Foreclosure Thursday - The Stealth Stimulus
by Phil - December 10th, 2009 8:26 am
US foreclosure filings will hit 3.9M in 2009, bringing the 3-year total to 10% of all US homes.
How is this "good" for the economy? "It’s a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again." That’s right, bankrupt is the new rich in the USA as the 4.8M homes that are at lest 3 months behind on their mortgages (see map) are "saving" $5Bn a month in mortgage payments.
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that’s roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s. Even the rich are playing the default game now. More and more Americans are realizing there is no sense in paying a $7,000 monthly mortgage on a $1M mortgage with $100,000 in equity when they can walk away and buy a similar home for $500,000. We’re talking about saving $3,500 a month for 30 years or $1.26M.
As more and more people see their friends and neighbors "get rich" by walking away from bad home investments, this trend is likely to accellerate, not abate, unless housing prices rally back fast. A recent study found that four out of five people believe defaulting on a mortgage is morally wrong if one can afford to pay it, but they also found that the people become 82% more likely to say they’ll default if they know someone else who defaulted. Meanwhile, there is a massive game of chicken being played by the 4.8M people who have simply stopped payinig their mortgages and the banks who have no desire to take a huge loss to their books by actually taking over and selling the homes in this terrible market.
Investors meanwhile, can’t be bothered with abstract market undercurrents and the above chart shows that there haven’t been so few bears in the market since right before we began to crash in 2007 - Excellent! What’s really funny is that, as the market has topped out the past month, the bulls have gone into a…
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Looming Lululemon Earnings Lifts Implied Volatility – Puts in Demand
by Andrew Wilkinson - December 9th, 2009 4:06 pm
Today’s tickers: LULU, XLE, OIH, JPM, IOC, CYB, AMSC, MW, SVU & JTX
LULU - Lululemon Athletica, Inc. – Investors are hoarding put options on athletic apparel maker, Lululemon Athletica, ahead of the firm’s third-quarter earnings report scheduled for release after market close. LULU’s shares rallied as much as 3.8% to an intraday high of $27.84. The stock is currently up 2.75% to $27.56 with 45 minutes remaining in the trading session. Some analysts expect the Canada-based company will record earnings of 19 cents per share on revenue of $111 million. Option traders hedged against an earnings disappointment by purchasing puts. Approximately 6,800 put options were coveted by investors at the January 25 strike for an average premium of 1.23 apiece. Put-buyers are positioned to profit if shares fall through the breakeven price of $23.77 by January’s expiration day. Mounting investor anticipation for third-quarter earnings and the increase in demand for option contracts on the stock boosted option implied volatility throughout the session. Volatility rose 10.85% from an opening reading of 59.93% to an intraday high of 67.52%.
XLE - Energy Select Sector SPDR ETF – Shares of the exchange-traded fund comprised of companies in the oil, gas, and energy equipment industries, fell 1% during the trading day to $54.30. A massive put spread by one investor indicates shares of the XLE may decline further by the time the quarterly December contract options expire on December 31st, 2009. It appears the bearish trader purchased 74,800 puts at the December 53 strike for 95 cents apiece, spread against the sale of 74,800 puts at the lower December 48 strike for 13 pennies each. The net cost of the pessimistic play amounts to 82 cents per contract. The investor likely holds a long position in the underlying stock. The puts serve to protect the value of the stock position in case shares continue to decline. Downside protection kicks in if shares of the XLE decline beneath the breakeven point at $52.18 by expiration on the final day of 2009.
OIH - Oil Service HOLDRs Trust – Shares of the OIH exchange-traded fund rallied 1.25% to $112.69 today. We observed bearish options activity on the fund despite the bullish movement in the price of the underlying. A put spread enacted in the January 2010 contract suggests some investors feel the need for downside protection through expiration next year. It looks like 1,500 puts were purchased at the January 110…
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Option Trader Irons Out Bullish Risk Reversal on Vale
by Andrew Wilkinson - November 25th, 2009 10:06 pm
Today’s tickers: VALE, GLD, BKC, VIX, IYR, GPS, CTXS, JPM, JCG, BKC, & TIF
VALE - Vale S.A. – Iron ore producer, Vale, experienced a more than 2.5% rally in shares during the trading session to arrive at a new 52-week high of $29.64. A bullish risk reversal in the March 2010 contract today indicates at least one investor is positioning for continued upward movement in the price of VALE shares by expiration. The trader sold approximately 3,300 puts at the March 26 strike for an average premium of 1.29 apiece in order to finance the purchase of roughly 3,300 calls at the higher March 32 strike for 1.59 each. The net cost of the transaction amounts to 30 cents per contract and positions the investor to amass profits if shares surpass the breakeven price of $32.30 by expiration. Shares must jump at least 9% from the current price to breach the effective breakeven point on the trade.
