Now we’re seeing some misses!

After the bell we got misses from AXP, EXP, RE, FNB, HPC, HXL, HIFN, LOGI, SNDK and TXN with guidance lowered by AAPL, MHK, SNDK and TXN while AXP said no more guidance - effectively saying they give up "until the economy turns around."  Well, that’s not very helpful is it?

AAPL’s earnings were fantastic but, as usual, their guidance was low but the big issue was and still is Steve Jobs’ health and CEO Oppenheimer’s comments (Jobs was not on the CC as usual) that "We get a lot of questions about Steve’s health, but would you mind addressing the situation? Steve loves Apple, he serves as CEO at pleasure of Apple’s board and has no plans to leave. Steve’s health is a private matter" did not exactly put the situation to rest.

SGP and MRK got bad news on Vytoren during the day and both companies lowered guidance over night so we have AXP and MRK assauting the Dow tomorrow and PFE will likely follow MRK down and T was killed yesterday and will probably go lower and JPM tanked with the financials after Paulson laughingly said he believes in a strong dollar on CNBC as it seems to be about as effective on reality as my daughters belief in faries.  TXN had sales down 2% and missed by 5% AND issued downside guidance on lower sales - they were executed in after hours trading but no worse than AAPL, who beat by a mile.

As was American Express, who were shockingly bad with earnings at .56 a share versus .83 expected.  Revenues actually increased 8% over last year to $7.5Bn but still below $7.6Bn estimated and the company had to set aside $600M in credit reserves and took a $136M charge against securatized interest against cardmember loans that was suddenly looking less secure than they thought.  Even worse, the company tossed guidance out the window due to an unexpected downturn in spending by their "affluent" cardholders, who make up a significant portion of earingns. "They may not be in the same situation as other [customer] segments, but the reality is that we’re seeing very affluent people who historically have had strong spending histories…change some of their spending behavior," CEO Chenault said.

"While we have been able to generate substantial earnings and returns relative to many in the financial sector, we do not expect to meet or exceed our long-term financial targets until we see improvements in the economy," Mr. Chenault said. Despite the results, "the position of our company today is financially sound and competitively strong," he said.

This will lead us to a fun retest of the lows of last week in many stocks.  I’m still seeing a fairly direct inverse correlation between oil and the Dow and it’s still not being discussed in the oil-boosting media but they jammed the NYMEX up $1.50 in the last 15 minutes of their session, bringing oil back to $131.50 and it seemed strange that the Dow stayed up.  Now it is no longer strange and we have a 100-point drop post market and you can point to a lot of things but when oil was at $131.50 on Thursday, the Dow was at 11,250 and when oil was at $135+ earlier in the week, we were below 11,000.

Oil used to not affect the markets because it was never such a significant factor in people’s spending.  Now that we are spending (at $131 a barrel and 21M barrels a day) $2.75Bn a day on oil which, combined with refinery mark-ups and ancillary food and other inflation, comes to about $5Bn a day on essential consumables - it matters a lot!  A 20% rise in fuel and food costs (they are up over 100% this year) takes $1Bn a day out of the hands of US consumers.  Already since last year $2.5Bn a day is being spent on food and fuel that was able to be used to purchase IPods and Levis last year as well as used for paying for things like the mortgage and the American Express bill.

This is THE problem with our economy.  $912Bn being funneled away from companies that produce things that last and used up on consumables and even the companies that produce the consumables are facing rising costs so they aren’t even making more money selling them to us anymore.  As TBoone points out, the real winners are the guys who have black goo in the ground that used to get $20 a barrel and now get $140 a barrel for the same goo, coming out of the same ground.  The failure of this administration to address this situation and take action has destroyed the American economy and is on the way to destroying the American way of life.

People are in big trouble in this country and we need our leaders to……… LEAD!  The celebration at the NYMEX came as the crooks who trade over there cancelled all but 63M barrels of the 367M barrels that were available for August delivery just 2 weeks ago and they are going to create another artificial shortage of oil while they pray for a hurricane to further disrupt supply so they can mark up the 313M barrels they have now "ordered" for September before they cancel them.  Hopefully Pelosi can get something together that will force Bush to open the SPR so they can choke on those contracts but, until then, the dollar is getting weaker and oil is going higher and our market is heading back down until we get oil under control.

