Deflation Takes Back Seat 11-15-2010

Cusick's Corner
After today's bond action, deflation does not seem to be on many minds. As I mentioned in the Midday, yields continued to rise, thus bond prices came down. This typically signals more worry over future inflation, especially with the strong retail numbers and concerns over sovereign and domestic debt issues. Ireland and the US have put some short-term jitters into the market, but the bulls have momentum in new highs, giving credence that the uptrend is still intact. Stay balanced and don't get complacent. Keep an eye on the PPI and Production numbers due out in the morning. See you After Hours.

Major averages chopped around and at the end of the day, finished mixed Monday. The economy was in focus early after a report released before the opening bell showed total Retail Sales up 1.2 percent in October, which was significantly better than the .7 percent increase that economists had expected. Excluding autos, however, sales rose .4 percent and in-line with expectations. Meanwhile, on a down note, the Empire Manufacturing Index showed an unexpected drop to –11.14 in November, which was significantly worse than the +11.7 that economists had predicted. A third report showed business inventories up .9 percent and in-line with economist estimates. Meanwhile, Caterpillar (CAT) shares traded higher and helped the Dow Jones Industrial Average after the company announced plans to buy mining equipment maker Bucyrus. Yet, after reaching a midday high of 11,281, the Dow faltered in afternoon action and finished the day up just 9 points. The NASDAQ gave up early gains and finished down 4.4. There was no specific news item to explain the reversal, but some players are watching the action in the bond pits, where Treasurys were pummeled and yields jumped Monday. The ten-year Bond lost 1 5/32 and its yield jumped above 2.9, from about 2.75 late-Friday (see Index Trading for more on Treasurys).

Bullish Flow
Procter & Gamble (PG) shares lost 4 cents to $64.29 and a noteworthy spread traded in the longer-term PG January 2013 call options. In this trade, which surfaced midday, the investor apparently bought 2,000 January 2013 $60 calls at $8.45 and sold 2,000 January 2013 at $3.50. This spread, for a net debit of $4.95, is a bullish play, as it makes its best profits if shares move up to $70, or 8.9 percent, by the 2013 expiration. The potential pay-off is $10 minus the net debit paid, or $5.05. (However, it's also possible that the spread was initiated for a net credit of $4.95. If so, the strategist is risking $5.05 to make $4.95. The max pay-off from the credit spread happens if shares close below $60 and the both sets of calls expire worthless.)

Bullish options action was also seen in Ford Motor (F), Cheniere Energy (LNG), and William's Companies (WMB).

Bearish Flow
Put volume picked up in Citrix Systems (CTXS) Monday. Shares finished the session down 87 cents to $63.92. There was no apparent news on the software maker, but it was one of the worst performers in the NASDAQ 100. Meanwhile, put activity picked up as the stock saw relative weakness as well. 16,800 puts traded in the name and, of that, 60 percent of the volume traded at the asking price, according to data from web site, Whatstrading.com. December and January 57.5 puts were the most actives. December and January 55 puts were busy as well. When out-of-the-money short-term puts are trading predominantly at the ask, as with CTXS Monday, it's sometimes a sign that some investors are concerned about the outlook for a stock in the weeks or months ahead.

Bearish flow also picked up in Novartis (NVS), WMS Industries (WMS), and Molex (MOLX).

Index Trading
The CBOE Ten-year Rate Index (.TNX) doesn't see a lot of options activity, but it's an important market indicator these days. TNX is a cash-settled index that tracks the yield on the ten-year Treasury note, multiplied by 10. It saw a 1.55-point jump to 29.11 Monday and is up 17.2 percent since November 4. The fact that TNX is rising is a sign that Treasury bonds are falling. Why is this important? The Federal Reserve has recently pledged to buy Treasurys to help keep market rates low. It is part of the so-called QE2 strategy. The fact that bonds are falling, and yields are rising, could be a sign that the market doesn't have a great deal of confidence in the Fed's plans. If the trend persists, it might be viewed as a negative for equities and a positive for volatility.

ETF Trading
SPDR Gold Trust (GLD) lost $1.27 to $132.42 after gold gave up $6 to $1,359.50 an ounce Monday. In the options market, a noteworthy trade is a November 132 – 137 risk-reversal at 13 cents, 6500X. That is, the investor apparently bought 6,500 November 137 calls at 36 cents and sold 6,500 November 132 puts at 49 cents. This might be a short-term bullish play on the metal. GLD holds gold and is a pure play on the commodity. If GLD moves beyond $137.13 before the options expire, the trade is a winner (excluding commissions). On the other hand, it might be a closing trade ahead of the expiration. November options come off the board at the end of this week.