Thursday Morning

It's Google day! 

That's right, tomorrow is make or break for the Nasdaq (not that it's not already broken at 45% off it's highs) as Google finally comes in with some numbers.  The other big news for the Nasdaq is AAPL next Tuesday but the earnings are coming fast and furious now and, while they may be bad – I'm not sure they are 50% off bad.  Even AMR lost less than expected in yesterday's report and EBAY beat (but lowered guidance) as did XLNX and this morning (7 am) we already have beats (of low expectations) by AOS, AF, BK, BAX, C, CAL, DHR, ORB and LUV. 

HOG had a bg miss and HSY, MER, PNC, TXT and WGO had misses too with many still left to report.  While this is certainly not great news, we do have to wonder how bad everything really can be if these are the reports from a quarter where credit markets were seizing up and oil was between $147 and $120 for the first two months.  Even if oil only averaged $120 in Q3, that's still $205Bn spent by US consumers in 90 days vs. "just" $128Bn that will be spent if we average down to $75 this quarter.  That's close to $1Bn a day back in consumers hands to spend on something besides energy and, adding in refining mark-ups and food and other commodity declines, we could be approaching a $2Bn per day change in buying power. 

Of course consumers are spooked and their confidence is shot and that extra $2Bn will probably go towards paying bills but, if we can get through the rest of the year without major job losses (an iffy proposition) then it's entirely possible things will not be as bleak as projected.  Hopefully, once they are done doling out Trillions to the financial sector, the government will give a little assistance to the actual people who are suffering through this crisis and make a serious effort to keep people in their homes and find some way to put people to work (and, unfortunately, that will include keeping GM's doors open for now, whatever it takes).

We did the Big Chart review in last night's post and things are ugly indeed (see David Fry's chart left and full post re. 40% levels).  We need to hold 8,400 on the Dow and we need to take back and hold the 40% line on the S&P (946), NYSE (6,232), Nasdaq (1,717) and the Russell (514) in order to have any hope at all but the SOX are below the 50% line (275) by a long shot already and the Transports are just above the 50% line at 1,557.  If those two continue to fall, there is little hope that the Dow can hold 40% and we'll need to be looking at the dreaded 50% line across the board.  Oil is hanging just below the 50% marke at $74 – hopefully that one will stick!

Nothing stuck in Asia this morning as the Nikkei dropped 11.4% and was, like our markets yesterday, only saved by the bell from heading back to Friday's lows.  The Hang Seng landed at the 5% rule as did the Shanghai and the Baltic Dry Index fell ANOTHER 13.65%, likely indicating another awful day for the commodity markets.  We are finally, almost 2 years later than I thought, seeing the end-stage of the Roach Motel Theory and it's good to review my October, 2006 article to keep in perspective that we are only just now back to the levels that I thought were unsustainable at that time.  Of course the bursting of an $8Tn commodity bubble is dragging down the broader markets and we're willing to take a little pain as long as we well and truly slay that dragon so money can start flowing into sectors that add more to the GDP than the oil we were burning at the rate of $2.2Bn per day last quarter.

Europe is no help so far, trading down about 3% even as Switzerland injects $5.3Bn into UBS for a 9% stake in that bank and their Central Bank is going to take $60Bn of "toxic assets" off their balance sheet.  "This is in line with what has happened in other countries, but more final, definitive and comprehensive," UBS Chief Executive Marcel Rohner said. The SNB offered the same help of a toxic-asset rescue fund to CS, which instead elected to raise its own 10 billion Swiss francs ($8.83 billion) in funds, the bulk from the Qatari Investment authority and that's a great thing – we want to see private (or, in this case, semi-private) capital start coming in as it shows a little confidence that banking may be near the bottom.

We had no change to the headline CPI but the core is still up 0.1% for the month and 2.5% for the year but jobless claims actually fell 16,000 to a still very high 461,000 – a little less catastrophic than anticipated.  Today we avoid Bush and Bernanke, who were no help at all yesterday and we have lots of earnings to chew over:

As we expected, BTU had a massive beat, coming in at $1.36 a share vs. expectations of .87 and they raised full-year guidance to between $3 and $3.25 per share – not bad for a $28 stock!  BK beat by 10%, BAX beat, BBW missed, CX was not good but not so bad, CIT missed by a mile, C beat but it's still a massive $2.8Bn loss, CAL "only" lost $236M and that was ALL on $1.5Bn in fuel costs plus $50M from the hurricane shutdown in Houston (it should be noted that flying a fleet of BA Dreamliners would have saved the airline $300M this quarter alone), FCS beat by 10% but guided down, HOG missed by 10% and guided down, HSY missed, HBAN beat by a lot AND raised guidance, ITW missed, KNL beat big, MER missed close enough to the mark to be called positive, NOK was in-line, PNC missed by a lot, PPG beat, LUV beat, SPWRA beat nicely, TXT mised and guided down, UTX beat, UNH was on the money and WGO missed (no surpirse at 8 mpg with a credit crunch).

It doesn't sound like a recession yet does it?  In fact, the data this morning and these earnings are changing pre-market sentiment to about up 100 but we're not going to get too excited until we see our 40% lines taken back.  I made my call to partially cover the downside at 8,800 yesterday (2:29) as that was the 7.5% rule for many of the indexes.  We didn't hold it but let's use that, along with 6,000 on the NYSE and 925 on the S&P as minimum levels to hold this morning otherwise it's time to weigh in with some more downside bets.  

Our upside play of the day is the QLDs (Nasdaq ultra-longs), which dipped to $30.50 at the low yesterday, down from $43 on Wednesday morning.  That makes the Nov $32s at $4.30 a fun speculative play on GOOG and AAPL earnings boosting the Nasdaq while the speculative play on GOOG is to take the Jan $320s at $60 and the Jan $420s at $20 and sell 2x the Nov $360s at $30 as you don't have to pay off the $360s until GOOG hits $390 and that puts your Jan $320s $50 in the money and by the time the gains on the Nov calls run into the $420 cap provided by the Jan $420s – your Jan $320s are $100 in the money plus the value of your Jan $420s and you still have December to roll your callers to.

AAPL is another fun play at $98 again.  If you missed it yesterday afternoon you can still give yourself a big discount by selling the Jan $85 puts for $10, meaning if AAPL finishes below $85 you will end up owning them for $75 on Jan 16th – otherwise you get $10 for doing nothing, both good outcomes I think.  On the upside, the AAPL Apr $85s are $27 with $15 in premium, less than what Apple lost in 2 days of trading.  Tuesday morning, the Nov $110 calls were $13 (now $7.50) and it's hard to argue the value of getting a spread like that so it's worth speculating on AAPL this morning and hoping for good news from GOOG tonight to lift the sector.  If not, AAPL will be a little more insulated from the drop than GOOG will be. 

Be careful out there and be mindful of our levels – they haven't steered us wrong lately!