Well, this was certainly better than last week!

In last weekend’s wrap-up we noted the market could go either way and, after a poor start on Monday, we really pulled it together and ended up tacking on (officially) 947 Dow points (11.2%) - most of them (890) coming on Tuesday!  The "good" week did not quite save us from a terrible month where the MSCI World Index fell 19.1%, Emerging Markets Fell 27%, the S&P dropped 17% and the CRB fell 22%.  Even gold dropped 18.5%, the biggest monthly loss since 1983 so we need to keep this week’s run in perspective until we see some real follow-through as we enter the traditional Santa Clause Rally season.

Yes the markets were oversold but the question now is - how oversold as there is very clear evidence of declining global growth which has popped the commodity bubble but also popped the Chicago PMI all the way down to 37.8 for October (down from 56.7 in September) and our GDP turned negative (-0.3%) for the first time since poppa Bush held office in 1991 so congrats to GW for getting this one in just under the wire!  Sadly, we are not alone in our suffering as the global picture is falling apart along with Japan (who has led the downturn) and the US (see chart below):

Even worse than the GDP data, is the Real Per Capita Personal Income which fell an amazing 9.6% in Q3, the largest decline since 1949.  This led to a decline in the PCE of 0.3%, news which the markets shook off on Friday and my concern is that the markets were poised to paint a gain on Friday and nothing was going to stop them but what will a weekend of reflection bring?

Last weekend, we didn’t get any major government action to prop up the markets and the futures were limit down in the US on Monday morning.  We recovered nicely from that and finished the day down "just" 200 points and we spend the rest of the week trying to get back to the highs of October 21st but still less than halfway back to where we opened the month on most indexes.  I pointed out in Monday morning’s post that the Nikkei was clearly oversold, trading at just 0.89 times book value and the Nikkei led us higher for the week with a 1,400-point gain (20%) off the bottom. 

My sole stock selection for Monday morning was WMT and the 2010 $50s came in right at $10 in the morning and finished the week at $12.97 - that one seemed kind of obvious with the stock under $50 but I continued to bang the table on bottom fishing during member chat and I had said in the main post on Monday morning: "Already (9am) I see the futures improving.  Let’s hope that follows through and we are not the only bargain hunters out there.  The technical traders would love to see us make a bottom test but they were denied on Friday and they may be denied again today so it’s going to be very interesting this morning but there is nothing bullish about it until we get back over that 8,800 mark on the Dow."  We took out that 8,800 line the following afternoon.

By Tuesday morning we were ready for a turnaround.  You can read my Tuesday morning post, where I reprinted my impassioned case for buying at 8,200, which turned out to be excellent advice and, of course, almost all of the nearly 100 bullish trade ideas I put up in the past two weeks are doing very well on this bounce but we remain skeptical until we make better progress on our levels - especially the 40% off the top marks we’ve been watching closely for weeks. 

We loved the early sell-off Tuesday morning and it gave us a great bottom test to key off of at 11 am, where we got almost all of the 1,000-point gain we were expecting off the Fed cut a day early.   Our much loved UYG calls jumped over 35% from that great bottom call and the SKFs, which we loved on the way up, were just as much fun on the way down as they fell from 190 to 125 by the week’s end.  Even if you weren’t a premium member and didn’t see my FXI call at 11:04 when it was $20.35 and read about it in the evening post, it "only" opened at $22 the next morning but finished the week at $25.16.   My group of slowpoke stocks on Tuesday evening did a pretty good job of outperforming the S&P for the rest of the week, especially WYNN, who jumped an additional 60% Wednesday-Friday!  LVS did even better but we’d been on that one for over a week and WYNN was good variety.

Wednesday morning, I said we needed a half-point cut to make the markets happy and Bernanke did not disappoint as our Federal pony once again trotted out his one trick, which reminds my of the Paul Simon lyrics: "Hes a one trick pony - He either fails or he succeeds - He gives his testimony - Then he relaxes in the weeds - Hes got one trick to last a lifetime - But thats all a pony needs."  Hey, they didn’t hire "Helicopter Ben" to run a tight Federal ship did they?  Of course the phrase "putting screen doors in a submarine" doesn’t begin to describe the inadequacy of Bernanke’s policy but it’s always good for a quick boost when we need it. 

