Well, I’m out today with a family emergency.

Looks like a crazy day ahead.  If the market can’t get it together with oil back at $120, I don’t know what’s going to help.  Nobody thinks the Fed will tighten so nice surprise if they do (and nasty surprise for commodities too).   Let’s keep in mind that we were at 10,800 on the Dow 2 weeks ago so holding 11,200 is good in the grand scheme of things and 11,100 was pretty much the floor last week.

On the S&P we look OK over 1,235, NYSE already in trouble at 8,250 so look for them to break first and the Nas needs to hold 2,260 or we have problems.  Not that holding those pathetic levels means we don’t still have problems but it’s better than nothing.  I’m setting up for a cover with DIA $116 puts, now $3.67 if we lose two of those levels and until we get them back as they have low premiums and I can cover them with $113 or $112 puts if I have to and then roll them back a month.  In the LTP, it’s just faster and more flexible than covering individual positions.

Asia is going to get killed on the commodity sell-off but if Japan holds it together, that willl be a good sign.  It is possible that commodities are tumbling because word is out that all the CB’s will be tightening in synch but that may just be wishful thinking on my part…

Have fun today, I’ll try to touch base later.

- Phil

Today’s tickers: XME, EWZ, GDX, MVL, CYPB, MOT, BID

XME - Option traders appear to be embracing the trope of demand erosion today, with volumes and volatilities elevated in a number of leading miners and ETF’s. Options volume in the SPDR Metals and Mining ETF showed an increase to 9 times the normal level as shares pulled back 5% to $72.29. Fresh volume occurred in August 67 puts, which traded 39,400 times to the middle of the market at $1.05 – making the directionality of the trade difficult to ascertain. A couple of scenarios may be going on here – a trader may be baldly positioning for a bold correction in the metals and mining space over the next 11 days, given that the fund is already down some 22% since June 30. Or he or she may be taking that $1.05 premium as a credit, playing on the 75% probability currently priced into the options market that the ETF won’t collapse below the $67 level by August 15. A share price decline of that magnitude would put the fund at levels not visited since March 17.

EWZ - Mining sector doldrums sent Brazil’s Bovespa index to a third consecutive day of losses, while during U.S. trading, shares in the iShares MSCI Brazil fund declined 4% to $75.88 as we showed puts outtrade calls by more than 5 to 1. We should note here the action – although it involves puts - may not be bearishly inclined. A 3,000-lot put spread was entered this morning between strikes 75 and 80 in the front month, and both sides, it seems, traded to the middle of the market. A buyer of the put spread would have paid a $2.35 premium in the expectation of shares trading at least as low as $77.65 but not below 75 by the expiration of the contract – this would roughly cover the magnitude of the move seen since Friday afternoon, when the fund closed at $79.08. Conversely, a short seller of the put spread would take that $2.35 as a credit, betting on a pull back above the $80 level over the next two weeks.

GDX - Shares in the Market Vectors Gold Miners equity fund pulled back 3% to $41.08 as options volume of 16,500 qualified the precious metals-indexed fund for our scan of early market movers by options volume. However, a glut of opening positions in the front month contract showed a couple of clear tendencies, both of which showed signs of volatility-bearishness. One trader sold a 1,500-lot strangle at the August 42/43 combination this morning for a premium of $2.45, predicting rangebound movement between those strikes for the duration of the August contract. We also noted heavy volume in August 41 calls, which traded to the middle of the market for $2.10, and did not appear related to the strangle – a buyer of this position would look for the price of the fund to bottom out at current levels and recover upward over the next couple of weeks.

ELN - “Weekus horribilis” for drugmaker Elan took hold today after its multiple-sclerosis drug Tysabri was implicated in new cases of a lethal brain infection. Coming hot on the heels of another product disappointment – underwhelming data on a much hoped-for Alzheimer’s drug in development – Elan Corp shares were stripped of 50% of their value to close at $9.85. The collapse put paid to options traders who believed this week’s first selloff would find some support at the $20 level – earlier this week we observed a good number of traders selling $20 August puts in a bet that the first selloff of the week was overdone. The magnitude of today’s surprise is perhaps best articulated by its implied volatility reading, which spiked 156% today to close at 149.9% - more than any other company today. About 500,000 options traded by day’s end – equal to more than a third of its total open interest - with a slight volume privilege to puts. As we observed earlier this week, traders are playing both sides of the selloff, with two-way traffic in excess of open interest in August calls at strikes 12.50-19 and in puts at strikes 10-15.

