The market is down sharply this morning as concerns related to the government’s $700 bailout package continue. Congress and the White House did reach an agreement over the weekend but it seems that Wall Street is disappointed that is still has to go to vote. The House is slated to vote later today and there is some nervousness in the market.

This is a difficult vote because it comes in an election year and there is a chance that the unpopular bailout package is not approved. President Bush was cheer-leading lawmakers to pass the bill, saying it is needed to “keep the crisis in our financial industry from spreading” across the economy.

There are many provisions that are unknown but one that is known is that the government will be authorized to purchase the assets from some of these financial firms and will help financial institutions to resume lending to individuals and businesses.

There is some heavy skepticism with this bill and that is why the market is being jittery. The Dow is down 275 points to 10,868. The Nasdaq is slipping 85 to 2,100 while the S&P 500 is lower by 40 points and is at 1,172. We should know something in a couple of hours concerning the status of the bill but I don’t expect we are going to see the big rebound everyone was hoping for. In fact, if the bill fails we could get a huge drop in the market.

Rick Rouse
Rick@OptionsMentoring.com

Well, we all knew there would be drama when it came to getting the $700 billion banking bailout package approved by the government. Instead of fighting to get this thing done, both sides seem to be tripping over their own two feet to be the first in line to take credit for it. On Thursday, in what looked like a sure thing to get it passed, Republican lawmakers rejected the emergency financial rescue package last night after both parties pretty much had announced they were near an agreement on a deal. I guess that’s why they call it politics…

Anyway, as far as the market, we opened 150 points lower on the Dow this morning but as the day has progressed the market has rebounded but is still down 60 points. Part of the big drop at the open was news that the FDIC had seized Washington Mutual (WM, $0.16, down $1.53) on Thursday and then sold the assets to JPMorgan Chase (JPM, $44.30, up $0.84) for nearly $2 billion. Yeap, as Queen said it best…Another One Bites the Dust.

WaMu was the largest financial firm in history to collapse under the mortgage debt market and it shows just how serious the housing market has crippled our economy. Of course, the news isn’t earth-shattering by any means and it was almost excepted. WaMu joins the ever growing list of companies disappearing and I’m sure there’s more to come.

Wachovia (WB, $10.75, down $2.95) is getting a 20% haircut this morning as volume has hit 100 million shares. The options for Wachovia are also trading at a furious pace with huge positions being taken in the October 5 puts (WBVQ, $0.86, up $0.66, or 325%). Volume has swelled to 33,000 contracts thus far. The October 7.50 puts (WBVY, $1.50, up $1.05, or 233%) are also active. I’m not sure if Wachovia will trade down to $5 but there is growing open interest at the 2.5 through 10 October puts strike prices. We have traded Wachovia in the past but let’s stay on the sidelines with this one. Something doesn’t feel right with Wachovia anymore.

Change is good and and the way the market is acting it looks like it is smelling a deal. It still remains to be seen but we can almost bet the farm a deal will get done and that should help the market over the near-term.

Rick Rouse
Rick@OptionsMentoring.com

Research in Motion (RIMM, $97.53, up $0.82) reported earnings after the bell and they weren’t pretty. Wall Street was eager to hear the news but punished the stock in after-hours trading when the company missed earnings by a penny. I mentioned on Monday that analysts were looking for revenues of $2.6 billion and earnings-per-share of $0.87. RIMM also missed revenues by $20 million.

We also talked about RIMM’s September numbers which were a little funny but this could have been because consumers are waiting for the arrival of the company’s new Bold smartphone. The company said new subscriptions were 2.6 million, which matched expectations but new devices sold only reached 6.1 million, not the 6.3 million Wall Street was expecting. So maybe consumers were/ are holding out or just buying the iPhone instead.

In after-hours trading as I write this, RIMM is down $18.88 to $78.65. Yikes. I was hesitant to recommend another strangle option trade on RIMM because I thought we would only see a 10% move in the stock either way. We had used the October 120 calls (RULJD, $1.20, down $0.36) and the October 80 puts (RFYVP, $2.06, down $0.54) as a strangle on September 16 and closed both sides of the trade within a week. We made a gain of 40% with that trade. The after-hours drop of 20% for RIMM should hold up to make this trade profitable if you put this strategy on before earnings.