On Wednesday morning I said: "For now, we NEED to take back last Tuesday’s levels as a minimum goal for the day and we really want to see those 40% lines taken back and held, not just right after the Fed, but through Friday - after the excitement dies down."  We had a really strong finish to the week but the FXP March $100s we were hoping to get for $40 over the weekend as disaster protection came all the way down to $30.50 so it will be interesting to see how much follow-through we do get out of China next week.  Thursday morning I think I was too bearish as I worried over the still-tight money supply but. aside from our own Fed, global CB’s were dumping cash on the market yet we still weren’t getting back to the 10/21 levels we had been watching.  My only pick that morning post was the IWM May $52s, which did make a nice pop from $5 to $7.27 as the Russell had a very nice 2-day run.

Friday Morning I discussed trading strategies for LVS, GE and GS, which are all doing quite well so far, especially LVS, which popped another 36% on Friday - the gift that keeps on giving.  Still, I remain very concerned about the global picture and we made our levels on what seemed like a suspiciously false rally but we caught it during member chat and I even put out a trade on USO CALLS of all things, which did tremendously well from the 12:47 pick.  At 12:53, GS gave us the go signal on the rally and the Qs finally broke 33, which was our primary signal to get a little more bullsh.  Thankfully, they held it into the close but we’re still nervous and will remain so until we see some progress next week.

We have the election to distract us on Tuesday and that is also keeping a lid on the financial news as most papers are concentrating on the election so it may go unnoticed on Monday that no additional funding is pouring into the markets.  We have a lot of data hitting the wire including ISM and Construction Spending at 10 am on Monday followed by Auto Sales and Factory Orders on Tuesday.  Wednesday we see ADP Employment and ISM Services, Thursday is Unemployment and Q3 Productivity and Friday will give us October Unemployment Rates (7% possible), Pending Home Sales, Wholesale Inventories and Consumer Credit so a big, big week of data!

Earnings have not mattered very much so far as the broader market has tugged companies up and down regardless of their actual reports.  There are hundreds of companies reporting next week and Monday we’ll be very interested to hear from DRYS, OSK and SPG pre-market and  APC, ADP, CROX, EOG, MA, and VIA.B after.  Tuesday we get ADM, DF, MVL, JOE, THC and VNO with SAM reporting during the day and NILE and HLS taking us through the election eve, after which the markets mood may change quite a bit.  So it’s a little more fence-sitting for now but that’s better than the 70% bearish stance we ended last week with so let’s call it progress!

Today’s tickers: CCL, AXP, WFC, HUM, PG, BUD, HIG & PRU

CCL – Carnival Corp. – It’s a pretty nasty squall economically speaking and cruise-line companies must be wondering about the affordability of winter cruises as well as the prospects for 2009. Today Miami-based Carnival announced the suspension of its first quarter dividend, which will save the company $1.3 billion. However, the statement highlighted the desperate straits ahead that will require the skilful and precise captainship of management to avoid the rocks. It’s hard to raise cash at present. Consumers are staying at home and one would imagine that luxury items such as cruise trips could easily be foregone. Investors punished Carnival despite its strong cash flow position for today’s prudence and sent shares lower by 16.6% to $24.00. Option investors were quick to pounce and chose to secure selling rights at the 22.5, 25.0 and 27.5 lines in November, while an equally large block of 1,195 contracts was bought at the December 22.5 line where only 263 positions existed ahead of today’s reading. Greater uncertainty surrounding the outlook gave option traders reason to boost implied volatility by 27% to 94% today as shares reached the lowest value in five years. It’s not all doom and gloom though as the well out-of-the-money calls are still trading to investors expecting a rebound. Today buyers lapped up calls at the 40.0 strike in December.

AXP – American Express – Shares in credit card lender Amex have been languishing at low levels lately and are rallying a small amount in response to a 10% reduction in workforce yesterday. Option traders today sense that a weaker share price might be ahead as they deploy defensive put option positions in the January contract. Amex has reported diminishing profits in the face of increasingly difficult conditions for consumers to repay credit card debt. There now faces the real possibility that credit card portfolio underperformance might deliver a ratings downgrade and push up the cost of wholesale funding at the company and further erode profitability. In the December contract, with shares trading at $27.75, investors bought the 17.5/25 put spread at a net premium of 2.40. That transaction in about 10,000 contracts involves the sale of the 17.5 strike and simultaneous purchase of the higher 25 strike. The maximum profit on the trade is 5.1 should shares fall to the lower strike by expiration.

