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Stocks moved broadly higher Monday. Banks led the way despite mixed news from the industry. Homebuilders were also strong. The gains in two of the market’s most battered sectors come a day before the Federal Reserve Open Market Committee [FOMC] meets to discuss rates. In addition, a flurry of call buying accompanied the move higher in the share prices of the banks and builders. It seems that investors are now looking beyond current troubles and are wagering on the Fed to help lift these troubled sectors out from their recent funk.

Bank stocks moved higher early in the trading session Monday despite news of more problems in the credit markets. UBS, the Swiss financial services giant, warned that it would suffer another $10 billion in writedowns due to exposure to subprime mortgage holdings. Shares of the bank rose, however, after UBS also said it received a large commitment from the Middle East and Singapore. The news of fresh capital into the bank seemed overshadow the fact that the bank’s profits for the year have been wiped out.

Bank shares also held steady in morning trading despite news that one of Bank of America’s (BAC) “money market-like” funds was being closed to redemptions. The Columbia Strategic Cash portfolio, which is a fund for institutional investors, is being closed due to illiquid investments. However, shares of Bank of America closed up $1.27 and near session highs after the bank said that the fund was not in danger of “breaking the buck”, which means that investors will not receive less than $1.00 for every $1.00 invested in the fund.  

Given that shares of the major banks held steady in the face of mixed news Monday suggests that investors are looking past the ongoing credit crunch and at the potential for a better banking environment in the future. One reason, perhaps, is the recent government plan to freeze rates on some adjustable subprime mortgages, which seems to have eased some worries about foreclosures and the profits of many lenders.

Consequently, shares of the lenders have performed well lately and that trend continued on Monday amid growing interest in the call options in the sector. For example, Ambac Financial (ABK), which plunged 70% from late May to late November, rose $2.58 to $29.42 Monday and more than 15,000 ABK call options traded on the day. Call volume also picked up in a number of other lenders including Thornburg Mortgage (TMA), MasterCard (MA), and MBIA (MBI).

The homebuilders were active. Traders were actively taking positions in many of the beaten-down names on hopes the worst is over for the housing industry. More than 19,000 DH Horton (DHI) calls traded, or almost four times the normal daily volume. Call options were also active in Lennar (LEN), KB Homes (KBH), and the iShares Dow Jones Real Estate Fund (IYR). The SPDR Homebuilders Trust (XHB), which tracks the performance of 21 different companies from the sector, rose 71 cents to a one-month high of $21.30 a share. 8,977 XHB calls traded on the day, compared to 3,758 puts.

Some traders were actively betting on the brokers ahead of the Fed rate decision. Lehman (LEH), Charles Schwab (SCHW), and Bear Stearns (BSC) saw increasing call volume. Others were more focused on the banks, with a notable interest in JP Morgan (JPM), Wachovia (WB), and US Bancorp (USB).

Meanwhile, the Select Sector Financials (XLF), which holds all of the financial related companies from within the S&P 500, rose 66 cents to $31.86 amid a flurry of call volume. In all, more than 400,000 XLF call options traded on the day. The January options with strike prices ranging from 31 to 35 saw heavy volume. The 35s were the most actives, with more than 118,000 contracts traded at the day. These calls are offered at only 30 cents a contract and represent a very cheap way to play a Fed-induced rally in the financials.

Suffice it to say, there was a lot of speculative activity in the housing, lending, banking, and brokerage stocks Monday. That optimism stems in part from recent news of the mortgage rate freeze plan and capital investments into some major banks from international investors. Now, speculators seem to be positioning themselves for further gains in the sector, with hopes running high for the Fed rate cut announcement on Tuesday. Hopefully, for these investors, the market response will be better than after the last meeting. On November 1, the day after the most recent rate cut announcement, the XLF and XHB both suffered one-day 5% slides.  

 
Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site
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