Wheeee - that was fun!

I wasn’t worried…  OK, I was very worried, especially after my opening statement to members on Tuesday morning where I said: "Something is simply trashing the value of long calls and this is not the best time to sell them but is a great time to buy.  I know it’s very hard to do that now but nothing has changed that drastically in 2 days that can’t reverse next week.  It’s a sentiment thing and nothing else.  Anyway, I doubled up on GOOG $540s at $9 and took out the callers.  I’m taking out callers on other positions but, if we take another leg down, I will cover in the money 3/4 and use that cash to roll down wherever possible.  XXX"  There is nothing harder than sticking with a strategy near a turning point, it seems like everything is going against you, your strategy is failing and NOW we have to commit MORE???  Not a comfortable feeling.

We were so scarred last week that I’m still a little gun-shy, even though this afternoon, with the Dow flying and oil falling I was able to say "Everything is proceeding as I have foreseen" as our bets on the banks and the Dow components really began to take off.  We took 3/4 covers with a mixture of July calls and index puts and hopefully we won’t get burned to the upside tomorrow but it’s not like we weren’t going to sell August calls anyway and a 3/4 July cover can generally be rolled to a 1/2 August cover and that will be our plan if the market continues to roll higher.

Congratulations to all who stuck with the program, that was a truly amazing one-day comeback but we’re not going to get all crazy just yet.  I said at the beginning of the week that I need to see 11,800 on this run to regain confidence in the markets and, so far, all we have is a retest of last week’s average.  11,400 was the high for July (sans occasional spikes) and THAT is still down 1,600 points from May 19th.

We committed a lot of cash to our new positions and, on the whole, I’d rather go back to cash or stay well covered than take a huge risk based on one or even two day’s trading.  We still have to get past GOOG and C earnings so, to make two Star Wars references in the same post, I’ll say "Great shot, now don’t get cockey kid!"  I do believe I’m right, I do believe the market is way oversold and I do believe that we can have a great recovery here but we are not as flexible as we were before.  We have to manage our capital and concentrate on getting back to a good balance so let’s take some winners off the table, leave the ones that we have a lot of confidence in and OBJECTIVELY view the market action.   If we are having a real rally, 13,000 is over 10% away from here, 10 days like yesterday to play and 13,000 is the bottom of the range we traded in last year after our spring breakout.

It is still all about oil and oil is a major wildcard that can turn on a dime.  If oil collapses, then I’m willing to take a lot more upside chances but $133 is not a collapse yet, it’s only testing the 50 dma at this level.  We need a proper breakdown to go hog wild and pull off the covers entirely.  I think we’ll get it, we should get it, I want to get it so let’s hope it happens because, as I said last week, it’s the only thing that’s really wrong with the global economy.

What has happened before is that market rallies on mild oil pullbacks have been taken as a signal that we can "afford" oil at that price and the NYMEX crooks have seized on that to create a bottom.  What can save us now is what I talked about recently, that now the market is so beaten down that it is more likely that you will get a double investing in a bank than you will investing in a barrel so it now makes sense for the manipulators to rotate themselves out of oil and into the markets. 

Remember the timing of rule changes support this theory (assuming you believe GS controls the universe) as the NYMEX margin requirements were doubled, making it harder for new buyers to come in and support oil and making it harder for new shorts to come in and make money to the downside, leaving the existing contract holders in control.  Combine that with the new shorting rules on the banks and you have a funnel that allows money to move from oil to the finanicials with very little risk of loss.  We’re not going to complain about this as we were ahead of these guys for a change - we never complain about evil market manipulators when they’re on our side!

Today’s tickers: XLE, AN, KMB, VIX, WB, F, AIG, DFS, EMC, INTC

XLE- Today’s $9 pullback in oil prices tempered some of the overweening bearish sentiment driving stocks lower, and sending shares in the Energy Select Sector SPDR 4% lower to $78.83. Given the overtones of Fed Chairman Ben Bernanke’s congressional testimony earlier today – which stated a fairly blunt case for demand erosion as well as his own commitment to combating the overarching inflationary threat – we were interested to see whether option activity would confirm or dispel a longer-term pullback below the $80 level. Earlier activity we noted in July 80 puts (trading to buyers and sellers) was later redoubled with heavy buying action at the 76 strike. The 4-to-1 overweight of put positions relative to calls indicates a very defensive posture among traders who are taking the demand erosion argument very seriously.

