Wednesday Worries – AAPL Makes $76,103 While You Read This

Good morning!  

We had yet another discussion on why I like AAPL this morning so worth a read and the new trade idea for them is:  

 

AAPL/Cturb – In a perfect world, they will test $600 and really dump out all the weak hands ahead of earnings but it's kind of iffy.  I love that you can sell the 2015 $400 puts for $40 for a net $360 entry and you can pair that with the purchase of the $500/600 bull call spread at $50 so you're in AAPL for net $10 on the $100 spread that's 100% in the money and, if you have 3 of those for $3,000 in cash (and about $12,000 in ordinary margin), you can sell 1 Weekly $655 call for $1.50, which is $20 out of the money and if you make 100 sales like that over the next two years, you'll collect $15,000 in premium against the $3,000 cash position and the $30,000 you collect if AAPL is over $600 is just a bonus.  

Obviously, this plan is dependent on AAPL holding $500 and I'd avoid selling calls on earnings weeks, when you are most likely to get burned but, otherwise, it plays kind of like the FAS Money spread.

 

We covered 6 of 10 of our AAPL longs in the $25KP yesterday by selling the weekly $640s for $7 and they are opening right around there so let's stop out of 2 at $8.50 (probably AAPL over $642) but, otherwise, let the premium burn.  I'm worried about a serious move up on the IPad Mini announcement.  

Dollar holding 80 so far but if it falls below we can get a serious move back up in stocks and commodities.  The Euro is down at $1.2884 so we need that to cross over $1.29 and the Pound ($1.6013) needs to hold $1.60.  

Oil is at $92.31 and should rise into inventories but $93 has been an excellent shorting spot for /CL so let's keep an eye on that one.  

After a bad start, Europe is getting kind of flat so that's encouraging.  What would be really encouraging is for XLF to get back over $16 so let's keep an eye on them ($15.96) but, of course, in the FAS Money Portfolio, we pretty much bet that wouldn't happen until Friday (JPM earnings).  We need to buy back those short calls at .13 as it's not worth the small risk of having them open up 90% already. 

Still a lot of negative pressure and we're watching that S&P 1,440 line like a hawk (failing at open) as we need to get more defensive if that's breaking.  Expect the weakness to last at least until Europe closes as they are freaking out about the IMF meeting and also about Spain – who refuse to be bailed out and raise all sorts of questions on the Euro's ability to last. 

The Dow is our best short for a drop to 13,000 and the DIA Oct $132 puts at .49 are a good deal for a possible double on that drop.

We get the Beige Book today and these are the anecdotes that led them to decide we need QE3 so maybe not a good one this time!  

At the open: Dow -0.12% to 13458. S&P -0.04% to 1441. Nasdaq -0.01% to 3065.

Treasurys: 30-year -0.32%. 10-yr -0.13%. 5-yr -0.06%.

Commodities: Crude -0.09% to $92.31. Gold -0.19% to $1761.65.

Currencies: Euro -0.02% vs. dollar. Yen +0.07%. Pound -0.1%.

Market preview: U.S. stock futures struggle for direction as earnings seasons gets underway with Alcoa's (-1.1%) mixed results late yesterday. The S&P benchmark is flat while Nasdaq futures are+0.1%. Yum Brands is +4.6% following rather tasty results and FedExpress is +3.1% as it reveals a $1.7B "profitability improvement" plan. Later: Wholesale Trade, Fed's Beige Book, Fed Speak

Corporate insiders get even more bearish, the Vickers sales-to-buys ratio rising to 5.61:1 from 3.8:1 at the start of September. The deterioration comes from Nasdaq issues, where the ratio jumped to 6.17:1 from 2.96:1. Perspective: The long-term average is 2-2.5:1. One year ago, with stocks gasping for air, insiders weren't sellers – the ratio dropped to 1.04:1.

Whoever is manipulating the jobs data to make it look better is doing a bad job of it, notes BofA, as the key number – overall payrolls – is still not very impressive and continues to come in weaker than what the ADP print would suggest. The unemployment rate – coming from a different survey – is "particularly unreliable on a one-month basis."

Spain doesn't necessarily need IMF loan assistance, says Managing Director Lagarde. Of course it doesn't now that the ECB has pledged to buy its debt (once the country submits to its conditions). Lagarde seems to view the IMF's role as continually crying wolf (I, II) about dire financial conditions in the hope of scaring up central bank and government policy action.

Singapore's central bank is expected to ease policy this week, according to a survey of investment houses. The bank adjusts monetary policy through the currency, so easing means slowing the pace of the Singapore dollar's appreciation. The government recently cut its 2012 growth forecast and inflation has fallen to its slowest pace in 2 years. EWS +22.8% YTD.

Looking past the current economic valley is South Korea, its finance minister saying policymakers should relax. "Mobilizing all available fiscal, monetary and financial policy means in a bold move with a large size may have harmful effects." Try something "less costly and more salient" like cutting regulations, he advises. Invitation to Jackson Hole: Revoked!

The debt of 30 California cities – including Oakland, Fresno, and Sacramento – is placed under review for downgrade by Moody's. The move follows Moody's August report in which it noted bankruptcy is likely to become a new tool for cities trying to get concessions from bondholders.