GLD - SPDR Gold Trust ETF – Shares of the gold exchange-traded fund, which replicates the performance of the price of gold bullion, rose 1.5% today to yet another all-time high of $116.43. We observed bullish activity in the June 2010 contract by one investor who initiated a call spread on the fund. It appears the trader purchased 13,265 calls at the June 125 strike for an average premium of 5.95 each, spread against the sale of the same number of calls at the higher June 150 strike for 2.10 apiece. The net cost of the gold-spread amounts to 3.85 per contract. The investor responsible for the trade accumulates profits if shares rally 11% from the current price and surpass the breakeven point at $128.85. Maximum potential profits of 21.15 per contract are available to the trader in the event that shares of the GLD surge 29% to $150.00 by expiration day in June of 2010.
BKC - Burger King Holdings, Inc. – Burger King-bulls bought nearly 4,700 calls at the in-the-money December 17.5 strike for an average premium of 50 cents apiece. Such activity suggests investors expect shares to rally through $18.00 – the breakeven point on the calls – by expiration in December. Bullish sentiment on the flame-broiled burger maker is perhaps inspired by strength in the fast-food restaurant sector. Cash-strapped consumers, wary of the 10.2% unemployment rate, are likely trading down from moderately priced eateries to cheaper nosh provided by the fast-food companies. BKC’s Senior…
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Did The Markit Group, A Black-Box Company Partially Owned By Goldman Sachs and JP Morgan, Devastate Markets?
by ilene - November 18th, 2009 4:57 pm
The Markit Group: A Black-Box Company that Devastated Markets
Courtesy of Mark Mitchell at Deep Capture
Although much attention has been directed at the contribution made by credit default swaps to the financial crisis, most discussion has focused on the companies, such as American International Group (AIG), that posted big losses because they sold these instruments without sufficient due diligence.
Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps in bear raids on public companies.
If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated. The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).
Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.
Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages. In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.
It should therefore be a matter of some concern that credit default swap “prices” and the indexes derived from them…
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Jobless Thursday - Max Keiser Bashes Banks
by Phil - October 22nd, 2009 8:19 am
I’ve never embedded a video before but you just have to see this so I’m learning a new trick. Keiser puts out some gems like:
Goldmans Sachs, JPM, CitigGroup are all engaged in accounting fraud- The American peasants have got to be the stupidest people in the World today. They don’t mind becoming peasants, they don’t mind living like peasants and, if that’s the case, then we should do nothing to stop them from sliding into a peasant class.
- Banks are just stealing money outright from the World economy.
- There is no liquidity being provided by the banks, they are hoarding their cash and non-disclosing their losses.
- In part 2 of the video: "The reality is people are dying due to the actions of JPM, GS and the Wall Street Jihadists"
Max compares Wall Street bankers to suicide bombers and predicts it is only a matter of time before they are back before Congress with a gun to their heads threatening the destruction of America if they don’t get another bailout. I’m glad he said it an not me because I get enough hate mail from GS fans… Keiser makes the point that, while the American people may put up with this nonsense, the leaders of Europe and Russia and China look at what’s going on here and have no faith in our currency.
I think this is great as it saves me from ranting and raving this morning. I had my fill in yesterday’s post when I said the only way to play this market to the bull side is to suspend all logical disbelief. Fortunately, we had a huge, ridiculous run-up in the morning that gave us tremendous shorting opportunties. Even as the market was rising, in my 9:56 Alert to Members, we targeted the DIA $99 puts at $1.30 and those finished the day at $2 (up 54%) and in my 10:32 Alert to Members we sold the FAZ $19 puts for $1.80 and those finished the day at $1.20 (up 33%). We also took short plays as the market topped on MS, IYT, CS, ICE, V, GMCR, DD, EBAY and even our beloved AAPL as the market was just too ridiculous looking to be bullish.
As usual, we jumped on top of the Beige Book and right at 2:02 I commented that the headlines didn’t seem so hot and by 2:50 we had a thorough breakdown and determined that SRS was the way to go as the statements regarding…
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Frightening Friday - You Mean Markets Can Go Down Too?
by Phil - October 16th, 2009 8:10 am
Every time I try to get bullish, they pull me back in!
We have struggled for two weeks trying to get more bullish but even at yesterday’s exciting close we remained 55% bearish and decided to hold that stance into the weekend. As I updated our $100K Portfolio last night, I was surprised and disappointed that I could find no justification to raise my targets on AMZN, BAC, C, GE, UYG or XLF, sticking with our generally bearish positions, even though they burned us this week. While both GE and BAC beat on earnings this morning, both companies missed on revenues and what’s surprising is how sharply the markets reacted to such small misses.
