Thrilling Thursday Wrap-Up
by Phil - January 31st, 2008 11:16 pm
Wheee, that was fun!
It was a terrible day for hyenas as sanity returned to the markets and great companes, like our ISRG, reasserted themselves. After hours we got in-line results from Google (OK, earnings were a 0.23% miss) and they tanked after hours but we’ll see if they pull an Amazon tomorrow and gain it all back during the day.
Our morning plays of MBI and ABK were up huge off their opens for the day so we were in a great mood from the start. MBIA was placed on negative watch by the S&P but Ambac had their AAA rating affirmed and the hyenas were chewing their own legs off to get out of that trap! FGIC, the private bond insurer I didn’t trust, was in fact downgraded by Fitch, but this was no surprise and the markets took it pretty much in stride. MBIA held a marathon, 4-hour conference call where the company laid out the case that their capital plan will exceed all AAA rating requirements and that a downgrade would impact them by no more than $200M even if it occurred.
Retailers were up across the board with the whole sector hitting the 5% rule during the day. We still have the jobs report to get through tomorrow but things are looking very bright indeed as the Nasdaq broke and held the 2,380 mark we were looking for on Tuesday’s Big Chart and the Transports blasted through 2,591 leaving only the SOX lying on the floor and we will be looking closely at this sector for opportunities if we get some follow-through from the Nasdaq into next week.
It remains to be seen how the markets will respond to Google’s "miss" but the Nasdaq held up well in after hours trading (which is a shame since I bought some QQQQ puts on Google’s announcement) but, on the whole, we’ve made huge progress for the week and all we have to do tomorrow is not blow it.
I’ll cut this post short as I intend to do small virtual portfolio reviews for tomorrow.
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by Phil - January 31st, 2008 9:23 am
Well I made my bull case in last night’s post, now let’s see what kind of mess we’re dealing with today…
As expected, MBIA reported far less than $12Bn in losses that were bandied about yesterday by Wall Street hyenas and an irresponsible MSM, but $2.3Bn lost in one quarter by a company with just $2.3Bn in SALES (not earnings) is simply not good. MBIA wrote off $3.5Bn in credit derivatives giving them a tax break (oh sorry, I mean loss on paper) of $1.9Bn for the year, compared to a profit of $819M in 2006.
John Laing wrote an excellent article on how overdone the MBIA sell-off was in Barron’s last week so I won’t get into it here but we really need to get real with these financial companies. Perhaps the company was a little overvalued at $70 in October but, had they not written off $3.5Bn (again, paper losses) they would have shown a profit of $1.6Bn for the year (and paid $500M in taxes). Barron’s is not blindly stating a bull case, back in June they correctly titled an article "A Mortgage Meltdown for MBIA?" and were just a little bit ahead of the curve, as was I when I said way back in 2006 that Amaranth was just the "Tip of the Iceberg."
Even an iceberg forms a base if you go deep enough and MBI down 82% and ABK down 88%, we just may be near enough the bottom to hit something solid. I’m not ready yet to dive back in there but I think I’ll begin a little speculative accumulation on both of these stocks with the MBI Jan ’09 $20s at $3 and the ABK Jan ’09 $20s at $1.75 and I will roll each down $5 for + $1.50 whenever it is offered. This will be fun if this thing turns around and there will probably be a chance to get out down 50% otherwise.
![[Go to story.]](http://s.wsj.net/public/resources/images/OB-AZ082_10pt_f_20080130142124.gif)
Well a 40% reduction in Fed Funds rates don’t seem to be exciting the markets today as jobless claims climbed 69,000 to a 3-year high of 375,000. Personal Savings climbed to 0.2% from 0% last month and that is going to scare the retailers as Personal Income was up .5% which led to a very low consumption rate, up just 5.5% for the year. Since food and energy are up close to 12%, that means pretty…
Option traders play Altria, UST faceoff for U.S. snuff market
by Option Review - January 31st, 2008 8:49 am
Today’s tickers: MO, UST, YHOO, XLF, DELL, RMBS, ETFC, CCU, HWAY, BID
MO, UST – This morning’s earnings report from the world’s largest tobacco producer, Altria Group Inc., confirmed speculation that the company will spin off its international unit, acquiescing to shareholders who have demanded higher dividends. Philip Morris International currently accounts for two-thirds of Altria’s total profits, so the loss of the international unit will force the company’s US division to resort to innovative tactics to make up the difference. With US cigarette sales consistently falling, the obvious choice for Altria is to branch out into the $3.7 billion per-year market for smokeless chewing tobacco, which is growing by 6% annually – and which is dominated by UST, the maker of Skoal and Copenhagen brand chews.