AN- Manna from heaven in the form of a $9 pullback in the price-per-barrel of oil helped leading automakers today…but did absolutely nothing for the likes of Autonation, the nationwide car dealership chain. Shares slumped 6.4% to $7.58 as we registered an increase in option trading volume to 28 times the normal level due to a massive, 31,000-lot position in October 5.0-strike puts. The 35-cent price tag on these puts – a 75% increase from yesterday’s level – and the 102% implied volatility (higher than the 89% reading on all Autonation options) suggest that these puts were subject to buying pressure. In any case, the implication here is of another 40% decline from current share price levels by mid-October, and looking at implied volatility versus the historic reading on Autonation stock allows us to infer that option traders are pricing in about 86% more potential turbulence to Autonation shares than they have shown historically.

KMB- Shares in Kimberly-Clark, the maker of Huggies diapers and Kleenex and Cottonelle tissues, bottomed below its 52-week low with a 6.5% decline to $55.01. Earlier today the company pre-announced Q2 earnings that revealed inflationary pressures taking a big chunk of its bottom-line. The company’s CEO also indicated that Kimberly-Clark would be passing these higher input costs along to consumers via sweeping product price hikes for the second time this year. Implied volatility on all Kimberly-Clark options rose nearly 23% this afternoon to 28.4%, ranking it among the day’s top-50 implied volatility gainers. This was accompanied by an increase in trading volume to 7.5 times the normal level, with what appears to be a preponderance of credit spreads involving August 50 and 55 puts – possibly indicating that some traders feel today’s selloff is overdone.

VIX- Fed chairman Ben Bernanke’s testimony before the Senate Banking Committee earlier today soberly acknowledged the asteroid field currently pummeling the nation’s economy – spreading financial sector dysfunction, putrid consumer sentiment, high food and energy prices, declining home values, and rising joblessness. But averring that the Fed remained focused on the inflationary threat as Job One, coupled with an implicit acknowledgement of the country’s current recessionary malaise, brought increasingly frustrated market participants to embrace a common theme: demand erosion for oil. Shares are now off morning lows as oil prices have staged a jarring $9 pullback. Against this Grand Guignol backdrop, the CBOE Volatility Index brushed a reading of 30 earlier in the day as traders grappled not just with Bernanke’s testimony but also the implications of a Fannie Mae/Freddie Mac bailout being dropped into the laps of already severely tested U.S. consumers. The index closed off its highs, up .21% to 28.54, but consistent buying interest in VIX calls in the August contract at strikes 30 and above supporting this “slow grind higher” scenario that has been taking shape for the past several sessions amid successive losses in the S&P.

WB- Meanwhile, the “Grand Guignol” to which we alluded earlier continues apace in the financial space today. Implied volatility in Wachovia options rose 21% earlier today after Oppenheimer analyst Meredith Whitney cut her rating on the stock, calling the outlook for the bank “bleak,” and telling Bloomberg News in no uncertain terms: “(Financial) stocks won’t be taken seriously by investors until they revalue dramatically – and Wachovia is the outlier.” Though implied volatility later came off its blistering highs amid more subdued share price action (shares closed 6.5% lower at $9.20), earlier today option traders wasted no time in selling July 10-strike calls for 20-cent premiums, while buying heavily into July 7.50 puts (which expire on Friday) for 25 cents. The premium on this position denotes a 10% likelihood of Wachovia shares breaching the $7.50 by that time. Interest in low-strike puts extended into the August contract at the 7.50 strike.

F- Before a $9 pullback in oil prices gave rise to an abrupt turnaround in the fortunes of automakers, it was news of GM’s recessionary restructuring that sent traders looking for downside protection in both it and Ford, where shares closed .21% higher at $4.67. Earlier today we noticed activity from at least one option trader who seemed to see a slump below $4 as more or less an inevitability, buying a 10,000-lot position for 37-cents at the August 4 put strike. This position may have been funded by shorting a December call spread between strikes of 5 and 7 – which he or she would have done if confident that neither strike was likely to be exercised by December 19 – for a net credit of 56 cents. If this is the way the trade played out, the net credit on the December spread would have covered the entire cost of the protective August position and left the trader with a 19 cent credit besides.

