a ringing endorsement!  This led to an explosion of high-risk loans and lax lending standards did the rest.

This caused US homeowners to double their mortgage debt from $5Tn to $10Tn, the bulk of which was sucked up by FRE and FNM gone wild.  Now that the American people took on $5Tn worth of debt and signed their land over to these institutions, it was time for the DEFLATION Jefferson warned us about and rapid attack on the financials has allowed the bankers of the ultra-rich like JPM to take out smaller rivals like BSC and now they are poised to take control of FRE and FNM and their $5Tn portfolios for a combined market cap of $20Bn - Mission accomplished!

I’m sure it’s all just an innocent coincidence that begins and ends in an eight-year cycle that coincides with the Bush presidency.  Yeah, it could have happened to anyone…  I think even his dad had some bad luck with the banking sector as well and his brother Neil had a spot of trouble if I recall.

As usual, you’d think I’d be more pessimistic but I’m not.  Our long national nightmare is finally coming to an end (until Jenna is ready to run for office) and the mission has indeed been accomplished with the nation near collapse and all the people indebted up to their eyeballs to a priviledged few and forced to pay huge portions of their income for necessities like food and energy.  Like any good farmer, these crooks know not to overwork a field and they will now allow us to recover a bit so that we can make our loan payments and save a little money for the next great robbery, probably of the Social Security system next time (they took a stab at it this time and failed to toss it into the market).

I’m concerned the game will not really be over until we do see FRE and FNM "rescued" by the private sector, who will buy out those institutions with their grossly inflated dollars.  JPM’s Dimon has warned us that other failures may follow and that worries me as well.  I though LEH escaped the attack of early June but they are still down at $20 and still a potential takeover target so we’re not going to mess around with financials, just following our plan to hold the ones we have. 

What we will do is concentrate on companies that do provide good, solid values and are oversold and there are plenty of candidates there.  That’s another reason I remain optimistic because, as I prepare for the mid-year Long-Term Portfolio Review, I see PLENTY of great bargains and I see an economy that is still held down by that ONE thing, that’s ready to move on once this raid on American assets winds itself down.

Today’s tickers: YHOO, AA, EMC, XLE, USO, GS, WB, C, CROX, LOGI

YHOO- Just one day after news that Yahoo-Microsoft deal may be warmed-over if Yahoo’s sitting board is dumped comes evidence in the option market of an anticipated October resolution to the unresolved takeover. Shares in Yahoo rose 3% today to $24.63 as a mammoth-sized block trade appeared in the October contract. The trade had all the earmarks of a long ratio call spread, with the trader buying 70,000 lots at the October 25 call strike at $2.28 apiece and selling 140,000 lots at the 27.50 call strike for $1.19. In this case the trader took a 10-cent credit on the transaction – selling twice as many out-of-the-money calls to keep trade costs low, even at the expense of upside exposure – and would be looking for shares to trade at least above 25 by October but not to surpass 27.50. This is further reinforced by the fact that the trader apparently sold twice as many 27.50-strike calls as he or she bought 25-strike calls. This would leave half the volume at the 27.50 strike call uncovered, thus leaving the trader vulnerable to hefty upside risk if Yahoo shares blew past $30 and he/she was exercised on the calls. The maximum potential profit for the trader occurs if Yahoo shares close at exactly $27.50 by October’s expiration, in which case the trader stands to pocket some $18.2 million. Interestingly, this is the second large-volume trade in a week to wager on a $27.50 close by mid-October. Last Wednesday, a 61,000-lot short straddle at the October 27.50 strike generated more than $7 in premium for a trader betting on precisely that premise. In any case, the wager doesn’t imply much premium in the event of a new Microsoft offer – and may be betting on only a partial takeover, or no deal at all.

AA- Shares in Alcoa rose .63% to read $33.60 ahead of its after-the-close earnings report, an event which marks the unofficial chow bell of earnings session. Options traders are still pricing in about a $3 move on back of the numbers, but even with call-side premiums sharply lower this afternoon on back of the share price action, the late-session volume favors call positions to puts by 2-to-1. We noticed some indication of call spread activity occurring between the 32.50 and 35 strikes, where a 5,000-lot position was implicated. This could be a last minute contrarian bet on upside share price action for Alcoa shares following the earnings announcement, with a trader buying the 32.50 strike and selling the 35’s.

