Today’s tickers: BAC, PBR, UAUA, BIIB, USO, MAC, NLY, NYX, CVS & KGC

BAC – Bank of America Corp. – Options trading in the August contract on Bank of America suggests a significant recovery in the value of the underlying shares within the next seven months to expiration. Shares spent the majority of the trading session in the red, but rallied in late-afternoon trading, improving 0.20% to $14.51. It looks like one trader sold 6,000 put options at the August $12 strike for a premium of $0.86 each in order to partially finance the purchase of 6,000 calls at the higher August $16 strike at a premium of $1.12 apiece. The net cost of the bullish risk reversal amounts to $0.26 per contract, positioning the investor to accumulate profits above a breakeven share price of $16.26. Shares of the underlying stock must rally at least 12% over the current price for the trader to break even on the transaction by August expiration. We note that B of A’s shares traded above $16.50 as recently as January 20, 2010.

PBR – Petroleo Brasileiro SA ADR – Shares of Brazil’s state-controlled oil company, Petroleo Brasileiro SA, rallied 3.70% to $39.60 today perhaps after the company stated natural gas output will increase to 93 million cubic meters in 2011, up from 85 million cubic meters in the current year. PetroBras-bulls stampeded the February contract this afternoon to sell roughly 15,000 puts at the February $39 strike for an average premium of $0.83 apiece. Investors selling short the puts retain the full premium received today as long as shares of the underlying stock trade above $39.00 through expiration day. Put-sellers are apparently happy to have shares put to them for an effective price of $38.17 each should the put contracts land in-the-money at expiration.

UAUA – UAL Corp. – Shares of the owner and operator of United Airlines surged 17% to a new 52-week high of $15.27 today amid better-than-expected unit revenue for the month of January. Optimistic option traders dabbled in both calls and puts to take bullish positions on UAL Corp. Investors sold 2,300 puts at the February $13 strike, taking in an average premium of $0.16 per contract. Put sellers retain the full premium as long as UAUA’s share price remains above $13.00 through expiration. One the call side, traders picked up roughly 2,000 contracts at the now in-the-money February $15 strike for an average premium of…

Hello readers,

I will get into the introduction after I post this. I am running short on time…

Buy Pick of the Day: American Commerical Lines Inc. 

Analysis: In Progress

Entry: We want to buy this one at market price right at the open. It is going to shoot up very quickly.

Exit: We want to sell at a 2-3% gain from our entry price. 

Stop Loss: No stop loss set until at least thirty minutes into session, which will be at 3% below entry price, if needed.

"If the US were a corporation, it would have bonds that are junk rated." 

That’s the word from Marc Faber but, then again, his column is called the "Gloom, Boom, Doom Report" so he is very much talking his book.  Faber makes the case that our unfunded liabilities make the US a toxic investment, much the way GM health and pension obligations.  The US ended up bailing out GM but who can bail out the US?   Faber argues that additional debt growth no longer has the ability to add to GDP growth, meaning we have passed a tipping point where we have no choice but to pay off existing debt (most likely through inflation) or default. 

Pragmatic Capitalist has a great article discussing total debt to GDP and, yes, we all need to be very concerned but our debt to GDP is up at levels we hit in the Great Depression - that was 80 years ago and the US is still standing!  While I don’t advocate dismissing these issues, I do want to point out that these issues are always with us and the MSM has gone from completely ignoring them (our Meatball Market of January) to focusing on nothing but.  Suddenly Faber, Roubini and various bond pimps have center stage and the gold bugs are trying to pull the last group of suckers into that tent with scary stories about the imminent collapse of the USA, as if having a share of an ETF that says it holds some gold somewhere is going to do you any good when your broker goes dark in the predicted economic catastrophe. 

The reason gold has been a valuable alternative to currency throughout human history is that it has a high value to weight ratio - Try loading up the SUV with a pound of gold ($17,088) or 235, 42-gallon barrels of oil and you’ll see what I mean.  Gold’s value as a currency hedge is that it’s readily exchangeable anywhere in the world for cash.  While it may make some sense for the bomb-shelter crowd to store some bullion along with the beans - what edge do you think you’re getting with a certificate that says you own a share of an ETF that stores some gold somewhere? 

If the US economy implodes and the market collapses - where exactly will you be going to claim your gold?  In 2008, when the economy WAS collapsing, gold fell from $936 on October 8th to $681 on the 24th. …

Today’s tickers: BAC, PBR, F, FXI, NXY, KFT, DELL & HPQ

BAC – Bank of America Corp. – Bearish option traders purchased put options on Bank of America today with shares of the firm trading 3% lower to $14.52. The number of put options purchased at the March $14 strike price surpassed existing open interest at that strike, suggesting many investors are bracing for continued near-term share price erosion. Approximately 33,000 puts were purchased for an average premium of $0.59 apiece at the March $14 strike. Investors picking up the put options perhaps anticipate B of A’s share price could slip beneath the effective breakeven point on the trade at $13.41 ahead of March expiration. The 12% increase in the reading of options implied volatility on Bank of America to 43.74% today points to increased fluctuation in the price of the underlying shares going forward.

PBR – Petroleo Brasileiro SA ADR – The Brazilian oil company’s shares recovered slightly today, rising 0.65% to $39.03, amid higher commodity prices and a rebound in the price of crude oil. Option traders are still initiating bearish trades on the stock though, which suggests today’s modest rebound could be short-lived. One investor purchased a put spread in the January 2011 contract, establishing long-term downside protection. It appears the trader bought 5,000 in-the-money puts at the January 2011 $40 strike for a premium of $6.50 each, marked against the sale of 5,000 puts at the lower January 2011 $30 strike for an average premium of $2.13 apiece. The net cost of the transaction amounts to $4.37 per contract. The parameters of the trade indicate an effective breakeven share price of $35.63, which marks the price at which shares must trade at (or below) before downside protection kicks in for the put-spreader.

F – Ford Motor Co. – Shares of the American automaker, whose sales increased 24% year-over-year in the month of January, rallied 3.40% to $11.28 today. Notable options activity on the stock involved long-dated put options in the January 2012 contract. It looks like at least one investor purchased 20,000 puts at the January 2012 $5.0 strike for a premium of $0.58 per contract in combination with the purchase of an equivalent number of shares of the underlying stock. The ‘married-puts’ picked up by options players provide long-term downside protection should Ford’s shares collapse in the next two years. But, the trader(s) are most probably taking a long-term bullish stance…

We love patterns!

Pattern recognition is the basis for human thought so it’s always fun to look at charts like this one from InTheMoneyStocks and think we may see something we recognize.  It’s interesting that looking at some of our other PSW Chart School posts from the weekend that look at virtually the same charts but spot different patterns.  Fallond, makes a convincing case that we have confirmed sell signals and Corey at Afraid to Trade also feels we’re in the middle of our correction. 