Rick Rouse
Rick@OptionsMentoring.com

It looks like the financials are getting close to being “rescued” by the government as both the Democrats and Republicans have made “tremendous progress” in negotiations over the $700 billion rescue for Wall Street. Let the debate begin on whether this is a good idea or not but it looks like it will happen over the weekend. In other words, Monday morning’s open could be huge. I say that with reservation but that is how the market should react.

There is so much riding on this package that many analysts believe that if this thing doesn’t go through then we are in big, big trouble. I’m not so sure of that because I believe there are many other solutions that would work that have not been heard. It’s just a timing issue and for the stock market it needs an infusion.

The market took a huge dive last Wednesday and Thursday as the Dow hit a low of 10,400 and was on the brink of a total collapse. Word of this bailout package helped stabilize the market and as you can see, if it fails, the market fails. Of course, the market still has a number of issues to work through and October is just around the corner. October has been the month where we have had some of the most historic corrections ever.

I’m leaning towards a rally but remain cautious as many investors keep selling into the rallies. If we can get a mini-rally for the market on the news of an approved bailout package then we could go long by buying options on any of the indexes. I prefer to use the PowerShares QQQ Trust (QQQQ, $41.52 up $0.66) when going long or short the market.

The October 43 calls (QQQJQ, $0.81, up $0.12) are up 17% this morning and could be worth a roll of the dice based on the belief the market will rally next week. It is clearly a lottery play.

Rick Rouse
Rick@OptionsMentoring.com

You know your stock has got to be “cheap” or “undervalued” when Warren Buffett steps in. That is exactly what happened after the market closed on Tuesday as Berkshire Hathaway (BRK-A, $128,800, down $2,200) announced it is investing at least $5 billion in Goldman Sachs (GS, $125.05, up $4.27). This is a pretty big deal and the market must have gotten wind of this before the final bell.

I had mentioned that some of the financial stocks were getting near our targeted areas yesterday and Goldman was quickly becoming my favorite one out of the bunch for a couple of reasons. First, best of breed. When it comes to owning an investment firm, Goldman tops my list. Secondly, Goldman Sachs (and Morgan Stanley) was one of the last two independent investment banks on Wall Street.

However, just two days ago both companies got the A-okay from the Federal Reserve to change their status to “bank holding companies.” This move gave Goldman broader access to borrow money and the ability to build a base of solid deposits.

Berkshire Hathaway’s investment in Goldman could double as the company also got warrants to buy another $5 billion in Goldman’s common stock. The first $5 billion is in Goldman’s “preferred stock” which will pay 10% and can be bought back by Goldman at any time for a 10% premium. The warrants allow Berkshire to buy $5 billion in common stock at $115 per share any time over the next five years. Goldman also said it would raise another $2.5 billion in its own public stock offering. Basically, Goldman just got the green light to print money.

The $115 tag is exactly what the shares were trading for when I did the blog yesterday. The point is not to toot my own horn but to let you know what is working in this market and what isn’t. The news sent shares of Goldman Sachs higher and the futures soared last night on a day the Dow posted another triple-digit decline.

Goldman reacted well in after-hours trading, up $9.70 to $134.75. That’s a 20-point move from lunchtime yesterday. The October 135 calls (GSJG, $6.90, up $0.10) traded as low as $3.80 yesterday. They will certainly see a big pop if last night’s gains hold.

Goldman Sachs’ shares had been falling at a rapid pace before the government announced its rescue plan. The bears were obviously targeting Goldman as they figured it would be the next General to fall during this financial war of bad debt. Now the question is if the SEC and/ or the government will have to look into Wall Street cashing in on our taxpaying money.

Here is what Mr. B said of the company…”Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

Maybe the Geico lizard is showing up on Goldman early but rarely does Mr. B make a mistake. Especially one of this magnitude. You think he is risking $10 billion on a stock going nowhere? His favorite quote of mine is: “I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”

Is that what we are seeing now? I mentioned back in August that September and October were historically bad months for the market and so far that has played out like Charlie Daniel’s fiddle. I’m not sure how bad October will be because no one has a crystal ball for the market. What I think could happen is a lower market into October and then a huge rally. And again, I’m just going by history and how this the market appears to be setting up.