EMC- News of the departure of VMW founder and CEO Diane Greene and a sharp cutback in its year’s sales guidance had a predictably awful effect on VMWare (whose shares paid a 25% penalty to $40, crashing through the 52 week low, and implied volatility spiraled by a nearly identical percentage rise). But it was downright deleterious for VMWare’s parent company, EMC Corp, where the perceived risk measure rose 28.9% to 51.2% earlier today -a six-month high. Compared to the 30% volatility shown by EMC shares in the past, we can conclude that the news out of VMWare has led option traders to ascribe about 61% additional price risk to EMC Corp shares over the next 30 days, with a pronounced bias to the downside. Even with its earnings report scheduled for July 23 (coinciding with the August options contract), we observed traders sell out of July 15 calls, the value of which have plummeted 86% to just 7 cents today. Fresh put buying at the August 13 and 14 strikes suggest further declines past these newest lows in the aftermath of earnings. Evidence of stability in EMC Corp’s share price surfaced further out in the option calendar, notably in January calls, where calls at strikes 12.50 and 15 were heavily bought on the offer. EMC Corp closed 11.2% lower at $13.44.

XLE- An early-session pullback in crude oil futures and confident forecast by oil investor Boone Pickens that lower demand for oil will bring prices back to the $100 level over the next 2 years led to a degree of froth being blown from the top of the Energy Select Sector SPDR. Shares closed 1.5% lower at $81.54 today and the fact that puts out-trading calls by nearly 3 to 1 speaks to the defensive drift in the market today. One notable trade here involved a 3,200 lot put spread in the July 18 contract, with a trader buying 85 strike puts at $4.05 and concomitantly selling 80 strike puts at $1.40 for a position that first breaks even for the trader at $82.35, but sharply limits any substantial near-term downside.

USO- For further confirmation of the pullback thesis in the options market, we took at look at action in the US Oil Fund. Shares in the fund responded to the paring of oil futures with a 4.4% decline to $109.89. With about 142,000 options in play by day’s end it qualified for our scan of top-50 most active option families with heavy buying in July puts at strikes 104 and 105. If these trades are involved in credit spreads with puts at strikes 107, 110 and 115 (where most of the volume was sold to the bid), it would imply residual firmness in oil prices for the remainder of the July contract, but the overwhelming preponderance of puts traded relative to calls (contracts to sell the fund are outmoving contracts to buy it by a factor of 3.5) tells us that the mood today favors protection against further downside. Just how low will it go? Our option scanners detected heavy, fresh buying in January 80-strike puts, which traded for $4.40 today – that premium requiring a break below $75.60, or 31% below current levels.

GS - Shares in Goldman Sachs – long considered the least dingy of these dogs – reversed early-session losses to pull off a 3% gain at $174.90. With some 132,000 options active, calls and puts showed a relative balance for much of the session. Earlier today we noted heavy activity in Goldman’s August 160 puts, commanding $6.30 per contract – a position that requires Goldman shares to chip away at least another 8% over the next month or so. Option traders currently see about a 1-in-3 chance of that coming to pass.

WB- Fed chairman Ben Bernanke’s promises of a clampdown in subprime and exotic mortgages seemed to stanch some of the bloodletting from the now-anemic shares of Wachovia . Shares rose 13% to $15.70 by day’s end, and with more than 560,500 options trading, Wachovia as among the top volume movers on our platform. Significantly, this has been due mainly to the 44,000-strong volume in July 12.50 puts (exceeding open interest), which has sold off heavily today, after losing more than half its value overnight. Late-session action also showed more than 345,000 lots trading in July 30 puts, volume that may have been tied to stock.

C- Citigroup shares also managed to wring a tiny advance out of Bernanke-speak, up 6% to $7.37. But a look at the 220,000-strong volume this afternoon showed evidence throughout much of the day of option traders looking for Citi shares to fight a losing battle with the $20 threshold for the remainder of the year. Earlier today we observed what looked like a 1,000-lot call spread go through in the September contract between the 12.50 and 20 strikes earlier today, a position that given current premiums would require Citi shares to trade between $16.31 and $20 to be profitable for the buyer, but it should be noted that the 20-strike calls have traded on much heavier volume, and most of this is trading through the bid. December 20-strike puts have mostly been bought.

CROX- Will Crocs finally catch a break…? Shares in the fad clog maker – which have taken a 80% in value this year alone - rose 14% to $7.90 today – coincidental to the fact that Republican presidential candidate John McCain is said to have stumped for Colorado-based Crocs in a campaign speech in Denver yesterday. A writeup of McCain’s speech quoted the presumptive nominee as saying, “Building barriers to Crocs or any American company’s access to foreign markets will have a devastating effect on our economy and jobs, and the prosperity of American families.” So has Crocs achieved the equivalent of a “McCain put?” Implied volatility the shoemaker Crocs rose 15.8% to 125.4% - towering over the 57.4% historic reading in the stock – and what’s more, we observed some 25,000 lots of fresh volume bought on the offer in September 7.00 calls. Crocs reports earnings on July 25.

