What a crazy day!

After falling over 800 points, the Dow and the other indexes turned on a dime at 2:45 and flew up nearly 5% before pulling back a bit into the close.  It seems the move was primarily based on speculation that there would be a globally coordinated rate cut, which has not yet come to pass.  We got bad news from BAC after the bell so we’ll have to see what happens in the morning but at least my morning plan to cash out the shorts into the dip and wait for a bounce to re-enter worked out pretty well. 

Right after I warned RMM to protect the gains on SKF at 2:31, the market took another leg down and, in the next 10 minutes, it was all I could do to just run down a list of stocks I thought were ridiculously cheap.  The list was: "BA $48!!!  It’s the end of the world as we know it…  TM $71, HPQ under $40, BTU $31, HOV under $6, LVS below $19, ISRG $191, MDT $46, SNE $25, TIE $7.37, SKS $7, SU $26…  GLW $12.50, NYX $30, CAKE $11.50, CAT $46, EBAY  $16.81, UTX $50, INTC $16.28…  These are amazing but how can you buy anything with the market like this."

The second half of that list was posted literally 3 minutes before the market took off.  Sometimes, when things look ridiculously cheap - they ARE ridiculously cheap!  A lot of members took advantage of selling puts into the downturn and that is absolutely the best way to bottom fish as you are taking stocks that are trading down 40% off their highs and giving yourself an additional 20% discount should the stock be put to you is always a good way to make an initial entry. 

We did not get the NYSE back to 6,800, which would have given us a more bullish outlook for tomorrow’s open but it’s all about the Fed now.  Not that a cut will be a long-term solution but at least it should be a rally we can sell calls into and pick up some more puts at a discount.  We need to keep an eye on the above list of stocks to see if any of them break below today’s bottoms, if we start seeing that, then another major leg down becomes likely.  I’ve made a new Big Chart to show where our danger zones are:

These are some very scary global numbers, especially as Asia is still trending down, perhaps fortelling the fate of Western equities.  The NYSE did, in fact, come dangerously close to the 40% line today when it bottomed out at 6,440 and the SOX certainly bear watching as they are, by far, the poorest performing US index.  So if the SOX can’t find buyers at 50% off and the Transports begin heading down to match (despite falling oil prices), then there is little hope for the broader market.

The transports actually recovered 100 points off their low yesterday, so they could have been 45% down and the CAC is teetering at the 40% line.  These are 1-year market losses folks, not good at all and no one is speaking about it yet but what about all those baby boomers who are just about to retire?  We thought this was going to be a problem 2 years ago, when they had 30% more money in their IRAs and homes that were worth 25% more - what’s the status now?  This is how a Wall Street crisis quickly becomes a Main Street problem. 

Gold was my top pick in "Option Plays That Are Better Than Cash" last Thursday and ABX is still very cheap at $30 ahead of possible global rate cuts, which will devalue all currencies.  The Jan $30s at $7.15 were my first pick of the morning yesterday and they fell all the way to $5 on the dip and can now be rolled down to the $25s for $2.70 more.  Another good play on ABX is selling the Jan $25 puts for $2.38, which puts you in the stock at $22.62, very near its 2005 lows, when gold was $450 an ounce.  We like ABX and FCX because energy costs are falling faster than gold and, in FCX’s case, copper is already back near $200, which should begin to provide some support.  Keep in mind that the ABX play is disaster protection only, in case our currency starts collapsing as the Fed dumps Trillions on the market fire while the GLD play was more of an all-purpose money-maker with an upside in a global collapse.  Platinum seems oversold too but I don’t know any good plays there…

One question both I and Barry Ritholtz had today was: "How much influence does Jim Cramer have?"  Our man Jim is well known for stampeding his sheep in and out of stocks but yesterday he made a huge call on the today show. In what Ann Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.  “I thought about this all weekend,” Cramer told Curry. “I do not want to say these things on TV." (HE SAID ON TV’s #1 MORNING SHOW!) “Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.  I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

Usually I would just look to do the opposite of what Cramer says but this is one incredibly scary market and a guy like Jim telling people to take 5 years’ worth of their income out of the market because it’s going to drop 20% can become a self-fulfilling prophesy very quickly (and almost did in yesterday’s action alone).  Note in the video Cramer is using my 2005-level target for how far stocks should fall but he neglects to mention there are already plenty of stocks that are oversold on that basis (see again above list).