MarketTamer is looiking for Dow 9,750, which is the middle of our worst-case targets at around the 10% rule, something I touched on in my own Weekend Wrap-Up, where I did my own humble best to paint a picture that says 1,000 words.  Fortunately (although maybe not for you!), coming up with 1,000 words has never been a problem for me so I will stick mainly to the Fundamentals, thank you very much! 

I did some soul-searching on the situation in Greece, as outlined in our Weekend Reading post and I am comfortable with last week’s gut reaction that we have now adequately priced in both Greece and Portugal’s problems.  Our outlying concern is a spread to Spain, Italy and France, which I don’t believe is likely as the cost of bailing out Greece, Portugal, Spain, Italy, France, Turkey and the UK would not even be what the US spent to bail out AIG.  The same way we gave the hyenas a bone back in November of 2008 and they attacked any financial institution that showed even a hint of weakness, the pack is now all over any country that is vulnerable to panic.  It’s a simple game, short the bonds (sell bonds at low rates), drive rates high, buy back the bonds, collect high yeilds. 

Sure the fact that this sort of activity can disrupt the lives of millions of people might give some people pause but I’m sure someone like PimpCo’s Mahamed El-Erian feels like he’s doing God’s work when he is done loading up on bloated rate bonds and then suddenly announces, as he did this morning (and we predicted he would last week): "The risk of Greece defaulting is low."  El-Erian said that, although the Greek government is in need of external financial aid, it likely will not default. 

Oddly enough, it was just this past Thursday that PimpCo’s Michael Gomez said: "Stay away from the Euro" which (funny coincidence) drove Greek bonds and CDS swaps to…

I’m done with Greece.

I was getting sick of it last week and now I’m really done after doing some research:  First of all, Greece’s deficit (as we discussed last week) is a shocking 12% of their GDP and their national debt is 120% of their GDP (ours is about 100% now so something about glass economies and stones comes to mind) BUT, their whole GDP is $343Bn so we’re looking at a grand total of $41Bn to completely bail them out this year - the boyz at Goldman probably took about that much home in bonuses just betting on Greece to fail!  

Do we really believe the $16,000,000,000,0000 EU economy is going to go down over $42,000,000,000 (0.26%)?   Kind of hard to imagine when put in perspective.  Of course it’s not just Greece, there’s Spain, Portugal and Ireland, although Ireland was last year’s worry with a $100Bn debt that they ended up fixing themselves by tightening their belts.  For the Greeks, it’s more a matter of is there a will than a way as Greece has long been the EU’s least productive economy (followed by Portugal), which has historically made them uncompetitive with their northern cousins. 

All it would take to fix Greece ($343Bn GDP) and Portugal’s ($220Bn) deficits is for Germany ($3,235Bn) and the UK ($2,200Bn) to buy a few extra Greek and Portugese goods and the factories would be humming again.  The two countries each have about 1M people out of work (10% of the population) and if we assume 5% is close to full employment then we’re just talking about employing 1M people.  Even if we pay those people $50,000 a year each, that’s "just" $50Bn and suddenly, everyone in Greece and Portugal is back at work, off the dole, paying taxes (iffy in Greece) and contributing to the GDP, which fixes the deficit. 

$50Bn is just 1% of the GDP of Germany and the UK and back to 0.3% of the EU’s GDP.  Hell, the global markets have lost $4,000,000,000,0000 in the last two weeks worrying about this $50,000,000,000 - THAT’s the magic of Credit Default Swaps - we get to leverage relatively small and correctable global problems into market catastrophes so fast that heads of state don’t even have time to call a meeting before the bankers have slashed and burned their economies. 

So I was leaning this way at the end of last week and, now that I’ve had a chance to dig into it, I’ve decided it’s…

That’s right, I said WIMPS! 

I have never heard so much whining and crying and complaining about a market drop as I have the past few weeks.  Last week, I pointed out that we had only fallen 105 points from the prior week (10,172 to 10,067) and this week we fell ALL THE WAY to 10,012 to finish the week and you would think the world was ending (again) from the way the MSM has been acting.

By Friday the panic was palpable as we gave up Monday and Tuesday’s bogus gains to test new lows for the year - testing, in fact, the lowest levels the market has hit since last November and I pointed out in Friday’s post that it reminded me of when BSC and LEH went under and everyone paniced and sold Financials off to the point where Warren Buffet was willing to give GS $5Bn AFTER they bounced 50% - THAT’s how undervalued the financials were in November of 2008. 

What do we do while people are panicking?  We BUY!  We don’t BUYBUYBUY like Cramer’s Pavlovian Peons but we sure do BUY and take some nice entry positions with sensible hedges.  I was finally motivated to finish updating our Buy List on Friday and 18 of our 38 positions were highlighted (immediately actionable) on Friday.  Sure they may go lower, but we’re buying them with 20% buffers built into the positions and then we can double down if they drop 40% (back to Nov 2008 lows) and then we’ll have our entries down 10% from the lowest levels of the past decade or so that we can hold until the next decade - what’s there to panic over?

If I wanted to buy IBM in January but thought it was a little pricey at $134, why would I not be HAPPY to have the opportunity to make an enty at $122, back at where they were pre FABULOUS October earnings?  I can buy IBM for $122 and take advantage of the panic-induced VIX at 26 to sell July $125 calls for $6.60 and the July $120 puts for $6.65 for a net entry of $108.75 with a call away at $125 for a $16.25 profit (15%) in 5 months.  If IBM should fall below $120, we will have a second round of the stock put to us as $120 for an average entry of $114.38, another 6.2% lower than it is now.  If we were more worried,…

Option Sage submits:

I saw an infomercial from Fisher Investments where Ken Fisher mentioned 3 attributes that he believes are keys to successful investing which can be crudely summarized as follows:

[1]  Focus on long-term investing

[2]  Expect surprises

[3]  Stay ahead of the crowd by knowing what others don’t

The first point is certainly critical and weeds out the greedy ‘get-rich-quick’ traders from the patient traders.  Our policy here is that of ‘play-to-win’.  We like to be aggressive in seeking profits with short-term plays but we also recognize that if those trades don’t work out that we can still rely on longer term plays to end up profitable in the end. 

The second point regarding expecting surprises asks the trader the question “Are you managing risk well and do you have contingency plans in mind each time you enter a trade?”  While the second part of the sentence is important, the first is paramount!  No matter what you do, never violate risk management rules which we have discussed here in the past.

The third point is a luxury in my view.  Of course, it would be nice to know what others don’t but it’s not critical.  By definition only a small number can have information that the rest of the crowd does not have so if you are not trading full-time you have to find another way of making money without relying on staying ahead of the crowd.