Interestingly, as Bloomberg news reported yesterday that Altria would likely turn its attentions to the US snuff market, we observed a 10% spike in implied volatility in options of UST – which is currently sitting on three-fourths of the market for smokeless tobacco. Bloomberg reports that Altria is already in the process of conducting tests in Atlanta to determine whether consumers would be receptive to Marlboro-brand chewing tobacco. After news of Altria’s overseas unit spinoff was made official this morning, option traders saw the writing on the wall and sent option volume to more than 7 times the normal level, with puts trading at three-month highs, outnumbering calls by 3 to 1. A somewhat defensive view for UST shares was in evidence through put-spread plays in the February contract between strikes 55 and 60, with traders selling the 55 puts against the purchase of the 60 puts. Shares closed 3.5% lower at $53.22, with the current share price representing a 10% comedown from its 52-week high.
Altria shares, meanwhile, gained 1.1% to $76.96, and with 68,000-plus options trading it was one of the most liquid option families on our platform. Twice as many calls traded as puts as implied volatility has come down sharply, off 20% from pre-earnings levels. Heavy traffic was evident in February 80 calls, and again in the 75 puts. Total open interest shows 1.8 call positions open for every put.
YHOO – Yahoo! – A disappointing 2008 outlook coupled with news of very limited downsizing measures failed to satisfy a market weary of Yahoo’s executive malingering. Shares closed 8.4% lower this afternoon at $19.00, with 292,000-plus options trading more…
WTF Wednesday Wrap-Up
by Phil - January 30th, 2008 11:44 pm
Oh now I’m depressed!
A 1.25% rate cut in just over a week and this is the market’s reaction? Rates are at 3% now, there’s only 2 cuts like that left before we become Japan. Not only that but you have the President (the rally-killer in chief) very appropriately addressing the nation from a helicopter factory (one of his handlers has a good sense of humor) to discuss the $146Bn money drop on top of the Fed’s $163Bn (that’s what a 1.25% cut costs the government).
"There’s some uncertainty in the economy, but in the long run, you’ve got to be confident about your economy," Bush said. "Inflation is down, interest rates are low, productivity is high. Our economy is flexible. It is resilient. We’ve been through problems before." Let me tell you something – unlike this recent study detailing 935 false statements used by the administration to lead us to war, this is totally true! I have never seen so much paninc in the markets over so little.
People are just ready to panic, they WANT to panic – they are disappointed if they don’t have a good reason to panic. Sometimes my kids happen to flip on a random "scary" movie on the TV and they watch it with the same indifference as they watch Pokeman but if I turn off the lights and put on the fireplace and TELL them we’re going to watch a scary movie, they’re ready to jump out of their skins during the opening credits. That’s what’s going on in the markets now, pretty much anything will spook investors and every new piece of information is looked at by people who expect it to be bad.
Today’s scary news was a report that the S&P MAY cut ratings on $534Bn of subprime mortgage securities and CDOs. The CDOs include the securities, the $534Bn figure is double dipping and downgrading paper from AAA to AA MIGHT cause an accounting shift and create paper losses but will have little actual impact on the financials. The real issue may hit the regional banks, who have so far used accounting tricks to avoid write-downs by hiding behind the still-AAA rated paper shield that kept them from taking losses last year.
“If you’re holding a AAA piece and it’s now downgraded to AA, you might have to write it down, even if you’re holding it for an investment,”…
Which Way Wednesday?
by Phil - January 30th, 2008 9:05 am
We are just waiting for the Fed today.
Professional bond-broker Greenspan jumped the gun today with a well-timed attack from Berlin where the former Fed chief (the one who people respect) said this morning: "I believe the probability of a recession is at least 50 percent, but up to now there are few signs that we are already in one," Greenspan said in an interview with weekly newspaper Die Zeit published in German. "In my opinion, it will probably happen but the facts suggest we are not there yet."
Asked whether central bankers and financial policymakers could head off a U.S. recession, Greenspan said: "Probably not. Global economic influences today are stronger than almost anything that monetary or fiscal policy can counter them with."
Gee thanks Alan - when you’re done killing our economy I have a puppy you can strangle too!
Greenspan has indeed done a complete 180 since becoming a bond pimp. After spending 20 years telling Congress the Fed had things under control, on Oct 16th he told Fox Business news that the Fed is NOT necessary (6:30 on the video) and intimates that we would, in fact, be better off going back to a gold standard or else we are doomed to ever sprialing inflation. Right at the end of the clip, Greenspan states that the nation did very well from 1870 to 1914 with the international gold standard. For more on this, you can read my sadly precient March article "Are We Heading for an Economic Tornado."
