What a great turnaround!

We can thank our man Paulson and Fed Gov. Plosser, who both made good strong dollar comments early in the day.  That puts at least 2 Fed voting members in the raising rate camp and I’m betting tomorrow’s Fed minutes will show a lot more discussion of tightening than the last set.  "Monetary policy cannot control changes in the relative price of a key commodity, like oil or food,” Plosser said at a breakfast hosted by the Philadelphia Business Journal. “But it can help ensure that a relative price increase doesn’t turn into a rise in overall inflation.”  The Nov. 4 presidential election won’t influence the Fed’s decision incoming meetings, Plosser told reporters after the speech.

That was enough to drive gold, oil and other commodities down sharply while the NYMEX crooks continued their "Tea Party" and dumped 38M barrels of oil that were scheduled for August delivery in just one day, once again leaving Cushing with just 23M barrels worth of contracts for the month and shorting the US another 4Mb a week of delivery.  This is the same BS they pulled at the close of the July contract last month - AND IT DIDN’T HELP - despite a month of the lowest level of foreign crude deliveries in 3 years, oil is still finishing the August contract period $10 below where it began.

Last Tuesday I pointed out that we had 154,516,000 barrels scheduled for delivery in August and I warned that "by Monday, at least 110M of these barrels will be dumped, much like a perverse Boston Tea Party, denying US citizens the delivery of barrels we already paid for."  Well, it turns out that 133M barrels were turned away from US shores by NYMEX traders even though our inventory levels are 30M barrels lower than last year so there is certainly room for it.  What do we call people who purposely choke off our nation’s supply of oil to line their own pockets?  Are they market manipulators, simply speculators or, perhaps, economic terrorists who hold the US consumer hostage through their control of the crude supply.

Don’t forget the contract you see on CNBC tomorrow morning will be the September contract, not August so there is an automatic .78 bump built into the price.  We have inventories in the morning but if we get past that under $130, then we may get our next leg down in oil to the $110s!  While this is great, this does not excuse the action of the NYMEX traders, who have cost this nation an unnecessary $500Bn+ this year in crude alone (and inflated world food prices) by running this scam on the US consumers. 

Also as we expected, the housing package is winding it’s way through Congress with the government looking to insure up to $300Bn in refinanced mortgages, which will let many homeowners recast their ARM loans at more favorable terms.  That is great for our HOV play, which is humming along nicely, as well as our bank plays as the XLF continues to provide leadership to the markets.  The oil patch did not take a big hit yesterday but if the inventory report is bad (for them) tomorrow, we can expect a very big commodity sell-off (XLE/XME puts, DUG calls) that will be a bit of a drag on the markets.

We had a great day today as our faith in both Apple and Google was rewarded.  We should have a very different tone than this morning as the market held up very well and we had a huge recovery from WB today that shows investors are turning to look ahead, not behind and misses from YHOO, DRH, CX, ILMN, TRMK, ZHNE and WM are being shaken off in after hours trading.  NBR is an interesting miss at they are up 30% this year but the CEO is asking for a mulligan and may get one, at least until the inventory report.

This was just what we wanted this morning, a nice test of the market that we passed with flying colors - the kind of move that makes us feel it may be safe to buy stocks again.  Like I said in the morning, we’ll be concentrating on people who already gave us good earnings reports as they have been slow out of the gate an we are a long, long way from recovery at 11,600!

Today’s tickers: BTU, CNC, QCOM, MRK, SNDK, TXN, TAP, GTXI, SPF, BRCD, XLF

BTU- Shares in the world’s largest privately held coal company, Peabody Energy, are down 6.7% at $64.58 as we report this afternoon on an unusually large ratio put backspread that appears to have gone through in the September contract on no news catalyst. This 2-by-1 spread showed a trader buying 20,000 of the September 55 puts at $2.90 and selling 10,000 of the 65’s at $7.00, taking a $1.20 credit on a transaction that allows the trader to double-up on downside protection at no initial cash outlay but doesn’t generate profit before a move to $46.20 (28% off current levels): lots of protection here for a big move that doesn’t appear to be correlated with Peabody’s earnings announcement tomorrow.

QCOM- Yesterday’s loud earnings miss at Texas Instruments sent a shudder through the shares and options of arch-rival Qualcomm, which is due to report tomorrow. Shares are down 4.5% at $43.27 as implied volatility ticks in at 47.5% - up about 9% from yesterday and a full 30% premium to the historic volatility reading. Having been caught wrong-footed by a number of larger-than-usual earnings moves out of the tech space in recent days, it appears that option traders are taking no chances on a large potential move out of Qualcomm – and indeed, front-month options are pricing in as much as a 10% move between now and August 15. We are also seeing traders accumulate long positions at in August puts as low as 35, where more than 3,500 lots have traded today where open interest numbered only about 805 lots prior to today.