As I was scanning for trades over the weekend, I came across one trade which might in fact fall into the category of offering relatively attractive profits by relying on options rather than additional information.  In fact, I know many of our members find it hard to focus on the daily trades and would like to construct portfolios with the longer-term in mind.  As Phil mentioned in his classic "James Bond Investing" article, playing short-term positions requires constant vigilance and you need to ready to turn on a dime with small windows of opportunity and this kind of trading is not for everyone.  Even Phil has a rule of thumb that 75% of a portfolio should be in long-term positions like calendar spreads, buy/writes and covered calls, which generate lower returns but are easier to manage and have a wider margins for error.

So, I set out with the goal in mind of finding a trade that could produce a 10% annual return, noting that this would lead to a doubling of your…

Today’s tickers: FNM, EWZ, IYR, GILD, FXI, WLP, EEM, ARG, DWA & WMB

FNM – Fannie Mae – Mortgage-financer, familiarly known as Fannie Mae, jumped onto our ‘most active by options volume’ market scanner after one investor went hog-wild with put options. Fannie’s shares slipped 3% during the trading day to $0.95 apiece. The investor appears to have traded 118,000 in-the-money put options at the March $1.0 strike for a premium of $0.15 apiece, spread against the sale of 118,000 puts at the January 2012 $1.0 strike for a premium of $0.40 each. Open interest of 156,689 puts at the March $1.0 strike indicate the trader could be buying-to-close a previously established 118,000-lot short put position initiated back in September of 2009. If this is the case, the investor is extending the short put position out to the January 2012 contract and expecting the government agency to ultimately survive the next couple of years. In this scenario, the trader keeps the $0.40 in premium on the sale of the fresh batch of put options if Fannie’s share price rallies above $1.00 by expiration in 2012. But, there are a other possible explanations for the trade. It is possible that the open interest at the March $1.0 strike is unrelated to today’s activity. In this second scenario, the trader is essentially predicting that shares will erode ahead of March expiration. If this is the case the trader sold 118,000 January 2012 $1.0 strike puts for $0.40 apiece in order to take a long 118,000-lot put stance at the March $1.0 strike for which he paid $0.15 each. The net credit received in this scenario amounts to $0.25 per contract and generates additional profits as Fannie’s shares continue to fall under $1.00. It will be interesting to see whether the open interest level at the March $1.0 strike changes to reflect the closing of a previously established long or short put position. Regardless of the direction of- or motivation behind- the transaction the large volume of the trading activity is certainly noteworthy.

EWZ – iShares MSCI Brazil Index ETF – A ratio put spread enacted on the Brazil ETF suggests we may continue to see bearish movement in the price of the underlying stock through expiration in June. Shares of the fund are down 3% to $61.80 as of 2:20 pm (EDT). The investor responsible for the transaction purchased 7,500 puts at the June $60 strike…

It was September 15th, 2008 when Lehman announced they would file Chapter 11.

Lehman had already lost half their value in one day on September 9th as the government failed to step in and assist them.  Whether they were solvent or not became a non-issue as investors lost confidence and put a run on Lehman, making the short attacks on them a self-fulfilling prophecy.  Jean Claude Trichet yesterday, was speaking up for the EU in the same way that Dick Fuld attempted to speak up for Lehman as the end was near.  Fuld could not believe that people were questioning the solvency of LEH and Trichet can’t believe that people are now questioning even the continued existance of the Euro.

"Trichet did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”  As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The comments yesterday didn’t stop Spanish and Portuguese stocks from dropping on concern they are in a similar predicament to Greece, or the euro from tumbling to a nine-month low against the dollar. 

Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.  “Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”

Trichet said the “solidity” of the euro area “is not necessarily very well known” and its situation compares “very flatteringly with a number of other industrialized countries.”  He said that according to the International Monetary Fund, in 2010 the average deficit for the entire euro region should be around 6 percent of GDP.  “Can I mention what it is…

Today’s tickers: EWZ, CVX, WFC, GFI, SU, MA, ZION, DAL, AMAG & JWN

EWZ – iShares MSCI Brazil Index ETF – An iron condor options strategy employed in the February contract on the EWZ implies one investor expects the underlying share price of the fund to stagnate ahead of expiration in two weeks. Shares of the exchange-traded fund, which generally correspond to the price and performance of publicly traded securities in the Brazilian market, are down 5% today to $64.37. Today’s decline merely adds salt to the wounds – The Brazil index ETF has taken a severe beating in the past few months, falling 20.5% since attaining a 52-week high of $80.93 back on December 3, 2009. The iron condor, a strategy utilized by option traders anticipating little movement in the underlying share price, is perhaps one investor’s way of indicating the worst is over and a bottom is close at hand. The iron condor’s construction is essentially the combination of two strangles, or alternatively can be thought of as two credit spreads. On the call side, the investor pockets a net credit of $0.09 per contract by selling 10,000 calls at the February $71 strike for $0.13 apiece, spread against the purchase of 10,000 calls at the higher February $74 strike for $0.04 each. As for the puts, the trader receives a net credit of $0.26 per contract on the sale of 10,000 puts at the February $59 strike for $0.44 each, marked against the purchase of 10,000 puts at the lower February $56 strike for $0.18 apiece. Therefore, the combined credit enjoyed on the iron condor amounts to $0.35 per contract. Maximum retention of the $0.35 credit, or total monetary profits of $350,000, is contingent upon the underlying share price at expiration. EWZ shares must trade within a range of $59.00 to $71.00 in order for the investor to walk away with maximum profits. The investor holding the iron condor is exposed to significant losses if his ‘neutral’ prediction is wrong. Maximum loss potential on the transaction of $2.65 per contract is far greater than the $0.35 credit received for undertaking such risk. But, apparently this trader is confident that shares of the underlying stock will move sideways – at least through February expiration. Perhaps this confidence stems from the fact that losses do not amass to the upside unless shares rebound 10.85% to surpass the upper breakeven price of…

Greece is the word these days.

We are getting a sell-off every morning as Europe goes through the daily ritual of waking up and seeing the cost of default protection rise and rise.  This morning Greece is with STUPID (Spain, Turkey, UK, Portugal, Italy & Dubai) as five-year sovereign credit default swap spreads were recently at 4.23 percentage points, compared with Wednesday’s closing level of 3.97 percentage points. That means the annual cost of insuring €10 million of Greek government debt against default for five years had risen €26,000 to €423,000.  In a nutshell, that’s 4.23% annually to insure Greek bonds from default so Greece needs to offer 4.23% more interest on their bonds than an Aaa nation to attract investors. 