MVL - With some market observers perhaps drily hoping for the intercession of a superhero to scoop the market from its Lex Luthor-like sentiment vise, some option traders are doing the next best thing by positioning in contracts for Marvel Entertainment. Shares in the company, whose comic-book icons have propelled the company to powerhouse status owing to their successes in film franchising and merchandising - trading flat at $35.39. With the company due to report earnings tomorrow, it’s not surprising to see an incongruity in the implied volatility reading (50.5%) versus the historic reading (39.7%), as the options market prices in an added premium ahead of the numbers. One trader appears to have taken advantage of a perceived mispricing – while also positioning for upside in the company – by using a 3,000-lot calendar call spread. Here the trader appears to have sold 3,000 deep-in-the-money January 30 calls for $7.53 and bought an equal number of December 45 calls for $1.03. In this case the trader is betting that the value and implied volatility of those December 45 calls will increase rapidly (which they will do if shares rise dramatically). He or she could have funded this purchase with the sale of the January 30 calls and taken a $6.50 credit in hopes of closing out the position profitably before being exercised on the January 30 calls. Option traders are currently putting the odds of a Marvel break of $45 by December 19 at only about 1-in-5.

CYPB - Shares in drug company Cypress Bioscience declined 5.7% to $8.23, which puts the share price about $2 above its 52-week low set back on May 9. The company’s VP of corporate development is due to speak at a clinical and regulatory conference for small and mid-cap companies today, while Cypress earnings are due out on Friday. Cypress tends not to be heavily targeted by options traders, which means today’s volume of just 4,000 lots represents an increase to 8 times the normal level. This appeared in out-of-the-money puts in the December contract, where it looks like traders opened positions at the 2.50 and 5.00 puts – sending overall put volume to its heaviest since March 20 and raising our eyebrows at what these out-of-the-money strikes might imply for its share price prospects going forward. The options market may have some intimation of this, given that implied volatility at 83.2% rates well above the historic reading of 57.0% - suggesting nearly 45% added potential price risk being factored into its options over the next 30 days.

MOT - Motorola shares rose another 10% to $9.70, one day after surprising the market with less-dire-than-expected earnings. But will the good times last? About one-third of the 63,000-strong lots already trading today involves bets on whether Motorola will surpass the $10 mark, and while August call activity showed traders readily buying into the long side of that bet, earlier today we observed heavy selling action in the same strike in September at just 36 cents apiece.

BID - Sotheby’s – Shares in the beaten-down auction house are trading 2% higher at $28.35 on the eve of earnings, and the 69.8% implied volatility reading (against 47.6% historic) attests to a high level of anticipation ahead of those quarterly numbers. The increase in option trading volume to 1.8 times the normal level shows traders positioning readily in August 30 calls – we’ll be keeping an eye on the options setup in this ticker ahead of numbers, given its habit of leaving pre-earnings call-buyers holding the bag.

Meredith Whitney is the 8am guest on CNBC.

That pretty much sums up the mood for the week right there.  More doom and gloom for the financials with Nouriel Roubine predicting in Barron’s another $2 TRILLION in bank losses saying: "We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up."   So happy Monday to you!

CNBC is now calling her "Influential Analyst Meredith Whitney," which should insult the other 500 analysts that appear on their show - if they had any actual self-respect that is…  Why it seems like just yesterday (but it was actually Wednesday) when Whitney was featured on CNBC at the close, telling Maria Bartiromo that "asset values on the books of many banks are aspirational" and will need to come down" and that "the equity raised by various financial companies, like MER, C and others, is just "plugging holes" in balance sheets, not funding growth."  Also featured today is guest host Kirby Daley, who says the Dow is heading for 10,000 because "if you walk around the streets of Middle America you will see we are already in a recession."

You will not hear CNBC mention that Q2 productivity was up a whopping 2.5%, something the WSJ says "has important implications for economic growth, inflation, employment and, ultimately, living standards. For example, strong productivity growth, by countering inflation pressures from energy and commodities, allows the U.S. Federal Reserve to keep interest rates lower than it otherwise might, helping it stoke the economy."  Gee, that doesn’t fit in with a recessionary outlook at all.  In fact, that is one of the ways you can have growth without inflation and without pressuring commodity prices - get more efficient!

I am in now way saying the financials are strong - they took a severe beating and will be long in recovering but they are down and not out and there are other parts of our amazingly robust economy that are capable of picking up the slack if given the chance.  It does seem, however, that there is a very determined effort NOT to give the economy a chance with non-stop media negativity.  Let’s remember the parting words of Phil Graham, as he mixed up the message of McCain by talking "straight" and calling us "a nation of whiners." 

