Well that was pretty bad!

$113 Oil and we can’t rally the markets?  As I mentioned in the morning post (and since the weekend) that Treasury Budget was a real market killer and we played a bearish game on Monday.  The projection was for and $86Bn deficit for July (yes, JUST July!) and, at 2pm, the ACTUAL deficit came in at an astounding $102.8Bn.  What was even more astounding to us was that this amazing, stupendous, terrifying number went completely unreported by CNBC, who purport to be some sort of news station last I heard.

My comment to members on hearing those numbers was:  "Woo-hoo!  $102.8Bn deficit in July and those morons on CNBC are talking about junk food!  I can’t believe the market isn’t tanking on this, it’s 3x last July!  Expectations were for $97Bn so we beat by 5%, which is $60Bn a year on just the beat.   Something very strange is going on as it’s not in the journal and it’s not on CNBC yet it was released on time…   Oh - did I mention covering is a good idea?"

 We were dumbfounded as the market went UP after that number came out - I mean, a run rate of a $1.2Tn annual deficit does seem like a lot doesn’t it?  Nonetheless, we don’t look a gift horse in the mouth and the run-up gave us great prices for our covers and we took GLD and USO calls anticipating a dip in the dollar as I said at 2:23: "Wow, Oil and gold not reacting to deficit number.  How sucky does the rest of the world have to be right now for us to run a $103Bn monthly deficit and people are still willing to leave their money over here?  We have good reason on both those trades to risk the overnight with oil inventories and retail sales tomorrow as well as import/export pricing.  Thurs is another visit to CPI fantasyland but doesn’t it bother anyone that CNBC can still be ignoring this number???"

5 minutes later, the market was still going up and I said:  "Wow, I feel like I’m out of touch with reality here…  Am I the only one that’s bothered by a deficit running at a $1.2Tn annual pace?  I’m sorry guys but I’m going to have a really hard time going with the flow on this one but I guess we have the advantage of the other markets being closed now so we won’t get our spanking until the morning (if ever)."  Then, 10 minutes later, at 2:38:  "Damn, this is like one of those cheesy horror movies where you are the only one that sees the monster deficit and every time you try to point it out it goes away…. "

Right about that time, the monster finally struck the markets and suddenly there was screaming and chaos and panic - 40 MINUTES AFTER THE NUMBER CAME OUT - what the hell CNBC?  How are people supposed to watch you for "market moving news" when you ignore the biggest market moving news of the day and let your viewers get blindsided?  The first mention of the budget gap on CNBC came at 2:59, cheerrily presented as a 3 second comment by Margart Brennan. 

Trading Goddess posted the letter in the above image and I thought it was very appropriate for today as it seems to be what’s wrong with our society in a nutshell.  We do not teach our children to think, we teach them to follow, to conform.  And, when they grow up and become corporate news people, they blindly follow whatever policy is handed down to them - there is no longer any such thing as "investigative journalism" - We are an information society where the information we get is whatever mindless crap gets stuffed down our throats and the government, business and the media take full advantage of that to create a couch potato nation of conformist consumers.

I mentioned the national debt yesterday and someone said to me "Yeah, but as a percentage of the GDP it’s not so bad."  Take 15 minutes to watch this great video (the whole series that Barry Ritholtz found is very good) on how the government uses "Fuzzy Numbers" to completely distort the GDP and other economic data that make the MSM reporting of the economy virtually useless.

I am the kid that gets detention for questioning the teacher and I do my best to teach members to question what we hear every day because you need to cut through a whole lot of BS to get to some investing truths that can make you money.  We hear so much conflicting information that it’s very easy to get confused or just give up and follow some pundit but that IS the scam - make you pliable and controllable so that you, the investing public, learn to shut up and do what your told.  This was all eloquently explained to Neo by Morpheus in The Matrix, so I won’t get into it here but, as Morpheus says, "there is no turning back" once you head down the path of questioning authority, you are doomed to a life of self-reliance.

Taking the red pill (questioning your world view) doesn’t solve any problems and it doesn’t make things any easier but it can make things more real, which can help you develop an investing style that is not dependent on the kindness of strangers, and that is financial independence.  It’s a complex World out there and today’s debacle just reminded me how scary it is to be too reliant on any single source for information.  We were on top of things, we took action, we made money - that is our site operating at its finest and the more people who bring in different views the better because the truth IS out there - it’s just so damn hard to find!

Today’s tickers: SKF, GS, KRE, X, GDX, SIL, SWY, TTWO, AUXL

SKF - News this morning Morgan Chase that it plans to write down $1.5 billion in mortgage backed assets amid “substantially deteriorated” trading conditions – coupled with an analyst downgrade of Goldman Sachs – didn’t just provide a terse lesson on the laggard performance and troubling vulnerabilities that continue to plague the financial space . It used its star pupils to deliver the lecture – namely the two institutions that up to now have seemed inured to much of the fallout. Downside continues to grip most financial stocks this afternoon, and shares in the XLF are down nearly 3% to $21.67 with puts outtrading calls by a factor of 1.4. Shares in the contrarian Ultrashort Financial Proshares fund rose 5% to $116.34 with calls outtrading puts by a factor of 1.6. The action here indicated traders positioning for a new round of upside in the contrarian fund (and downside for the financials en masse) into September, with some traders buying September 125 calls at $9.50 apiece – a premium requiring another 15% upside by September 19 just to break even.