WFC – Wells Fargo – There appears to be some bearish positioning through the options market despite a 6.8% rally in the share price today to $34.00 at Wells Fargo. With little or no open interest at the December 38 strike call line, an investor sold around 15,000 call options at a premium of 1.15. This could be plain bearish betting that the rally in the stock or for financial shares in general is set to soon subside or it could be half of a covered call position with an investor buying stock and writing calls as well. As with Amex above, a large bear put spread involving around 15,000 contracts appears to have been placed at the 20 and 30 strikes in the December contract. The net premium appears to be 2.0 giving a maximum potential gain of 8.0 if shares hit the skids. The volume at both these strikes is building independently and so far we’re seeing lower strike volume read 48,000 and volume of 33,600 at the upper strike. These are fresh positions given investors’ existing positions.

HUM – Humana Healthcare – One of our largest volatility movers today is Humana, where shares are weaker to the tune of 7% at $27.55. Implied options volatility is up 27% to 105%. Healthcare earnings have been poor and investors are nervous over what a changing political agenda might mean for healthcare insurance companies. Today’s activity appears to show investors banking on still more volatile share price movements given the purchase of both 25 strike November puts and 30 strike calls. If this is a combination made by the same investor using similar amounts then it appears to be a long straddle, which would pay off if shares in Humana moved by more than the current premium paid on the combination. Shares would need to exceed a price range of $21.10 and $33.90 or implied volatility would need to continue rising to see this position work.

PG – Procter & Gamble – We keep seeing bloated options volume in P&G day after day and we believe that this is due to a forthcoming corporate action. At the end of next week shareholders can convert stock in relation to a planned Folgers and Smuckers merger and the current gyrations in both possibly makes some arbitrage position worthwhile, which accounts for high but balanced amounts of activity in both calls and puts at out of the money strikes in the November contract.

BUD – Anheuser Busch – An analyst today stated that the InBev merger will likely proceed at the agreed $69 per share offer price and that’s boosted BUD shares by 0.8% to $62.50. The options tend to corroborate this view, today at least, given the sizeable 18,000 lot positioning in the December 65 strike calls where the premium currently stands at 3.10. At 53% implied volatility investors are still casting a significant degree of caution into the mix. Traditionally volatility would dry up post announcement. This race is clearly far from over.

HIG – Hartford Financial Services Group – Although the stock is higher by 3.7% at $10.00 it remains the most volatile among equity options series today with an elevated implied volatility reading of 262%. One analyst noted that the company has few options to raise fresh capital but investors aren’t yet balking. Perhaps that’s due to the fact that shares more than halved in value yesterday. Today we are seeing good two-way traffic across the November series where puts at the 7.5 and 10 strikes are active, while 10 and 12.5 strike calls are most popular.

PRU – Prudential Financial Inc. – Feeling the fallout is competitor Prudential whose share price is lower today by 8.6% at $26.50. Option market activity is concentrated in the December puts at the lower strikes, warning of investors’ fears that more selling might be on the cards. Investors paid premiums of 4.20 for 3,000 17.5 strike puts, 4.50 for 2,000 puts at the 20.0 line and 6.20 for 1,500 puts at the 22.0 line. Implied volatility is running at 205%.

I’m no longer apologizing for being skeptical into the rallies.

Yesterday was tough as I made a series of bearish calls in the afternoon as the Dow hit 9,200 which were ingenious at 3:45 as the Dow broke 9,050 but had us very nervous as the Dow went right back to 9,200 just 10 minutes later.  Still, we held fast as I have my overwhelming concern that the weekend will arrive as scheduled this afternoon and we have a tough data day today and, most importantly - we STILL have not made our levels.  A buy program or a sell program can only move the market so far until it runs into real resistance and that’s what we take full advantage of with our intra-day trading.

David Fry summed up yesterday’s action perfectly: "Yep, it was that kind of day. Was there any good news to account for an up day? Absolutely nothing, unless you think the GDP data falling a little less than expected was something to place bets on.  Nope, the market is just oversold and this is the end-of-month prop job mutual funds and a few others need…  So desperate are bullish tape painters they ignored San Francisco Fed President Janet Yellen’s statement that “…recent economic data is deeply worrisome and the economy is likely to contract significantly in the fourth quarter.” Sure, that’s really bullish!"  I also strongly recommend linking to David’s column as he has a great series of charts that give a nice overview of where we are at the moment.