Of course, my new "I’m with STUPID" T-shirt franchise is going like gangbusters as we are getting orders from all over the US, especially California, as our own triple-A credit rating may not last they year.  Japan is a strong customer (mostly small and extra-small) and sales are strong in France and, of course, Mexico and all of South America.   

Keeping up with the STUPIDs is no easy feat as Portugal’s CDS spreads jumped 15% overnight to an all-time high 2.26 while Spain gained 10% to 1.68%.  (Have I mentioned I like TBT lately?)  The moves followed news Wednesday that the European Commission had put Greece under more pressure to cut its deficit; that the Portuguese government sold only €300 million of treasury bills at an auction, compared with an indicative offer of €500 millon; and that the Spanish government had raised its budget deficit forecasts for 2010 through 2012. 

As we expected in yesterday’s post, Greek workers were none too pleased with the EU’s budget plan for their country and is rejecting the idea of wage freezes on top of wage cuts.  Greece’s biggest union is moving towards a mass strike and the public-employee union is planning a job action next week as well.  Tax collectors are striking, customs workers are striking, which is screwing up the airports and shipyards and delaying commerce all over Europe - shades of things to come perhaps?

Today’s tickers: ORCL, SKX, EEM, TM, ZION, DHI, BBBY, RL, MCD & MYGN

ORCL – Oracle Corp. – A massive bearish transaction on software manufacturer, Oracle Corp., paints a gloomy picture for Oracle investors through expiration in June. Shares are trading 0.15% lower on the day to $23.73 with just under two hours remaining in the trading session. The pessimistic portent is a bearish risk reversal transacted in the June contract on the stock. The trader responsible for the reversal sold 34,700 calls at the June $24 strike for an average premium of $1.37 each in order to offset the cost of purchasing 34,700 put options at the lower June $23 strike for $1.24 premium apiece. A net credit of $0.13 per contract pads the investor’s wallet as long as the June $24 strike call options remain out-of-the-money through expiration day. Additional profits, or downside protection on a long stock position, kick in if shares of the underlying trade under $23.00 ahead of June expiration.

SKX – Sketchers USA, Inc. – Street and fashion footwear design firm, Sketchers USA, received a vote of confidence by a bullish options player today despite the 4.25% decline in shares of the underlying stock to $28.54. The investor etched optimism into the July contract on Sketchers by utilizing the ratio call spread strategy. The trader purchased 1,500 calls at the July $30 strike for a premium of $3.00 apiece, spread against the sale of 3,000 calls at the higher July $40 strike for an average premium of $0.60 each. The net cost of the transaction amounts to $1.80 per contract. In the next six months to expiration, SKX-shares must rally 11.40% from their current value in order for the investor to breakeven at a share price of $31.80. Maximum potential profits of $8.20 per contract accumulate should shares explode 40% higher to $40.00 ahead of expiration in July.

EEM – iShares MSCI Emerging Markets Index ETF – An enormous bullish bet on the EEM today implies one investor is positioning for a 5%-11.25% rebound in global markets by March expiration. Shares of the emerging markets exchange-traded fund, which was developed by MSCI as an equity benchmark for international stock performance, dipped slightly lower by 0.20% during the current session to $39.55. Optimism on the fund came in the form of a large-volume call spread in the March contract. The trader responsible for the transaction purchased 60,000 calls at the March…

Hello Oxen Report Readers,

Yesterday, I recommended an Overnight Trade of the Day in Pioneer Natural Resources Co. (PXD). The company, an independent oil producer, announced a surprise on their EPS estimates. The company earned 0.18 EPS vs. the expected 0.05. The company’s stock did not take off quite like I had wanted in pre-market, but it is up 1.5% on very light volume. We should look to get out of this one for 3-4% today, which is feasable given the market’s outlook.

Which brings me to our Pick of the Day…

Buy Pick of the Day: Ultra/Ultrashort Proshares Oil and Gas ETF (DIG/DUG)

Analysis: Its a confusing day in the market for sure…

In Progress…

Entry: We are looking to enter DIG/DUG on the 10:30 AM Crude Oil Inventories release. A positive number in the inventories is a buy for DUG. A negative number is a buy for DIG.

Exit: We are looking for 2-3% gains before exiting.

Stop Loss: 3% on bottom of entry price.

Good Investing,

David Ristau

So close but yet so far!

We set our bounce levels way back on Jan 25th and just yesterday I posted up the WEAK BOUNCE levels we need to see before taking our bullish betting to the next level but we have only skimmed along our lines, finishing yesterday at Dow 10,296 (down by 2), S&P 1,103 (down by 2), Nasdaq 2,190 (down by 10), NYSE 7,001 (up by 1) and RUT 614 (down by 6).  This may be seem like some pretty amazing targeting 10 days in advance but, actually, we could have predicted this move last year as it’s nothing more than the same 5% Rule levels we’ve been using since the middle of last year.

That is why, we are not in the least bit impressed by close.  Close, as they say, is no cigar!  Don’t forget those are the natrural dead-cat type bounce levels off the drop from the top that we are trained to IGNORE as they are meaningless in the grand scheme of things.  What is meaningful is when they we retake those levels and that means we found a true floor at 5% (see weekend chart)  NOT taking back AND holding our retrace levels means we are very likely to see phase 2 of our leg down and hit 10% drop levels of Dow 9,630, S&P 1,035, Nasdaq 2,088, NYSE 6,660 and Russell 585 so we will now become much more concerned by failure or those lower levels (10,058 on the Dow etc) which MUST HOLD.

We’re not there yet, we MAY be consolidating along the 5% lines and that would be good, but unnerving.  We have our disaster hedges in place and we got our commodity rally so we can on some oil puts (what a joke at $77.50 already with yet another inventory build to be announced today) and perhaps even some gold puts as we test $1,130 (GLL $9 puts have very little premium at .90).  Our favorite hedge of the moment is once again EDZ, who are back to $5.50 thanks to a nice move up in Asia today.  March $5 puts can be sold for .45 and that’s a very nice way to collect premium as EDZ has to fall 20% before you even owe the putter a nickel but the July $4/6 bull call spread at .85 pays $2 (up 135%) should emerging markets falter (and you know how we love to exploit those emerging…

Peter D has a long-running and very successful system of selling premiums on a regular basis that’s well worth learning.