Graham went on to say: ""We’ve never been more dominant; we’ve never had more natural advantages than we have today. … Misery sells newspapers," he said. "Thank God the economy is not as bad as you read in the newspaper every day."  John McCain quickly denounced Grahams positive outlook because the media (and Obama) put a negative spin on it saying "Phil Gramm does not speak for me. I speak for me. So, I strongly disagree," McCain responded. "America’s in great difficulty, and we are experiencing enormous economic challenges."  It would be very funny if he weren’t running for President…

Consumer psychologist Kit Yarrow backs Graham up saying "I think the way consumers feel about things is very emotional.  Those emotions are trumping reality, creating a snowball, which makes the economy worse. It’s not as bad as consumers feel like it is.  I think we’ve become entitled to a sense that we’re going to have continued prosperity, and if we hadn’t had it good for so long, I don’t think there would be this level of emotion that’s causing us to draw back on our spending," she said. "We expect great growth. Any sort of normal growth is considered a catastrophe now."

Asia is in catastrophe mode with the Hang Seng dropping 1.5%, the Shanghai gave up 2% and the Nikkei fell 1.2% led down by steelmakers and shipbuilders - very recessionary outlook.  Nippon Steel dropped 7.1% on the day, TM got crushed (again) and Nissan fell to the 5% rule while Mazda zoomed past them, dropping 8.76% on the session.  No cars, no steel - who’d have guessed?  Apparently energy traders can’t connect the dots as oil was still trading at $124, perhaps held up by an explosion at a VLO refinery since somehow a shut down refinery that can’t use oil causes oil to head up.  We also have a tropical storm in the Gulf and that’s going to be considered a disaster until it isn’t anymore but none of this is enough to get oil back to $125 so far.

Europe is mixed ahead of our open and HBC wrote down $10Bn in loans causing (and prepare to be shocked and dump everything you own and load up the basement with canned food and ammo) a 29% decline in first-half net profit making just $7.72 Billion vs. $10.9Bn in last year’s first half.  OH THE HORROR!!!  (that would be the famous sarcasm font…)  Get a grip people - profits go up and down, we invest for the long haul and the market has been acting like it has a severe case of ADD lately. 

The pre-tax profit of HBC was $10.25Bn, a slight beat of the expected $10.13Bn.  HBC was trading as low as $70 just two weeks ago as "influential analysts" told us losses would be fare more severe.  Don’t expect this news to boost financials though, GS has come out with more negative statements on the financials and CNBC is running the above mentioned interview under the headline "Whitney’s Wisdom" and it seems she’s getting the cover of Fortune this week!

Let’s keep an eye on the financials, whcih will have a lot of downward pressure and it will be interesting to see what holds.  We have a Fed meeting tomorrow so anything can happen there.  Personal income was up 0.1% vs. -0.1% expected and personal spending was up 0.6% vs. 0.4% expected yet you will no doubt continue to hear about the death of the American consumer because it’s so much more compelling than telling you spending hasn’t chanbed all that much.  Factory orders come out at 10 am and expectations there are for 0.7% growth so we’ll see how that is trending. 

There are still plenty of earnings to keep us busy but it’s all about the POO (Price of Oil) with plenty of earnings still pouring in this week (SIX was a huge upside surprise this morning).  Let’s continue to be careful out there, I could be right about the economy but that’s not going to make the markets rise in a sea of negativity but it does give us a lot of very interesting opportunites to go bargain hunting ahead of the crowd.

We did very little on Friday to change Thursday’s Portfolio Review so no need to go over them here.

After taking a long drive this weekend and catching up on my reading, I’m still more bullish than most and still on my premise that the US economy may suck, but it sucks less than other global economies and that’s enough to drive investment dollars back to US equities, which are still dirt-cheap when priced in foreign currencies.

First Priorty Bank in Florida closed on Friday and it’s the 8th bank this year to go under and I thought it was amusing to see the panic this was causing as I Googled for the total number of banks under review (90) and found this 1992 NYTimes article about the $33Bn that was projected to be needed that year from the FDIC for bank closings (this year they have spent less than $6Bn insuring bailouts and, back then $33Bn was a lot of money!) yet our country survived (also an election year when we got rid of a Bush). 

It’s not the news that changes, it’s the sentiment and it’s the lack of leadership that has set this country adrift.  The reason the hyenas in the media can run hog wild with doom and gloom scenarios is no one in the administration makes any strong statements to the contrary (here’s one from DB, who says the crisis is about over).  Here’s a nice, boring article from Bankrate.com where the FDIC clearly states that even IndyMac’s $32Bn is in no danger of not being returned to insured depositors and even the $1Bn of uninsured deposits are getting 50 cents on the dollar.  This seems at odds with claims that taxpayers will have to kick in $8Bn to "save" IndyMac…. 