We have some very scary Personal Income and Spending data hitting us at 8:30 followed by the downwardly creepy Chicago PMI at 9:45 and the gloomy Michigan Consumer Sentiment for October, which may be revised below 50, more than 10% down from September.  Also sending chills down my spine was a WSJ story on the conference of the Turnaround Management Association, who are expecting a banner year in ‘09.  "We’re all salivating. Wait. Don’t say that," said one bankruptcy lawyer. "This is clearly the most devastating economic situation I’ve seen in my 40 years. I would say there is some distress even among the distressed-debt community," said Henry Miller, co-founder of the turnaround firm Miller Buckfire. Revenue is up by about one-third this year, he said. "Many of the patients are getting to us too late, I fear."  I like that he thinks of himself as a doctor performing emergency surgery…

"I am like an air-traffic controller with five planes trying to land at once. And they are all on fire," said Gregory Segall, managing partner at Versa Capital Management Inc., a $1 billion distressed-investment fund in Philadelphia. "Our greatest competition to do a deal is liquidation, getting the deal done before the bank or lender pulls the plug on a company," he said.  Through the first nine months of 2008, Standard & Poor’s Corp. said that 66 companies have defaulted on $218 billion in rated corporate debt. That compares with 53 companies defaulting on $11 billion in rated debt for all of 2006 and 2007.  Mr. Miller and others estimate there is $2.3 trillion in leveraged and high-yield loans right now, with about one-quarter of that rated CCC or lower — a subinvestment grade rating that indicates a higher likelihood of default. Much of it comes dues in 2009 and 2010.  BOO!

Bill Gross put out a predictably scary newsletter this morning calling the economic collapse: "a nuclear implosion – destructive fusion not controllable fission."  The article is a good read and Bill does say, however, that "perhaps over the next few weeks or months, when deleveraging of the private sector is met by the leveraging up of the government sectors: the TARP, CPFF, and MMIFF will inject over a trillion dollars of liquidity into the system over a short period of time. At that point, our nuclear atom will begin to stabilize and it should be safer to move a little distance back out toward the perimeter where yields and potential returns are very attractive."  Obviously, Mr. Gross is a student of my Stock Market Physics class and agrees with my underlying bullish premise - $1Tn is a LOT of money and it has to move the markets at some point.

Speaking of Physics, we have been applying some fundamental market laws to trades this week that are based on the premise that there IS a limit to how low a stock can go and we’ve been taking advantage of the outrageous premiums that are reflected in the options contracts to make interesting plays.  One I saw yesterday during member chat is a great example of simple option plays you can make that can generate a significant return - even in these terrible markets.  We looked at LVS, which closed at $10.38 and the play is to buy the stock, sell the Nov $10 call for $2.58 (prices at close) and also sell the Nov $10 puts for $2.20.  As you are collecting $4.78 in credits, the net cost of entry is $5.60. 

There are two possible outcomes on Nov 21st (option expiration day):  If LVS closes above $10, you will be called away from your position at $10, a 78% gain off your $5.60 entry.  You will not owe your put holder any money as the stock is over the $10 strike price.  If the stock finishes below $10, you will not owe your caller any money but an additional round of LVS shares will be put to you at $10.  That $10 plus your $5.60 net entry on the first round will put you into LVS for an average cost of $7.80, which is a 25% discount off the current price.  So the point to this trade is - as long as you feel you wouln’t mind owning LVS for $7.80 long term - this is not a scary play at all!  These are the kind of trades you SHOULD be making in these markets, taking advantage of the fears of others that is causing implied volatility to skyrocket.

