Bond Prices Have Stalled 08-17-2010

Cusick’s Corner
The market made a nice move into the Midday and over the last few hours trading has turned into a complete grind. Yesterday’s late day pullback seems to have washed out the weak longs, but there has been equal pressure on the shorts today. These kinds of moves are expected when volume is light and data coming out is very mixed. Bond prices have stalled their meteoric rise, if yields start to move up, this could be a potential sign that the risk off trade might be starting to dissipate at this stage. Some readers have sent some questions pertaining to dividends and dividend yielding stocks, in reference to our past discussions of disinflation/deflation. An ETF to consider for this kind of exposure is DVY. This ETF has the core defensive sectors: Utilities, Telecom, Consumer Services & Goods, and dividend paying stocks which could be a potential underlying for defensive positioning. See you After Hours.

Stocks are broadly higher following a round of positive stock news Tuesday. Home Depot (HD) shares are up 4.5 percent and leading the Dow Jones Industrial Average after the company reported quarterly earnings that topped Street expectations. Walmart (WMT) is also up on earnings news. Meanwhile, some mergers were announced after BHP Billiton made a bid for Potash and Reynolds Group Holding said it wants to buy Pactiv (PTV). The economic news was mixed. Data released early showed July housing starts rising less than expected (546K vs. 555K consensus) and separately, an in-line reading from the Producer Price Index (.2 percent) for July. Separate data released later showed industrial production up a better than expected 1 percent last month (vs. .6 percent consensus). At the end of the day, the focus seemed to be on the earnings and merger news. Consequently, the Dow Jones Industrial Average is up 143 points and the NASDAQ has added 36 through midday. The CBOE Volatility Index (.VIX) lost 2.06 to 24.06 and trading in the options market is very active, with about 3.4 million calls and 3 million puts traded through 12:00 ET.

Bullish
A number of fertilizer stocks are seeing interest after Potash (POT) shares rallied on news BHP Billiton has made a $39 billion bid for the fertilizer giants. Brisk trading is being seen in POT and Mosaic (MOS). Meanwhile, Intrepid Potash (IPI) jumped $1.47 to $25.43 and options volume is running 5X the average daily, with 5,985 calls and 4,583 puts traded in the name. The September 25 puts are the most actives and are trading predominantly on the bid, which indicates sellers are dominating the flow. Meanwhile, August 26, September 27, and September 28 calls are busy as well, with most of the volume trading at the ask, suggesting that buyers are driving the flow.

A large bullish spread traded in Exxon Mobile (XOM) after one strategist sold 10,000 August 60 calls at 73 cents to buy the October 52.5 put – 62.5 call risk reversal at 73 cents, 10000X. This might be a roll. That is, the strategist is exiting a large position in 10,000 August 60 calls to open a new bullish position in October. The premium sale of 73 cents, along with the sale of October 52.5 puts, finances the entire purchase of the October 62.5 calls. Shares are up $1 to $60.88 and this strategist might expect the stock to rally, or at least hold above $52.5 through October. If not, they will be asked to buy the stock (have put) at $52.5 or the strike price of the short puts.

Bearish
Pfizer (PFE) is up 31 cents to $16.34 and has been trading in a range since rallying on earnings in early-August. One strategist has been active in the name Tuesday morning and initiating a bearish three-way spread on the pharmaceutical maker – selling September 17 calls at 23 cents while buying the September 17 – 15 put spread at 80 cents. The same bearish spread was initiated in the December contracts, 5000X, at 15 cents. Meanwhile, PFE August 16 calls are busy, with 15,800 traded and 92 percent traded on the bid. The overall tone of trading seems cautious after PFE’s 14.3 percent run higher since early July.

Put volume is picking up in Gannett (GCI). Shares of the Mclean, Virginia newspaper company are up 19 cents to $12.79 and the focus is on the October 12 puts. More than 12,000 traded. With two thirds trading at the asking price and 2,481 in open interest, the action looks like put buyers taking new positions in anticipation of a drop in the share price in the months ahead.

Unusual Volume Movers
Potash (POT) options volume is running 4.5X the usual, with 182,000 contracts traded and call volume accounting for about 60 percent of the activity.

Mosaic (MOS) options activity is running 2X the usual, with 51,000 contracts traded and call volume representing 69 percent of the volume.
MBIA (MBI) options volume is running 6X the usual, with 46,000 traded and call volume representing 97 percent of the activity.

Unusual volume is also being seen in Home Depot (HD), Dynegy (DYN), and Pactiv (PTV).

Implied Volatility Movers
Strayer Education (STRA) implied volatility is still climbing. As noted yesterday, a number of for-profit education companies faced heavy selling Monday on worries about greater government regulation of the industry. The government is scrutinizing education companies, as many students are graduating with high debt loads, but few job prospects. STRA is down another 3.85 percent to $157 and options volume is 2.5X the average daily, with another 1,360 puts and 410 calls traded in the name. Implied volatility is up 3 percent to 64, a new 52 week high. IV has now risen 36 percent on the week.