Deflation Potentially More of a Threat 07-15-2010

Cusick’s Corner
JPM knocked the ball out of the park with their earnings call, earning $1.09 Q2 as credit and loan delinquencies were down. So one might ask why the market isn’t on a run up after what seems to be good news. One word -- deflation. At 9am ET there was disappointing economic data coming from multiple sources: Producer Price Index [PPI] (Jun), NY Empire Manufacturing Index, and Philly Fed Survey (Jul), all potentially suggesting that the industrial sector, XLI, could be slowing down, making these price drops, deflation, look like more of a threat. We want to see if the market can hold key levels, SPX 1080, and monitor if there’s a potential challenge to some key resistance areas like Finance, XLF $15, which could spur on some volume to these positive earnings results and guidance thus far. See you After Hours.

Stocks are broadly lower on disappointing economic news Thursday. The major averages opened the day only modestly lower after JP Morgan (JPM) delivered better than expected earnings and the latest weekly jobless claims numbers showed a decline of 29,000, and much better than the 8,000 drop that economists had predicted. However, early gains were kept in check after the latest Producer Price Index [PPI] showed a drop of .5 percent (vs. .1 percent estimate) and the NY Empire Manufacturing Index for July slid to just 5.08 from 19.57 (vs. 18 consensus). Then, the major averages fell at 10:00 ET when the latest Philadelphia Fed Survey for July sank to only 5.1, down from 8 the month before and much worse than the 10.1 that economists had expected. The weak manufacturing data could not be overlooked and the Dow Jones Industrial Average is down 90 points. The CBOE Volatility Index (.VIX) added 1.21 to 26.10. Trading in the options market is busy ahead of the expiration, with about 3.9 million calls and 3.7 million puts traded through 12:45 ET. Tomorrow is the last day to trade July options. Some index contracts stop trading today.

Bullish
Some of the agricultural chemical names are seeing relative strength. Potash (POT) is one of them. Shares are up $2.87 to $96.72 and 16,000 calls have traded in the name so far. A lot of the action is in the July 95 and 100 calls, as some short-term players appear to be buying premium and looking for the rally to continue through the end of the week. There is no company-specific news in the name, but others in the sector – like Mosaic (MOS), Intrepid Potash (IPI), and Agrium (AGU) – are also seeing relative strength Thursday.

Cisco (CSCO) saw two large blocks of calls traded on the networking giant in morning action. Shares are up 2 cents to $23.76 and the activity included a block of 16,000 August 24 calls at the 70-cent asking price. 33,000 contracts now traded. Another player was focused on the longer-dated January 2012 25 calls, and apparently bought a block of 6,900 at $3.30 apiece. 8,400 now traded. The action might be in anticipation of good earnings, due early-August.

Bearish
Traders are showing interest in Qualcomm (QCOM) puts Thursday. Shares of the chipmaker are down 17 cents to $36.73 and the focus is on the short-term July 35 and 36 puts, which have traded 2,870X and 18,450X, respectively. About 90 percent of the volume traded at the offer and implied volatility is up about 3 percent, suggesting put buyers are driving the flow. It’s not clear what’s motivating the short-term bearishness in the name. Earnings are due out next week, and after the July expiration.

Put activity is picking up in the SPDR Homebuilders Trust (XHB) ahead of housing starts and new home sales data due out next week. Shares are down 8 cents to $14.83 and 21,000 puts traded in the fund so far. Much of the action appears to be a roll of 5,500 September 15 puts to 10,000 December 13 puts. That is, the investor sold to close a position in the in-the-money puts and then bought to open a larger position in out-of-the-money puts. They might have amassed a profit on the September 15s and want to maintain a bearish stance on the homebuilders through year end.

Unusual Volume Movers
Arena Pharmaceuticals (ARNA) options volume is running 6X the usual, with 51,000 contracts traded and call volume accounting for about 54 percent of the activity.

Motorola (MOT) options activity is running 2.5X the usual, with 44,000 contracts traded and call volume representing 81 percent of the volume.
CIT options volume is running 8X the usual, with 35,000 traded and call volume representing 73 percent of the activity.

Unusual volume is also being seen in Boeing (BA), Skechers (SKX) and RadioShack (RSH).

Implied Volatility Movers
Apple Computer (AAPL) implied volatility is up ahead of a news conference tomorrow. The company will discuss antenna problems with iPhone 4. Shares are down $3.59 to $249.14 and trading is very active in the July 250 puts and calls, as well as the July 240 puts and July 260 calls. Bullish and bearish traders are scrambling to take positions ahead of the news. As a result, implied volatility is up 5 percent to 44.5.