EWC- Options on the iShares MSCI Canada fund ticked our market scan of relative volume gainers with a boost in activity to more than 36 times the normal level. Shares in the closed-end fund, which is indexed to a basket of Canadian stocks heavily weighted in the financial and commodity spaces, are 1.7% lower at $31.59 at present reading. Today’s action appears in a 2,500-lot strangle at the December 30/32 strikes, which appears to have sold to the bid for a pretty $3.30 premium (10% of the current share price). The trader in this case is looking for shares to remain at or around current levels by year’s end – in the past 6 months, the Canadian market ETF has traded as low as $28.36 and as high as $35.75.

CTC - Shares in managed-care provider Centene gained more than 16% to $19.75 after reporting better-than-expected Q2 numbers and – critically – left its guidance intact. Centene options activity was noteworthy to us due to an increase in volume to more than 12 times the normal level, with option traders putting a possible cap on the near-term upside at the August 20 call line. These contracts sold mostly to the bid, well in excess of open interest, as the value of this position rose 533% on back of the numbers. The activity here was enough to represent the single-biggest call volume in Centene in at least 52 weeks. Option traders have accumulated loads of defensive put positions in Centene throughout the month of July – where open interest at the first of the month was more or less split evenly between calls and puts, the company’s modest, 12,250 open interest is currently made up of twice as many puts as calls.

MRK- Yesterday’s move by Merck and Schering-Plough to postpone their earnings releases pending the release of some very discouraging clinical data on storied cholesterol drug Vytorin led investors to chasten the latter drug company much more virulently than the former. This puzzled us for much of the day yesterday, but it seems the downside quickly caught up with Merck after the company withheld its year-end earnings guidance and trimmed projected sales for two of its core drugs, Gardasil and Singulair. The news led to a smattering of analyst downgrades, and with that in mind we see Merck shares down 10.3% to $31.68 – crashing below the 52-week low and rewarding traders who were long of volatility heading into the earnings report (August options were pricing in about a $8 move on back of the numbers as of yesterday, so we can see with benefit of hindsight that long straddles and strangles were a relative bargain). The question on option traders’ lips this morning appears to be whether a move below $30 is overdone for Merck, and that drama has played out at the August 30 put line more than 26,500 times today. While relatively more of these August positions have sold to the bid, we noted fresh buying interest one month ahead at the September 30 put line, where more than 7,700 lots have traded today at $1.20 apiece – a position that requires another 8% more downside between now and September 19. Option traders currently see a slightly better than 1-in-3 chance of that happening.

SNDK- Speaking of orgiastic selloffs, shares in Sandisk lost nearly a quarter of their value today to read $13.70 after an earnings thunderclap that brought with it a torrential drop in sales revenues and a 10% rise in cost of product revenue, hardly helped by what the company’s CEO called a “rapid deterioration in consumer confidence.” Citigroup, which has been vocally bearish on Sandisk since at least mid-June due to anticipated “demand erosion,” immediately cut their rating on Sandisk shares to “sell” and said in a note to clients that they were “throwing in the towel” on its shares for the duration of 2008. Implied volatility on all Sandisk options has come off about 12% since yesterday but at 69.9% remains stubbornly elevated above the 60.9% historic reading on Sandisk stock. This suggests that a heightened risk premium to Sandisk price levels is still being factored into its option premiums. We see brisk two-way traffic in excess of open interest at the August 12.50 and 15 call strikes, but also heavy buying pressure at higher premiums and ballooning implied volatility on the put side at strikes 10, 12.50 and 15.

TXN- Earnings doldrums extended to chipmaker Texas Instruments, which offered slightly softer-than-expected Q2 numbers but killjoy guidance for Q3 – and that was the rub for traders, who sent shares down 18% to $23.40 today. The options market was so taken aback by the miss that implied volatility on its options actually rose 14.5% this morning – after the numbers were out. This reading has since come off a bit but at 40.6% shows a slight risk of yet more turbulence being priced into the coming month (the historic volatility reading on Texas Instruments shares is 38.2%). August volume shows calls and puts at the 22.50 and 25 strikes trading with a fairly even split to buyers and sellers well in excess of open interest at all strikes – suggesting that traders aren’t just closing out pre-earnings volatility positions but playing speculatively on the likelihood of near-term stabilization in Texas Instruments’ price. Buyers appear keen to accumulate fresh longs in September 22.50 puts, however, suggesting further erosion into the fall, in line with Texas Instruments’ dour forecast.