Today’s tickers: BSX, WPI, SGP, MRK, AZN, AMGN, CELG, BBH, BAC, KRE, XLF

BSX- Implied volatility in the maker of “less invasive” medical instruments, Boston Scientific Corp, is elevated at 45.4% (compared to 33.8% historic) ahead of its after-the-bell earnings report as shares trade flat at $13.84. An increase in options trading volume to nearly 8 times the normal level shows traders eschewing the front month, however, and entering 10,000 lot positions in November 15 calls for 90 cents, and again at what looks like the January 10/17.50 collar or strangle. If the January volume was a strangle, it would have been a short position favoring rangebound activity between the strike prices with a 75-cent credit hanging in the balance. A collar at these strikes given the order flow would also have been short, with a trader selling the 10-strike puts and buying the 17.50-strike calls to protect a short position in the stock. Boston Scientific shares are up 19.6% for the year to date.

WPI- Last week’s much-ballyhooed buyout of Barr Pharmaceuticals by Israeli sector peer Teva, and this morning’s offer by Roche to acquire the remaining stake in Genentech has option traders looking for the next possible takeout target. To that end we’re look at options activity in Watson Pharmaceuticals, which we should be careful to stipulate has no specific rumor tied to its stock, but where some option traders showed an unusual interest in out-of-the-money calls today. With shares down 2.5% to $29.13 we registered an increase in option trading volume to nearly 10 times the normal level, situated in November 35-strike calls, which were bought for 40 cents. Given that Watson shares have traded as low as $23.90 and as high as $33.58 over the past 52 weeks, a buyer of this strike is looking for a 5% premium to the 52-week high by November 21. This seems unusually precise timing for upside of that magnitude – especially given today’s share price action. Implied volatility at 34.6% is elevated above the 23.6% historic reading, but this gauge of potential share price turbulence has risen steadily (some 44% in fact) since mid-June. Today’s activity in the strangely suspicious out-of-the-money call strike brought overall call volume in Watson Pharmaceuticals to a 3-month high.

SGP- Schering-Plough – Shares are down 14.3% to $18.40 after news that its drug Vytorin, which is co-marketed with Merck, had failed to meet its primary clinical goals and apparently carried a slightly higher risk of cancer. Schering-Plough and Merck both postponed their earnings announcements until after the bell pending the Vytorin update. While implied volatility in Schering-Plough options remains very high at 62% (against 36.5% historic, and far higher than the reading in Merck), option contracts are moving at more than 21 times the normal level at present report with a slight edge to calls. Excessive volume at the 20 strike has been mostly bought, while the 22.50 strike calls have traded to mostly to sellers. The preponderance of fresh longs at the 15 and 17.50 strike puts suggests that other traders may be positioning long of volatility via strangles, or simply bracing for more downside.

MRK- As we indicated above, despite Merck’s involvement in the Vytorin saga and its similar move to postpone quarterly earnings until after the bell, both the downside and the implied volatility setup is far more subdued in Merck as compared to Schering-Plough. Shares are down 6.7% at present at $35.12, and implied volatility on all of its options ticks in at 37.2% - that’s about a 12% gain from the close on Friday, but still well below the extreme gains we’re seeing in Schering-Plough this morning. Front-month options suggest about a $3 move for Merck shares between now and August 15, which we can reasonably interpret to mean an 8% move on back of the earnings. The action here appears more resolutely contrarian given the share price action, with virtually all of the open interest in August 37.50 calls being actively deployed today and trading mostly to buyers. Volume at the 32.50 and 35 put strikes is selling mainly to the bid.

AZN- Options on the American depositary receipts of global pharma giant AstraZeneca picked up to 4 times the normal level after analysts at J.P. Morgan offered bullish prospects for its July 31 earnings report, forecasting positive benefits from foreign exchange, an ongoing corporate restructuring, and positive sales guidance. With shares up 1.3% to $45.84, the activity appeared to spur new positioning in August 45 calls at $1.85 apiece, which require a break of at least $46.85 to prove profitable for the trader.

