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Markets recover on word of Iraqi concessions

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Stocks have recovered form their earlier losses which was the Dow Industrials (INDU) 8,419 +0.39% recover from an early morning low of 8,462 after newswires reported that Iraq's President Saddam Hussein accepted the U.N. resolution on weapons inspections.

The broader S&P 500 Index (SPX.X) 883 +0.02% has edged back to unchanged, reversing 10-point loss with healthcare groups getting a bounce as depicted by the RXH.X 278 +1.9% and HMO.X +1.57%.

Meanwhile, Fed Chairman Alan Greenspan is testifying before the congressional Joint Economic Committee about the economic outlook. In prepared testimony, Mr. Greenspan emphasized the forces that continue to put a lid on the economic recovery. Comments made had stocks trading at their lows of the session, prior to news of the Iraqi concessions.

In Q&A period, Greenspan says that the Fed moved 50 basis points instead of 25 basis points because of the relative consequences of being wrong in either direction. In other words, the Fed was more fearful of the consequences of keeping rates high and watching the economy falter than they were fearful of the consequences of lowering rates too much and seeing inflation rise. In essence, the recent rate cut was an insurance move.

In addressing the issue of potentially "running out of bullets" if the economy enters a deflationary period and the Fed has already lowered the funds rate to near zero, Greenspan calls the risk of such deflation "extraordinarily remote" and says that the funds rate is not the Fed's only tool, and that there is no limit to the amount of liquidity the Fed can inject by buying Treasuries all along the yield curve, which it has done in recent past and can continue to do.

Shares of Campbell Soup (NYSE:CPB) $22.30 +12.68% are the second largest gainer on the NYSE after trading a multi-year low yesterday after the company reported Q1 earnings of $0.47 per share, which beat estimates by 3 cents a share. In late August, I had profiled shares of CPB as a bullish seasonal play in the November $22.50 calls. This trade did not work in my favor up until today and would look to garnish option premium today with November expiration near. This Friday is option expiration. Those willing to perhaps exercise their option and take the approach of writing covered calls may also find this as an alternative.

Yesterday, there was suspicious action in the November $22.50 calls when there was a buyer at $0.10 per contract when the stock was dropping to new lows. I found that a "gift" and took an exit for a loss in the calls.

I note this here as it may be useful in the future to note "suspicious" call or put activity in options that look to be worthless. I'm thinking somebody "knew" of today's earnings and were buying the out the money contract for dimes, ahead of today's bullish move and earnings news.

Jeff Bailey

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