TAP- Many market observers have speculated in recent weeks that the digestion of the Anheuser-Busch/InBev deal will create a short-term opportunity for Molson-Coors and its joint venture with SABMiller. But the distraction may not last long, and in the longer term, some say Anheuser Busch-InBev is likely to represent incredible cost pressure to Molson Coors in an environment of already high-and-rising oil and hops prices for beer producers. With that in mind, shares in Molson-Coors are up .71% to $56.43 today as we observe a boost in options trading volume to 4.7 times the normal level. This appeared what looks like a short October call spread between strikes 60 and 65 involving 3,600 lots. The trader in this instance sold the lower-strike, closer-to-the-money call for $2.80 and bought the 65-strike call for $1.35, taking a credit of $1.45 on a wager that Molson-Coors shares will remain below $60 by October 17.

GTXI- Shares in GTx Inc., a Tennessee-based biotech company that develops molecules that strategically modulate the effects of estrogens and androgens connected with cancer and osteoporosis, are up 4% at $18.31 today on no apparent news catalyst. An increase in options trading volume to 7.3 times the normal level appeared in the form of a trader buying a 3,500 lot position in August 17.50 calls for $1.25, and possibly defraying part of this transaction by writing 3,500 lots at the September 15 puts strike for 40 cents. The takeaway here is that the trader isn’t expecting a drop below 15 in connection with GTX Inc’s August 5 earnings report.

SPF- Standard-Pacific Corp – For a second consecutive session we’re seeing heightened option trading interest in Standard Pacific, as shares trade flat at $4.14. An early increase in option trading volume to 32 times the normal level appeared first in the form of pair of fresh put spreads at the 7.50 and 10 strikes in the August and September contracts involving about 2,390 contracts at each strike, but the volume has since expanded to show far higher volumes at the deep-in-the-money 10 strike. Implied volatility at 106.3% shows a dramatic elevation above the 83.2% historic reading on Standard-Pacific stock.

BRCD- – Brocade Communications – Shares dropped 20% to $6.66 on news of its takeover bid of Foundry Networks – a move that analysts have tipped as a bid to take on Cisco in the network equipment space. The move was accompanied by a healthy 37.5% spike in implied volatility, as traders looked to 6.0-strike puts in the October and particularly the January contracts, driving overall volume to about 2 times the normal level.

XLF- Finally, a check on the always-liquid Financial Select Sector SPDR. Shares reversed early gains on back of Wachovia earnings and now read 1.2% higher at $20.99, holding ground firmly above that $20 threshold. Since our first early morning check of the markets, we’ve seen some mammoth volumes go through in August calls at the 17, 19 and 21 strikes, with the 19 and 21 strikes appearing to sell to the bid on volume in blocks of 48,000 lots and 162,000 lots respectively. We have no read as yet as to whether this volume was traded together. Implied volatility in the XLF continues to sink, however, at 48.6% it remains below the 51.86% historic reading on XLF stock, which speaks to some measure of fear resolution at least inasmuch as the depositary institutions are concerned. And at least one trader banked on that with a good old-fashioned 5,000-lot call spread in the January contract between strikes 20 and 25, paying a $1.84 debit on a bet that XLF shares will trade within a $3.16 range above current levels heading into the New Year.

That was a great first 4 months! We are now up 585% since the beginning of portfolio, up 184% in the last month, for 3% risk per trade.

All trades were posted live in the comments and in the portfolio and most of them were simple calls or puts. Our expectancy per trade is still around 1.85R and our winning rate is between 65% and 70%.In the last 2 weeks we also played a couple of straddles, on GOOG and C, with more than 100% profit on each. I am planning on doing more of those, and am working on a spreadsheet to record them.

Again, I want to thank everyone who has been participating in the comments. It is very rewarding to see everyone making such good progress and booking profits.

To learn more about the swing trading portfolio, please click here

- Optrader

Ow, ow and ow!

Those were some hurting earnings reports last night!   On a percentage basis, the misses are few and far between but when you get downside guidance from AAPL, SNDK, TXN and AXP along with misses from KEY, ERIC and WB this morning, it’s no surprise that we are looking at a 100-point pre-market drop (8 am).  This one is severe enough for Paulson to be on TV this morning looking to calm the market as the dollar heads back below 72.

