Stocks are trading broadly lower for a second day, as worries about the deep-rooted problems in the banking world along with some pre-earnings jitters conspire to send the major averages deep in the red. Banks have been under pressure since Monday morning when an analyst at Calyon Securities warned that mounting loan losses in the financial industry could exceed those levels seen during the Great Depression. Today, the International Monetary Fund issued a similar warning, saying that toxic debt held by banks and insurance companies could spiral to $4 trillion, up from their previous estimate of $2.2 trillion in January.
Meanwhile, pre-earnings jitters continue to weigh on investor sentiment. Although the reporting season doesn't get into full swing for another two weeks, Alcoa (AA) unofficially kicks off the reporting period with a report after the close of trading today. Analysts expected a 57-cent per share loss from the aluminum maker. For the S&P 500 as a whole, analysts expect fourth quarter earnings to fall 37 percent -- and mark an eighth consecutive quarter of dismal corporate earnings.
Against this backdrop, sentiment is turning a bit more cautious and anxious than in weeks past. After falling 42 points Monday, the Dow Jones Industrial Average was down 185 points heading into the final hour of trading Tuesday [and closed down 190]. The CBOE Volatility Index (.VIX) is remarkably subdued, up just .07 to 41. Trading in the options market is on the light side, with 5 million calls and 4.6 million puts traded so far.
Lockheed Martin (LMT) is up 51 cents to $73.79 and sentiment is leaning on the bullish side after the Defense Department released changes to the 2010 budget. 12K calls traded on LMT, compared to 6,600 puts. Friedman Billings analysts note that the defense sector rallied on the news Monday, but they are not convinced the rally can last. However, they think LMT has benefited the most from the budget changes. Some options traders appear to agree and are buying April 75 and 85 calls as shares move higher Tuesday.
Gap Stores (GPS) is down 48 cents to $13.98 and14.1K April 15 calls traded so far, compared to only 1500 of existing open interest. In addition, with 81 percent hitting ask-side, it looks like some traders are opening new bullish, short-term, positions on the retailer (perhaps in anticipation of monthly chain store sales results Thursday.) April options expire next Friday and, due to the holiday this Friday, have only 7 trading days of life remaining after today.
Bed, Bath and Beyond (BBBY) puts are actively traded ahead of earnings, due out after the closing bell. 18K traded, compared to 3,800 calls. Shares are down 86 cents to $25.51 and recent trades include a 1X3 May 20 - 24 put ratio spread, looking like buyer paid 20 cents, 1000X. Meanwhile, implied vols are moving up to 59 from 55 the day before.
Hasbro (HAS) options activity is running 2X the average daily levels after a strategist apparently bought the May 22.5 - 25 put spread, 1500X for 72.5 cents on the NYSE. The company is scheduled to report earnings on April 20.
Implied Volatility Movers
The Dow Jones Industrial Average is down 194 points and falling to new session lows, with GM showing notable weakness. GM (GM) is down 27 cents to $2.00 and not far from its worst levels of the day after Reuters reported the automaker is in "intense" and "earnest" preparation for possible bankruptcy, according to a source familiar with the company's plans. A split on the company into "good" and "bad" units is on the table, according to another source. 57K GM puts and 56K calls traded so far. Implied volatility is up to 349, from about 332 yesterday, and not far from record highs around 358 seen early December.
Implied volatility is also high in Alcoa (AA), General Electric (GE), and JPM. Meanwhile, implied volatility is easing a bit in BofA (BAC), SPDR Gold Trust (GLD), and the iShares Long-Term Bond Fund (TLT).