Monday Market Movement
by Phil - March 31st, 2008 11:17 pm
Well that was another fun day!
We picked up a lot of new calls early in the day, made some great day trades and cashed in our first round of oil puts – pretty much a perfect day. We’ll see if we get some follow-through tomorrow but the markets held up well against a significant commodity sell-off that knocked 3.8% off the price of oil, 1.6% off gold with the entire precious metals index falling 1.8% and even agriculture took a 3.3% hit as the crops report pointed to a well-supplied market.
We were right on top of this at 11 am as we were already short on oil and MRB and NAK gave us a strong exit signal on gold that we took at 10:12. By 11 am we were quoting "Trading Places" as we watched all the commodity traders suddenly scrambling to escape the $6 Trillion roach motel they checked into.
We discussed speculation in the agriculture markets in this weekend’s reading section so this is coming as no surprise to us however we jumped on POT as it bottomed out at 2:30, picking up a quick 20% into the close on the $150 calls. There will be tons of opportunities for quick trades like this so I cannot emphasize enough how good it is to have cash in this environment as we don’t expect commodities to give up without a hell of a fight but, just like homebuilder stocks and housing prices and mortgage companies and financial institutions, down and down and down they will go.
Still, we are not ready to celebrate yet as this marks the 5th consecutive negative monthly close for the S&P, the longest losing streak since Bush the First was in charge (1990) and little George has been shattering his Dad’s records right and left. Hank Paulson discussed sweeping reforms for the financial system - everybody hates it so it’s probably fair and the idea for merging the SEC, who actually does something once in a while with the Commodity Futures Trading Commission (who, since this is the first time many of you have even heard them mentioned, obviously do nothing ever) sent shivers up the spines of commodity manipulators everywhere as they will have to pay off a whole new group of guys.
We picked up QID puts into the close, looking for a nice Nasdaq breakout tomorrow as the…
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Talk of Target’s credit card sale may be fueling interest in OTM calls
by Andrew Wilkinson - March 31st, 2008 9:33 am
Today’s tickers: TGT, ALTR, ANF, TSRA, LM, MER, LEH, APOL
TGT- We’re positively intrigued by a late-afternoon spike in Target’s implied volatility – a 12.5% gain that seemed to come out of left field from the quirky retailer, and which now indicates option traders pricing in more than a third additional price risk to Target shares over the next month than they have shown historically. With no news in the public domain, and the company still a month away from its May 23 earnings report, this is a scintillating development indeed. Even more so is the fact that with shares down 1.8% to $50.06 – possibly on fallout from bearish comments from J.C. Penney – option traders are positioning with unmitigated bullishness in the May contract, buying up calls at the 50 and 55 strikes on volume exceeding open interest, while selling puts at the 45 and 52.50 strikes. The price of Target’s May 55 call at $1.30 reflects barely a 30% probability of landing in the money, but fully 10% of today’s active volume in Target is planted at precisely this strike, trading to buyers to boot. Open interest shows a fairly even split between puts and calls, giving today’s positioning in an elevated implied volatility environment added luster. Speculation over Target in recent weeks has centered on the fate of its credit card business, a division that activist investor William Ackman is keen to see divested. Two weeks ago, Target acknowledged that it was in talks with J.P. Morgan Chase over the sale of a 50% interest in its credit-card receivables.
ALTR- Shares in Altera, the maker of so-called programmable logic chip devices, are trading .82% lower today at $18.17, extending a slump that began in late-October when the company slashed its sales forecast. What interested us most today however was an intraday quintupling in option trading volume that did not appear to follow any news announcement, wrapped up in fresh writing of out-of-the-money May calls at the 17.50 strike for $1.65. The volume here would seem to suggest a fresh leg lower for Altera shares heading into the month of May that would put shares well below the 52-week low of $16.17. Trading in this highly risky proposition supposes a pretty solid level of confidence that shares won’t recoup the 17.50 mark that would make these calls vulnerable to exercise. Implied…
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Monday Market Mayhem
by Phil - March 31st, 2008 8:28 am
Asia is selling off, Europe is selling off and the US is flat at 6am.
So far, so good. It’s a scary world out there and all we have to do is be the least scary place and money will fly in. The US has been looking scary the past two weeks because Congress was on vacation and the only voice we heard was our President, telling everyone to stay the course. Now Congress is back and Bush is being sent to Europe so it’s time for the Democrats in the Senate and the House to put forward their agenda for solving the financial disaster.