AMGN- Shares in Amgen are up 1.3% to $53.28 in late-day trading. The ticker qualified for our scan of top-50 option movers by volume due to what may have been a trader deploying a diagonal calendar put spread, selling 15,000 puts at the September 52.50 strike for $2.12 and buying October 45 puts for 85 cents. The trader in this case is taking advantage of relatively higher implied volatility in the September contract, which he or she expects to decay in value more rapidly than the October 45 put. Amgen shares are up 25% since June 12. Implied volatility at 35% compares to a historic reading of 23.5% on the underlying stock.

CELG- – Celgene – which is due to report earnings on Thursday – likewise ranked among the top-50 movers by volume early in the session on Monday. Shares rose 1.2% to $71.73 as we noticed what looked like a 3,000-lot credit spread trade in the August contract between strikes 60 and 70. In this instance, the trader sold the 70-strike puts for $2.20 and bought the lower-strike puts for 45 cents, taking a $1.75 credit and hedging the short put position to boot. The trader in this case is hopeful that both positions will expire worthless by August 15, which they’ll do by remaining well above the $70 strike through Celgene’s earnings report later this week. This credit may also have been used to fund the purchase of September 80-strike calls for $1.40, although we have not confirmed the order flow of those September calls. Celgene shares are up 55.7% for the year to date.

BBH- Shares in the Biotech HOLDRs Trust, a closed-end fund whose components include the likes of Gilead (a big options mover on Friday) are up 6.3% today at $190. The increase in option trading volume we’re observing to nearly 5 times the normal level shows a fairly even balance between puts and calls, but notable trades include what may be call spread activity in the October contract between strikes 180 and 195.

BAC- Shares are up 4% to $28.56 and with earnings now out of the way, anxieties in the options market have been quelled enough to allow implied volatility to shrink back about 31%. Puts are trading with a slight privilege over calls by a factor of 1.2, as front-month positions at the 30 strike and below have been depleted of 70-80% of their value due to the spike higher for shares. Call-side premiums up about 200% at the 30 strike and above, and we’re seeing heavy volume at these strikes as well.

KRE- KBW Regional Banking ETF - Shares are down .80% to $28.47, and with more than 124,000 options trading, the regional banking ETF is one of the absolute top movers of the day –even trading at 19.5 times its own daily average. The heavy volume in ratio put spreads between strikes 22.50 and 25 in the September contract may relate to heavy volume at these very same strikes that went through on Friday – i.e., traders may have closed out these positions on back of the less-pessimistic numbers from super-regional Bank of America.

Today’s tickers: KRE, MSFT, BAC, MIR, OSTK, GILD, BRL, MAT

KRE- We spent much of the afternoon puzzling over a sizable 2-by-1 put spread in the KBW Regional Banking ETF, which closed the afternoon 1.3% higher at $28.70. We discovered that this extremely large-size 2-by-1 put spread involved 80,000 lots in the September 22.50 put bought 90 cents, and 40,000 lots sold at the 25 strike for $1.80, breaking even on the entire trade without a credit or a debit at the outset. Generally a trade in which the lower strike is bought and the higher strike sold is a bullish strategy initiated at a net credit, in which the trader plays on the spread narrowing and both puts expiring on a rise in the stock. In this case, the trader is doubling-up on downside protection in the event of a large blowout move below the 52-week low of $21.72 and hedging the higher short position if shares remain below the $25 line by mid-September.

MSFT- Heading into Microsoft’s earnings yesterday, we were mindful that long volatility positions hadn’t paid off particularly well for Microsoft traders. While January options had priced in nearly an 8% move, the actual move fell short of 1%. Again in April we saw option traders looking for a 6.6% move and only got about 5.9%. Traders were pricing in about a 5% move heading into the numbers this week and the implied volatility reading on all Microsoft options actually fell below the historic reading on the stock prior to the report – a very unusual setup ahead of earnings. So with today’s 7.7% decline to $25.40 it’s clear that it paid to go against the grain and long of volatility – and that downside disparity in implied volatility, coupled with the low time value of the July options ahead of the release – likely made it cheap for contrarian bets. Today’s heaviest volume is in July 25 and 36-strike calls, which have lost about 98% of their value overnight Earnings misses by Microsoft and its search-rival and Nasdaq cohort Google sent Nasdaq Volatility as reflected in the VXN 2% higher at 30.49.