We recently ran a collection of comments following through on some trades over time and quite a while ago Sage wrote an article relating this strategy to longer-term stock plays, which provides some additional ideas on how to apply this strategy.  Peter has been kind enough to provide us with a definitive guide to help set you on the road to a successful carrer as a strangler.  The following is a collection of posts on Short Strangles and the Crazy plays on the indices (SPX, RUT, NDX, etc.):
 
1- The Crazy play consists of a Short Strangle and a protective long put vertical. These plays are mainly for Portfolio Margin accounts, with balance greater than $125,000, preferably over $200k as the margin can swing wildly.
 
http://www.philstockworld.com/2009/12/03/thrilling-thursday-japan-jump-juices-futures/#comment-272396 
 
2- Very rough comparison among Short Strangle, Iron Condor, Buy/Write and straight stock purchase. Note the rolling tips in the second to last paragraph:
 
http://www.philstockworld.com/2009/11/20/friday-dell-misses-is-goldman-sachs-stupid-or-evil/#comment-270495
 
 
3- VIX, the effects of:
 
http://www.philstockworld.com/2009/12/02/which-way-wednesday-47/#comment-272331
 
 
4- Possible adjustments of the Crazy Play:
 
http://www.philstockworld.com/2009/12/19/wild-weekly-wrap-up-17/#comment-276237
 
Additional discussion on the doubling down:
 
http://www.philstockworld.com/2010/01/07/thrill-ride-thursday-retail-sales-and-maybe-some-jobs/#comment-278802
 
 
5- Figuring out the margin requirement for short strangle using Thinkorswim Analyze Tab:
 
http://www.philstockworld.com/2009/12/19/wild-weekly-wrap-up-17/#comment-276242
 
 
6- Setting up February 2010 spreads on Jan 4th:
 
http://www.philstockworld.com/2010/01/04/monday-market-movement-my-2010-technical-outlook/#comment-278096
 
 
7- Thoughts on Delta movement with respect to the underlying:
http://www.philstockworld.com/2010/01/20/whig-party-wednesday-republicans-take-kennedys-seat-at-the-table/#comment-281552
 
 
8- Selling into a VIX excitement, play-by-play examples, including the discussion on escape routes:
 
http://www.philstockworld.com/2010/01/26/tightening-tuesday-global-edition/#comment-283221

http://www.philstockworld.com/2010/01/26/tightening-tuesday-global-edition/#comment-283222

http://www.philstockworld.com/2010/01/26/tightening-tuesday-global-edition/#comment-283223

Today’s tickers: VIX, MS, BAC, UNG, SU, RL, GIGM, FCX, CVS, SPF & DOW

VIX – CBOE Volatility Index – A massive bearish put position initiated on the VIX today is a bullish sign for the S&P 500 index. The VIX fell more than 6% during the current session to stand at 21.21 as the past two day’s uptick in equities serve to dissipate some of the fear and uncertainty felt by investors during the prior trading week. One investor anticipating further downside movement for the VIX picked up roughly 103,000 puts at the March 20 strike for an average premium of $0.70 per contract. The put options position the investor to accrue profits beneath a VIX reading of 19.30 through expiration. It appears the investor expects the so-called fear-gauge to head in the direction of the index’s 52-week low of approximately 17.49 attained on January 19, 2010. But, the VIX must fall another 9% from the current reading in order for the investor to breakeven by expiration. Furthermore, today’s reading is still 21.25% greater than the 52-week low described previously.

MS – Morgan Stanley – Global financial services firm, Morgan Stanley, attracted the attention of bullish options investors in afternoon trading. Shares are currently trading 1.00% higher at $27.83 with roughly one hour remaining in the trading day. A bull call spread stuck out like a sore thumb in the scantily populated March contract on the stock today. One investor purchased 5,000 calls at the March $28 strike for a premium of $1.35 each, and sold the same number of calls at the higher March $31 strike for an average premium of $0.34 apiece. The trader paid a net premium of $1.01 per contract for the spread, but stands to accrue maximum potential profits of $1.99 per contract should Morgan Stanley’s shares rally up to $31.00 ahead of expiration day. The call-spreader breaks even on the transaction as long as MS’s shares rise 4.25% from the current price to $29.01 before the options expire.

BAC – Bank of America Corp. – Optimistic sentiment on Bank of America appeared in the August contract today amidst a 0.65% improvement in shares of the underlying stock to $15.52. One bullish trader initiated a call spread to position for upward movement in BAC’s shares by expiration. The investor purchased 4,000 calls at the August $16 strike for an average premium of $1.52 apiece, spread against the sale of 4,000…

Well, yesterday and today so far have been pretty solid days for The Oxen Report. Yesterday, we picked up some shares of DIG in the morning at 32.50 and were looking to sell at 33.15 - 33.47. We were not able to reach 33.47 but sold at the end of the day for 33.30 for a solid 2.5% gain. On the Short Sale side, we were looking at SRS for a short sale. The housing industry was a laggard yesterday, which did keep SRS up. We got into it at 8.12, looking for 7.96 - 7.88 for a sale. The ETF hit 7.96 briefly, and we did not sell. We got out at the end of the day at 8 for a solid 1.5% increase after covering. THE REAL GEM THOUGH is our Long Play of the Day from Friday with M/I Homes. We got into this one for an earnings boost coming in tomorrow. I said, however, if we got 5-6% before that, we should sell. Well, today the stock is up over 13%. We got in on Friday at 10.35. we were able to sell out at 10.97 for a 6% gain today. Pretty great trades.

3/3!!!

Let’s get into today’s Overnight Trade of the Day… 

Overnight Trade of the Day: Pioneer Natural Resources Co. (PXD)

Analysis: Oil companies have across the board been doing fairly well this earnings season both on the main line and on the independent side. This has mostly been not to exceptional quarters but because of the fact that they were majorly undervalued in the Q4. Nearly every company to report has beat earnings. Yet, the market downturn over the prior few weeks has made for some great buying opportunities on surprises. 

Pioneer Natural Resources (PXD) is one of these companies that I am expecting a pop from after reporting earnings this evening…

IN PROGRESS

Entry: We want to enter today between 46.60 - 46.70.

Exit: We are looking to exit tomorrow morning on any increase. If decrease, we will have more information as to what to do.

Stop Loss: None.

Good Investing,

David Ristau

Too tricky to call!

We’re trying to be bullish now, so we don’t complain about stick saves and we got a nice one into yesterday’s close and another one in the futures, which were down about 50 at 3am - but it still looks like BS to me.

On Thursday morning I said: "Our 5% "must hold levels" remain:  Dow 10,165, S&P 1,088, Nas 2,200, NYSE 7,000 and RUT 620 with 3 of 5 below = BAD!"  We got the Dow, S&P and the NYSE back over the line yesterday and now we need the Nasdaq and the Russell to show us the money and catch up.  Of course, this is just our "averting disaster" levels - we haven’t even broken our "weak bounce" targets of: Dow 10,300, S&P 1,105, Nasdaq 2,225, NYSE 7,100 and Russell 625 that the 5% rule predicted in last Monday’s post. 

Last Wednesday I asked the question, is it weakness or good old fashioned consolidation?  My premise was that commodities were overvalued and we were due for some rotational correction, which was GOOD and HEALTHY.  The market still has much to prove and we are still pursuing disastrous economic policies that will all end in tears but, in the meantime, we can still party like it’s 1999 as long as we know where the nearest exit is - and that’s what our Disaster Hedging is all about. 