There are no ratings in telling you this and even less ratings in explaining to people how the banking system really works and how a lender like IndyMac could go so wrong.  The reason a lender like IndyMac gets shut down is BECAUSE the regulations do work and there is very little tolerance for fraud.  Banks are not supposed to be taking risks with your money and CDO’s and sub-prime loans can easily break the back of institutions that only have a 5% margin of error in their investment portfolios.

If you remember "It’s A Wonderful Life" the Baily Savings and Loan was going under because $7,000 went missing.  That’s not far off in banking, it takes very little for a bank to run into trouble and they can often recover UNLESS people start stampeding in to get their money out (it’s not in the bank, it’s on loan to others) or unless regulators step up inspections while they are vulnerable - both of which are happening now as hyenas direct the government to "look into" troubled institutions while forcing liquidity crises by stampeding investors in to demand their money.  It’s not even creative, we watch it happen every Chrismas yet investors fall for it every time…

Speaking of investors, nice article from Business Pundit about 25 businessmen who got rich breaking the rules.  Think about this if you find yourself falling into the follower category!  Here’s 10 skills that will help you succeed at almost anything.

I’m going to lose a fortune in Zimbabwe dollars as my Billionaire status in yet another country will be revoked.  I collect crazy inflated currencies and Zimbabwe only recently issued a $100Bn bill, worth about $1.70 US but they just announced a "devaluation" of the currency that chops off 10 (TEN) zeros so that $100,000,000,000 bill is now worth just $10 new Zimbabwe dollars.  Just a few day’s later, the new money is already inflating out of control and it now costs $25 (was $250Bn) to buy a loaf of bread that was "only" $150Bn last week.  Bad timing for Zimbabwe as our dollar is just starting to gather strength…

It looks like the next bubble is forming in "green" technology.  $148Bn was invested in clean energy technologies, companies and projects in 2007 and interestingly, as much money was moved into UK green energy hedge funds this quarter as was moved OUT of Asian hedge funds during the same time - that’s one way to follow the money…  Another way to follow money is to see who’s bribing who and bank officials connected to the UBS tax-shelter scandal have dropped $2M into Congressional and Presidential campaigns this year!  According to the Washington Post: "Campaign finance records show that expanded political giving is an approach shared by UBS and other key figures in the Senate’s probe of offshore tax shelters that are costing the government $100 billion a year."

Commodities other than oil keep dropping like corn, soybeans, platinum (cars) and orange juice (expensive luxury) but oil looks like it’s up at $126 over Iran nonsense and the media never, ever, ever mentions that Ahmadinejab pumps 4M barrels of oil a day and takes in (at $125) $500M a day which can go up $10M a day every time he says the word "missile."  The CRB dropped almost 15% in July and oil did it’s share, dropping 13.8% off the $145 high.  On the 5% rule, $145-$120 = 17.5%(ish) and a 20% retrace is $5 so we expect a bounce to $125.  The breakout from $80 to $120 is 50% up so $120 is hyper-critical to hold for oil and SHOULD be significant resistance.  While we’d love to see oil fail $125, it would be fine with us to see $132.50 (the 50 dma) fail and then we can short expecting sub-$120 on the next roll down.   No change in downside target of $110 for this run down.

When commodity prices rise corporations hope for gains in productivity to offset and that’s exactly what US corps are getting with 2.5% growth in productivity.  "It’s a bit of a two-edged sword," said Chris Varvares of Macroeconomic Advisers, since efficiency gains could mean that companies can get by with fewer workers, exacerbating unemployment in the short run.  Some economists say the current healthy growth in productivity reflects a shift in the economy from less productive domestic sectors like home building and into exporting industries, which tend to be highly efficient. That shift has been aided by the weak dollar, which has made U.S. exports more competitive.

Hedge funds of all stripes are getting killed this year.  This is great for me as several hedge funds have expressed interest in investing in my fund, which (hopefully) could not be starting at a better time.  There will be more on this shortly for people who have expressed interest to admin@philstockworld.com as we’re finally getting all the legal BS out of the way and moving forward with the incorporations! 

Barry found an excellent article from Investopedia (good place to bookmark) about "Seven Forehead-Slapping Stock Blunders" - very good reading for fledgling analysts!  Also from Barry, Nouriel Roubine predicts in Barron’s $2 TRILLION in bank losses saying: "We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up." 

So happy Monday to you!