Asia did not know Greenspan was going to rain on Bernanke’s charade today but they took the time to sell off anyway, despite what seemed to be an encouraging US session yesterday (of course YHOO bummed everyone out last night). Japan gave back 1% in a very rocky session while Hong Kong fell 638 points, saved only by the bell after giving up a week’s worth of gains and not looking too healthy on a monthly chart.
As I mentioned on Monday, HMC officially reported yesterday a 38% rise in net profit led by very strong exports. Overall industrial output in Japan EXPANDED 1.4%, slower than expected but far from what Goldman’s Chicken Little report would have had us believe. There were legitimate issues with bank earnings and China’s massive snow storm (which I also predicted as a byproduct of global warming) is…
Yahoo options in focus ahead of earnings
by Option Review - January 30th, 2008 7:09 am
Today’s tickers: ING, CLWR, AMZN, YHOO, VMW, EMC, ZMH, SOV, XLF, JPM, VLO
ING – Options in the American depositary receipts of Dutch banking giant ING hit our market scanners owing to unusual trading in April calls. With ADR’s in the Benelux bellwether closing .36% higher at $33.08 this afternoon, it appears that some 15,000 lots were bought in out-of-the-money April calls at the 45 strike. Given the apparent lack of news catalyst, this was eye-catching volume indeed – enough to push total volume to 5 times the normal daily level. The 25-cent price tag on these calls may have induced a closing purchase of existing short positions, or could represent a bargain bet on a $12 upside tear for ING shares heading into the springtime. ING last traded at the $45 level in mid-October, and current premiums reflect a market pricing in just a 1-in-5 probability that it will do so again in April.
CLWR – Options in wireless Internet company Clearwire traded at 17 times their normal volume this afternoon, following a Wall Street Journal report that the company has resumed talks with Sprint Nextel on joint venture for high-speed wireless Internet connection using so-called WiMax technology. With Clearwater shares up more than 22% to $15.30, the news elicited a rush to buy February 15 calls. Implied volatility also saw a massive uplift, currently topping 109% – indicating traders’ expectation of 34% more price risk to Clearwire shares over the next month than they have shown historically.
AMZN – Online retailer Amazon.com was due to report earnings after the bell today. Its shares closed 2.5% lower at $73.90. Today’s earnings report will unmask the numbers behind an unusually eventful quarter in terms of product unveilings – to wit, its wireless, Sprint-powered electronic reader Kindle, the debut of the video downloading service Unbox, a separate MP3 download service in cooperation with Warner Music Group, as well as the impact of a record holiday season. Over the past 52 weeks, Amazon’s charmed run has brought about a near-doubling in its share price, but it’s lost 20% of its froth so far this year. With more than 59,000 options in play today, about 10% of its open interest appeared actively deployed, but it still ranked among the top 25 tickers by volume on our platform. Implied volatility in Amazon.com shares is at an extraordinarily high level – at 81%…
Tuesday Wrap-Up
by Phil - January 29th, 2008 11:53 pm
That was nice and dull for a change!
We needed that, a day where we could take the time to adjust our positions ahead of the fed without all the wild intraday swings we’ve been getting pretty much every day this month. The Dow passed our days test at 12,420, dipping below it just once at 10 am but then holding that line on 4 sell-off attempts. That is, at least, encouraging.
Birinyi put up an interesting chart detailing the major S&P declines since 1982 and it’s nice to put things in perspective:
So this is an "average" decline so far but we are at a tricky sort of mid-point. As Tom2oc and I have noted for weeks, this is where we expected to be on a correction but, below this is a gaping abyss filled with pain and suffering the likes of which few men have ever seen! OK, maybe a little dramatic but you get the point…
Tom has shifted his outlook on the BKX to "unconfirmed bullish" so we will watch that index closely, especially around the 90 mark, where they just broke over. On a longer view, the finanicals are still down from a solid 115 that started failing in July so we still have about 20% of upside to get back on track, we will watch each 5-point increment with great interest.
The financial sector did gain 1.4% on the day, leading all other indices but there is talk that the ratings agencies will be downgrading the bond insurers and the FBI has opened up criminal inquiries on 14 companies in a sweeping subprime mortgage probe – either of those things could derail our little rally.