GS - Shares in Goldman Sachs slid 3.4% to $171.87 after respected Deutsche Bank analyst Mike Mayo forecasted weaker-than-expected Q3 earnings from the longtime star pupil of the brokerage space, due to its vulnerability to slowing U.K. and Eurozone economies. The sheer geographic diversity of Goldman’s equity exposures has served as a kind of trump card for Goldman since the early days of the credit crunch, lending the brokerage luster as a kind of “artful dodger” of the worst of the carnage. But with economic woes coming home to roost across the Atlantic, Deutsche Bank’s report suggested, the gold-plated investment bank may find itself unceremoniously cut down to size. On the options front, implied volatility on all Goldman Sachs contracts has risen about 20% since Friday, suggesting a rising current of risk awareness in the market. Today, with more than 52,000 options trading, we’re seeing not just two-way traffic in August contracts as they near expiration, but a willingness to buy September puts at strikes 175 and 165 – the latter strike priced at $8.28 per contract to require another 8% drop from current levels. Today’s premiums suggest a slightly better than 1-in-3 chance of Goldman shares doing so by September 19. We’re observing very little interest in put strikes nearer the 52-week low level of $139.47, suggesting that this level remains sacred for now.

KRE - Abiding fears that yet more bank failures may be in store in the US led to the kind of defensive positioning that has become old hat for option traders in the KBW Regional Banking ETF. An increase in option trading volume in the regional banking ETF to 1.5 times the normal level appeared due to a 6,000-lot long September put spread between strikes 25 and 30. Here it appears that the trader took an 80-cent debit on the trade, suggesting that shares in the closed-end fund may trade at least as low as $29.20 but likely not lower than $25 over the next month. Shares in the ETF are down 1.8% to $34.16.

X - U.S. Steel shares are up .28% to $128.81, and it looks as though some traders are jockeying for more upside where that came from – positioning in a 2,000 bull call spread in the September contract between strikes 130 and 145 for a $6.00 debit – and possibly funding the position in part via the sale of September 115 puts at $4.85.

GDX - Market Vectors Gold Miners - Shares are up 1.2% to $34.86, as brisk option trading volume approaching 40,000 lots in the first 30 minutes of the market appeared due to call spread activity in the September contract between strikes 36 and 39. Consistent with what has been generally bullish options activity in gold mining companies despite irksome losses for the stocks in recent sessions, this looked to us like a bullish call spread, with the trader buying the 36-strike calls for $1.90 and selling the 39 strike for $1.10. Implied volatility at 55.2% is elevated above the 45.1% historic reading – suggesting additional risk for the kind of moves that could make that long spread profitable in the coming month.

SIL - Earnings from Apex Silver Mines caught option traders off guard, sending shares down more than 38% to $3.47, plunging (as can be imagined) below the standing 52-week low. Implied volatility on all Apex options more than doubled from yesterday’s levels and now at 197.3% weighs in at nearly two and a half times the historic reading on the stock – a strong indication that option traders do not feel that the full exertion of the earnings has been absorbed into the stock price. An increase in option trading volume to 13 times the normal level indicated heavy buying interest in September 2.50 puts at 30 cents apiece, a move that suggests a continued descent into the tar pits for Apex – a stock that, incidentally, hit its apex of the past 52 weeks at a price of $21.33.

SWY -Shares in supermarket chain Safeway rose 1% to $28.36, as an increase in option trading volume to more than 25 times the normal showed a trader confidently positioning long of a 24,000-lot position in September 25 strike calls at $3.50 apiece. Safeway shares hit a 52-week low back on July 17 with a precipitous drop to $25.67 after lowering its year-end sales guidance. Since then the shares have battled back $3 and the size and direction of the call-side positioning today indicates one trader confident that current levels will hold at least another month.

TTWO - –Option traders are looking for an upside breakout past the 52-week high next spring for video games maker (and parent of the “Grand Theft Auto” franchise) Take Two Interactive – sending option volume to the highest level in at least 52 weeks today. The current share price of $24.74 shows a .73% uptick from yesterday’s close, and about an 11% discount from the standing 52-week high of $27.95 set back on June 6. An increase in options trading volume to 5 times the normal level today showed traders selling September 20 puts for 60 cents and buying 27.50 calls on signs of confidence heading into Take Two’s September 10 earnings report. What caught our attention was some diagonal calendar call spread activity at bullish strikes further out. A trader here appears to have bought freshly into March 30 calls at 75 cents apiece (a price indicating about a 1-in-4 chance at Take Two shares breaking the $30 threshold by mid-March), and funding this position with the sale of 35-strike calls in the January ’10 contract for 45 cents apiece. Option traders have long felt that Take Two is a stock with an unusual propensity to big moves – the fact that the share price is up 34% so far this year is reflected in its 34.7% historic volatility reading, but implied volatility ticks in at 54.7%: a disparity that has remained more or less stable since early July but suggests Take Two options are being priced to reflect about 57% additional risk over the next month than is already charted into the share price.