Today’s tickers: Today’s tickers: : VIX, RIO, C, XLF, STJ, SWY, EAT, PX & JBHT

VIX – CBOE Volatility index. – Options volume is pretty heady in the fear gauge today, which stands at elevated crash-time readings. You have to look back on a monthly or weekly chart to see levels above a reading of 50. Today the VIX is 18% higher at 53.28, which has seen the call side of the options market most heavily traded today. It looks like some profit taking may have been behind the 35 call strike where 23,000 out of the 25,700 lots traded was sold at the bid. Open interest here of 74,142 contracts has been declining over the last week indicating some bright investor may have reached their goal. At the October 37.5, 50 and 55 strikes more buying was evident as investors clamored for protection higher up the ladder. It appears that a long butterfly may have been traded at the December 30, 35 and 40 strikes judging by volume and time and sales readings. This may have been traded at a credit of 30 cents to the investor who now hopes that VIX index gravitates around a central point of 35 through expiration.

RIO – Cia Vale do Rio Doce ADR. – The flight to “quality” that is driving the American dollar higher took a fresh new breath of air today, with investors finally turning all out bearish on the euro as Europe grapples with something closer than the 10,000 feet birds-eye view of the banking crisis. As such commodity prices (except for the price of gold) are once again in freefall. As too is Vale’s share price – down 15% to $13.36 and well down from the one-year high close to $45.00. Options activity is busy, but on both sides of the fence. Call buyers were seen at the October, November and December 15 strike while some investors stretched fo put protection at the November 10 strike at a premium of 1.30.

C – Citigroup Inc – Option trading on Citigroup continued to be frenzied today. Whether or not Citi comes to an agreement with Wells Fargo on carving up the carcass of Wachovia Bank is immaterial as global indices plunge on a scale unseen since 1987. Shares in Citi are 9.7% down at $16.58 eliciting action at the out-of-the-money 20 strike in October where 16,000 out of 26,000 contracts in play today where sold at 70 cents premium. Meanwhile there was also keen buying of both October 15 and 20 strike puts at 1.0 and 4.10 respectively.

XLF – Financial Select Sector SPDR – Amazingly, with markets reaching fresh lows the XLF is not yet at a fresh 52-week low. In order to do so it still needs to take out the July 15 low at $16.79 at which point implied volatility stood at 68.4%. Today such options implied volatility reads 86%. Options volume of close to 200,000 ahead of noon shows keen call options buying in both October and November at strikes as high as 20, 22 (October) and 23. In the October contract at the 18 strike 11,000 puts were purchased out of overall volume of 18,000 this morning. At an approximate premium of 2.00.

STJ – St. Jude Medical Inc. – With its shares lower by 5.8% at $40.15 today there was still interest to buy October 40 strike calls in St. Jude at a premium of 1.70. There was also heavier volume on the put side at the 40 strike but this all traded to the middle of the market masking the intentions of the investor. The current open interest reading at the 40 puts is dwarfed by today’s 5,945 lot put volume indicating possible fresh positioning in favor of more downside in the stock. Implied volatility at 40% is not high in this climate in comparison to the 30% reading on the underlying shares.

SWY – Safeway Inc. – No one is getting away with hair-cuts to their share prices today including supermarket chain, Safeway, whose option volume is around six-times the daily average. It appears that despite surging implied volatility on its options at 75% today, an investor is still willing to bet on a further rise. Both the October 22.5 puts and the 25 calls were bought today indicating uncertainty over the future path of the share price, which is bordered by these strikes at $21.80 and down 3.3% so far today. The total premium paid of 2.25 infers breakeven prices for the buyer of this strangle strategy at $17.50 to the downside and $25.00 to the upside.

EAT – Brinker Intl Inc. – Restaurant-owner of Chili’s Grill and Romano’s Macaroni Grill is under the cosh today with shares 8.7% lower at $14.75. The common logic – not that any is needed in a market crash – is that with an economy in the grip of recession fewer people will eat out with their families. That thought possibly permeated the thoughts of an investor who sold January 20 strike calls in EAT at a 70 cent premium. While this could have been a closing sale against existing open interest of 2,311 lots, there was also decent activity in the October 17.5 and 20 strike puts. The overall 6,518 contracts at play compares to just 22,723 overall open interest in this series, while options volume was around 10-times the normal.