I’m not saying these guys have all the answers but the administration has, so far, proven it has no answers so we’ll at least give a chance to the first kid in the class who puts their hand up and at least tries to address the question. Bush is scheduled to say something at 7am and, as I said on Friday, I am expecting something to happen to boost the markets but I never for a second imagined it would be Bush. Paulson speaks at 10, but that’s likely to be about the financial reforms, not about an actual solution for troubled homeowners.
I think the market is chomping at the bit to respond to some "good" news today as it is the end of the month and plenty of downside money has been made so it may be time for the bulls to polish some apples as they dress their portfolios up to close out the quarter – just throw us a bone, please!
In looking over the Big Chart, I notice we have gone nowhere in the past two weeks but there are some who would call this CONSOLIDATION and consider it a good thing (beats going down):
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Weekly Wrap-Up
by Phil - March 30th, 2008 10:51 pm
It’s my birthday weekend so I’m going to keep this short and sweet:
I was too bullish this week, I underestimated the resiliency of oil and the lingering panic that is gripping the markets, especially in the financial sector. As a fundamental analyst, one of my weaknesses is getting ahead of the curve so I tend to see bottoms and tops early, which is salvagable with our stop, drop and roll strategy on longer options but not at all helpful on our short-term bullish positions so next week is either going to be great for us or a disappointment we have to roll into May to salvage what we can.
We made great progress from last week in our flexible portfolios: The Short-Term Portfolio gained 9%, the Long-Term is up 8% as another round of our callers bit the dust, our Day Trading Portfolio was a home run with a 34% gain on the week, benefitting from the risks we took on AAPL and GOOG, which also rocketed the Complex Spreads Portfolio up 24%. Other than Google and Apple, what these portfolios all had in common was the flexibility to flip negative, something we lacked in our smaller portfolios.
Our Stocks Portfolio dropped 2% but the $10,000 Portfolio fell back to $10,543, down 6% for the week and the $25,000 Portfolio fell back to $25,227, a nasty 18% drop on the week as we put more cash to work while getting murdered on our positions in BA, CROX, MDT and NDAQ, all of which I still have hope for. We still have $6,000 in cash but we will need that to adjust ourselves if the sell-off continues next week.
Last week we were optimistic DESPITE the fact that I used this picture of the Titanic to summarize our position. I’ve given up on this administration doing the right thing but my optimism stems from the fact that the balance of power has shifted to the G7, who will now be able to force Bush to do something about the dollar and take some action to actually fix the housing crisis that doesn’t involve just throwing more money at rich people.
I had not counted on how stubborn the White House could be as the dollar dropped 2% on another demonstration of fiscal ineptitude which sent oil soaring back from $100 on Monday to $108 on Thursday as the Vice President…
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Trading The Trends
by OptionSage - March 30th, 2008 3:12 pm
How many times have you traded stocks that you felt were oversold, but you just weren’t convinced the downtrend was over? How many times have you seen a stock or an index drop further before hitting a bottom and racing back up again? And how many times have you profited from such moves?
In this article, one of the many strategies that takes advantage of such expectations is discussed – the non-standard put calendar.
Before introducing the non-standard put calendar, let’s first review quickly the standard put calendar. In a standard Put Calendar, a long put option is purchased out-of-the-money, typically with 45-120 days of time value and a short put option is sold at the same strike price in the current month (expiration month).
The expectation when entering a put calendar is that a stock will remain relatively flat or ideally will drop a little in price. If the stock were to fall to – but not below - the strike price of the put options by expiration, then the short put would expire worthless and the long put would gain in value. Hence, both options would produce a profit.
More often than not, you will find when buying one option and selling another, that only one of the two options makes money. While this may be true also for the put calendar, if the stock remains flat (resulting in some loss in the long option due to time-decay and a profit in the short option as it expires worthless) or if the stock rises (in which case the long put loses value due to stock appreciation while the short put profits in such instances), the strategy offers the potential to make outstanding percentage returns if the stock should fall slightly.
The standard put calendar is structured such that the long put always protects the short put in the event that a sharp decline in stock price materializes. This is due to the fact that the long put is placed further out in time. The worst-case condition for a put calendar is that a stock moves up or down by a huge margin before we can take any action to modify the structure of the trade to the new trend. In short, gaps up or down are going to work completely against the strategy and much of the debit spent on the overall position is in jeopardy at such times.
While…
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Weekend Reading – Always in Progress!
by Phil - March 29th, 2008 9:16 am
Forbes is picking up on my premise that US equities are the least sucky place to put your money in 2008.
This article points out that: "The blue chip Dow Jones Industrial Average and the large-cap Standard & Poor’s 500 both have lost much less than their major European and Asian counterparts of late, suggesting that the five- or six-year run in which foreign bourses routinely thrashed the S&P and the Dow has ended."