AIG- Implied volatility in multi-line insurer American International Group rose 37.6% earlier today to 152.8% today – fast approaching 3 times the historic volatility on the stock, and quantifying in fairly stark terms the level of perceived price risk that the options market is pricing into AIG shares. Though implied volatility later pulled back as AIG pared some losses to close 8.6% lower at $21.49, it remains at the highest level we have on reading for AIG. Heavy put volume appeared to involve July spreads between the 20 and 22 strikes, with fresh volume in August puts favoring the 19 strike again at $2.24 per contract – up one-third in value overnight.

DFS- Options in credit card issuer Discover Financial traded at nearly 5 times the normal level as shares closed 4% higher at $13.43. The action here appeared in a put ratio backspread in the January ’09 contract, with a trader selling 3,750 lots at the January 15 strike and loading up on 7,500 lots in the January 10 puts. Even buying twice as many puts as selling them, the trader is able to pocket a $1 credit per contract on this trade, which wagers on volatile downside for Discover Financial shares heading into the first of the year.

ABX- Shares in the world’s largest gold producer, Barrick Mining Corp, declined 1.3% to $49.75 after announcing an unsolicited takeover bid for Calgary-based oil company Cadence Energy Inc. According to Canadian news reports, the bid was aimed at harnessing Cadence’s 3,600-barrel-per-day output to hedge up to one-quarter of the oil Barrick needs for its mining operations. Energy costs have been a major bane for metals producers, many of whom sustain a 1:1 increase in costs per rise in the price of a barrel of oil. With Barrick due to report earnings on July 31, corresponding with the August options contract, it looks like one trader may have anticipated the effect of high energy prices on Barrick’s bottom line, buying August 47.50 puts more than 4,000 times for $1.90 per contract in fresh positioning. The price tag on this position implies at least a 6% decline over the next month to break even.

EMC- Last week we noticed an increase in defensive position in EMC Corp options following the abrupt leave-taking of VMWare CEO Diane Greene. At that time (last Tuesday), implied volatility rose nearly 30% on the session to 51.2% as traders sought protection in August puts at the 13 and 14 strikes in seeming anticipation of an earnings shortfall on July 23. Today EMC Corp’s implied volatility continues to etch higher, ticking in at 54.4% as shares closed .95% lower at $12.53. Again, here some traders appeared to be bracing for volatile downside on back of earnings, but deployed a different strategy to express that view – selling about 11,000 lots in August 14 calls for 22 cents in a diagonal calendar call spread with January 12.50 calls, which were bought 11,000 times for $1.57. The trader in this case is taking advantage of a disparity in the implied volatilities of the two contracts (50.7% for the short August position and 44.6% for the long January position), betting that the value of the August position will decay more quickly (especially on back of an earnings miss). The value of the January position – in the mind of this trader – is likely to appreciate given some stabilization in EMC Corp prices at current levels by the first of the year.

INTC- Finally, Intel shares are trading 2% higher at $20.90 ahead of its after-the-bell earnings. While the price of the front-month straddle suggests a $1.36 move on back of the numbers (6%), early options volume today suggested option traders betting on fairly subdued price action, looking for shares to remain south of the $21 mark, but above $20. We noted preponderant selling in July 21-strike calls, but some evidence earlier today of credit spreads involving 19 and 20 strike puts, in which the traders would have taken a 30-cent credit betting on a close for Intel shares above the $20 mark by Friday. Implied volatility on all Intel options is ticking in at 46.7% against a historic reading of 36.3%.

The Consumer Price Index is up 1.1% for the month - that’s a 13.2% run rate!

Of course the "core" CPI, for all you consumers who don’t use food or energy and simply exist to purchase other things (sort of like Buddha with a gold card) is up "just" 0.3%, a run rate of 3.6% but the overall core is now up 5% year over year so the truth is probably somewhere in between.  Well I say Jimmy crack corn and I don’t care because oil prices are still down this morning and THAT is the ONLY reason we have a high CPI in the first place.