BAC- Meanwhile, the earnings caravan marches on with Bank of America due out before the bell on Monday. Bank of America shares gained 3.3% to $27.37, further rewarding holders of July 25 and 27.50 strike calls, whose values rose more than a third on their final day on the board. August options, which trade from Monday, are pricing in about a $4.82 (17%) move up to August 15, which speaks to a large potential move on back of the numbers Friday. Calls at the 27.50 and 30 strikes are trading heavily in that month.

MIR- Option volume in Mirant, the power company whose shares are down 18% in the past month rose to 6 times the normal level due to some unusual call spread positioning in the September contract. It looks like a trader may have gone long the September 35/37.50 call spread in a 16,000 lot position that would have created a net debit of 80 cents. Additional volume in December 40 calls traded to the middle of the market at $1.80 – Mirant last having traded at that level in late June. Implied volatility at 57.4% represents more than twice the historic reading on Mirant stock – an unusually high elevation for a company not due to report earnings until August 8. This rise in implied vol has culminated quietly since late June. Mirant Shares closed .95% lower at $33.28.

OSTK- Despite an earnings announcement in which it managed to trim its second-quarter loss in half, implied volatility in Overstock.com actually rose 16% today to 113.5%, ranking the company among the top volatility gainers as shares lost more than 40% of their value to read $16.42. Option volume appears fairly sporadic, but still came in at 9.5 times the normal level with a slight skew to puts at strikes as low as 15 in the August contract, where premiums rose 714% to $2.85 today.

GILD- Shares in Gilead Sciences dropped 10.4% to $49.64 after the producer of drugs to treat viral diseases guided larger-than-expected costs for 2008. The company was also downgraded by a number of analysts. Options traded at 7.7 times the normal level, as we saw evidence of traders positioning for what analysts at Oppenheimer called “short-term disappointment” in its share price action. They appeared to be doing this via August put spreads between strikes 50 and 55, a position that comes with a net debit of $3.25 for the long buyer that first breaks even at $51.75 – implying little confidence in a near term recovery. Fresh volume is showing up in July 50 calls, which expire today and have lost 73% of their value overnight. August calls in the 50-60 strike range appear to be selling mostly the bid. Implied volatility on all Gilead options has shrunk back more than 17% today but at 31% still shows an elevation above the 28.7% historic reading – suggesting continued likelihood for greater share price movement over the next 30 days than these shares have shown historically.

BRL- Seems there was something to the talk of a Teva bid for Barr Pharmaceuticals after all. On Wednesday, we observed a spike in implied volatility coupled with giddy call buying in Barr that appeared consistent with a stock moving on takeover rumors. An article appearing on an Israeli business website named Teva Pharmaceuticals as the buyer, and today a deal was announced valuing Barr shares at $66.50 apiece. Barr shares ended the day 11.2% higher at $63.60 on the news, as options traded at 9 times the normal level, trading to calls more than 4 times as often as puts. Heaviest demand was for the August 60 calls, which were up 89% in value to $4.90 today.

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.

MAT- Another on-target call by option traders was today’s court ruling in favor of Mattel in its copyright infringement suit against the maker of Bratz dolls. The sanguine mood was further reinforced by better-than-expected quarterly earnings thanks to its film merchandising business. Mattel options moved at 3.5 times the normal level today as shares advanced 11.3% to $20.34. Most of this activity was in front-month 20-strike calls, trading at 25 cents apiece, with not much action in subsequent months. Implied volatility remained elevated for much of the day at 41% against 37.3%, although it’s come off 17.8% from yesterday.

All right, nothing blew up this weekend and BAC had good earnings - looks like fun!

BAC beat by a mile with .72 in EARNINGS vs. .53 expected on revenues of $20Bn vs. $18Bn expected and, of course, miles and miles ahead of Meredith Whitney’s doom and gloom forecasts that chased investors out of a stock that is effectively paying a 10% dividend and was as high as 15% at last week’s prices.  This would all be very funny if it wasn’t for all the people I meet who lost a substantial portion of their assets while the media savaged their retirement portfolios and the constant onslaught of CNBC, Whitney, Cramer, GS, Ackman et al drove them to liquidate previously "safe" financial positions at the bottom.

