Google missed by 9 cents! 

Oh my gosh, a 9-cent miss - quick Tina, get to the store and load up on the beans and buckshot and I’ll try to hold down the fort…  Without that 9 cents, I’m very concerned that Google won’t hit their 2008 EPS goal of $20.14.  I mean they beat last Q by 31 cents and the stock gapped up $80 and rose quickly to $602 but now that they’ve missed this Q by 9 cents (despite the fact that the $4.63 they did earn is .10 MORE then the $4.53 they earned last Q) I guess our whole premise for liking GOOG is just shot to hell.

Let’s review the carnage:

• Revenues were $5.37Bn, up just 39% from last year, when the stock was at $550 in early July and rose to $725 in October (after falling to $500 on that "disappointment.")
• Operating income was $1.58Bn, only 29% better than last year.
• Revenues on Google-owned sites were $3.5Bn, up 42% from last year and up 4% from last Q (when we gapped up $80)
• Revenues on Partner sites were $1.66Bn, up 22% from last year but DOWN 2% from last Q.  Ah ha!  There it is!
• Cash flow for Q2 was only $1.77Bn, down $10,000,000 from the $1.78Bn that gapped them up $80 3 months ago. 

So you can certainly see why $16Bn worth of market cap was hacked off this company in after hours trading.  I mean, if you are only going to make $1.5Bn a quarter, what’s the point?  At this rate, Google could perhaps earn as little as $19.80 per share in ‘08, that would be a p/e of 26 for a company that’s growing 30% a year.  Average p/e for the Internet Information Providers sector is 30 and 30 x $18 a share is $540 so another 10% knocked off earnings and they are still way undervalued at $500.

That makes it pretty easy for me to hit the BUYBUYBUY button on GOOG tomorrow.  We’ll have to play it by ear but I’ll generally be looking to take out callers and will resist all but token coverage into the weekend as the only difference between this quarter and last quarter is that this quarter calls outnumbered puts by a wide margin and last quarter, Google was heavily shorted. 

I’m going to be taking a gamble on whatever contract I can buy for $1 at the open, maybe the $520s and I’ll also be grabbing whatever August calls are $10.  We have our two butterfly plays and we’ll have to see what the best adjustment will be but we’ll probably move our longer puts into a vertical anticipating a rebound.  This is going to be a lot of fun but I am worried that the Aug premiums will not deflate as fast as we’d like as, obviously, a move like this increases the implied volatility of the contracts.

Of course, we’re going to take the opportunity to roll down our calls.  Spending $5 to gain $10 in position in a stock you believe in is one of the great gifts of the option market so when you are $40 out of the money and need to spend $15 to roll down to be in the money, realize that you are spending $15 to buy $40 in position and, if GOOG goes up $40, that will become a 166% return on your investment.  Also, rolling down allows you to get in position to sell calls to someone else, so you can get most of that money back very quickly by taking on a caller.

If you are in August, look to roll down to September and if in September, look to go to December and if you are in December, you’re probably fine just rolling down as you have October earnings ahead of you and 4 months to sell premiums. 

This is also a great opportunity to take out our AAPL callers as Apple is down in sympathy with Google even though the two companies have virtually nothing in common other than being big name tech companies.  Of course, Google search is the default on the new 3G IPhones and Apple is giving GOOG 10M more possible customers this year.  And let’s not forget that GOOG just took over YHOO’s ad network (leaving Yahoo doing I don’t know what) and they have yet to monetize YouTube, which is getting upwards of 100M hits a day.

Long and strong on GOOG is my general plan…

I suppose some other stuff happened today, IBM was good, MER was bad but not bad enough to justify their discount price.  MSFT missed but we know that company is run by the second-worst chief executive in the country (hey, maybe Bush does have a future ahead of him) and anyone who has seen (or remembers) the Zune did not expect them to beat.  ZION missed but not enought to bother anyone and COF also missed and no one seems to care.  This represents a MAJOR change of attitude from last week!

Of course, it’s all up to C and all up to oil to stay below $132.50 and we can be happy, happy campers for expiration day.

Today’s tickers: LUV, MFA, C, VIX, XLF, MSFT, BRL, CCL, ARM, BWA, PXP

LUV- It’s fair to bet that the relief rally sustained by airline stocks following a hard-won comedown in the price of oil and less-bleak than expected earnings from Delta and AMR Corp, wasn’t hurt by news that former airline analyst and gazillionaire contrarian investor Wilbur Ross had bet $80 million on a struggling Indian airline – and an announcement that his firm was “looking at everything that has been hurt by fuel” for similar other news. Coming in the thick of earnings season – and a week ahead of numbers from Northwest and Southwest Airlines – the Ross endorsement probably wouldn’t hurt the market’s appetite for calls, and indeed that’s what we’re seeing in options of Southwest Airlines, which traded at 11 times the normal level this afternoon. Shares closed 6.3% higher at $14.62, as it looks like traders unwound positions in July 15-strike calls and moved them to the August 15 strike on a volume more than twice the open interest, keeping upside expectations intact.