Mortgage REITs continue to slide – NLY -1%, AGNC -2%,HTS -2.3%, to name 3 – the sector revaluing itself for what must surely be significant dividend cuts. The Fed's MBS purchases – likely to help book values and dividend maintenance in the short run – are vaporizing net interest margins. Absent a big jump in leverage, returns must fall.

OPEC cuts its forecast for world oil demand growth this year to 800K barrels/day from 880K previously. 2013's forecast is left unchanged at 800K. "Risks to the forecast for 2013 are primarily on the downside." First the IMF, now OPEC. Is there any organization on the planet not prepping for slowing growth going forward?

We're now using so little oil that Canada has to find new customers!  Canada is focusing attention on India and other Asian countries as it seeks to reduce its dependence on the U.S. for exports of hydrocarbons, Minister of Natural Resources Joe Oliver says. India is particularly concerned about securing supplies of natural gas given dwindling production at its main gas fields; Oliver says he welcomes Indian companies interested in acquiring energy assets in Canada.

Iraq predicts oil production of 9-10M barrels/day by 2020, far higher than yesterday's bullish IEA prediction of 6.1M. The country's deputy PM for Energy says Iraq has underway a plan to address the infrastructure bottlenecks raised by the IEA. 

Chevron (CVX -2.5%) tumbles at the open following yesterday's announcement that its Q3 profit will be "substantially lower" than its Q2. UBS cut its Q3 EPS estimate for CVX to $2.83 from $3.22 based on "significant" negative foreign exchange impact, lower-than-expected production, lower liquids realizations and higher corporate expenses.

Alcoa's (AA) earnings report, greeted initially by at least moderate enthusiasm, raises some red flags after the company cut expectations for growth in aluminum consumption in 2012, even as it reaffirmed its outlook for a doubling of aluminum demand between 2010 and 2020. AA -1.1% premarket. 

BUYBUYBUY!!!  With 325 suppliers building parts at 5,000 factories around the world for Boeing's (BA) 787 Dreamliner, it's little wonder that, in the words of company exec Jeffrey Luckey, the company "lost visibility in the supply chain." However, Luckey says that Boeing now has the chain under control and will be able to ramp up output to ten 787 jets a month by the end of next year from 3.5 currently.

BAE Systems and EADS cancel their planned $45B merger after negotiations became bogged down in political deadlock.

More on EADS-BAE merger breakdown: "It has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger," BAE says in astatement. The end of the merger is not a huge surprise given that it was dependent on France and Germany agreeing to reduce their influence. 

Shares of Toyota (TM) fall 1.3% premarket after the company issues a recall for over 7M vehicles. Though the raw number of automobiles affected is high, with no injuries or deaths attributed to the faulty power window switch the issue isn't viewed as one the automaker can't climb out of rather quickly.

Cummins (CMI) -3.7% premarket following its sales warninglast night. Deja vu all over again, this warning is nearly identical to the one given 3 months ago to the day. Shares cratered then, but were quickly back on the rise and soared the day (July 31) of the earnings release. Will history continue to repeat (earnings set for Oct. 30)?

Federal Express (FDX) +3.1% premarket following its $1.7B "profitability improvement" plan. The sell side reacts: The magnitude of the savings figure suggests that the stock will go higher on the news, says CSFB. The plan is well above the $400-500M expected by JPMorgan, which sees a positive response from the shares

The EU could issue a "statement of objections" by next week to UPS's (UPS) proposed €5.2B acquisition of TNT Express unless the U.S. firm offers concessions that would assuage antitrust concerns, the FT reports. The EU is worried that the deal will leave just three "global integrators" that can provide a full range of delivery services by road and air.

The Nevada Gaming Control Board reports that Las Vegas casinos took in $490.94M in gaming wins during August, down 1.2% from last year's mark. Overall, casino revenue in the state fell 3.1% compared to a year ago. On watch: LVS, MGM, WYNN, PENN,MPEL, BYD, CZR.

Wal-Mart's (WMT) investor meeting highlights: The company says it will push its pricing advantage with another $2B investment to grab market share. Grocery stores appear to be an ongoing target of the company, with its claim that it now holds a 17% pricing advantage in local markets on food items. Wal-Mart also plans to try to fend off the challenge of dollar stores by using pricing, depth of brands, and a localized assortment to meet market needs. (webcast)

Protests against Wal-Mart (WMT) spread to 28 stores in 12 states as organizers hint that further events could be planned into the holiday season. With a workforce of over 1.4M workers, catching enough support to force a union down the throat of the retailing giant is given a very low chance by analysts.

Costco (COST) fired on all cyclinders in FQ4 (I, II) with same-store sales in the U.S. and globally both clipping along at a healthy pace. Analysts note the retailer has struck a unique formula for success with below-market gas prices bringing consumers to its warehouse stores to save money where they are then happy to add to the company's coffers with higher membership fees. New vision centers and private-label products also helped boost sales and margins during the latest period. COST +2.2% premarket.