PX – Praxair Inc. – Oxygen and industrial gas maker, Praxair, was not in favor today and its shares declined by 6% to $68.44. Of note in its option trading was the purchase of 5,918 lots at the January 60 strike at a premium of 2.65. The position looks to be fresh since the volume exceeds the current open interest at the strike by twofold. Overall option volume on the series constitutes around 20% of total open interest.

JBHT – JB Hunt Transport Services Inc. - Option volume of 7,435 contracts was almost entirely made up of put transactions at this logistics provider. The pattern was not as dull, however, as it might seem. While the November 30 strike traded to the middle of the market masking the investors intention, the January 35 strike put was sold 3,550 times at a premium of 8.70. Finally the February 22.5 strike puts were purchased at 2.10. If the November contract was purchased, the investor is looking for upside potential from the stock, which is naturally being beaten up again today. Using the IB Risk Navigator, we can see that the investor would benefit from two things: A rising share price at JBHT plus a decrease in implied volatility. With shares at $26.90 the options carry implied volatility of 30% more at 80% than that displayed by the underlying share price (60%). The January 52-week low still holds at $22.98.

Total market carnage!

That’s what we’re waking up to today.  We may be finally getting into oversold territory but the waves of panic are coming from across the globe and it’s going to be hard to fight this tide.  On the way down on Friday, at 1:47 we looked at two emergency covers, the FXP $110s at $7.50 and the DXD $63s at $5 to guard against just such an occasion.  Both are ultra-shorts - one on China and one on the Dow.  It’s good to have plays like this ready, in cases of emergency as it’s faster to cover with one big short position than scrambling to cover a dozen more bullish plays. 

It is also important to remember that a cover like this does not do you any good unless you take the profits.  Taking profits can mean selling all on a good move or selling 1/2 or covering your short plays to raise cash.  If you allocated 30% to the short side and they double, then you have 60% of your portfolio back to cash.  Even if the other 70% dropped in half, you still are coming out pretty well and you can reallocate a new 30% (of the remaining 35%) to cover the remaining longs, which puts you into half cash with a 5% loss.

If you had taken something like the DXD $63s at $7.50 and they open today at $12.  The premiums are likely to be highest on the opening rally (as it’s a short) and you need to be realistic as to what you expected out of the position.  Again, if it’s a 30% allocation and you gain a quick 60% like that, it means cashing out can put your portfolio in 1/2 cash.  Another tactic could be to sell whatever new call is $7.50, perhaps the $68s, which gives you a free $5 spread but that’s only up $1.50 from where you are at $12 and cash is certainly king in this market (just ask Mr. Buffett, who wishes he held onto his this morning!). 

We started picking the ultra-shorts on Wednesday morning, in my "Hedging for Disaster" post.  Tuesday was an up day and we prefer to take those covers when the market is against them but better late than never applies in this situation if the US markets fail the 2.5% rule (Dow 10,050, S&P 1,075, NYSE 6,900, Nadaq 1,900) then additional short positions can be taken, using those levels as stops.  IF those levels hold however, then it will certainly be time to lighten up on the put side as that would be very resiliant considering global markets are down at the 5% rule AND the dollar is up over 2% this morning, making our assets expensive to foreign investors. 

Your stock may be losing 5% but a share of AAPL can be traded for a barrel of oil and you get some change - on that basis, you are only $20 worse off than you were in July.  2 shares of Google bought 1 Oz of gold on August 1st, today they buy .9 oz of gold.  Things are relative.  The best news I see in this sell-off is that the commodity bubble is well and truly popping.  Oil is back under $90 in pre-market trading and looking very weak.  Back in July, as the market melted down that Monday, I fixed the blame for the destruction of consumer spending squarely on oil, which was over $140 at the time.  Now, at "just" $90, US consumers alone are spending $1Bn PER DAY less on fuel than they did at the beginning of Q3.  On a global scale, that’s $4Bn per day saved on energy, a $1.5Tn bailout to the global consumer.  Compound that with the drop in other commodities and we can build a pretty good case for cyclical rotation - IF the panic ever subsides…

So commodities are outperforming equities at the moment by about 10%, we should keep an eye on the stocks to oil and gold ratio, perhaps with the S&P and we can see the SIGNIFICANT improvement in the energy buying power of our portfolios.  In fact, the S&P priced in oil is about to possibly break out above the 200 dma indicating either oil will break sharply lower or the S&P will break sharply higher or, perhaps a little of both.  Due to the "flight to safety" issue, we are not looking as good as gold on the chart, still around 15% (combined S&P up/gold down) from looking like stocks are a better investment than gold BUT - don’t forget the S&P includes miners and oil companies, so it’s a tricky comparison as those same sectors drag down the index. 