Options are a way to mitigate fear in a scary market and those of you who own stocks are doing yourself a grave disservice by ignoring the very profitable strategies that can be employed by buying protective puts (especially against dividend paying stocks) or selling calls to others to generate a steady monthly income.  Why sit on your $19.35 share of GE hoping it will go up when someone is willing to pay you $2.20 to buy your stock from you for $19 on Dec 19th?  The net $1.85 call away is 9.5% of your stock price in 50 days - far outpacing the 6.5% annual dividend.  If you intend to hold a stock through thick and thin, then what’s so terrible about lowering your basis to $17.15?  If you do get called away, you can always buy more…

Warren Buffett rightly said "Be greedy when others are fearful" and that’s the underlying philosophy to the trades we’ve been going after for the past few weeks, these wild market swings are great entry opportunities for long and short plays but we prefer to take advantage of premiums by being mainly a seller, not a buyer of options.  Another great trick in a volatile market is, rather than buying a stock you think is "cheap," simply selling the put.  Selling a put gives someone the right to force you to buy a stock for a certain price on a certain date so, if you want to by GS (along with Mr. Buffett) on yesterday’s dip to $89, you can give yourself an automatic discount by selling the November $85 puts for $8.  You collect $8 up front and, if the stock is put to you at $85 by 11/21, your net entry is just $77, 13% less than the current price.  If GS continues higher, you will NOT end up with the stock (that is the "downside," the lack of upside) but you will keep the $8 as the obligation expires - not a bad profit for 2 weeks without ever actually taking ownership of the stock. 

There are, of course, more complex strategies that can benefit you on both ends but it amazes me how many people have money tied up in portfolios and just let them lay there, not even attempting to unlock the revenue generating potential that can be realized through option selling.  It’s a strategy well worth checking out, especially for many of you who depend on getting a monthly income from dividends and are seeing your portfolio values shrink and feel you may need to sell stocks at these lows to make ends meet - that’s why I’m discussing this now as I’ve spoken to some new members in this situation and it seems to be all too common this month and, from my perspective, there is always an option…

Japan may be out of options as they cut their 0.5% rate to 0.3%, which is a 40% cut but investors didn’t see it that way and the Nikkei sold off 5% on the button, back down to 8,576, which is 53% off the 2007 highs.  The Hang Seng pegged the 2.5% rule on the nose as well while Shanghai fell 2% to close the week sadly at 175, over 70% off the high of 588.  The Baltic Dry Index fell 5% as well as commodities continue their global collapse - which is great for us as we stayed short on oil into that BS rally.  In pre-market trading, oil dipped to $63 a barrel and Brent crude was down to $60 and threatens to break that mark if US equities don’t save us today.  News that should not be ignored out of India is a series of 13 coordinated bombings that killed 61 people, injuring 300 others in an escalation of separatist violence. 

Europe is mixed ahead of the US open with not much news over there.  There is still the anticipation of an ECB cut next week and there will be heavy disappointment if it doesn’t come through.  US indexes have recovered from some disappointing futures and look to open flat as well but unless we go flying through the levels we laid out in yesterday’s post, we’re certainly going to remain well covered into the weekend.  Consumer spending was down 0.3%, about what was expected and the dollar is gathering strength again so it should be a technical trading day overall. 

If nothing blows up over the weekend and we don’t have any countries or major corporations entering bankruptcy, we may be able to make some progress next week but, until we get the majority of our indexes over the 40% mark - let’s continue to proceed with caution and remain well hedged.

Today’s tickers: ACE, SPLS, YHOO, EMC, OI & GS

ACE – ACE Limited – Comments out of the CEO’s mouth on Wednesday helped push shares sharply higher at multi-line insurer Ace. Mr. Greenberg noted that the soft patch in his company’s business line was more than likely over and that the government bailout program had removed excess industry capacity. As such he’s insisting that business managers at the company simply say “no” to clients’ bargain requests. As shares rose, we noted some sizeable action on December calls, which were sold by a customer. Today we’re picking up more of the same this time at a higher strike price. With shares at $57.00 an investor is likely buying the stock and writing calls against it at the 65.0 strike at a premium of 1.30. Yesterday’s surge on heavy volume took shares from $47 to $58 and the 60 strike call was written. An optimistic buy-write strategy would make a total return on the combination of 16.3% if the share price reached the 65.0 strike price and confirmed Mr. Greenberg’s optimistic assessment of the business operating environment. Implied volatility is running at around 47% at that strike. If the share price does achieve its gain to where the calls were sold, the investor is prepared to deliver the stock to the call buyer.

