Low Yields, Consumer Confidence, Income Impact 06-28-2010

Cusick’s Corner
Volume stayed light and the market stayed range bound into the After Hours. What was interesting to watch is the precipitous fall of bond yields, the 10 yr pulling back to 3.02%, signaling a stronger case for potential deflation. This move into the fixed income arena could be a potential reaction to the G20 spend and deficit reduction efforts that were disclosed after the meeting. This reduction in spend could be a signal of a larger and deeper global economic slowdown. Watch the Case Schiller and the Consumer Confidence numbers due out tomorrow. Consumer Confidence could give us a better idea of incomes, which in turn could give a better picture of potential spending habits. See you Midday.

The major averages bounced around a bit, but finished the day little changed Monday. The table was set for modest gains at the opening bell after the G-20 met over the weekend and pledged to reduce deficits and cut debt. European markets finished with modest gains on the news. In the US, the early focus was also on May Personal Incomes and Spending data. The data showed incomes up a less than expected .4 percent, but spending increasing by .2 percent. Economists were looking for a .5 percent gain in incomes and .1 percent increase in spending. With not much else to guide the morning action, the major averages wavered at the open and were showing modest gains into midday. However, with a busy economic calendar ahead, including key jobs data Friday, the tone of trading turned more cautious late. At the closing bell, the Dow Jones Industrial Average was down 5 points and the NASDAQ had lost 2.8.

Bullish Flow
Plains Exploration (PXP) was the subject of a bullish “smart money” trade Monday. Shares of the Houston-based oil and gas company lost 73 cents to $20.95 and an investor apparently sold 10,000 November 17.5 puts at $1.30 per contract to buy 10,000 November 22.5 – 28 call spreads at $1.75. The bearish three-way spread, at a 45-cent net debit, is a bullish play because it makes its best profits if shares rally beyond $28 through the November expiration. By selling naked puts, the strategist is also saying that they’re willing to buy the stock at $17.5, even if shares fall below that level through mid-November.

Bullish order flow was also seen in Aflac (AFL), Home Depot (HD), and Expedia (EXPE).

Bearish Flow
GlaxoSmithKline (GSK) sees increasing put volume late Monday. Shares of the British pharmaceutical company lost 31 cents to $34.30 and options volume hit 12.5X the recent average daily, with 13,000 puts and 345 call options traded in the name. July 32.5 puts were the most actives. 5,440 changed hands and 82 percent hit at the asking price, which indicates buying interest. 4130 July 35 puts traded (92 percent Ask) and another 1380 August 32.5 puts (97 percent Ask). Implied volatility rose 7.5 percent to 29 and, while there’s no company specific news to explain the action, it looks like bearish trading or hedging on concerns about the short-term outlook for GSK.

Bearish flow also picked up in Dell Computer (DELL), Starbucks (SBUX), and Alkermes (ALKS).

Index Trading
Options action remains rather slow in the index market and so there’s not much to report. About 260,000 calls and 237,000 puts traded across the S&P 500 Index and other cash indexes, which is only 44 percent of the recent average daily volume for the index market. The top trade of the day was in the CBOE Volatility Index (.VIX), which finished up .47 to 29. A block of 4000 VIX October 37.5 calls traded for $3.50 and appeared to be part of a VIX 32.5 – 37.5 call spread, or a bullish bet in anticipation of increasing levels of market volatility during the historically volatile months of September and October.

ETF Trading
Market Vectors Junior Gold Miners (GDXJ) saw more action than usual. This fund holds shares in smaller and medium-sized companies that derive at least 50 percent of their revenues from gold and or silver mining. Shares lost 43 cents to $29.19 and the focus was on the August 36 – November 40 call diagonal spread, with one investor paying 33 cents and 32 cents, a total of 2500X. This spread appears to be a bullish play, or a bet that shares will hold below $36 through the August expiration and then rally from that point forward.