AUXL -Elsewhere, option traders are taking a bullish stance on urology drug maker Auxilium Pharmaceuticals. Shares set a new 52-week high today despite a marginal .58% gain from yesterday’s close to $39.99. An increase in option trading volume to 14 times the normal level appeared due to a diagonal calendar call spread in which a trader looks to have sold January 50 calls at $2.30 to defray the cost of September 40 calls bought for $3.00 apiece. The trader in this case is looking for continued gaps above the 52-week high into September. Implied volatility at 51.2% is elevated above the 45.9% historic reading.

OK, let’s see if we can hold this rally through some significant points today. 

We ran the Big Chart on Thursday and I’m very pleased to say we touched our "Feeling Better" goal on the Dow (11,808), S&P (1,311) while we broke it on the Nasdaq (2,380) and the Russell (712) Friday and never looked back.  Our laggards are the NYSE, who need to take out 8,642, the SOX, who are so far away from 465 that we will settle for 419, which would be "just" 25% off their last summer’s high and the Transports - who need to get to 2,591 but do deserve a pat on the back for breaking their 20% off line at 2,491 and holding it yesterday.

Wow, that’s more information in one paragraph than most people give you in a week!  What’s really amazing is we are dead on all these levels that we set over 3 months ago, using the 5% Rule…  When I want technical information I go to David Fry (and Tom, but he’s on vacation) and I strongly recommend you take a look at his charts today as we are critical in so many sectors you need to get the feel of what a focal point this week is going to be.  As I mentioned in last night’s article on the dollar, I’m a little skeptical about the recent movement as I think it’s more to do with a slight change in sentiment than lasting fundamentals.  Combine the dollar bounce with a commodity pop (chickens and eggs) and an equity rally that was certainly boosted by the enforcement of the uptick rule and a crackdown on naked shorting and we have to watch these levels VERY CLOSELY to see if this is going to be enough to get us past the serious technical resistance.

Let’s keep those levels on a post-it and make sure we’re gaining, not losing them during the day.  It’s only 150 NYSE points and 91 Transport points to make our last two critical greens and, if we hit those, then I’ll be putting a big bet on the IGW to show (up that is) as the semis have been lagging in a tech rally and seem like a real no-brainer investment if this thing has real legs.  Options are VERY thinly traded on this index but that’s no reason not to pick up the Jan $45s for $7.95, with just $2 in premium as we can sell the Sept $50s for $2.50 but my plan there is to place a "sell-stop" at $2, triggering the sell only if the position heads down on us.   We may also play the $SOX in our Butterfly Collection depending if they hold $370 on today’s pullback.

If you ever doubted Barron’s role as a tool for the Goldman/Cramer/Whitney crowd, check out these two lead stories today:  "Unlocking the Auction-Rate Mess" (gee, tell us how you really feel) and a BUYBUYBUY piece on energy stocks called "High-Octane Plays at Regular Prices," which was (coincidentally I’m sure) the theme of Cramer’s mid-day Mad Money show yesterday.  If I had a research department I’m willing to bet I’d have the same article telling you what a great bargain the builders were when they lost 25% of their value and were trading at p/e’s of 10 or less - everything old is new again.

It turns out our Trade Deficit was not too bad at $56.8Bn, our lowest deficit in 3 months and better than the $61.5Bn expected as the cratering dollar in June boosted exports.  I’m still very nervous about the terrifying Treasury Budget at 2pm with an $86.8Bn July deficit projected - the worst deficit ever accomplished by a country on this planet in a single month!  Actually there are very few countries in the history of this planet that have run up a deficit of $86Bn in an entire year so we are really into uncharted territory here - yet another mission accomplished by this administration…

Asian markets ran a 1% deficit this morning with the Nikkei down all day but the Hang Seng making a dramatic 500-point reversal after lunch as rapidly falling commodity prices hit the steel sector.  The BOJ showed corporate goods prices rose 7.1%, the worst since 1981 so the Nikkei never stood a chance.  X is already off sharply, it will be interesting to see if they can hold $130. 

Europe is flat ahead of our open but Russia is standing down in Georgia saying they "have achieved their goals" but have not said they will be withdrawing troops so I guess occupying Georgia was one of those goals.  Perhaps President Bush will be able to tell the Russians that it is outrageous to send troops into a sovereign nation, occupy its land and refuse to leave - that is something America simply should not stand for!

I’m remaining cautious today ahead of the Budget at 2pm and tomorrow’s Retail Sales report and Crude Inventories, as a bounce from this level ($110-$113) would not surprise me.  BP shut down a couple of pipelines in Georgia as "a precautionary measure" even though the fighting stopped and the pipelines were never near the fighting.  I guess the precaution they are taking is against oil falling to $110…  I said yesterday to get ready for shenanigans from the oil manipulators and BP is one of the convicted ones so it’s no surprise they take the lead today.  Thank goodness they are only in control of 10% of the world’s oil, right?

Be careful out there.