SPLS – Staples Inc. - The price action of shares at Staples does look like a nice bottom formation and today’s confirmation from the company that it will meet analysts’ expectations have added to the rosy picture as shares jump 13.7% to $18.13. The company is also discussing the integration of its Dutch acquisition at a meeting in Boston today. We’re watching options in Staples as one of the most actively traded contracts today where morning volume surpassed 41,000 lots. That compares to existing open interest of 178, 684. Most actively traded today are calls at the December 20 line and puts at the 17.5 line where volume of 9,000 each side smacks of a strangle. Implied volatility has come in from 85% to 75% recently and today’s activity could indicate more volatility selling with the investor making the statement that shares will remain within the strangle range. If they do the investor gets to pocket the combined 3.0 premium. That gives the seller $3.00 above and below the range before being proved wrong on the strategy.

YHOO – Yahoo! Inc – Another actively traded option contract today is in search-engine, Yahoo! where there is plenty going on. Shares are 2.6% higher at $12.46 and investors appear to be diving into November and December calls at the 16.0 strike implying a further share price recovery of around 28%. We do note, however, that around one-third of the December volume was instigated by a seller at 94 cents, which casts doubt on the theory of sustained recovery. The volume at both series exceeds current open interest levels suggesting fresh interest here. In the January 12.5 line we’re watching volume increase lot for lot on both calls and puts indicating an investor taking a volatility position on the stock. The implied volatility reading on options contracts is higher by 16% at 105% today. Time and sales muddies the water, however, since the data indicates a long call and short put positions are being established.

EMC – EMC Corp. – Not exactly suspicious but more of a coincidence is the fact that we’re picking up unusual volume in EMC puts today following the filing by William Ackerman at Pershing Capital that he’s acquired 39.5 million shares in the company. Shares recently reached $8.45 and today have rebounded 4.7% to $11.02. This acquisition must have been within the past several days, but the filing with the SEC was made today. Meanwhile, a block of 37,500 puts was bought at a premium of 2.14 in the January 12.5 strike, meaning these puts are already in the money. Several thousand more contracts were traded at the strike. The existing open interest at the strike is almost 135,000 and this transaction might have nothing to do with Pershing whatsoever.

OI – Owens Illinois – Stronger than expected results from this glass-packaging manufacturer helped shares rebound 22% to $23.48. Our option market scanning tool has detected unusual volume at the November 30 strike calls where 10,226 calls have traded at 30 cents up from 10 cents prior to earnings yesterday. The volume exceeds investors’ current stance where investors hold rights to purchase 6.3 million shares in the company at $30.00 before November’s expiration.

GS– Goldman Sachs – What is the deal at Goldman exactly? Shares just can’t catch a sustainable bid even when the market has a good day. The continued ‘will they, won’t they?’ debate over its ability to leverage shareholder equity won’t go away. Perhaps it’s the current rise in debate on employee bonus payments that is leading to speculation over some kind of brain-drain from the company that’s not helping. Today its options are again among the most active on morning volume of 72,500 lots with a put/call ratio of 1.25 favoring bearish bets. There are two intriguing slugs of volume in today’s trade. On the call side in the November 110 calls volume of 10,000 lots almost matches the exisiting open interest here. On the day its premium is down by a quarter – since shares are 6.8% lower at $90.95. Elsewhere in the January contract at the 60 strike, volume of 5,000 lots has gone through at a premium over 50% higher than yesterday costing 6.70 today. During the recent stormy conditions put option open interest has built in this contract way down to the 10.0 strike as investors continue to make bearish postures.

We got huge moves in both directions following yesterday’s half-point cut.

I was negative on the rally and we went as far as to pick the DXD (ultra-short Dow) calls at 3:46 with the Dow topping out at 9,350 as I said to members: "I don’t know that Europe is going to have such an easy time cutting rates with oil up 8% and other commodities going up as they are now up sharply against the weak Euro and the ECB has a very definite inflation-fighting mandate."  Still, I was as surprised as anybody to see DXD fly from $71 to $77.50 in the last 14 minutes of trading.  Looking at the futures (7am) I may have been wrong to be so bearish about the Fed statement but the commentary struck me as very negative and, with the GDP and Unemployment hitting us at 8:30 and then the weekend looming, I couldn’t see not covering into what looked like a pretty irrational rally.

