Jobs Report Disappoints 08-06-2010

Cusick’s Corner
Market participants continue to worry – the latest jobs data was disappointing, the private sector added fewer jobs than expected. The Labor Department’s unemployment number actually came in at 9.5% which is the same as last month’s, but that’s because some discouraged job seekers stopped looking for work and are not being counted as unemployed. After the pre-market report, the S&P 500 fell below its 200-Day Moving Average -- 1110 and 1080 are now in play with the S&P 500 now trading near the 1110 levels. The VIX is at 23.15 which is 4.7% higher than yesterday’s close. See you After Hours.

Stocks are broadly lower on disappointing jobs data Friday. Stock index futures fell into the red before the stock exchanges opened in New York after the Labor Department reported that the US economy shed 131,000 more jobs in July, which was worse than the 87,000 loss that economists were expecting. Making matters even worse, June numbers were revised down to –221,000, from –125,000. Average hourly earnings rose .2 percent, and a bit better than the .1 percent increase that was expected. Meanwhile, the rate of unemployed stayed the same at 9.5 percent. Overall, the data disappointed. The Dow Jones Industrial Average fell on the news and, with little else to guide the market action, never recovered. The Dow is down 138 points. The NASDAQ lost 29. The CBOE Volatility Index (.VIX) rallied 1.05 points to 23.15. The tone of trading in the options market is clearly more cautious, with about 3.6 million calls and 3.9 million puts traded through 11:45 ET.

Bullish
Fortress Investment Group (FIG) rose nearly 4 percent on earnings yesterday. Shares of the New York, NY asset manager are up 10 cents to $4.19 today and have now rallied 46 percent since June 30. One strategist appears to be looking for additional upside over the next year and half. They apparently sold a hefty position in 12,000 January2012 5 puts at $1.50 per contract to buy a large position in 12,000 January2012 2.5 – 5 call spreads at $1.45. This three-way spread, at a 5 cent net credit, is a bullish longer-term play, as the best profits are gained if shares settle at $7.5 or more at the January 2012 expiration. By selling $5 puts, this strategist is also stating they’re willing to buy the stock if it rallies beyond that level by early 2012.

Homebuilder Pulte Homes (PHM) is seeing action in its longer-term 2012 call options as well. Shares are flat at $8.56 and one strategist is focused on the 2012 calls at the 12.5 line. A block of 4,800 contracts traded at 90 cents. The bid-ask spread was 76 to 90 cents at the time. So, this looks like a buyer. 5,000 traded total. Since open interest is 3,332, this looks like opening action in anticipation of a move above $7.5 through January 2012.

Bearish
Put volume surged in the ETF market after Friday’s disappointing jobs data stirred up a lot of bearish sentiment. About 2 million puts and 1.1 million calls traded across all the exchange-traded funds through midday. The action includes large blocks of puts on both the S&P 500 Depositary Receipts (SPY), or “SPYders”, and also on the iShares Small Cap Fund (IWM). Some institutional investors are snapping up puts on these exchange-traded funds, using them as a tool to hedge risk should the recent market slide continue.

Cina Yuchai International (CYD) shares are flat at $18.82. Meanwhile, options volume in the Singapore-based machinery company surged to 50X the usual. The action is similar to the bullish trade in FIG (see Bullish Flow above). However, this trade involved the sale of 6,600 September 20 calls at 60 cents to help finance the purchase of 6,600 September 15 – 16.5 put spreads at 70 cents. Looks like a new bearish position in the name.

Unusual Volume Movers
AIG options volume is running 2.5X the usual, with 58,000 contracts traded and call volume accounting for about 57 percent of the activity.

Allstate (ALL) options activity is running 4.5X the usual, with 30,000 contracts traded and call volume representing 97 percent of the volume.
Genworth (GNW) options volume is running 2X the usual, with 23,000 traded and call volume representing 94 percent of the activity.

Unusual volume is also being seen in Kraft (KFT), CF Industries (CF), and DirectTV (DTV).

Implied Volatility Movers
L-1 Identity Solutions (ID) is up 6 percent to $8.82 and implied volatility is higher amid increasing put volume Friday. The gains in the share price are being attributed to takeover chatter. It hasn’t been confirmed and, in addition, the overall trading in the options seems more bearish than bullish. The top trade of the day is a block of 2,300 September 7.5 puts at the 55-cent asking price. 8,300 contracts now traded. Meanwhile, implied volatility is up 12.5 percent to 90.