"The international [outperformance] was a great story, but it’s over," says Alec Young, S&P’s international equity strategist, who notes that U.S. stocks now represent 41.3% of world stock market capitalization, up from 40% at the end of the year. While other global markets are breaking throught the 20% zone (something we have been tracking on the Big Chart all year), signaling a bear market, the US keeps bouncing off the line, consolidating around 15% declines.
Forbes echos my sentiment with this: "Either the equity markets are in complete denial, and U.S. markets will soon face a major crash, or maybe, just maybe, great U.S. companies that are not home builders or financials or purveyors of overpriced consumer junk are quietly selling excellent products and services around the world and are still making good money." The article claims that $9 out of every $10 from US fund investors went into international equities last year but I find that very hard to believe. If true, it would be possible to see a shocking, major reversal of fortune as money gets repatriated back to the states.
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Wheat has gone from $4.05 in July ’06, to $4.88 in July ’07 to $10.68 this month. How did that happen? Was there a surge in demand, did farmers stop planting wheat? Was there a drout? No, none of those things. What happened is the same thing that happened in the energy markets in 2001, when trading restrictions on oil and natural gas were lifted – The Commodity Futures Trading Comission (who answers to the White House) opened the markets to unlimited trading by giant hedge funds last year! This happened at the same time that Bush rolled out his "energy plan" to turn food into fuel.
"It is estimated that $8 billion has flowed into ag futures since the start of the year,” said Joe Hampton, President of the Oklahoma Grain and Feed Association. "They never have any intention of owning…
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When Whitney Attacks – Part 2
by Phil - March 29th, 2008 12:51 am
I have gotten a ton of mail regarding my recent article "When Whitney Attacks" mainly from a rabid assortment of her supporters.
I do apologize to Ms. Whitney as it does turn out that CIBC divested her division to Oppenheimer so she is now an Oppenheimer analyst who only used to work (as of last November) for CIBC. It may not sound like a big deal to you but it seems to be vitally important to others (like Toronto’s Globe and Mail) that this fact be ironed out lest my entire defense of the financial sector be deemed invalid.
Perhaps they are touchy about the fact that I pointed out that foreign banks, in addition to the usual suspects, stand to benefit from CitiGroup’s troubles, last I heard they did all compete in the international markets and CitiGroup was, and still is at the moment, the 800-pound gorilla of the financial industry.
Rather than allow this to degenerate into a war with the Whitney camp, I’m just going to make a simple case for CitiGroup (most data from Yahoo Finance and Investools) as an example of how this bank bashing has gone too far:
CitiGroup has $2.1 Trillion in assets and some of those assets are in the dreaded "sub-prime" category. The company wrote down $1.56Bn in Q3 ’07 in CDOs and an additional $1.35Bn of "leveraged finance commitments." This dropped Q3 net income to "just" $2.2Bn on $43.2Bn in sales vs. $5.5Bn earned in Q3 ’06. In November, CEO Chuck Prince resigned and was replaced by Vikram Pandit and I predicted at the time that they would throw the kitchen sink into Q4 so they could put it all behind them and the bank indeed came through, writing down $18Bn worth of debt, turning Q4 into a $9.8Bn loss.
At the time, CitiGroup said their total exposure to sub-prime was $55Bn, INCLUDING $43Bn of CDOs. Remember this is out of $2,100 Billion in total assets! While all this was going on, Citi’s business was going gangbusters, with 5% growth in overall revenues, led by a 29% growth in International revenues – beating out competition like… oh, let’s say CIBC.
As a rapidly expanding bank, Citi finds themselves vulnerable to the old Mr. Potter attack strategy of fomenting panic in the markets as the bank has a very high, but usually manageable lone/deposit ratio:
Since a large portion of their money is lent out, it…
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TGIF!
by Phil - March 28th, 2008 9:12 am
Wow, the end of another wild week in the markets!
It’s been a rocky one for us as we got a little too bullish and have been punished for it but I still believe that THEY are not going to let the dollar fall to 70 and we will have a Deux ex machina come down from the heavens and save the markets. While I realize that this is not the kind of solid fundamental reasoning that is going to help you sleep well at night with your open calls under your pillow, I have to view this very much like when I have to tell my children there are no monsters in the closet. How do I show you no monsters?
As I mentioned in last night’s article, it is very easy to scare investors by telling them that horrors await them at every corner. This is the type of thing rich people like to tell poor people while they buy up all of their assets. Believing there are no monsters requires the same act of faith that believing that there are angels entails as neither one is very likely to pop out from under your bed on the average evening but why are we, as a society, so much more willing to believe in bad things than good?