LOGI- Logitech – Shares in the maker of computer mouse trackballs, game controllers, keyboards and other digital miscellany rose 2% today to $26.65. Earlier today, when Logitech shares were trading sharply lower, we observed an increase in option trading volume to 9.5 times the normal level, appearing in an interesting 3,000-lot put spread in the front month. Here it appeared that a trader sold the upper-strike 30 puts for $4.60 against the purchase of 25-strike puts for 80 cents, taking in a $3.80 credit to wager on the spread between those strikes narrowing over the next week and a half in the event of a rebound for Logitech shares. Implied volatility on all Logitech options reads 51.5% against a historic reading of 38.6%.

Vice President Dick Cheney’s office sought to alter a federal official’s prepared testimony about the health consequences of global warming.

You would think that would be the story of the day in the news but it barely rates a mention as we have come to expect deception and witness tampering from our country’s second in command.  According to the WSJ:  In a letter dated July 6 in response to questions from the chairwoman of the Senate Committee on Environment and Public Works, Barbara Boxer (D., Calif.), Mr. Burnett said Mr. Cheney’s office and the White House Council on Environmental Quality "were seeking deletions" last fall to congressional testimony about climate change prepared by the Centers for Disease Control and Prevention. Mr. Burnett said the latter office asked him "to work with CDC" to remove from the testimony "any discussion of the human health consequences of climate change."

The issue of whether greenhouse gases endanger public health or welfare is significant because a finding by the EPA that they do would require the agency to regulate them under the terms of the federal Clean Air Act, spurring new rules across a range of industries.  This is possibly one of the factors affecting coal at the moment as it seems that "clean coal" plants may be called into question.  We need to keep our eye on affected utility companies as well.

Cheney’s pals in Iran had a missile test today that has sent oil back up $2 pre market for the 10th time the same excuse has been used in 4 years.  Yes, Iran has missile, yes, they test them once in a while.  Perhaps if the Vice President didn’t order secret war plans to be drawn up for Iran and then have one of his staffers leak his plans to the press, things wouldn’t be so tense, but oil was languishing at $80 last October and the VPs actions were just what we needed at the time to boost the price over $100 as the "march to war" with Iran heated up.  Of course, despite the fact that he was caught red-handed lying about intelligence on Iran back in March, Cheney keeps banging the drums - throwing the oil markets into a frenzy and driving the dollar relentlessly downward as investors fear yet another disastrous war is in the making.

That’s why I’m optimistic!  They can’t keep this up forever.   In fact, they can’t keep it up past Jan 20th so the end draws near and there will be no more Pumper-In-Chief to keep what is now a $40 "terrror premium" in the price of the 21M barrels of oil a day that this country consumes.  The end is near and commodity traders are not known for sticking it out until the last minute so I figure they have until the end of hurricane season tops. 

Asia didn’t see this run-up until late in the day and the Nikkei fell off a cliff as crude climbed, dropping over 200 points after a nice open.  The Hang Seng also dove in late trading, then recovered on last minute buying but the 22,000 barrier held tough to the upside.  India flew up 614 points, a 4.6% gain on the day and the Shanghai Composite made it back to 320, a nice 10% improvement over last week but oil was "just" $136.74 at the close of China trading so, once again, we will be able to play the markets by keeping our eye on oil today.

Europe is up about 1.5% as the dollar rises to test 73 again today, which is great for their exporters and gives the EU reason to believe that the Fed may actually follow them and tighten rates to control inflation.  Financials showed a lot of strength and UK homebuilders announced big staff cutbacks and were rewarded for their efforts.

We should be happy just to hold our gains from yesterday but I’d like to see us do better than that.  We are very concerned with getting a big draw in crude inventories, caused by NYMEX traders refusing shipments of all but 21M barrels scheduled for July deliveries, effectively shorting our country 5M barrels a week to offset the dreadful news from Mastercard’s Spending Pulse Survey that shows 4% less consumption than last July 4th weekend and, even more startling, a 4.3% decline in total US gasoline consumption in the past 3 weeks alone - that’s VERY rapid demand destruction.

Let’s remain cautiously optimistic today as we need to keep an eye on how many of the above factors are dogging our corporations as they report on Q2.  AA came up roses yesterday and we have a biggie from GE on Friday to look forward to, it’s going to be an interesting week to say the least!

1PM is the re-announcement of the Air Force tanker deal, the loss of which diproportionately tanked BA from the $80s all the way down to $65 (it’s only 2% of their projected revenue) so we’ll see if we get a disporportionate reversal today…