In this week’s Wrap-Up, we talked about watching the top 10 Dow components and assessing the outlook for each one to get a handle on where the Dow is going next.  Our big worry was, of course, XOM and CVX, both of whom are still miles above the 2005 levels that most of the S&P has sunk to and they are both major weighted components.  IBM also has a long way to fall and all of these make great put plays if the Dow breaks further down as a falling tide lowers all ships and these are still the relative high-flyers of the Dow (outside the staples, which benefit from "flight to quality" plays). 

With the worst-case market melt-down scenario on our minds, IBM Nov $95 puts are surprisingly cheap at $4.25 as IBM was in the mid-$80s in 2005.  XOM is still up 50% from 2005 levels while oil itself is still almost double the $55 average of that year.  If oil comes down fast, so will XOM and Jan $70 puts are only $3.50.  CVX is a very different company than they were in 2005 but they also made big acquisitions and they could fall back to the $60s if oil and natural gas collapse.  That make the March $70s at $4.60 an attractive hedge against the end of the world and the collapse of the Dow but, keep in mind that holding 10,050 is going to be a good thing and the Fed is on the march, throwing everything they can at the markets short of their last few rate cuts (so far) so I’m not saying we should be eager to pick up Dow puts - just ready to do so if things head south from here…

Things are heading very far south in Asia and we’ll be drawing up a very scary-looking Big Chart this evening.  The Nikkei closed down 4.3% (-465) and the Hang Seng fell 4.97% (-878) to finish below 17,000, close to 50% off last year’s peak at 32,000 and the Shanghai dropped yet another 5.2% to 2,173, over 60% off last year’s high.  "There’s a growing view that an interest rate cut by the Federal Reserve and other global central banks wouldn’t be sufficient, and concerns over a spread of financial woes in Europe still linger despite the approval of the U.S. bailout plan," said Hiroaki Kuramochi, head of the equities department at Tokai Tokyo Securities. 

European markets are faring little better ahead of our open with the FTSE off it’s lows but still down 2.5%, the CAC still below 5% and the DAX right at the 5% line.  It should be noted that this is just a retest of last Tuesday’s lows for the FTSE and the CAC and won’t be so awful if they hold it but the DAX is testing 2006 lows at 5.500 and the prognosis is NOT GOOD if they fail at this level.  As Europe’s largest economy, don’t expect the rest of the EU to save Germany. "We now believe national recessions in the U.S. and the U.K. will be deeper and longer than previously forecast," said Larry Hatheway, an economist at UBS in London. "For the first time, we also anticipate recession in the euro zone."  "The troubles in the European banking sector are arguably beginning to overtake those of the US," said Philip Shaw, economist at Investec Securities in London.

Russia stopped trading after their markets fell 15% at the open and the RSX is already more than 60% off it’s May highs.  As an oil-based economy, Russia is in very serious trouble at the moment as their moves of last year to jack up the price of natural gas come back to haunt them as the world has spun into a cycle of epic demand destruction. 

C is getting no love at $17 as it fights for the WB deal and WFC got slammed too and makes the best looking call play since they never got a big boost from the acquisition but the fact of the deal stamps them as a lasting player.  With the Oct $34 callls sellable at $2.75 the Apr $30 calls are attractive at $8 or lower (about 1/2 premium).  Pending Fed action does make bank plays very dangerous though and full covers are too dangerous so it’s more of a long-term bullish, 1/2 cover-type play.  BAC is also getting cheap today as an $8.4Bn settlement with state AGs is in the works.  The value of the modification program is as much as $8.4 billion, according to the Bank of America spokesman. The costs of the program "have already been estimated and accounted for" by Bank of America as part of its acquisition of Countrywide, the spokesman added.

We’re hoping for signs of hope but it’s the upside plays that remain speculative.  The Fed is pouring money into the markets to no avail and sentiment is very bad.  Needless to say, be careful out there!