Zions Bancorp (ZION) –Despite welterweight volumes trading on an abbreviated pre-holiday session, option activity in regional bank suggested more punishing declines in store when the market resumes trading after the weekend. Implied volatility is higher across the board and put trading is elevated on most sector names after Zions Bancorp shares tanked 14% on talk of its exposure to bad home loans in Arizona and Nevada. This followed comments from an analyst at Stifel Nicolaus as quoted on Bloomberg. Implied volatility in Zions Bancorp is up 27% today and a read of the option activity shows buying at the July 25 and 22.50 strikes, implying further erosion under these new lows. Other sizable spikes in implied volatility were observed in Corus Bankshares and Keycorp – while many these companies are due to report earnings before expiration, explaining some of the positioning (i.e. Zions Bancorp), the skew to puts has been fairly consistent throughout the sector.

Initial jobless claims jumped to 404,000 mark last week, up from 388,000 the week previous the Labor Department reports. That's only the second time the 400,000 mark has been passed on the upside in many a moon, the previous instance coming this past March 29 when claims reached 406,000.

What is the outlook for the next six months?

Anything short of 100k would have been dollar positive and that is exactly how the market reacted today. The biggest contributors were healthcare, education, leisure and government. The biggest losers were in goods producing and business services.

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The ECB did, as expected, tighten rates by a quarter point, now 4.25% to our Fed’s 2% and our payrolls were indeed down 62,000 jobs with 5.5% unemployment and May was revised DOWN another 13,000 jobs to minus 62,000 as well.  All this was worse than expected with manufacturing and construction losses of 69,000 jobs were combined with 51,000 lost "Professional and Business Services" jobs and those were offset by 29,000 new government jobs, 15,000 Health care jobs and 7,000 service sector jobs.

History shows time and again that the worst returns come to those who buy at - or even near - market peaks, like those of 1928, 1969, 1999 and 2007, when Price/Earnings (P/E) ratios are typically higher than “normal.”

So we're back here at S&P 1260 where we miraculously rallied off on Tuesday (out of the blue) - of course the market being the wicked thing she is - I was positioned much better for a fall through that level  before the out of the blue rally. So she is being at her most wicked self at this point with reversals left and right. I am reading a lot of frustrated investors/traders on multiple sites so if you are feeling that way, you are not alone. I haven't seen so many headfakes since the Barry Sanders years.

a) A stunning intraday rally on Tuesday off the S&P 500 Maginot line, apparently based on GM (GM) sales figures, the flimsiest of possible justifications.

Notably, the track record of the ADP survey in predicting the Department of Labor's private payrolls has faltered significantly over the last 4 months. DoL's initial readings on private payrolls showed -101K, -98K, -29K and -66K in Feb, Mar, Apr and May respectively, while the ADP private payrolls showed -18K, +3K, +13K and +40K. The considerable divergence of the last 3 releases means that a stronger than expected release yesterday morning may not be positively received by the dollar.

Index -1.9%
Energy +19.2% (14% of Index)
Utilities +8.0% (4% of Index)
Materials +5.8% (4% of Index)
Technology +3.2% (16% of Index)
Health Care -1.1% (11% of Index)
Telecom -2.5% (3% of Index)
Consumer Staples -5.4% (10% of Index)
Industrials -8.0% (12% of Index)
Consumer Discretionary -8.1% (9% of Index)
Financials -16.9% (16% of Index)

I think this is significant for the Fed as they fret about whether of not higher levels of inflationary expectations have become embedded. Until now one could argue (and I have) that the only venue in which inflation expectations have jumped is in some of the sentiment surveys.

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Using Intraday prices:

• Job cuts, $1.3B charge at American Air. American Airlines (AMR) is cutting almost 7,000 jobs (8% of its workforce) and will take a $70M charge to cover severance costs and a $1.2B non-cash charge to reduce the value of its parked aircraft. Analysts say similar charge-offs are likely at peer carriers. American will reduce its U.S. capacity by 12%.
• Nvidia warning sends shares diving. Nvidia (NVDA) lowered its Q2 revenue and margin outlook due to delays, end-market weakness and price competition. It now sees revenue of $875-900M vs. a $1.1B consensus. Nvidia will also take a $150-200M warranty charge arising from a material defect in certain notebook chips. Shares -21.9% to $14.08.
After you finish reading Wall Street BreakfastSeeking Alpha's Market Currentswill keep you current all day long.
• Jockeying for position on the transatlantic runway. American Airlines (AMR), British Airways (BAIRY.PK) and Spain's Iberia are in late-stage talks to create a profit sharing pact, inside sources say. American's current deal with BA excludes overseas routes, which is where the two stand to gain the most. Adding Iberia to the mix gives the two a critical link to continental Europe and Latin America. Regulators have hassled BA and American in previous attempts at a pact; they are expected to argue that the Open Skies accord has changed the competitive landscape. Delta (DAL) and Northwest (NWA) received antitrust approval for a JV with Air France-KLM earlier this year. Continental (CAL) recently left the Delta team to join forces with United (UAUA) and Lufthansa.
• Same old same old. Sources say Yahoo (YHOO) and Time Warner (TWX) are once again talking about Time Warner folding AOL into Yahoo, and taking a minority stake in the combo. News Corp. (NWS) is also keeping an eye on what's doing. Microsoft has spoken to News Corp. in a deal which could see Microsoft buy Yahoo's search business, and News Corp. fold MySpace into what remains of Yahoo.
• Watching the watchers. A judge has ordered Google (GOOG) to turn over records of every video watched by YouTube users, including user names and IP addresses, to Viacom (VIA) - which is looking to prove the overwhelming popularity of copyrighted materials vs. user-created and increase Google's liability if it is found guilty of contributory infringement. Privacy advocates are already kicking up a fuss.
• Vodafone takes control of Ghana Telecom. Vodafone (VOD) is buying 70% of Ghana Telecom for $900M, as it continues to push into emerging markets. Ghana's government will retain the remaining 30%. The move was widely expected.
• Two birds... IBM (IBM) agreed to buy Platform Solutions Inc., a move that both eliminates Platform's outstanding litigation against IBM, and removes competitor for its lucrative mainframe business.
• This ain't over yet - Paulson. The current economic downturn has further to go, but U.S. growth should pick up by the end of 2008, U.S. Treasury Secretary Henry Paulson said Thursday in a BBC interview. Spiking oil prices, the credit crunch and a slumping housing market are all contributing factors. Paulson conceded the impact of the global credit crunch could have been minimized by better regulation of U.S. banks.
• Commercial rentals send mixed messages. The national vacancy rate for U.S. office space rose to 13% in Q2, from 12.8% in Q1. Rents rose 0.7% to $25.16/square foot.
• The bottom line. In an effort to reduce the risk counterparty failures pose to the $62T credit-default swap market, 13 major players will initiate a new process at the end of July that cancels out offsetting CDSs to arrive at actual risk exposure.
• Overdue debt inches up. Delinquent accounts for auto loans rose 2 BP to 1.92% in Q2; RV loans by 3 BP to 1.11%; boat loans by 18 BP to 1.75%; and personal loans by 7 BP to 2.55%.
• Deutsche Bank pays Fortis $1.1B for commercial lending business. Deutsche Bank (DB) said it is buying two commercial lending units that Fortis inherited from ABN Amro for $1.13B. At this point, it's probably safe to believe Deutsche that it doesn't need to raise capital.
• The ADP said private-sector jobs fell by 79,000 (vs. -20,000 consensus) in June. The service sector's 3,000 decline was its first since Nov. 2002. Assuming an average monthly addition of 20,000 government jobs, ADP's number suggests today's payroll number will be about -60,000 - 10-20K more than the Street consensus.
• Layoff announcements jumped 21% in the first half of 2008 vs. a year ago. June's announced layoffs of 81,755, 19,000 of which were financial firms, were 47% more than June 2007. Reasons for the layoffs: market conditions (37,363), cost-cutting (21,213), M&A (7,811), restructuring (3,896) and closures (3,414).
• May Factory Orders climbed 0.6%, better than the +0.5% consensus. At almost $450B, orders are at their highest level since at least 1992. Shipments also set new records.
• Crude inventories fell by 1.98M vs. +0.5M consensus. Gasoline +2.1M vs. +0.5M. Distillate +1.26M vs. +1.5M. Refinery utilization 89.2% vs 87.2%.

Today's Markets

• Asian markets were largely in the red Thursday: Nikkei -0.16% to 13,265. Hang Seng -2.13% to 21,243. BSE -4.18% to 13,094. Shanghai +1.95% to 2,704.
• Europe at midday: London -0.6%. Paris -0.65% Frankfurt -0.8%. Stockholm -2.15% after its central bank hiked rates 25 BP to 4.5%.
• U.S. futures: Dow -0.04%. S&P +0.04%. Nasdaq -0.37%.
• Oil breached $145 for the first time in overnight trading, boosted by concerns about Iran, yesterday's inventory data, and a possible ECB rate hike which could weaken the dollar. Futures +1.24% to $145.35. Gold -0.25% to $944.
• Thursday's economic calendar:
  7:45 ECB Announcement
  8:30 Payrolls and Jobless Claims
  9:00 RCB Cash Index
  10:00 ISM Non-Manufacturing
  10:30 EIA Natural Gas

Earnings: After Close

• WD-40 Company (WDFC): FQ3 EPS of $0.49 beats by $0.02. Revenue of $82.1M (+5.8%) in line. Sees full-year EPS of $1.78-1.85 vs. $1.86 consensus. Shares -5.7%. [PR]

Although meat-and-dairy prices are expected to zoom even higher from their current record levels, this slice of the commodities boom won’t be a slam-dunk profit play for investors: Many food producers are watching the revenue gains they’re reaping from the rising market prices get wiped out by even bigger spikes in commodity-related expenses.

Although not directly examined by that particular paper, one category that makes no denials about its lack of active management is the S&P Index Mutual Fund category.  These (almost) purely passive funds are the subject of another paper by the same authors available here.