Pre-market, we are back up to roughly 9,150, the mid-point of yesterday’s trading.  Holding Tuesday’s close will, of course, give us a small victory for the week but, as I pointed out in yesterday’s Big Chart Review, it doesn’t mean much unless we can take back LAST Tuesday’s highs which are: Dow 9,265, S&P 985, Nasdaq 1,770, NYSE 6,051, Russell 546 and SOX 243.  The Hang Seng (15,041) and the Nikkei (9,306) made valiant attempts to get back to last week’s levels with massive gains this morning but the Hang Seng still finished down 712 points since 10/21 and the Nikkei, despite a 10% gain on the day, fell 277 points shy of the mark.  Both had strong finishes and may follow through tomorrow if the US looks good today but it’s going to be a real level test ahead of the weekend.

In addition to our half-point cut yesterday, the IMF offered up $100Bn in an expanded loan fund and we discussed China’s cut to 6.66% yesterday.  Norway dropped rates to 4.75%, it’s second cut in 2 weeks and Taiwan dropped rates to 3% while Japan is discussing halving their 0.5% rate to 0.25%.  Meanwhile, junk bond rates are exploding to 16% as corporations scramble for cash.  Last year junk bonds traded at 2.5% over Fed Funds rates of 4%.  "The junk-bond market is looking at a ticking time bomb," says Martin Fridson of Fridson Investment Advisors. "Even under the best of circumstances there’s a lag with fiscal or monetary stimulus to the economy. When you have the banks as beaten up and resistant to lending, it is likely to be even less effective than usual."

Mortgage rates have also gone up, not down. That’s in part because Fannie Mae and Freddie Mac, the mortgage-finance giants taken over by the government last month, are finding it costlier to borrow as investors are shifting away from their debt and toward other instruments, such as bank debt, that have new government guarantees. In just the past week, the average 30-year mortgage rate increased to 6.56% from 6.1%, according to HSH Associates.  As I keep saying, nothing the administration has done so far is doing anything to help the actual homeowners in crisis - or businesses for that matter…  With consumer spending making up 70% of the GDP, that’s a recipe for disaster!

While Japan tossed a $51Bn stimulus package onto the global currency bonfire, as I expected, the rapid rise in commodities on yesterday’s Fed move already has the ECB hedging and Jean-Claude Trichet said that an interest-rate cut at the bank’s Nov. 6 meeting was a "possibility."  Even so, the market is expecting a half-point reduction to 3.25% from 3.75%.  Business confidence in the Euro-Zone hit new lows in a recent poll but Unilever (Europe’s GE), RDS.A and DB had good earnings reports

8:30 Update:  Europe is up about 2% as we get our GDP report at -0.3% and the markets are taking that very well as the expectations were already baked in and, of course, that was before all the stimulation hit the economy so we can spin this as the worst being behind us.  Unemployment claims were flat at 479,000 new claims for the week, also pretty much in-line with expectations.  Government spending was up 6% and accounted for most of the positives in the GDP and the PCE index was a whopping 5.4% for the quarter, the worst inflation number since 1990, when Bush the first was dumping money on his S&L fire.  Consumer spending was down 3.1%, the worst level in 28 years and was responsible for 2.5 GDP points lost.  Durable Goods orders were off 14.1% and Residential Construction fell 19.1%. 

The bright spot of the GDP was International Trade, which gained 5.9% on a falling dollar, that’s not looking like it will repeat in Q4 and that was responsible for 1.1% positive in this GDP.  Separate from Government Spending is Defense Spending, which was up 18.1% in the quarter so a MASSIVE effort was made by the administration to paint the GDP positive in Q3 as it comes in just ahead of the election. 

 XOM did it’s part today with $14.83Bn in profits as our economy’s pain was their gain in Q3, which began with oil over $140 per barrel.  We are hoping to get a nice pop in XOM to short into so we’ll see where they go today, hopefully they get to $80 and we can buy some 2010 puts for a leap spread as things will look very different for XOM in a quarter where oil opened at $95 and is down to $65 at the end of the first month. 

We’re going to sit on the fence and watch our levels this morning, especially our 10/21 close, which we would like to retake and hold in order to book a change in sentiment for the week.  Note that, for the most part, a 5% up move on the day will get us there other than the Russell, which is way behind (and that’s why we went long on it) and the IWM May $52s at $5 are a nice way to play a breakout as that ETF was $70 just a month ago and there are plenty of nice premiums that can be used as a cover while you wait.