I’m in a good market mood this morning because we’ve already recovered from a 100-point pre-market drop as oil fell off it’s usual BS after-hours pump and WFC laughed off Meredith Whitney’s predictions and reported a net INCOME of $1.75Bn, or 53 cents a share (down from .67 last year) on revenues of $11.46Bn (UP 16%), a nice beat on the .50 expected by the average analyst. "We are open for business and getting lots of it," said President and Chief Executive John Stumpf. "We also continued to benefit from opportunities in this environment to gain new business and customers through selective acquisitions."  WFC is raising it’s dividend 10%.

Ms. Whitney downgraded WFC in April and said the company would need "at least" $4.5Bn in additional reserves (they needed $1.5Bn) and that they would earn just $1.20 for the year (the company is ahead of projections to earn $2.12).  WFC is where I choose to put my own money as they are a very solid bank who have barely flinched in this financial mess despite being very heavy in California, Vegas and other beaten-down West Coast markets.  Since her April attack, WFC has fallen 33% with a $5 drop in the past 5 days to $20.51 at yesterday’s close.  This is the irrationality of the markets - there was no evidence whatsoever that this bank was in crisis other than Whitney and her pack of roving hyenas effectively screaming fire in a crowded theater.

While the SEC is finally starting to ask Goldman Sachs a few questions about what BSC CEO Alan Schwartz claims was manipulation of BSC stock by the London office of GS in BSC’s final days.  LEH CEO Richard Fuld told GS’s Blankfein he was hearing "a lot of noise" about Goldman traders who allegedly spread negative rumors about Lehman. In recent months, Mr. Fuld has contacted traders he felt may have been bad-mouthing his stock, according to someone familiar with the matter.  Spreading rumors one knows to be false with the intention of manipulating a public company’s price is illegal - we’re talking Martha Stewart in the slammer kind of illegal, the kind of illegal even GS’s CEO may not be able to wriggle out of if it all hits the fan…

Contrary to what Blankfein’s gang would have us believe, NTRS reported Q2 earnings ROSE 4% to .96 a share on $1.09Bn in revenues (up 24%).  The .96 a share was a miss from the $1.05 the average (non GS, non Whitney) analyst was looking for but it included a .39 per share acconting charge.  Northern Trust said its corporate and institutional services business reported a 32 percent jump in revenue to $409.2 million, reflecting strong securities lending fees and new business. The group’s assets totaled $3.6 trillion, down 1 percent from last year.

Oh no - PANIC - run away from the financials.  Really folks, can you really believe that GS, Whitney, Cramer et al are merely incompetent analysts who can be off by 100% in their estimates of a financial institution’s earnings, or is it possible that they are nothing more than manipulative crooks trying to foment (Cramer’s word) panic in the markets in order to rake in profits and scare the retail sheep who follow them out of perfectly sound positions while they (or the people who pay them) secretly pick them up on the cheap for pennies on the dollar? 

Isn’t it interesting that, the FRE/FNM crisis gives former GS CEO Paulson an excuse to get the SEC to curb short selling of GS and other financial the same day that earnings start coming in that clearly show the panic was way overdone.  What does curbing short selling do?  It now allows GS et al to turn around and buy the very same financials they chased you out of with impunity as they can now manipulate the stock UP and they will get away with their sudden reversal by saying that the situation has fundamentally changed due to the SEC and Fed action initiated by former GS CEO and now Treasury Secretary Hank Paulson.  The fox is truly guarding the hen house and we, the investing public, are getting nothing but rotten eggs!

Asia was flat this morning and Europe is mixed with the UK off 2% on rising unemployment and the DAX flat but none of that matters to US markets today as we have oil inventories at 10:30 and Fed minutes at 2 pm along with testimony from Bernanke that will hopefully include my very favorite thing on TV, an episode I like to call "When Ron Paul Attacks."

We should have a very choppy market until we get past the testimony and past the inventory and past the Fed minutes so let’s just try to survive into the afternoon.  As I said last night, we are hoping for a weak oil reaction to the almost certain draw-down in crude, caused by NYMEX crooks shorting the oil market 20M barrels at the close of trading in June.  That is costing us 5Mb per week of July imports. 

INTC gave us a good report last night, driven by strong laptop sales (good for AAPL?) and should keep the Nasdaq up but we need the horsemen to pull it together.  I like RIMM right now, the Aug $110 calls are a nice buy at the open.

Be careful out there, it could go either way or both ways today!