We’ve been saying for quite some time that revenue projections are in fantasy land. Overall wages may be up 0.2% for the year but the average workweek is down 7% and 10% of our population isn’t taking home a paycheck at all - of course revenues are going to be down, how is that even surprising? For the week, revenues of reporting companies are down about 18% so I consider a winner anyone who’s ahead of the curve (not counting financials, who were given special gifts this year). Even with that gift, it was the financial unit that dragged GE down, with GE Capital’s profits down 87% for the quarter, dragging corporate earnings down to just 23 cents a share, but better than the .20 expected by analysts (see my weekend rant against low expectations).
We also have low expectations for today’s Industrial Production and Capacity Utilization Report. Pretty much anything better than terrible is likely to be celebrated after looking at this chart:
The bounce we got in last month’s report was due to an increase in the production of foods and beverages (up 1.6%) as well as chemicals (up 0.7%) and utility production (up 1.9%) and, of course, the Auto Sector, where Cash for Clunkers ramped up motor vehicle assemblies 12.1% overall. Outside of motor vehicles, production was up just 0.4%, which is what is expected for this month. As expected by the unemployment numbers, Cap Utilization is hovering around 69%, 11% lower than "normal," a strong indication that you do still need people to run those machines despite decades of robotics advancement. 
Hey, there’s an idea - let’s create an army of robot shoppers and equip them with American Express Black Cards and program them to go out and BUYBUYBUY. They’ve been programming the American people to be shopping…
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Thrill-Ride Thursday: Jobs, What Jobs?
by Phil - October 15th, 2009 8:12 am
Yesterday was very hard for us.
Our theoretically conservative $100,000 Portfolio dropped 6% in one day as we had a farily bearish position into options expiration that I stubbornly refused to adjust this week. Surely, I thought, after running up 250 Dow points from Thursday, 10,000 would act as some kind of resistance? We’re also up a neat 500 points for the month of October so that’s our 5% rule and to not get a 1% pullback, even in the most bullish of markets, is very rare indeed.
So we stayed bearish yesterday and got crushed by the AMZN $90 calls we sold as well as UYG calls we sold and our PSQ calls we bought for protection got slaughtered as the Nasdaq flew up not 5% but 5.5% for the month and up 6.2% from it’s October 2nd low. While we are disappointed, we’re not terribly concerned as we’re only going to roll the calls to November anyway and I did promise the members that, if we hold our breakout levels for 2 closes, then I’ll be shifting more bullish. I’ve been trying to identify more bullish positions this week but our mix has still tended bearish as I’m just having so much trouble buying into this rally.
In yesterday’s Member Chat, my comments on the current situation was:
I do wish we were more bullish, this is a very smart group of people and we’re pretty bearish but so is the general investing public or there’d be volume to this rally. I have a hard time ignoring the fact that 600,000 more people lost their jobs this week and, even if it’s "only" 500,000, I still think that’s not really a sign of a healty economy. I think the REITs are off in fantasy land and I think so is the government, who cannot keep borrowing money at these low rates. The dollar has dropped 25% of it’s value since March so the market is only 25% ahead of the currency fall which means a flight back to the dollar, which could happen very suddenly if an EU nation like Spain collapses, could send our market down as fast a 9/11.
That being said, we have no choice but to follow the technicals and now that we can look at nice, easy support levels like Dow 10,000, S&P 1,100, NYSE 7.200, Nas, 2,200 and RUT 620 and simply call that the mark at which we’re 60% bullish. I’ve…
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Wednesday Rally - INTC and JPM’s Piles of Chips
by Phil - October 14th, 2009 8:26 am
That is a crushing beat of the 51 cents expected by analysts, who have been playing expectations catch-up for over a month, trying to get a handle on this quarter’s earnings. JPM’s earnings are more exciting than GS’s earnings as JPM were supposed to be "dragged down" by Chase Banking. With $2Tn under management, the company put up $3.6Bn in quarterly profit, almost 10 times what they made last quarter (.09). "These results included the negative impact of the tightening of the firm’s credit spread, offset by the positive impact of counterparty spread tightening and gains on legacy leveraged lending and mortgage-related positions," the firm said.
Of course we could nitpick and point out that last year they had competition from LEH and BSC and last year they didn’t have $25Bn in bailout money to play with and they didn’t have a Fed Discount window feeding them countless other Billions every month at 0.25% interest but we won’t, because we are trying to get more bullish! Not wanting the Government to get the idea that they don’t need any more free money, CEO Dimon said: "While we are seeing some initial signs of consumer credit stability, we are not yet certain that this trend will continue." Frankly, I think the company sandbagged the earnings as they put $4.967Bn aside as a provision for credit card losses against $5.159Bn in total sales so either their clients are MAJOR dead-beats, or there will be some more profits recognized down the road (assuming all this recovery stuff is real).