I find it funny that Paulson says we can expect problems "until the housing market stabilizes" yet the administration has done nothing concrete to help the housing market.  Bailing out banks who made inadvisable loans to people who couldn’t afford the homes doesn’t help the people who can’t afford their homes.  You can point your finger at the homeowner and say they should have known better and read subsection A of paragraph 4 on page 11 of the mortgage contract, which clearly indicated that everything the broker said was BS and they would not be able to easily refinance their loan after the "teaser rate" expired but perhaps we should reflect upon what kind of industry is proud of using a "teaser" to generate business in the first place.

We need to help the homeowners, the people who are losing their homes at a rate of 7,000 families a day and have been for over a year now.  That’s 35,000 homes a week, it’s like wiping another American town off the map every single week while the administration hems and haws around the issue, showering untold Billions of dollars on the lenders that peddled these loans while allowing the people who they were sold to fall into pits of despair. 

As we discussed last week, the only way to properly address the mortgage and housing crisis is to help PEOPLE stay in their homes. How did we ever let CNBC and Fox (and Murdoch’s Wall Street Journal) convince us this was un-American?  What ever happened to this country where we are willing to spend $1Tn "nation building" in Iraq and Afghanistan when just $200Bn spent at home could stop half the foreclosures from happening this year (more than 2.5M).  

The math is very easy: If you help a family make their $3,000 monthly mortgage payment, say by somehow helping make 1/2 the payment for 3 years to get back on their feet, that will cost $1,500 X 36 months or $54,000.  If we don’t help the people stay in their homes, we lose a consuming family from the community, the town loses a taxpayer and the vacated home loses value (dragging down the community’s values) and we end up giving the bank $400,000 for the home they wrote off their books, which they also declare as a tax loss and fail to remit 35% of that $400,000 to the government in taxes.  How is this efficient???

The more we throw billions at the banks, the further we devalue the dollar, which is what the average consumer uses to buy things with, which further reduces their spending power and forces another 7,000 families a day into foreclosure as rising unemployment (due to all those towns worth of homes being wiped out) makes it impossible for them to demand wages that keep up with inflation.  This is basic economics folks, can it really be possible that this is all "unintended consequences"?

I’m still bullish on the markets because I see a lot of things happening in Congress that should actually begin to address these problems and I think the run-up in oil yesterday was nothing more than more desperate pumping by traders who stand to lose their shirts if oil continues to drop at a rate of $10 a week, which can’t be fast enough as it only gets us to $80 by September, which will be still too high if we don’t have either a hurricane or an exchange of nukes with Iran.

That does not mean that it’s a good time to buy stocks unless you have a long-term horizon.  Things are cheap right now but, as AXP said yesterday, you can’t give guidance until this economy turns around and the economy can’t turn around until we FIX oil and housing and fixing does not mean showering cash on people so they can keep paying outrageous oil prices and bailing out banks so they can continue to ignore the suffering of the people they wrote "liar loans" to (the banks term for them, not the borrower’s) because it doesn’t, in the end, affect them when Paulson and Bernanke come calling with bags of cash to wash it all away.

Interestingly, it was the Financials that led the NIkkei to a 3% gain last night, pushing them right back over 13,000 but mainly in one big move at the close so we’ll have to watch that one closely tomorrow.  The Hang Seng and the Shanghai were flat and that is great after watching the US markets melt down after hours, India was positive despite the fact that the government is in chaos over a bribery scandal.  Europe is taking our news far less well this morning as ERIC reported a 70% drop in net profit and VOD guided down.

I don’t want to be a cheerleader because we have some very serious problems but we need to keep a little perspective as the misses by WB (which was awful), RF, PTEC, ERIC, GNTX, FCX, DPZ and ARB this morning just seem to me to be slightly offset by beats by AKS, AXE, ALV, AVY, BHI, BIIB, BJS, CP, BEAT, CSL, CAT, CNC, CME, CPO, DD, FITB, FCFS, FMER, FRX, ICLR, IMN, JEC, JEF, JBLU (yes, an airline!), JRN, KVHI, LXK, LMT,NEOG, NVR, PCAR, PNR, PAS, PCP,DGX, RYN, ROK, STI, SVU, TLAB, UAUA (another airline), UNH, LCC, USG, WAB, WAT, WBS, WU, XMSR and XTO. 

Companies do miss you know but 50 beats, 7 misses and 5 in-lines is hardly a reason to dump our portfolios.  What I am seeing is that a beat isn’t enough to get a stock moving and that gives us some very interesting buying possibilities so let’s keep our eyes open for opportunities.