I think once the details of how this $700 billion is going to be taken care of, the market will rally. And it could rally big-time. We also have the election which is usually bullish plus earnings season is right around the corner and we could get some surprises. Wall Street has lowered the bar so far that many companies could easily blow-away expectations.

As far as the other financial stocks, they rebounded as well:

Citigroup (C, $19.99, down $0.02) was at $18

Morgan Stanley (MS, $28.00, up $0.91) was at $25.36

Wachovia (WB, $14.75, down $1.85) hit a low of $14.01 but still ended lower by over 10%.

Of the three, Morgan Stanley looks to be the “safest”. Although risky, I think Morgan could ride Goldman’s coat tail on this one. Watch the Morgan October 30 calls (MSJF) this morning. They closed at $2.55.

Note: I gave a quote for Berkshire Hathaway’s Class A stock which is correct, it is currently going for $128,800 for ONE share but the Class B shares are a little cheaper…(BRK-B, $4,300, down $55.00) a share…

Rick Rouse
Rick@OptionsMentoring.com

The market has been moving slightly higher this morning as Congress debates the $700 billion financial rescue package for the troubled credit markets. Wall Street is watching like a hawk to find out the details and there’s a lot riding on how this thing is set up. The Dow is up 22 to 11,038 after rising more than 120 points in the morning. The S&P 500 is trading higher by 2 points to 1,209, and the Nasdaq is in the green by 5 to 2,184.

Our buddy Bernanke urged Congress to get this package through in a hurry and warned “the implications for the broader economy could be quite adverse”…perhaps the biggest understatement of the year. Look, Congress will make this thing work, no matter what the consequences because they can’t announce this big of a package and then not have it go through quickly.

The government is taking some steps in the right direction but the fundamentals for many of the bank stocks and financial institutions are still weak. Yes, there could be a “cleansing” of the books but there will be more pain before it’s full steam ahead.

The dollar is also rebounding today, while gold stocks are taking a breather after Monday’s big advance. Some of the financial stocks we follow are getting to our targeted areas again:

Citigroup (C, $19.15, down $0.87)

Goldman Sachs (GS, $115.94, down $4.84)

Morgan Stanley (MS, $26.84, down $0.25)

Wachovia (WB, $15.04, down $1.56)

If we can get another 10%-20% drop it will be time to go long again on some of these names.

Rick Rouse
Rick@OptionsMentoring.com

Oil prices briefly shot up more than $25 a barrel Monday, shattering the record for the biggest one-day gain ever as Wall Street worried about the government’s $700 billion bailout plan. The concerns caused oil to spike and the dollar fell sharply which led to the sharp rise in gold. This all took a toll on the market as the Dow fell 373 points to finish at 11,015. There went Friday’s gains.

Oil jumped as high as $130 a barrel before falling back to settle at $121. A big reason for the jump was the expiration of the Obcotober contracts which expired at the end of the day. This clearly added to the volatility as traders rushed to cover positions.

What was interesting was the fact that the severity of the price move prompted the U.S. Commodity Futures Trading Commission to launch an investigation into whether illegal manipulation was to blame. This has been a topic of interest for quite some time and I always say where there’s smoke, there’s fire.

If you were short oil over the past few months then you probably did well up until the last few days. Oil has gained nearly $30 over the past four trading sessions. The U.S. Oil Fund (USO, $87.62, up $4.99) which tracks prices of West Texas light, sweet crude oil gained 6% yesterday and the iPath Crude Oil ETN (OIL, $64.57, up $3.40) also traded higher.

In other trading, the weaker dollar helped gold prices surge more than $44 to settle at $909 an ounce. It seems that commodities are catching fire because of a general weakness in the dollar. The jump in gold sent gold stocks and options soaring. Take a look at some of the returns from Monday:

Barrick Gold (ABX, $38.14, up $3.04)
October 40 call (ABXJH, $2.20, up $1.20), or 120%

Goldcorp (GG, $36.29, up $4.11)
October 37.50 call (GGJU, $2.10, up $1.20, or 133%

Gold Fields (GFI, $9.72, up $1.16)
October 10 call (GFIJB, $0.91, up $0.51), or 128%

Newmont Mining (NEM, $44.43, up $2.48)
October 45 call (NEMJI, $2.50, up $0.85), or 52%

I mentioned on September 3 that gold was getting cheap and many of these stocks and options were much lower. The October options I’ve listed may have more room to run if gold continues its rally but as we have seen with this market it’s hard to say what’s next.