INTC also beat earnings expectations last night but they are underperforming last year by a wide margin so not in any way as exciting as JPM’s results. Our strategy for INTC yesterday was to short sell the Nov $20 puts and calls for a total of $1.95 so our upside break/even on INTC is $21.95 but even last night, on the announcement, I still said to members I thought they were a short at $22 but we’re not going to fight the market, not now that we’re over our breakout levels.
The levels we’ve been watching (Dow 9,829, S&P 1,071, Nas 2,146, NYSE 7,047 and Russell 620), should be crushed this morning and, hopefully, will hold up through the end of day. If this is a real rally then we should have no trouble and the last thing the bulls want to see is volume selling at this…
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Friday - Is Anybody Working For the Weekend?
by Phil - October 2nd, 2009 8:28 am
Wheeee, what a ride!
Just like any good roller coaster, market plunges can be fun when you are strapped in safely and prepared for them. Our members have been so prepared we’ll have to hand our Eagle Scout badges (we don’t need no stinkin’ badges) for riding out a toppy market for two tedious weeks, which I won’t rehash here but you can go back to my Sept 19th "Wrong Way Weekly Wrap-Up" to see how hard it was to stay bearish in the face of all that "great" news that the media kept throwing at us. Nonetheless, had you followed our trading ideas in that post, you’d be a VERY happy camper right now!
Now we are down 300 points from that Friday’s finish, about halfway to our 9,100 target, which is the top 5% of our original trading range around Dow 8,650. We’d love to see 9,100 hold, especially on a nice volume sell-off so we can move our range up 5% and make 9,100 our new mid-point, putting the 33% (off the top) lines withing striking distance of a proper breakout but suddenly the news-flow has turned sharply negative. This is something I warned members about way back on August 11th, the last time I thought we were getting toppy (and we were) at Dow 9,400 when I said: "Watch the newsflow in the MSM. If it starts to get negative, look out below."
Yesterday we talked about GS’s about-face on the REIT sector and, later that day, we noted during Member chat that JPM had decided to downgrade SKS, hitting the retail sector hard in the afternoon. I called a slightly early top on Retail on 9/16, when I said to Members: "Right now all retail is being played like a huge winner, as if no segment will lose market share to another. This is amazingly stupid in a declining wages and declining consumer credit environment." RTH was $88.76 that day after running up just about 20% from July 7th so we were looking for a pullback at least to $85, but I think worse as I see nothing in the data that makes me believe in Santa Clause this year or the rally he often brings.
As you can see from David Fry’s chart of the XLY (another Retail tracker) we topped out at technical resistance and are now looking for a completion of a 5% drop back to the August highs but I’m very concerned about today’s job number and wondering how Retail indexes…
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Japan Bear Goes Defensive on Nikkei
by Andrew Wilkinson - September 25th, 2009 4:22 pm
Today’s tickers: EWJ, V, JPM & EFA
EWJ - A massive options position has been initiated on the Japan exchange-traded fund this morning amid a slight 0.3% increase in shares to $10.13. The 150,000 contracts exchanged on the EWJ today are likely the work of one investor who was probably also responsible for another 100,000 contracts traded late yesterday afternoon. The trader appears to have sold 75,000 calls at the January 2011 12 strike for a premium of 35 cents apiece in order to partially finance the purchase of 75,000 puts at the March 2010 10 strike for 65 cents each. The net cost of the spread amounts to 30 cents per contract for a total cost of $2,250,000. Perhaps the investor established the trade to protect a long position in the underlying stock because he is concerned by prospects for price weakness through expiration in March. If this is the case, downside protection will kick in if the price of the fund slips 4% to breach the breakeven point at $9.70. Interestingly, another 100,000 contracts were exchanged at the same strike prices during yesterday’s trading session for a net cost of 28 cents apiece. Both the calls and puts traded to the middle of the market making it difficult to discern magnitude. However, we believe it is likely the investor has increased the size of the protective stance. This would leave the trader short 125,000 calls in the January 2011 contract and long 125,000 puts in the March contract. – iShares Japan Index Fund –
V - Investors piled into put options on the electronic payments network, pushing the global financial services brand onto our ‘most active by options volume’ market scanner. Shares declined as much as 5.5% this morning to $69.68, but have since recovered slightly to stand 3% lower at $71.13. Traders bracing for further bearish momentum in the stock vied for near-term puts in the October contract. The most pessimistic individuals picked up 1,000 puts at the October 65 strike for 59 cents each. The October 67.5 strike had approximately 6,000 puts purchased for an average premium of 1.27 apiece. Finally, the now in-the-money October 72.5 strike had nearly 3,000 put options coveted by bearish traders for about 3.16 per contract. The rise in demand for put options fueled the 20% rise in option implied volatility experienced by Visa today. The stock’s implied volatility reading shifted up from a…
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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
(