Which Way Wednesday?

The Chinese have a saying "May you live in interesting times" few people realize it's actually a curse!

Today should prove "interesting" for the markets as we get to retest some downside support as MER comes in with a $7.9Bn write-down of "CDO's and sub-prime mortgages" this is significantly higher than the $4.5Bn Merrill had prepared the street for in their pre-release just last month.

Earnings (do you still call them earnings when they're negative?) were a $2.3Bn loss from continuing operation or – $2.85 per share, totally wiping out the Q2 gains of $2.22 per share at a full $2.40 LOWER than the expert consensus of the 19 analysts who are paid to follow this company for a living AND JUST ONE OF THEM HAD A SELL RATING ON THE STOCK!  At what point can we accept my premise that Wall Street has no clue how bad this mess is?

“Mortgage and leveraged finance-related write-downs in our FICC business depressed our financial performance for the quarter. In light of difficult credit markets and additional analysis by management during our quarter-end closing process, we re-examined our remaining CDO positions with more conservative assumptions. The result is a larger write-down of these assets than initially anticipated,” said Stan O’Neal, chairman and chief executive officer. “We expect market conditions for sub-prime mortgage-related assets to continue to be uncertain and we are working to resolve the remaining impact from our positions.”

We'll see if we can shake this one off but, if not, it will be time to shed the last of our open calls, including the small virtual portfolios as a change in sentiment can drop us quickly back to Friday's lows.  Oil is skimming along $85 and the energy sector is still trading within 5% of all-time highs even as the Saudis fret over demand destruction issues.  "The market is very well-supplied," OPEC Secretary-General Abdalla Salem El-Badri said in a statement last week. Rising oil prices, he said, were "largely being driven by market speculators," though he cited refinery bottlenecks, the falling U.S. dollar and geopolitical jitters as other factors.  With 2Mb per day of spare production capacity, perhaps the speculators should be concerned about OPEC's concerns…

Earnings are still pouring in with BA giving us good results this morning, beating expectation by over 15% and keeping '08 guidance in-line.  This will be a great sentiment indicator for us to follow during the day.  We have an Existing Home Sales report at 10 (5.25M expected, down from 5.5M pace last month) and crude inventories at 10:30.  Tomorrow we have Durable Goods (anything positive will be a relief), Jobless Claims (random number), New Homes Sales (CTX says not many) and the Michigan Consumer Sentiment revisions.

There is some good news in earnings:  ATI had a small beat and, coupled with BA, both their stock and TIE are buys.  I like the TIE Jan $35s at $2.15 but I'll probably cover with Nov $35s if they get back over $1 and ATI has a long way to climb but I'll sell the front-month premium ($95s are $3.90) against the April $100s at $9.35.  Both of these plays are contingent on holding our levels and BA not pulling back below $95.50.  As with all calendar spreads, if you can catch the momentum, try to buy the long end first and sell your shorter call to cover on signs of weakness – you don't need to get it exactly right, an extra dime or two can make a huge difference (and don't lose more than a dime – if you're wrong, you're wrong so just cover!).

My early 2008 stock of the year, TASR, had spectacular earnings with profit doubling on a 56% increase in revenues BUT – 3 cents of it was from a better tax rate so let's not get too excited.  Monday's pre earnings set up was: "I am covered with Nov $20s from 10/9, down here I’m actually taking the opportunity to roll my Jan $20s to Mar $17.50s and I’ll sell Nov $17.50s if I think it looks toppy but, for now, I’m content to let it go a bit."  I'm very proud of keeping everybody in the stock on September's sharp sell-off (over "incidents" of injuries) as I said at that time: "Imagine if they logged all the incidents involving guns! This is the typical options expiration hack job that is regularly pulled out for TASR (just like Jobs’ endless legal issues always come around expirations – not helping this time, they need a new story)."  We got the same sell-off into the current expiration which killed our poor September callers because – WE DON'T CARE IF IT'S A SCAM, AS LONG AS WE KNOW HOW THE SCAM WORKS!

So Asia was mixed with the Nikkei dropping 92 points on banking concerns while the Hang Seng dropped 43 points with a very mixed bag of movers.  Australia's BHP had disappointing earnings as it turns out that producing less metals, although it does drive up the price of what you do bother to sell, ends up impacting the bottom line.  If they can't make money with Copper, Nickel and Oil at all-time highs, what's going to happen to that $238Bn market cap (up from $110 last year, when the bubble bursts?

Oh I'm sorry, it's not a commodity bubble, it's a "paradigm shift."  Silly me, it's not like someone is trying to convince me to buy Yahoo at 400 times PROJECTED revenue back in 1999, I'm sure also that XOM (11/1) will have no trouble sustaining their $506Bn market cap despite declining profits (that would be the sarcasm font!).

Europe is flat ahead of our open, also held down by financials but tech is keeping the markets up in morning trading.  Speaking of manipulated markets, BP pled guilty to manipulating the propane market and was fined $303M but thank goodness (again the sarcasm font) Congress has decided that only the $200Bn propane market is manipulated, not the $3T oil and $1T gas markets!  According to the WSJ: "BP's attorneys have been working overtime in recent months to settle probes involving its propane, gasoline and crude-oil trading activities. This year, BP disclosed it had concluded an independent review of its "trading compliance culture" and had taken steps to strengthen compliance. People familiar with the settlement say BP is settling the propane matter and taking those steps in hopes of neutralizing an additional, longstanding investigation into its crude-oil trading desk."

COP also had an earnings slump (but no convictions), so we'll see how they get treated, we got out of our calls yesterday as they were weaker than we had hoped and I think we'll be glad about that!

We are well positioned for a drop but let's shift to robot mode and watch our levels without prejudice.  We expect a build in crude (still working off the 48M October barrels someone stuck the NYMEX with last month!) and, if it's bigger than the net 2MB expected, that could break the oil market, which will drag an already weak market down further so let's watch the action carefully around 10:30 and watch our levels on the big chart:

We lost a level on the FTSE and  the CAC.  The Nikkei can't get any worse without making a new chart (and we REALLY don't want to have to do that) and the BSE and the Hang Seng are so far out in space that if they come back down to these levels it will be like an asteroid hitting the financial markets.  We dropped a level on the S&P and the SOX so we really need them to perk up and the Russell will probably tell the tale as it chooses to either get into our comfort zone or fail at "must hold."

No holding MUST HOLD is bad folks as we were, not too long ago, almost totally green across the board.  We DO NOT want to see our breakdown indexes (SOX, CAC and Nikkei) pulling others down with them so let's see how we hold up today, hopefully we can maintain our levels and move on.