Rick Rouse
Rick@OptionsMentoring.com

Research in Motion (RIMM, $97.84, down $5.60) fell back below $100 on Monday ahead of its scheduled earnings report on Thursday. The stock has been making $10 swings almost on a daily basis which leads me to believe the stock will make a substantial move by the end of the week.

There are some analysts who expect RIMM to post solid quarterly results, with revenues of $2.6 billion and earnings-per-share of $0.87. Although early October’s availability of the company’s 3G Bold and Kickstart have acted as a near-term catalyst, there’s a report out that says RIMM’s September sell-through numbers are looking “slightly disappointing” ahead of the new product launches. This was on top of a “flat” August.

There are too many variables to consider a trade for RIMM, especially with earnings coming out. To me, it is looking as though RIMM’s new products are going to have a bigger impact on the company’s next quarter, not this one.

Worldwide smartphone sales grew nearly 16% in Q2 from a year earlier and smartphones control about 11% of the mobile device market. That’s good news for RIMM because it shows there is still plenty of market share to capture. However, with so many competitors coming into the fray, RIMM will be fighting for that market share with the likes of Apple (AAPL, $131.05, down $9.86) and even Google (GOOG, $430.14, down $19.01).

The stock hit a low of $88 on September 18 which tested multi-year support. I profiled a RIMM strangle option trade earlier this month that netted us a 35%-40% profit. I would almost go out on a limb and recommend the same trade but it’s just too risky. The recent low has me leaning towards RIMM testing those lows again but a good earnings report may help the shares from sinking.

Rick Rouse
Rick@OptionsMentoring.com

Anheuser-Busch (BUD, $66.69, down $0.46) has been trading 5%-10% below its takeover price of $70 a share and I wanted to point out what this means. In late June and early July, this was a hot topic for the blog and many of you did well with some of the option trades I profiled.

Having said that, although there are no option trades that I would recommend right now, BUD is perhaps one of the best risk arbitrage plays out there in the market. InBev has agreed to purchase the shares of Anheuser-Busch for $70 per share and typically, until an acquisition is completed, the stock of the target typically trades below the purchase price.

An arbitrageur (love that word) is someone who buys the stock of the targeted company and makes a gain if the acquirer ultimately buys the stock.

Brazilian antitrust regulators have already approved without restrictions the sale of Anheuser-Busch to InBev so there’s a really good chance that the $70 a share will happen. The stock traded as low as $63.50 last Wednesday and Thursday and if we can get back to those levels, I think you should pull the trigger on a stock trade.

Rick Rouse
Rick@OptionsMentoring.com

With a lousy market you can get lousy stock prices. At least that what a few companies are thinking. Although we had an 800 point rally to close the week, there are a few companies who feel like the market has given them the opportunity to buy back shares of their company stock.

Microsoft (MSFT, $26.01, up $0.85) said Monday its board approved a plan to buy back up $40 billion of its shares. The company said it has completed its previous $40 billion stock repurchase program and the new buyback expires in September, 2013. The company also raised its quarterly dividend to $0.13 from $0.11.

Although I don’t actively trade options on Microsoft, I have mentioned that at $25, Microsoft is a good stock trade to ride to $27 or $30.

Hewlett-Packard (HPQ, $47.75, down $0.51) also approved the repurchase of up to $8 billion in shares. The buyback comes on top of a previous $8 billion repurchase program started in November that has about $3 billion remaining. The company has about 2.5 billion shares of common stock outstanding.

And finally, Nike’s (NKE, $63.85, up $0.15) board approved a four-year, $5 billion buyback program. Their repurchase program will begin following the completion of its current $3 billion buyback program. Nike had about 492 million shares of “Class B” stock outstanding.

This is usually a bullish sign for the market when companies come in and buy their stock back. It shows the faith that management has in its stock price. Buybacks lower shares that are available to trade and could help increase earnings because of higher revenues on less shares outstanding.

Rick Rouse
Rick@OptionsMentoring.com