MFA- An unusual trade surfaced in MFA Mortgage Investments earlier today that not only sent the total option volume to some 133 times the daily average, but also stacked up to nearly 4 times the total open interest in MFA Mortgage Investments period. It appears as though the trade here was initiated by a seller at 25 cents per contract at the August 7.50 call line, suggesting little confidence in a return to price levels last seen in late spring. MFA Mortgage Investments is currently trading 41% off its 52-week high. Shares closed 2% higher at $6.35.

C- Citigroup shares came in 13% stronger at $16.43 in fairly subdued options trading just two days before its own earnings announcement, which coincides with the expiration of the July option contract. Front-month options currently indicate a $1.61 price move (10%) on back of the numbers. This afternoon’s calmer options activity showed traders eagerly unwinding 15-strike puts as 17.50-strike calls traded to buyers and sellers. August 20 calls traded on similarly two-way traffic. Implied volatility at 78.7% compares to a historic reading of 62.8% - coming down 13% from yesterday’s angrily elevated levels.

VIX- Stocks rose sharply amid resuscitated faith in financial issues and a second sharp pullback in the price-per-barrel of oil. Today’s backdrop also included a second day of congressional testimony by Ben Bernanke – in which the Fed Chairman appeared to conditionally sanction dollar intervention in some cases – and oil inventory data showed a build in crude oil and gasoline stores. News of a stricter interim limits by the SEC on short sales of major financial stocks, together with Wells Fargo’s better-than-expected Q2 results before the bell, chilled some of the euphoria in put trading that has become a hallmark of financial sector options in recent days. All of the above correlates negatively to implied volatility in the broader market, offering a reasonable explanation for the 12% drop in the reading on the CBOE Volatility Index, which closed at 25.10. Heavy call action in the now-current August series showed traders still locking in long protection at the 25-strike as higher strikes traded to buyers and sellers. Earlier today we observed what looked like a 5,000-lot call spread in September between strikes 22.50 and 25, which would indicate much tamer, more predictable readings in the volatility index heading into September. A 9,000 lot position in the September 30 calls traded for $1.15 to the middle of the market, and it is not known at present dispatch whether this was part of a ratio spread, or an independent position wagering on or against a new test of 30 in the fall.

XLF- Financial Select Sector SPDR - The financial sector ETF rose 12% to $19.28 by day’s end Wednesday, with the slight volume bias to calls indicating at least a near-term breather for financials. Earlier in the session we observed significant buying pressure in the July 17 calls, extending into the August contract at strikes 19, 20 and 21. September activity showed some evidence of traders selling calls at strikes 22 and 23, which could indicate a cap on any significant upside for the XLF over the next few months.

MSFT- Microsoft shares traded higher throughout the session, closing with a 4% uptick to $27.16 ahead of its earnings report tomorrow. The near-expiration front month options are currently pricing in about a $1.70 move (6%) for Microsoft shares between now and Friday, which is moderate, and implied volatility on all Microsoft options actually indicates less perceived risk of turbulence over the next 30 days than it has already charted. Unwinding of July call positions continues today at strikes 25 and 26 as these positions appreciated in value today on the stock price movement. Buyers of call options have readily taken to the August contract at strikes 26 and 27, suggesting a stable view for Microsoft shares heading into next month.

BRL- Option implied volatility in Barr Pharmaceuticals rose nearly 27% to 55% by day’s end as its option trading activity quickly picked up to some 12 times the normal level. The massive disparity between its implied volatility reading and the 27.4% degree of deviation that Barr Pharmaceuticals shares have already documented suggests option traders pricing in twice the potential price risk over the next 30 days, heading into its earnings report on August 7 – an astonishing level so far in advance of earnings. With calls outmoving puts by more than 7 to 1 as shares read 2.3% higher at $47.15, the option here appears to favor the upside, with heavy action in August calls at strikes 45, 50 and 55.

CCL- Shares in cruise liner Carnival Corp rose 10% to $33.21 today, trending with sector peer Royal Caribbean, on back of the oil price decline. An early spike in option trading activity that piqued our “Hot by Options Volume” scanner showed traders seeking not just long positions at the August 32.50 call line, but positioning via a 6,000-lot long call spread for sustained, marginal upside heading into the first of the year. The spread occurred between strikes 32.50 and 40 for a net debit of about $2.00, which implies another 7% upside move between now and mid-January just to break even. The $40 short strike would cap the upside for Carnival prices last touched in May. Interestingly, implied volatility in Carnival Cruises continues to loiter at 52-week highs, with the current reading on all Carnival options coming in at 55% - more than one-third higher than the historic reading on Carnival stock. Put open interest in Carnival has swelled since June and currently outsizes call open interest by nearly 2-to-1.