When a person holds C for 5 years at $50 to $55 and collects a 4% dividend in a retirement account (as millions did) that is a cornerstone to a portfolio.  When that stock drops from $50 to $17 and everything they hear in the media is "SELLSELLSELL" and they get out at $17, those people can’t afford to get back in at $21 a week later.  That is why allowing this kind of rumor-mongering in the press and lack of accountability from "analysts" is damaging to America, especially the middle class, who have been told they can’t count on Social Security and the Fed has kept interest so low that money in the bank can’t earn enough to keep pace with inflation that the Fed has caused with their low interest rates.  Meanwhile homes are losing money so those make bad investments while brokerage firms like GS place commodities on their "Conviction Buy List" and put bank stocks on their "Conviction Sell List" effectively forcing money from investments that have been safe since the 1940s into the biggest bubble ever recorded.

So happy Monday America!  Let’s see what nonsense we have to look at this morning…  Oil is up past $131 pre market (up $2.50) on dollar weakness and a breakdown in Iran talks despite the fact that Iranian oil output clocked in at a record 4.2Mb per day and is spending $50Bn to raise output to 8.5Mbd by 2015 - I guess they didn’t read the "peak oil" reports.  Pre-revolution, Iran was producing 6Mb of oil a day so 8.5Mbd after 40 years of technological advance is a very realistic target.  It’s interesting that Bush I’s CIA-connected student revolutionary Mohmoud Ahmadinejad began his career disrupting the oil in 1979 and has now been elected (coincidentally with Bush II’s "help") at a time when oil prices are at a maximum and Ahmadinejad stands to control (at 8Mbd and $140) $408Bn in annual oil wealth - not a bad career path for a sudent revolutionary!

So we are not out of the woods yet on oil until we are firmly below $120.  We have a light data but very heavy earnings week with about 1/3 of the S&P 500 reporting in the next 5 days.  Leading economic indicators are out today at 10 but no one expects growth there so anything positive would be great.  Nothing else until Thursday’s jobless claims, and home sales and Friday we get the very scary Durable Goods report along with Michigan Sentiment  (just a revision) and New Home Sales.

Earnings are too many to list.  This morning we had beats from ALDN, ALB, AME, BAC, HAS, PETS, RPM and UB so far with ASTE and WFT both giving us 2 penny misses (less than 5%).  Later we get reports from SGP, AXP (got ‘em), AMLN, BSX (got ‘em), CNI, CX, EXP, EFX, FNB, HXL, LOGI, QLGC, SNDK (got ‘em), STLD and, of course, AAPL (got ‘em).  After today, there are just too many to even discuss but we’ll see what’s hot and what’s not and hopefully get some good ideas for earnings investments in the coming weeks.

Asia had a great morning but oil was still $129 at the time.  The Nikkei was closed and the Hang Seng put up a 3% gain as did the Shanghai composite.  Pakistan is having a meltdown as rising food prices (CPI up 22%), energy outages and a market that has been down for 15 consecutive sessions and, in a national poll, 86% of the respondents thought that Pakistan was "headed in the wrong direction."  President Bush was outraged and vowed to do something as only 81% of Americans surveyed felt America was going in the wrong direction and we will not lose to Pakistan in a poll will we?

Europe shot up off a poor open on BAC’s earnings and Swiss Roche offered $43.7Bn for the 45% of DNA they don’t already own - talk about a bottom call from an insider!  Of course, those are only American dollars, kind of like when we used to drive to Canada to stock up on cigarettes and beer…  HBOS had trouble selling $8Bn in notes and found buyers for just 8.29% of it, that’s not at all good and bears watching.

Batman beat Spider-Man in the box office with $155.3M in its opening weekend, this should be good for IMAX, who are already up in anticipation of the event.  We’re very excited as we are rolling out a new $10KXtreme Portfolio, looking to see how well we can perform off a $10K basis in a riskier format as well as a nice, safe(ish) Butterfly Portfolio.  We will also be resetting our Stocks portfolio to take advantage of trades like buying IMAX for $8 and selling the $7.50 calls for $1 for a nice 14% one-month return if we get called away.  I also like the vertical spread on IMAX of the Sept $5s with very little premium at $3.20, selling the Aug $7.50s for $1, which we will roll into the Sept. $7.50s for hopefully another .50 in premium for a very nice return and a break even of just $6.70. 

It’s going to be an exciting week, lots of earnings and new portfolios to play with, we’ll see how today goes before we start shopping in earnest though.