This morning’s news of a Bank of America rescue of embattled mortgage lender Countrywide through a $2 billion equity stake is likely to provide continued ballast for financial stocks this morning. The move comes after yesterday’s announcements that the four largest U.S. banks, led by Citigroup and followed by Bank of America, J.P. Morgan Chase and Wachovia, had borrowed $2 billion between them at the Fed’s so-called discount window.
Markets softened at mid session yesterday as investors digested the implications, leading to a run on put-buying in the XLF, the financial services ETF, and put spread activity in Citigroup, which was the first to own up to the gesture. A subsequent joint announcement from the other three major banks did the same, which seemed to neutralize any market stigma attached to running to the Fed as lender of the last resort. Yesterday’s news was not necessarily an admission that these top-rated institutions are having a hard time funding their books. These banks may be heeding the requests of banking and corporate counterparties and ensuring that liquidity reaches its intended destination. In any event, share prices across the investment banking and retail-banking sector shrugged off any negative feeling surrounding the move, and share prices rebounded - lifting the broad market as they did.
Options activity indicates that bears took a hit on yesterday’s developments. Bearish put options in the XLF, the financial services ETF, were traded earlier in the day on heavy volume just as the reverberations from the discount window news were assimilated. Our data indicates that much of the buying was done at prices above the day’s close. Meanwhile some of the call buying was done later in the day as investors digested the news and what it may mean looking forward.
We will be watching options activity in Home Depot today, following overnight reports that plans to sell its wholesale supply division to a group of private equity buyers are in the balance due to credit concerns. Home Depot, the second largest US retailer, has been in talks with Bain Capital, Carlyle and Clayton Dubilier & Rice about a renegotiation of the $10.3 billion all-cash deal, which was unveiled in June. As Home Depot shares closed at $34.77, yesterday’s option volume centered upon the out-of-the-money September 45 strike, plays we associated some weeks back with risk-reversal activity tied to Home Depot stock in the run-up to tender offer – an offer later reduced due to a reduction in the asking price for the supply division.
US shares are poised to open higher this morning, with the future on the S&P 500 trading .17 points above fair market price. The Nasdaq future is at .06 points above fair market price, while the Dow Jones Industrial Average is .08 points above fair market price. Earnings are due out today from retailers Barnes & Noble (BKS) and The Gap (GPS). Street expectations for the clothing retailer’s Q2 earnings have come in at 19 cents per share.
European shares are in positive territory, with the FTSE 100 up 1.25 percent at 6,273.60, The CAC 40 is up 1.09 percent at 5,578.13. The DAX is .79 percent higher at 7,559.50. This morning’s European option activity on the Eurex exchange involved heavy call-side volume in DaimlerChrysler (DAI) options. With shares trading at EUR 64.10, there was heavy buying in the September 66 calls. Front-month exposure to share price gains in mobile phone giant Nokia NOK1V) was also heavily bid, with 2,000 lots bought in the September EUR 21 calls.
Rebecca Engmann Darst
Equity options analyst/Financial Writer
(203) 618-5988
