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Morning Update

This morning jobless claims were reported at 370K, which beat consensus expectations of 380K. This is the third straight week of declines in claims since the spike caused by Hurricane Sandy and suggests the effects of the storm are wearing off. In Europe strong manufacturing data out of Germany and strong risk sentiment in Asia sent European shares higher in early trading, but the major indices are since well off their highs. The Euro is lower and the Yen higher, suggesting traders are positioning themselves into risk-off positions. Spanish and Italian debt has had a rough day, with Spanish 2yr spreads 38bps wider on the week. Swiss 2yr rates hit 3 month lows this morning, also confirming the risk off sentiment. Today I would not expect to see too much action in US equity markets as traders sit tight ahead of tomorrow’s jobs numbers. The market is looking for payrolls to increase by 80,000 versus 171,000 last month, and for the unemployment rate to increase 0.1% to 8.0%.

One of the best performing stocks in the S&P 500 yesterday was Bank of America. Shares closed 5.7% higher on the day and outperformed the KBW Bank Index, which was up 1.7%. Bank of America not only saw heavy stock trading volume, but also heavy call option volume, sending the call-put ratio was 3.4:1. Heavy call volume indicates that traders are expecting Bank of America to extend its gains into the New Year. One trader bought 10,000 Feb. 10 calls for $0.76 with the stock at 10.23. This is a bullish bet that profits if BAC is above 10.76, or 5.2% higher, at February expiration.

Bank of America shares have been rallying since July and have risen over 50% since its summer lows. CEO Brian Moynihan has sold $60 billion in assets, increased capital, and targeted $8 billion/year in spending cuts. BAC will face the next round of stress testing in March, but looks poised to breeze through it. Moynihan told employees in October that a dividend increase “will be on the table” after the stress tests.

Yesterday was the first time BAC closed above $10 since 2011 and made a new 52-week high. The $10 level was not only psychologically important to cross, but was also a technically significant resistance point. The next level of resistance the stock faces is not until $11, meaning BAC could run up another 10% from here. If the fiscal cliff is avoided and the housing sector remains strong, the banks, and Bank of America in particular, could continue their rally into the first quarter of the New Year. Since Bank of America has already appreciated so much and so rapidly, I prefer to own call options instead of the stock. The February expiration is after the next earnings announcement, which allows traders to profit from a rally into the announcement but with fixed risk should the numbers disappoint. If BAC still looks strong at February expiration I would be willing to own the stock and hopefully see a dividend hike in the near future.

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