Dr. Brett has written exensively on the subject so I won’t get into it here but I will say, very simply, that as a fundamental analyst – we are way past the point of reasonable concern about the markets and the financials in particular. BSC did not fall apart over fundamentals, Bear has a good, old fashioned run on the bank that turned them from solvent to insolvent in a matter of just seven days.
Any bank is subject to a liquidity crisis if more than 10% of the investors, if only 5% of the investors, ask for their money back because it just isn’t readily on hand. As Jimmy Stewart points out at the Baily Building and Loan when the townsfolk are panicked into demanding their money back by the evil Mr. Potter (who just so happens to look just like our Treasury Secretary!): "you’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house -right next to yours. And in the Kennedy…
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Thursday Thump – When Whitney Attacks!
by Phil - March 27th, 2008 11:13 pm
OK, even I forgot the Thursday Thump rule this week!
We felt a little silly very soon after the open and covered up a little more as we had gone out on a limb Wednesday expecting a bounce. Fortunately, we did get a huge jump at the open, which minimized our damages but we are still woefully under covered if the market doesn’t come back as we elected to leave ourselves half covered in hopes that today marked the short-term bottom.
We can blame $108 oil and Meredith Whitney for today’s drop as both looked very scary to the majority of holdings. Oil stokes inflation fears while Ms. Whitney threatens severe deflation for your portfolio: ""The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney.
Make no mistake about it, Whitney is not saying another 15% down from the 35% the financial sector has already fallen, she is saying that the average bank, which was worth $100 last year and is now trading at $65, is really worth just $32.50. It amazed me that this woman is being treated as some kind of genius by the media as she met her husband in 2004 on TV as she made a bearish call on C then, when it was trading at $50, a level that held for 3 years. So NOW Ms. Whitney is right and she is using her 15 minutes of fame to attack all things financial, single handedly causing a world-wide sell-off.
It should not be lost on readers that Meredith Whitney is an analyst for CIBC, the CANADIAN Imperial Bank of Commerce, a group that benefits tremendously from a weak US dollar and weak US financial markets. Her report on CitiGroup cost the bank $15Bn in market cap yesterday, more than the $13.5Bn she predicts they will write down in her doom and gloom (and admitedly worst-case) scenario. With the bank trading at just 6 times earnings, it should take a loss of $90Bn to have that sort of effect but investors are in the mood to panic and Whitney is one very scary lady!
I find it very interesting that she is consistently referred to as an Oppenhiemer analyst on CNBC when that group…
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Sprint’s decline draws call-buyers…and is Diebold due for a fall?
by Andrew Wilkinson - March 27th, 2008 9:59 am
Today’s tickers: S, DBD, VRSN, CFC, XLF, MER, C, SIRI, URBN, OVTI
S – Shares in Sprint led telecom sector losses with a 1.6% decline to $6.47 on the fairly paltry news catalyst of a poor WiMax technology rollout in Australia. Implied volatility in Sprint options has shown hair-trigger sensitivity – to wit, an analyst downgrade two weeks ago sent shares down 10% and implied volatility up past the 90% mark – and today’s implied volatility reading at 94.6% is even higher (up 21% from yesterday, in fact). Measure this up against the degree of fluctuation to which Sprint shares have already shown a capacity, and you have an option market that’s pricing in about 14% more price risk to Sprint shares over the next month than they have already shown historically…on no news catalyst? Today, as was the case earlier this month, we see option traders taking the opportunity of a down day for shares and an upward spike in implied volatility to buy front-month calls. Perhaps the sense is that barring any significant news catalyst, Sprint shares – having dwindled from a 52-week high of $23.34 – have digested all the bile the market could possibly fling at them. This time the buying interest is at the April 7.00 call line. More than half today’s active volume in Sprint options appears centered at this strike, where the buying volume is more than triple the prior open interest, and where traders are paying about 45 cents for the right to buy Sprint shares at $7.00 by April expiration.
DBD -From pregnant chads to put spreads…option activity in Diebold, the producer of ATM cash machines as well as those notorious automatic voting terminals, ticked our market scanners owing to an increase in trading volume to 30 times the normal level. This occurred against flat share price action at $37.00. Earlier this month, Diebold shares posted a 61% gain over the course of a single day after the company’s board uniformly rejected a $40-per-share takeover bid from United Technologies as “too low.” Shares have come off about 1.6% in the interim, but it looks like some option traders are banking on a drop below the $30 line by May – possibly on expectation that no new bid will be forthcoming. Today’s volume appears centered in 12,000-lot put spreads, with a trader buying the May 30 put for $1.00…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(