More on Costco (COST) FQ4: Net profit +27% to $609M. Same-store sales +5% and +6% excluding the affect of gasoline prices and forex fluctuations. Membership fee revenue +18% to $694M. Ends FY 2012 with 608 warehouses, including 439 in the U.S., and plans to open another 14 before the end of calendar 2012. (PR) 

The House's Intelligence Committee has received "dozens and dozens" of calls about suspicious behavior by Huawei and ZTE equipment following the panel's report recommending that the Chinese companies be shut out of the U.S. market due to security fears. Meanwhile, Canada has indicated it won't allow Huawei to help construct a secure government communications network, also due to security risks.

Bloomberg describes how the SEC extracted key data from a reluctant Facebook (FB) prior to the company's IPO. The volley of emails between the sides "depicts a management team…still guessing at even rudimentary aspects of its business." Many of the issues "now unnerving investors were foreshadowed" in the correspondence, including about Facebook's mobile strategy.

A "quality-control crackdown" at Foxconn related to iPhone 5 (AAPL) scratches is making shortages worse, a source tells Bloomberg. The report meshes well with earlier reports of labor disturbances caused by workers unhappy with Foxconn's quality-control rules. Interviewed workers claim each step in the iPhone 5 production process brings with it the potential for scratches to its aluminum back. The iPhone 4 and 4S use glass casing rather than aluminum.

AAPL $1,000/Diamond – I like this p/e chart!  

AAPL/Amit – That's why I'm worried about the covers – virtually no upside resistance once it gets going. 

COST/StJ – I keep waiting for them to get cheaper but they never do.  That membership fee is brilliant.  55M members and their total income is "just" $1.5Bn so a $10 rise in fees drops $550M to the bottom line any time they want to…

IMAX/Diamond – $20 is close to where we like to get in ($17.50).  The stock can be bought for $20.35 and selling the 2014 $20 puts and calls for $8 net's $12.35/16.18 for a very nice entry or just selling the 2014 $17 puts for $2.50 is a very nice net $14.50 entry on 1x. 

Dollar holding 80 despite Euro and Pound improving – perhaps a little Yentervention is to blame….

Iraq/StJ – Making the world safe for Russian Capitalism….

FAS Money – Although the .10 on the short $118s seems unreachable, I'd rather free up the slot and sell something else when we do get a pop.

DIA/Hemas – It's just .35.  If you really want to roll it, I'd sell the same calls to someone else and roll to the Nov $138s at .60 so you drop your net by .10 and now you have a reasonable spread to get a longer look without spending money.  If we have 2 good weeks of earnings, this market could take off sooner than you think. 

SPX/Scott – Yes but barely.  Have to give them a chance.  RUT needs to confirm at 824 and Dow 13,400 should fail too.  

FLS/Mill – Well they're at $128 so you already used up all the premium on your short $120s (now $8.60) and I suppose you are in a bear call spread (which I hate for exactly this reason) and totally screwed as your $135s are just .20 so it's really a matter of whether or not you want to push this short naked with earnings on the 29th but I'd just roll the calls to the Nov $125s ($6.60) and eat the $2 for now in exchange for selling $3.30 of premium and then your roll is to the Jan $130s (now $6) but they are not terribly expensive so I don't know why you're short in the first place.  

Sorkin/Mjj – I didn't even notice.  I tend to tune those guys out – just want to hear if any breaking news. If Bloomie didn't ignore breaking news (other than the ticker) I'd never watch CNBC.  Welch is simply becoming a fool – maybe he finally realizes it after getting feedback on today's WSJ piece.  

Bloomberg/1020 – That's what I wake up to, I only switch on CNBC when I don't have time to look anymore.

IPad announcement/Zip – It was originally rumored for today with a 10/17 launch but now no one is sure but they say the weekend for sure.  

BA/JJ – Sure, I love those guys at this price (70.85).  Combination of small dividend ($1.76) and the possibility of a crash knocking them down to $40 makes me like the artificial buy/writes better on BA like selling the 2014 $60 puts for $4.60 and buying the $55/70 bull call spread for $10 for net $5.40 on the $15 spread that's 100% in the money to start.  If they do have bad luck – you get a great opportunity to roll and adjust and, if not, then you have to force yourself to be satisfied with the 185% upside.  

Oil inventory/StJ – You're right.  What BS, that was not much of a holiday.  No wonder they popped $93.  

COST/Pharm – Lots of gas sales but usually a loss-leader for them as they really try to pass it straight through to Members.  

Welch/MJJ – I'm always amazed when guys like that run around using up their reputation with nonsense.  You would think they would be smart enough to know it's the only thing they have left…

Bullish/Jabob – I'll be bullish when XLF is over $16 and the Dow is back over 13,500 and the S&P is over 1,450 and AAPL is over $650 – maybe this afternoon….

Oil/Jrom – No inventory until tomorrow means they can push it today without fear. 

AAPL $25KP – 2 of the calls stopped out.  Now we want to sell 2 next week $650 calls for no less than $8.50 if AAPL goes back below $640 to replace the $8.50 we just spent.  That's also where we'll likely roll the remaining 4 if we break $650.