We took positions on DXD and QID yesterday as the weak bounce we got was a good chance to establish new hedges and I’m hoping we get another push in commodities so we can short some of them.  EDZ is getting interesting again, back at $5.65, about 10% away from our sweet spot ($5) for taking up a position but we may hit them early if the US indexes can’t provide some leadership this week.  As you can see from Trader Mike’s charts - we have plenty of resistance to get through and we’re still waiting to see a rise on anything but weak volume to give us more confidence.    

Germany gave our confidence a small boost this morning as Retail Sales, adjusted for inflation and seasonal swings, rose 0.8 percent from November, when they dropped a revised 1.7 percent.  Germany’s government this month raised its forecast for 2010 economic growth to 1.4 percent from 1.2 percent. While the economy is still grappling with the aftermath of its worst recession since World War II, the government has extended subsidies that encourage companies to hang on…

Today’s tickers: AMZN, DELL, FXI, AET, XOM, LPX, CSCO, VCI & ITMN

AMZN – Amazon.com, Inc. – E-tailer, Amazon.com, Inc., attracted two-way trading traffic in its options today after the firm gave in to publisher, Macmillan’s, demands to increase the price of digital books. Amazon.com’s concession to Macmillan is fueling investor concerns that the largest internet retailer is relinquishing its pricing advantage. Shares of the online shopping destination slumped more than 8.65% during the trading session to an intraday low of $114.38 – the largest decline in Amazon’s shares in more than one year. Investors inundated Amazon with options trades today, exchanging more than 226,300 contracts on the stock by 2:50 pm (EDT). Option volume generated thus far in the session represents more than 45% of the total 493,697 lots of existing open interest on AMZN. Strong demand for options on the stock as well as a rise in investor uncertainty boosted option implied volatility on Amazon roughly 8.3% higher to 41.44% in afternoon trading. Option traders expecting shares to rebound quickly purchased 2,200 call options at the February $115 strike for an average premium of $5.67 apiece. The $120.67 breakeven price on the contracts suggests call buyers expecting to amass profits in the next few weeks, anticipate a more than 5% increase off the intraday low, by expiration day in February. Call buying and selling in roughly equal proportions was observed at the February $120 strike and at the February $125 strike. Two-way trading traffic of put options is also apparent in the February contract. Contrarian players sold nearly 8,000 puts at the February $115 strike to take in an average premium of $3.58 per contract. Put sellers at this strike keep the full premium received if AMZN’s shares trade above $115.00 through expiration day. The most bearish moves were made at the March $105 strike where 1,100 puts were picked up for an average premium of $2.81 each.

DELL – Dell, Inc. – Bullish investors initiated call spreads on the just-in-time manufacturer of personal computers this afternoon with Dell’s share price up 2.5% to $13.22 on the day. Option traders purchased more than 10,000 calls at the August $14 strike for an average premium of $1.17 apiece, spread against the sale of roughly 10,000 calls at the higher August $18 strike for an average premium of $0.20 each. The average net cost of the bullish trade amounts to $0.97 per contract. Investors…

Good Monday Oxen Report readers, 

The market is looking like it is ready for a rally today as the market has dropped over 6% since hitting its high of 2010 back on January 15. On Friday, we picked up a Long Play of M/I Homes Inc. (MHO). We got into that one at 10.35 and are looking for 4-6% increase with a sell expiration on Wednesday after earnings are released. If I get 5% before Wednesday, though, I will look to sell MHO.

Let’s get into some plays for Monday…

Buy Pick of the Day: Ultra Proshares Oil and Gas ETF (DIG)

Analysis: Nothing has been able to get the market going since that high, but the downturn may be looking upwards. On little news that would spark a rally, the market as of 8:15 AM had futures that were up above 55 points on the Dow. At 8:30 AM, we got some neutral economic data that did very little for the market’s direction. One of the big earnings market movers is ExxonMobil (XOM), which despite a 23% profit decline beat estimates on Wall St. and has investors a bit excited.

With the market looking up for the day, that should translate into a good day for the oil market. Oil has been on a steady decline from the 80s all the way down to now at $73 per barrel. The oil ETFs have been closely following this downward trend, and one, in particular, presents a perfect buying opportunity for the day. Ultra Proshares Oil and Gas ETF (DIG) is a great buy after the ETF has taken a 20%+ nosedive in the past three weeks. The ETF is extremely undervalued. If oil and the market can rise, then DIG is a great opportunity.

Will oil keep going up today? The first reason we can expect a solid day out of oil is that President Obama’s announcement that we would reach a record deficit has weakened the dollar significantly, which always gives a boost to oil prices. Further, it is time for a correction. Fundamentals have said that oil should be much lower than it is right now, but market fundamentals say we can only decline for so long before we get at least some sort of rebound (no matter how short lived it is). 

"This is not a trend higher but a reaction after three weeks of falls. The fundamentals have not improved, the market is…

"Every civilization," Swiss historian Jacob Burkhardt once wrote, "carries within itself the seeds of its own destruction."

Dr. Hanmer Hill and Josh Bill tell us: "We believe the financial crisis of 2008 exposes a seed that can destroy Western-style free-market capitalism. The name of that seed is the credit default swap, or CDS…  A surgeon could not take out a life policy on a patient he or she was about to operate on. You could not take out a fire policy on a home you did not own, and you could not take out more than one policy on a home you did own…  It was, and still is, possible to buy an unlimited number of CDSs against any financial instrument, whether one owns that instrument or not. Imagine someone taking out 20 fire policies on his neighbor’s home. Common sense tells you the odds just went up that that house is going to burn, and you have just created a perverse appetite for the homes most likely to burn." 

The total amount of subprime mortgages written soon rose to $2 trillion. The total value of the CDSs written against CDOs rose to $65 trillion. That’s right: $65 trillion of insurance against $2 trillion worth of high-risk mortgages.  Those who profited the most sought out the worst of the worst mortgages to bet against. One big winner was hedge fund manager John Paulson. In 2006, Paulson convinced Goldman Sachs and Deutsche Bank to create extremely high-risk CDOs and sell them to others, so both he and they could bet against them. Paulson picked the mortgages. He made $15 billion. His friend George Soros (who later said "I’m having a very good crisis") made $5 billion. Deutsche Bank made $25 billion doing this. Goldman Sachs made much, much more. 

In 2006, Goldman Sachs and Deutsche Bank underwrote 352 fraudulent mortgages in Sikeston, Mo. In 2009, Goldman Sachs paid Massachusetts $60 million to close an investigation into its role in creating "mortgages designed to fail at the inception." 