We’ll be happy to be forced to flip-flop off our bearish covers yesterday and it’s easy to sell covers against our put plays and keep a firm eye on the 2.5% line to protect our bearish positions from an upside rally but the weekend is coming and I can’t see risking more than a neutral (50/50) stance into Friday’s close as there is a centipede’s worth of other shoes to drop and all we may have done this week is shifted the usual Monday stimulus (we didn’t have one this weekend) over to Thursday, which is why it’s so critical that we beat the goosed-up levels we hit last week to prove this is more than another dead cat bounce.

Today’s tickers: MGM, LVL, XHB, RYL, RIGL & LM

MGM – MGM Mirage – Investors showed their true colors following a 67% decline in profits at Vegas casino and leisure company. The rebound today of more than a quarter of its share price to $13.27 tells us that it was short sellers earlier who tried to take it down. The company was less than optimistic in announcing losses and noted it was shelving expansionary plans until the capital markets were more solid and there were signs of life at the casinos. Calls were in demand in the November contract between strike prices of 12 through 20 while a decent chunk of 10 strike puts was bought for a premium of 1.40 after the shares had recovered. There was also healthy two way activity in the December puts at both 10 and 12.5 strikes. That tells us that the rebound was largely short covering and shares might not yet be out of the mess.

LVS – Las Vegas Sands Corp. – Hand-in-hand with MGM goes Las Vegas Sands, whose shares recovered by a huge 80% to stand at $8.91 today. The move sparked call option buying in the November contract from strikes as low as 5.0 all the way through 17.5. More curiously was activity in the put options where investors chose to go long November 7.5 at a premium of 1.50, while selling short the December 10 strike. Our scanners indicate that some 16% of overall open interest is in play today. Implied volatility subsided from a reading of 293% to 231%.

XHB – SPDRS S&P Homebuilder ETF – Around one quarter of overall option open interest was trading this morning on the homebuilder ETF. This could represent some repositioning across different calendar months. The basket of shares rallied 4.4% to $13.05 while November puts at 18, 19 and 20 saw option volume of 18,000 contracts each. In the January 12 strike some 15,000 contracts were sold for a premium of 2.0 out of total volume of 23,000 in the series. Similar volume was also found at the 15 strike, which traded to mid-market prices.

RYL - Ryland Group Inc. – An investor appears to be rolling out of front month protective puts at the 25 strike and buying January protection across the 12.5, 15 and 20 strike prices. That would appear to indicate that despite an 11% jump in Ryland’s share price to $16.40 this investor remains hesitant on prospects for a meaningful recovery. At 115% implied volatility remains heightened.

RIGL – Rigel Pharmaceuticals Inc. – The day after sour news on its rheumatoid arthritis candidate known as R788, devastated its market cap, shares in Rigel are rebounding today. Activity in its options is curious and the 10,000 lots in play today compares to 30,000 lots open in the stock options series overall. We are unclear as to whether the puts were bought or sold at this stage of the day but the activity at currently unpopulated strike prices indicates that this is a fresh wager by a speculator. The November 5.0 puts traded on volume of 1,000 lots at 50 cents. Shares today are back at $7.98 having printed $5.62 yesterday. At the March 2.5 strike an investor took interest in 7,700 contracts at a 45 cent premium. Is this cheap insurance or is it a bet that the stock won’t be sunk by developments on R788. The company revealed some major differences between trial patients in the U.S. and Mexico. Patients undergoing trial treatment in Mexico were found to develop liver toxicity and high blood pressure. At least one analyst noted that this information was perhaps already known or that there were previous occurrences of differences in the genetic make up. Regardless, the analyst noted that such issues hadn’t prevented ultimate FDA drug approval.

LM – Legg Mason Inc. – Profits beat forecast at money-manager Legg Mason whose shares rose by around one-third to $17.18 after being caught up in the financial market mayhem earlier this week. The company earned 97 cents instead of the forecast of 86 cents, which was impressive despite an 18% slide in revenues. Earlier the company had to draw upon capital of $2.1 billion in order to support its money market funds to insulate clients from losses on mortgage related securities. Put option volume caught our attention after shares had rallied where it appears that investors purchased rights to sell 12 million shares at $12.00 for a 1.05 premium. Meanwhile they sold puts at the December 7.5 strike some 7,500 times at a 70 cent premium. Implied volatility came in by 26% to read 138%.