Growthflation 04-20-2011

Cusick's Corner
RISK ON -- trading in a growthflationary (growth & inflationary atmosphere) market is really on! This market clearly had more pent up demand than expected. The headlines in the last two sessions were what most market watchers thought would bring this rally to its knees but then in rode earnings, thanks INTC, and positive EU debt auctions in Portugal and Spain (THE P & S in PIIGS), where the Spanish auction was the more impressive. This was more than enough a catalyst to get the overnight and early morning markets right where we left them two weeks ago, ready to challenge their highs. This rally has some legs with earnings power behind it. Crude though has more of a risk premium built in the move, more on the potential of Mid East and N. Africa tensions increasing over the long weekend. The metals have really kicked in high gear with Gold, Silver and Copper all hitting highs. The buck is the only asset class that is getting beaten down and with no real active deficit plan being pitched, future inflation is on the horizon and the buck is reacting.

Stocks are broadly higher following a round of mostly upbeat corporate earnings reports. Intel (INTC) is up 6.8 percent and the best gainer in the Dow Jones Industrial Average after the chipmaker said late-Tuesday that its quarterly profit was 59 cents per shares, which easily topped Street estimates of 46 cents. Freeport McMoran (FCX), Wynn Resorts (WYNN), and United Technologies (UTX) are among the others rallying around earnings. Meanwhile, the day's economic news included a report on Existing Homes Sales that showed an increase to an annual rate of 5.1 million in March, from 4.92 million in February and better than the 5 million that economists were expecting. Some of the commodities are seeing notable strength today as well. Crude oil gained $3.02 to $111.01 on bullish inventory data. Gold gained $6.50 to $1501.60 and reached records. The Dow Jones Industrial Average has added 166 points and the tech-heavy NASDAQ gained 51. The CBOE Volatility Index (.VIX) is down .59 to 15.24. Overall options volume is running at its best levels so far this week, with 6.7 million calls and 4.9 million puts traded through 1:15pm ET.

Bullish Flow
Dow component Verizon (VZ) sees an interesting trade ahead of earnings. Shares are up 66 cents to $37.90 and one investor sold 10,000 January 32 puts at $1.18 to buy 10,000 January 42 calls at 85 cents. Therefore, they collected 32 cents on this bullish risk-reversal and, since volume exceeds open interest in both contracts, this looks like a new position. It's not a straight bullish bet, however, as it was tied to 492,000 VZ shares. Both contracts have now traded 14,000 contracts and the positioning comes ahead of a profit report, due tomorrow morning.

Natural gas producer Williams Companies (WMB) is trading up 93 cents to $31.48 and a massive spread traded in the name Tuesday. Shares are up after natural gas gained 6 cents to $4.33. Prices have rallied 7.2 percent since April 8. Meanwhile, in options action, an investor apparently sold 35,000 May 17 calls at $14.40 and bought 35,000 January 22.5 calls at $9.35. They paid $5.05 for the spread and are possibly rolling a position out a few months and up a few strikes. WMB shares have risen 54 percent since late-October.

Bearish Flow
Put volume is picking up in the SPDR 500 Trust (SPY) despite the equity market rally today. Shares, which hold the five hundred components of the S&P 500, are trading up $1.69 to $133.00. Options volume in the exchange-traded fund through midday is 971,000 puts and 478,000 calls. Weekly 132 puts, which expire at the end of the week and stop trading after tomorrow (Friday is a holiday), is the most active. Volume is approaching 100,000 contracts. Meanwhile, the top trade of the day is a spread, in which the investor apparently bought 20,000 May 132 puts at $1.55 and sold 20,000 May 130 puts at $1.04. If so, 51 cents was paid for the spread and the investor might be looking for SPY to give up today's gains and fall back to $130 or less through the May expiration (in 30 days).

Ariad Pharmaceuticals (ARIA) added 25 cents to $8.10 and has now rallied 44.1 percent in a little more than one month. Meanwhile, a spread traded in the biotech today after an investor apparently sold 10,000 May 3 puts at 2 cents and bought 10,000 November 5 puts at 27 cents. The action looks like a roll, or closing out the May 3 puts, which are more than $5 out-of-the-money, to open a new position in November 5 puts. A shareholder might have initiated the spread to adjust a hedge.

Unusual Volume
Intel (INTC) options volume is running 2.5X the (22-day) average, with 121,000 contracts traded and call volume accounting for about 65 percent of trades.

TIVO options volume is 8X the average daily, with 245,000 contracts traded and call volume representing for 76 percent of the activity.

iShares Long-term Bond Fund (TLT) options volume is running 5X the average daily, with 161,000 contracts traded and call volume accounting for 97 percent of the activity.

Increasing options activity is also being seen in Qualcomm (QCOM), Johnson & Johnson (JNJ), and IBM.

Implied Volatility Mover
The CBOE Volatility Index (.VIX) plummeted to its lowest levels since July 2007 today. The market's "fear gauge" hit morning low of 14.30 and was recently down .56 to 15.27. VIX is down 51.2 percent from the multi-month highs of 31.28 set on March 16. However, it is also 6.8 percent off session lows. The options expiration might have affected the volatility index early Wednesday. VIX options expire today and the settlement value is 14.86, which means that any April call option with a strike price greater than 15 is expiring worthless. As of yesterday, strikes ranged from 10 to 80, with substantial open interest in the April 23, 25 and 30 calls.