Expiration Morning To You!

This is a bizarre market.

Let's start with what's good - and there is some good news here.

Caterpillar (CAT) reported this morning and had nice, strong earnings. BIG overseas sales (no surprise there.) The stock will be up strongly today and with it, the DOW at the open.

McDonalds (MCD) hit its numbers; no big surprises there. They shouldn't move too much, although I wouldn't be surprised to see a bit of a relief add to them.

Overseas was solidly green.

Last night I covered Capital One (COF) in detail, but I missed HR Block (HRB). They were positively destroyed on earnings; their subprime unit (Option One) essentially wiped them out. This morning the news is that they're selling it to Cerberus Capital (what people call "smart money"), so it finally appears to being jettisoned. But - but - but - the deal won't close until October, its at $300m less than O1's mark-to-market as of that date, and HRB is on the hook all the way up to that point! The paradox - HRB is up strong premarket, showing a bid of $23.35. Relief? Maybe. But what's HRB worth without the unit that contributed more than half of their earnings in the last two years, and how the hell do you figure that hanging onto this until October, plus selling at what amounts to a huge fire sale price - is good?

My best guess based on previous analysis is that HRB might have to pay Cerberus to take O1 in October! It is entirely possible that the net value of that unit will be negative by October!

Hmmmm.... We shall see on that - my outlook on HRB and its stock price is that this is a $10 stock with only the tax unit's earnings. The market, this morning at least, disagrees.

Morning brings nothing for clarity on AMD or Yahoo. Yahoo appears to be hanging in there, but it makes absolutely no sense for it to do so. Google positively destroyed them on earnings last night; if anything I'd be worried that Yahoo might end up in the dustbin of the Internet! GOOD, on the other hand, is doing what you'd expect a stock to do when you have an absolute blowout quarter - they're running HARD.

AMD is another odd one - here's a company that plays the LBO card in an off-the-cuff comment and what should have been certain destruction of their stock price is instantly reversed. Oooookkkkkk - who wants to buy a losing business? Hmmmm....

This being options expiration trading today is certain to be lively. I won't get to add much today during the day as I have a bunch of complex positions to unwind; looks like most of them are going to be to the good, but as expected (you can't win 'em all!) there will be a few stinkers.

On the broader market the internal depth was negative for the last two days. I will be closely watch this today - if we have another advance with no broad leadership then my nervousness level is going to go up bigtime. GOOG will boost the Naz and CAT will lift the DOW, but that doesn't make for a broad advance - although it certainly does boost the indices.

The other crack that is showing up in the dam is in the consumer. Yes, I said consumer. Consumer debt is going up bigtime, and the default rate is starting to tick up as well. This is a very significant warning sign; the home ATM machine is closed and now consumers are loading up on the credit cards! AXP's earnings report was excellent but the amount of debt being carried has gone up tremendously. COF's report showed both strong growth in credit card interest and balances held, and their default rate is rising significantly.

The default rate, however, is tough to read. Why? Bankruptcy law reform. That has, unfortunately, created a major disruption in the default rates; people rushed in to file before the deadline, which depressed numbers coming off the transition. The real "run rate" becomes to be very difficult to determine in this environment - but the slope is positive and has been since the bankruptcy law change, and that's not a positive sign. Of the credit card issuers I've looked at who have reported as of yet, I've yet to see a company with a declining default rate.

Now here's the quandry. Everyone is cheering about earnings beats - 63% so far if I'm counting it right - but earnings expectations were only 2.5% ahead of 4Q 2006! The real growth rate in earnings appears to be right around five percent.

To put this in perspective, for the last three years we have had double-digit earnings growth rates. Now we "beat" but we did it by lowering the bar so far that you could walk over it.

This produces a teriffic rally off the lows in February - but on the strength of..... what?

GDP looks to be under 2% in the US - we'll find out next week. Earnings growth is anemic with nearly all of it coming from overseas sales - expected, with a weaker dollar (makes exporting things really nice for the foreigners who get to buy with relatively more valuable currencies!) But this same thing makes imports more expensive here, which raises our real inflation rate, irrespective of what Propeller Head Bernacke wants to believe. Want proof? Go look in the grocery store. Year-over-year inflation is easily 10% in the food sector, with certain areas - especially anything that contains or eats corn - up 20% or more.

More after the market closes - I'm up to my eyeballs closing complex spread trades right now...... so I'll stick this out and let it float!