Morning Update

Yesterday US equity trading resumed after a 2 day hiatus due to hurricane Sandy. Volume was a little light but overall trading appeared to be normal. This the ADP employment report was released, coming in at 158,000 versus 155,00 expected and 162,000 last month. However, ADP has switched to a new method for gathering data this month meaning that there is no track record to show how well the numbers will predict tomorrow’s NFP report. Jobless claims were also released this morning, coming in at 363K, down 9K since last week. The market is little changed by this data and looks to open nearly unchanged from yesterday’s close. The e-mini S&P futures tested the 1400 level in overnight trading for the third night in a row, and the level was once again swiftly defended by the bulls. This appears to be a key support level that is likely to be tested in a regular trading session before the market moves higher. 

On Tuesday Ford Motor Company reported an EPS beat for its 3rd quarter earnings. This sent shares 8.2% higher on the day and put a bid under Ford call options. The biggest trade of the day was the purchase of 11,111 Dec. 12 calls for $0.11 with the stock at 10.85. This is a bet that Ford will be above 12.11 at expiration, or 8.5% higher than yesterday’s close. This bullishness undoubtedly comes as a result of Ford’s robust domestic sales, which more than made up for weakness in Europe. Ford’s North American operations posted a pre-tax profit of $2.3 billion, which is the best third quarter the region has ever recorded. This profit was driven by margins, which came in at 12% and attributed to sales of high-end trucks. In Europe Ford posted a $468 million loss and said it could lose up to $500 million next quarter. Year to date Ford has lost $1 billion in Europe, which has led CEO Alan Mulally to announce a major restructuring and layoffs there.

Though Ford’s numbers this quarter are good, it is still unclear if North America can carry the company through a European recession. If Ford’s European restructuring is able to minimize losses while sales remain robust in North America the company will be fine, but that is a big if. To play Ford I like this strategy, which keeps risk fixed and profits from momentum the stock might have after a great quarter like this one. Ford’s chart suggests the stock is likely to test the 12-13 range it traded in during the first quarter of 2012, which would make the Dec. 12 calls a profitable trade.