As I mentioned this weekend in my Davos review, I find it VERY disturbing that we are seeing an extreme uptick in both lending to risky contries and CDS betting that those same countries will fail.  This is kind of like playing that carnival game where you squirt water into the clown’s mouth until you pop the balloon while adding bets that the balloon will pop. 

Unlike the clown game, your bet doesn’t…

.

Maybe this time we can actually do some buying!

Back on Jan 9th I posted the last update to this list but said: "Fundamentally, I still don’t buy this rally but, technically, we could go up and up from here" - Not exactly a ringing endorsement and we have gotten at leas the first leg of our technical correction.   Rather than hitting our list we ended up dumping our longs into the rally and I’m not really convinced about next week either.  So far, we’ve stuck to buying blue-chips that we didn’t even think we’d get a good shot at when I made this list.  It’s all about holding that 10,000 line on the Dow now, there is no more room for error to the downside of the markets or we may be seeing 8,650, not 9,650 again.  Last time we looked at the market moves as they compared to 2004 and I noted that 2004 was a choppy and downtrending year - notice how similar our pattern is working out at the moment!

Obviously we can’t rely on patterns to simply keep repeating themselves.  We could have another terrorist attack, we could have more stimulus or maybe both in our future but, until we see the patten broken, we can play for a similar move to what we see in early 2004.  Our buy/write strategy is ideal for this as it’s a conservative play that gives us 15-20% downside protection.  Combine this with our usual strategy to scale into positons along with some sensible disaster hedges and we can build a nice, bullish portfolio for 2010.  Keep in mind we don’t fear the upside with buy/writes as our "worst case" there is we get called away with a nice profit.  

These are the bullish plays that form the bulk of our portfolios and that sometimes gets lost in our weekly short-term trading.  It was a lot like shooting fish in a barrel, picking winners from our September 6th Watch List (we had our last Buy List on July 11th our first since the bottom in March).  As always, our active lists are found under the Portfolio Tab near the top of our pages - always check there for recent updates.  Keep in mind that we are just now getting near to where we were on September 6th, when I last felt it was a good idea to start bottom fishing (and Thanksgiving was the last update to that list as, from that point forward, we thought the whole rally was BS and not suitable for long-term…

Debt-O, debt-uh-oh
Interest come and we need another loan
Debt-O, debt-uh-oh
Interest come and we need another loan

Work our lives just to lose our homes
Interest come and we need another loan
Stack default swaps till they come undone
Interest come and we need another loan

Come on Economists, tally us some BS
Interest come and we need another loan
Come on Economist, tally us some BS
Interest come and we need another loan

6%, 7% - it’s a credit crunch
Interest come and we need another loan
6%, 7% - it’s a credit crunch
Interest come and we need another loan

Debt-O, debt-uh-oh
Interest come and we need another loan
Debt-O, debt-uh-oh
When interest comes we’ll need another loan
 

It was the best of times (with the IMF predicting 3.9% Global growth) and the worst of times (with Roubini saying we’re all doomed) at Davos this week as the men who rule the world gathered to divide the spoils over card games while vying with each other for podium and TV time so they could talk their various books from the safety of the Swiss mountains.  Davos, a tiny village perched on a mountain with just two main streets lacks the protests of other Global gatherings.  During the annual meeting, the town is taken hostage by thousands of police.  “Anyone who looks like a protester can be thrown off the train,” says Marco Leutholz, head of the local Socialist party.  Sir Howard Davies (director of the LSE) writes:

The mood is certainly better than last year, when the world was ending, but it is worse than at the beginning of last week. Alessandro Profumo of Unicredit acutely observed that Davos is likely to accentuate whatever mood you arrived in, rather as alcohol does, I guess. So those who arrived nervous about the economic prospects are leaving even more jittery. If you arrived feeling pessimistic, you will leave somewhere between suicidal and homicidal.

The market background has not helped. Anxiety about Greece has grown over the past three days. In the circumstances, it was strange to see both the Greek prime minister and his finance minister here. Maybe the subtext was to show that there can be no crisis if they are munching muesli in the mountains, but though some may have been reassured, more people asked who was at home minding the taverna.

Hey I like that guy - let’s sign him up as a regular writer! 

IN PROGRESS

Another week another 100 points lower. 

Yep, that’s all it was, we lost all of 100 points more than last week, when we fell from 10,725 to 10,172 (553 points) and this week we dropped from Friday’s Dow close of 10,172 all the way down to 10,067 yet you would think the world had come to an end to hear the media and the traders freaking out.  I’m not going to try to explain it, I can’t.  Maybe it’s because going into last week we were very bearish but, starting on the 22nd, we started to get a little more bullish AND THE MARKET BETRAYED US!

How could the market not zoom right back up?  It always zooms right back up, doesn’t it?  As I said a week ago Friday: "Boy, when sentiment shifts - it REALLY shifts!"  My closing comment on Friday the 22nd was "Back to cash but leaving disaster hedges, which are looking great now as this is shaping up to be some disaster" and our weekend "Global Chart Review" showed us to be at some very key inflection points, letting us go well prepared into this week: 

Manic Monday Market Movement

My Jets lost on Sunday so I was not in the best of moods on Monday.  My outlook that morning was: "We still have our disaster hedges in case things get worse but, on the whole, we’re expecting a 1% bounce in the very least off our 5% lines (anything less will be a bad sign)."  We were pretty much at the 5% rule on Friday’s close so we focused on the bounce we wanted to achieve in order to get more bullish. 

I noted that the levels we were looking for were not exactly 1% retraces (see post for reasons) and our target retraces were:  Dow 10,300, S&P 1,105, Nasdaq 2,225, NYSE 7,100 and Russell 625.  What were the highs for the week on those indexes?  Dow 10,310 (+10), S&P 1,103 (-2), Nasdaq 2,227 (+2), NYSE 7,098 (-2) and Russell 621 (-4).  So that’s a net of +4 points out of  21,355 points worth of predictions on the retrace, accuracy to within .019% - not a bad showing for our patented 5% rule.     

Please, under NO circumstances subscribe to our daily newsletter, where you would get this kind of information every day and DO NOT get an Alert Membership where we send out our amazingly accurate watch levels every day.  Having this sort of advanced information on the markets would be unfair to other traders - thank you for your restraint…

See how I cleverly used…

Today’s tickers: COP, EEM, DE, SIRI, JPM, FCX, T, PCS, MSFT & EK

COP – ConocoPhillips– Oil and gas company, ConocoPhillips, attracted an optimistic options player to the January 2011 contract today. Shares began the trading day on the up-and-up, but reversed direction in the latter portion of the session, falling slightly by 0.20% to $48.26. The long-term bullish strategist purchased a debit call spread to position for upside gains in the underlying share price by expiration next January. The spread involved the purchase of 5,000 calls at the January 2011 $50 strike for an average premium of $3.91 apiece, marked against the sale of the same number of calls at the higher January 2011 $65 strike for about $0.60 each. The net cost of the transaction amounts to $3.31 per contract. The investor responsible for the trade stands ready to accrue maximum potential profits of $11.69 per contract if COP’s shares gain 35% over the current price to reach $65.00 by expiration day. Shares must rise at least 10.5% from today’s price before the call-spreader breaks even on the transaction at $53.31.