ARM- Automobile stocks continue to harvest relief gains following the decline in oil prices, but option traders aren’t relinquishing defensive or speculatively bearish positions just yet. Shares in auto parts supplier ArvinMeritor rebounded 7% to $11.31 in afternoon trading, as we noted an increase in option trading volume to 8.6 times the normal level. This appeared in a 5,000-lot position at the August 12.50 line, which appears to have been bought on the call side for 55 cents and sold to the bid on the put side for $1.95. This looks to us like a short conversion strategy in which the trader may have sold short the stock, bought the call, and sold the put against that underlying position in an overall bearish view on the underlying stock.

BWA- In another car industry play, shares in Borgwarner Inc the maker of powertrain components for car engines rose 6.5% to $39.61 today as its options registered an early volume increase to 11 times the normal level. Early on we observed what looked like August strangle activity ahead of Borgwarner’s July 31 earnings release, but it now looks like the 2,000-lot position we saw in the August 35 puts were bought independently at $1.35. This may have been funded in part via a 2,000-lot short call spread between strikes 40 and 45, which would have generated a 63-cent credit for the trader with the proviso that shares not break the $40 mark by August 15. .

PXP- Shares in Plains Exploration & Production, a West Texas/Gulf Coast-based driller, dropped 4% to $67.63 this afternoon. An early morning rise in option trading volume appeared due to an out-of-the-money 6,000-lot put spread in the November contract between strikes 45 and 60. This trade was logged to the middle of the market, so we are unable to confirm the order flow here, but the spread on this trade at $2.50 would indicate a buyer of this spread looking for a break at least below $57.50 by mid-November. A seller, meanwhile, would take the credit in anticipation of Plains Exploration & Production remaining well above the $60 level into the fall. The company’s shares have risen more than 25% this year so far, as it prepares to report earnings on August 6.

And the hits just keep on coming!

Building permits and hosing starts were much stronger than expected (10%) and that should push our beloved HOV’s higher (but don’t get too excited, the gains were the result of code changes in NYC) while jobless claims were slightly below expectations, also very nice.  We get the Philly Fed at 10 and expectations there are for a very pathetic -15 and any beat will give us a nice boost.  Oil is still down at $133, hopefully they won’t take this good economic news as a sign that we like paying $133 a barrel… 

Earnings are coming up roses as well with too many beats to list but notably Dow components JPM, KO and UTX, with JPM and UTX in our portfolios (we prefer PEP to KO) and we’re looking very good in pre-market trading and looking ahead to the big G(OOG) tonight along with IBM (got ‘em), COF, MER and MSFT (got ‘em).  Tomorrow morning we see if C (got ‘em) really deserved to lose $250Bn in market cap or if Meredith Whitney is a loon - that should be fun and you know where my money is on that bet!

We also hear from ex Dow component HON and OIH mainstay SLB tomorrow so a pretty serious day for a Friday.  As long as oil stays down we are going to be fine.  So far, in this whole big week of earnings, only HST, HOKU and JCI have guided down versus upward revisions from ALTR, CSGP, VFC, LUFK, STJ, AOS, FCS, HBAN (a bank!), KNL and AMTD (a broker!).  I still maintain that a lot of the guidance is still very conservative as CEOs and CFOs are affected by the same gloom and doom pronouncements that you are and all these projections were done with oil in the $140s and looking to go higher.

Oil is not dead yet, even though there was an 8M barrel build in inventory and products vs. an expectation of a 4Mb draw (we were surprised too) no one has ever accused the NYMEX of reacting rationally to what has to be the most shocking example of demand destruction ever seen.  As I pointed our earlier in the week, imports are off close to 1Mbd and they are shipping 1.4Mbd OUT of the country to make it look like we need more oil than we do and STILL 1Mbd is building up in inventory - that is shocking!

Asia was shocked back to life after seeing our rally yesterday and the Hang Seng gained 500 points (2.4%) with the Nikkei gaining 127 (1%).  China’s GDP growth "slowed" to 10.1% and C (got ‘em) won approval to offer debit cards in China.  Europe is off to a flying start, with 2.5% gains so far (9 am) with financials leading the charge.  The UBS probe continues and the Senate probe is indicating the US is losing $100Bn a year to offshore tax evasion schemes.  Bush is, of course, against closing down those loopholes as many poor widows and orphans have offshore accounts and cutting off their ability to hide assets would be an unfair burden on the average American. 

I’d love to see a nice, relaxing gain today, rather than another huge rally.   Something to show us that there is thought being put into these purchases, rather than program buying or knee-jerk rushes off the sidelines by investors who think they are bottom fishing as that can be a sign of a bull-trap.  We are well covered, perhaps over-covered but, as I said last night, our 3/4 covers in July calls can be rolled to 1/2 covers of August calls and there’s no way we want less than that over the weekend and, with all the extra cash we committed this week, a more conservative strategy is appropriate until we get a clear indication that this is more than a bounce off 11,000.  If the market really starts to fly again, the DIA calls are the way to go for a nice momentum play.

Things are starting to get fun out there but let’s be careful!