Inflation Back On Radar Screen 12-14-2010

Cusick's Corner
Commodities are flying, bonds are pulling back and the FOMC has not yet released their statement. The catalysts for this equity and commodity run up are bonds and inflation. Inflation is back on the radar screen as we watch bond prices continue to fall, follow the rate that money is being printed and wait for the FOMC. This means that market participants are feeling like the economy is on a better track, dare I say growing, which would be a potential explanation for a full on flight from yield to risk, in other words out of bonds and into equities and commodities. The FOMC statement will have an impact on the continuation of this trend, so keep an eye out for the 2:30 ET announcement. See you After Hours.

Stocks are broadly higher with help from better-than-expected retail sales data Tuesday. The table was set for morning gains on Wall Street after the Commerce Department reported that retail sales rose for a fifth consecutive month, increasing by .8 percent in November. Economists were looking for an increase of just .5 percent. Separate data showed the November Producer Price Index [PPI], a gauge of inflation at the wholesale level, up .8 percent and also .3 percent more than expected. Meanwhile, some eyes are on Washington where the Senate votes on the tax plan today. The Federal Reserve will also be in focus this afternoon, as it releases its post-meeting statement at 2:15 ET. The Dow Jones Industrial Average is up 71 points to 11,500 and near session highs ahead of the news. The NASDAQ has added 9.5 points. The CBOE Volatility Index (.VIX) is off .29 to 17.26. Options trading is active with about 4.8 million calls and 3.8 million puts traded through 12:45 ET.

Bullish
AIG shares are up another $2.89 to $51.41 on news Fairholme Capital bought more than $30 million worth of AIG stock on December 7 and 8. The fund manager now owns almost 29 percent of the common shares. AIG has now rallied 21.8 percent since announcing on 12/9 its plans to repay its debt to the government. Meanwhile, options have been actively traded since the announcement. Today, for example, 58,000 calls and 26,000 puts have traded in the name. December 50 and 55 calls are the most actives, with 11,375 and 12,245 traded, respectively. January 50 and 55 calls are heavily traded as well.

Seagate (STX) has been the subject of covered call trading in recent days. Shares are up 30 cents to $14.71 and the focus has been on the January 14 call options. More than 6,000 traded through midday. In morning action, one investor sold 2,500 at $1.23 against shares at $14.89. These calls are already in-the-money and if shares hold above $14 through the expiration, the calls will be assigned (called away) at $14. If so, the profit is equal to the difference between $14 and the cost basis of the stock (or $14.89 - $1.23), or about 2.5 percent (excluding commissions).

Bearish
The top options trade so far today is in the SPDR 500 Trust (SPY). Shares of the exchange-traded fund are up 53 cents to $125.09 and one strategist sold 160,000 December 120 puts at 9 cents per contract. The massive trade was part of a butterfly spread, as the same strategist also bought 80,000 December 117 puts and also bought 80,000 December 120 puts. They paid a net debit of 25 cents per butterfly spread (plus commissions) and might be setting up a short-term hedge ahead of today's Fed meeting. December options expire at the end of the week and the spread has a max pay-off if shares fall to $120.

CSX puts are actively traded after a newsletter from Stansberry Research recommended that readers buy January 62.5 puts on the railroad operator. Shares have traded down 8 cents to $63.70 and 17,860 Jan 62.5 put options have traded, which compares to 1,841 in open interest. Most of the action has been in smaller lots. The top trade is 267 contracts on the $1.67 bid.

Unusual Volume Movers
Best Buy (BBY) options volume is running 9X the usual, with 170,000 contracts traded and call volume accounting for 56 percent of the activity, according to data from website WhatsTrading.com.

William's Companies (WMB) options activity is running 4X the usual, with 106,000 contracts traded and call volume representing 99 percent of the volume.

Amgen (AMGN) options volume is 3.5X the typical levels, with 89,000 contracts traded and call volume accounting for 69 percent of the activity.

Increasing volume is also being seen in AIG, Whirlpool (WHR), and MannKind (MNKD).

Implied Volatility Movers
Amgen (AMGN) implied volatility is falling after the company reported positive results from a clinical trial of a prostate cancer drug. Shares hit a morning high of $57.22 and were recently up $2.43 to $56.54. Options volume jumped to 4X the average daily. 70,000 calls and 30,000 puts traded in the biotech. Implied volatility has plummeted 29 percent to about 25 percent.