EEM – iShares MSCI Emerging Markets Index ETF – Shares of the MSCI Emerging Markets exchange-traded fund fell less than 1% in afternoon trading to stand at $38.47. September contract options trading suggests one investor is positioning for continued downward movement in the price of the underlying stock by expiration. The pessimistic trader established a bearish risk reversal on the fund by selling 5,300 out-of-the-money call options at the September $45 strike for a premium of $1.35 apiece, spread against the purchase of the same number of put options at the September $33 strike for $1.77 each. The investor paid a net $0.42 per contract for the transaction. Profits to the downside accumulate only if shares of the EEM slump another 15.3% from the current price to breach the breakeven point at $32.58 by expiration in the next eight months. We note that the fund’s share price has remained above the $33.00-level since July 15, 2009.

DE – Deere & Co. – Shares of agricultural equipment maker, Deere & Co., are trading 1.80% higher to stand at $52.03 in the first half of the trading day. Notable options activity appeared in the January 2011 contract where one investor initiated a long-term protective play using put options. The trader established a put spread by purchasing 10,000 puts at the January 2011 $50 strike for…

I am looking at a couple of long term plays to buy into today. By long term, I mean 4-5 days…haha. I think that the market has presented some outstanding opportunities for some big money making. Over the past ten trading days, we have had only two up days. That has taken a lot of stocks down, down, down. Investing 101 is buy low and sell high. I have found two companies that have been dropping in value and are now extremely undervalued, but I think present the ability to see some significant movement upwards in the next week leading into their earnings reports.

Let’s get into both of these picks that you should pick up today…

Long Term Play #1: M/I Homes Inc. (MHO)

Analysis: IN PROGRESS

Entry: We want to enter in the 10.20 - 10.30 range at some point before closed.

Exit: We are looking to exit on Wednesday during the day after a Wednesday morning report unless 5-6% is reached before Wednesday morning. Otherwsie, we will hold and sell for gains on Wednesday.

Long Term Play #2: IN PROGRESS

Analysis: IN PROGRESS

Entry: IN PROGRESS

Exit: IN PROGRESS 

At 12:52 yesterday I officially went long on the markets.

This could be a big mistake (in fact, that’s what I said to Members at the time) but the logic was Bernanke would be confirmed (he was) and that we’d have a big GDP number today.  Now the reason we’re going to have a big GDP number is because we will have a big build in inventories (we discussed this effect on Jan 14th) as manufacturers got all excited and produced goods that nobody bought and, because it is assumed that goods are only produced in accurate anticipation of demand - this kind of nonsense comes in a positive to our GDP. 

Production collapsed during the recession as companies sold from their existing inventories but didn’t order new goods, because of uncertainty about future customer demand. These inventory declines dragged on GDP for six consecutive quarters, the longest streak on record since 1948.  The turnaround in inventoris could give us a Q4 GDP in the 5% range.  Rational economists prefer to look at final sales to domestic purchasers, a subset of GDP that doesn’t include inventories and trade, to better gauge U.S. economic activity. That category is likely to grow at only a 2% pace, similar to the third quarter but shhhhhhh! - we don’t want to wake the rational economist - who has clearly been asleep since the the mid 90s…

So we went bullish (speculatively), not because we are going to be excited by a 5% GDP number that makes us look like some overheating Third World economy even as another 2M people lost their jobs in Q4. No, we’re bullish because we cynically believe that the sheeple are clueless and will stampede into this number as if the US is recovering and nobody told them until this morning. 

Meanwhile, I have a message for the sheeple:  Please keep selling us you Google stock.  I think this chart of the day is self-explanatory but you never know.  This is a chart of the amount of money Google makes per employee, per quarter.  Currently they are gernerating $1.34 MILLION dollars for each person they hire (and they’ve been hiring).  For a comparison, Yahoo generates $500,000 per employee yet GOOG currently has a p/e ratio that is 1/2 of Yahoo’s. 

Microsoft’s 98,000 employees generate $623,000 each, ORCL’s 86,000 employees pull in just $267,000 each.  It’s not a definitve indicator but consider how well they have managed that number through the recession, which…

Today’s tickers: HPQ, GS, XLE, QCOM, JPM, TM, SLV, EK, GMCR & TYC

HPQ – Hewlett-Packard Co. – Shares of technology giant, Hewlett-Packard Co., are down 3.5% to $47.70 this afternoon, but the actions of one option trader indicates the stock may rebound by expiration in March. Call activity in the March contract effectively mimics a ratio call spread strategy, which positions the investor to benefit from a move higher in share price in the next couple of months. The ratio call spread took place at the March $46 strike where 5,000 in-the-money calls were purchased for a premium of $3.20 apiece. At the higher March $50 strike, 10,000 call options were sold for an average premium of $1.15 each. Assuming both trades are the work of one investor, the net cost of the bullish move amounts to $0.90 per contract. Maximum potential profits of $3.10 per contract accrue to the upside if shares of the underlying rally to $50.00 by expiration. We note that shares of Hewlett-Packard last traded above $50.00 as recently as January 21, 2010.

GS – Goldman Sachs Group, Inc. – A couple of contrasting option trades caught our eye this afternoon on investment banking institution, Goldman Sachs Group. Goldman’s shares edged 1.15% higher in late-day trading to stand at $153.22. The first and nearer-term of the two transactions appeared in the March contract. The sale of more than 6,800 call options at the March $160 strike for an average premium of $4.58 apiece is a bearish signal. Investors selling the calls apparently expect to keep the premium received today because they do not see Goldman’s share price rebounding to- or above $160.00 by expiration in March. Contrary to the call selling described previously, the April contract attracted bullish sentiment. One investor purchased a call spread by picking up 2,000 calls at the April $160 strike for a premium of $5.78 each, marked against the sale of 2,000 calls at the higher April $175 strike for about $2.05 apiece. The trader paid a net $3.73 per contract to position for a rebound in GS shares by expiration in three months time. Shares must rally approximately 7% from the current price before the call-spreader breaks even at a price of $163.73. Maximum potential profits of $11.27 per contract amass if shares surge more than 14% (from $153.22) to $175.00 ahead of April expiration.

XLE – Energy Select Sector SPDR ETF – The energy…