Asianomics makes the bear case on the financials, comparing the decline of the homebuilders - which indicates the financials have room to fall or the builders have room to rise:
While that’s all very doom and gloomy, it’s the builders that have been rising to meet the XLF as the XHB have been on a tear since last week, gaining a quick 25% off the lows. Try to keep this in mind as "THEY" try to panic you in and out of the markets, you can use charts and data to illustrate any point you want to but do not be satisfied until you have several sources (and sources that were linked…
Tech-space tenterhooks! Call-sellers, straddle buyers jockey for Yahoo earnings
by Option Review - January 29th, 2008 9:10 am
Today’s tickers: YHOO, AOB, NTAP, CAT, LGF, MCD, VIX, MSFT, UXG
YHOO – Ahead of its earnings report tomorrow, shares in tech-space whipping boy Yahoo! slid 5.1% on the session to close at $20.82. With opinion split as to whether tomorrow’s earnings report will bring news of job cuts – news that could be bullish for a stock that has suffered in the eyes of investors for the perceived inaction of its executive management – today’s option action showed flagging confidence in the capacity of stock to pull out an upside surprise. Heading into earnings, the price of the front-month, at-the-money straddle implies a 13% up-or-down move factored into current premiums. Fresh volume was observed in the 22.50 calls, which were mostly sold despite the fact that this position lost 35% of its value simply by dint of Yahoo! lackluster price action today. We did, however, observe traders load up on longs in that 20.00 straddle, which at $2.90 will generate profit for the buyer upon an upside break past $22.90, or downside move below $17.10 – that’s 8% below the standing 52-week low.
AOB – Shares in Chinese small-cap American Oriental Bioengineering gained 4% to close at $9.45 this afternoon. The company specializes in the development of plant-based pharmaceuticals and nutraceuticals with roots in traditional Chinese medicine. No apparent news catalyst is behind today’s spike higher in its share price, but the ticker has been on the receiving end of some scattered stock recommendations as a compelling growth story-slash-China-play. Its share price, however, has declined about 17% over the past month. It appears that a trader may have taken the opportunity to adjust an existing volatility position in the January 2009 series from the 12.50 strike to the 10.00 strike. It appears that the $12.50 straddle may have been shorted back on December 26, when American Oriental Bioengineering shares were trading at $11.56, for a total premium of $6.20. The position was bought back today for $6.50 – a slight loss from the initial position, if this is indeed the case, and then a new short straddle was opened in the same contract at the 10.00 strike for a combined premium of $5.35. The trader in this case may be looking to avail himself of the fact that at 75%, American Oriental Bioengineering’s implied volatility is at a two-month high (making premiums costlier), taking advantage of the…
Testy Tuesday Morning
by Phil - January 29th, 2008 8:25 am
I’m still bothered by the 88% probability of a .50 Fed cut that is priced into the futures.
One week ago the Fed Funds Rate was at 4.25% and the Fed went with a .75 emergency cut. Another .50 cut would knock us down to 3% and that would be a 30% drop in just one week! Were we really 30% too high – is the Fed that totally clueless that they are now going to stand up and say to the world "We were at least 30% wrong at our last meeting, maybe more – we’ll get back to you next time Cramer pops a blood vessel."
So I guess the question we need to ask is: "How dumb is the Fed?" Are they "just" 30% wrong or are they 50% wrong or perhaps (if we eventually race down to BOJ levels and start just GIVING money away) they are 100% wrong. The BOJ has been SO wrong for SO long that they put a guy in charged named Fukui, just to make sure people got the message!
President Bush gave the people a big FU in his State of the Union Address as there was little for him to do, other than laugh at his own suggestions while he was reading them, because he knows there’s not a chance in hell he’s going to put these things through Congress. Rather than focus on productive legislation that CAN be passed, Bush decided to spend our nation’s time at this very critical point in history asking for more war funding, more tax cuts and ratcheting up the rhetoric against Iran. Needless to say, he drove the dollar to new lows in overnight trading.
The Democrats have begun to show ourtight disdain for the President, which I can’t say I approve of but clearly, this administration is over and the Democrats are already measuring the drapes in the Oval Office. “I don’t know what they gain by this relentless stream of negativity,” said Senator John Cornyn, Republican of Texas. “But I guess they just can’t seem to help themselves.” Nancy Pelosi said: "“To realize that the president of the United States, in his final State of the Union address, is not talking about the promise of the future, he is talking about the process of an appropriations bill, I think that’s pretty sad.”
Jack Kingston (R-GA) said: "I think there was a certain relaxation…
Discounted Happy Meal
by Stock and Option Trades - January 28th, 2008 11:59 pm
Last Tuesday the Dow dropped hugely at the open and rallied intra-day from around 11650 to 11950. In our daily wrap-up we wrote "Overall, the indexes did drop substantially today and did rebound but they still closed negatively. Unfortunately, we have no choice but to view this negatively. Was it capitulation earlier in the day? Absolutely. Were the bullish moves through the day huge from the lows of the day? Sure. Did we go bullish for the day and print attractive technical charts? No. In fact, the Dow has closed down 5 days in a row….we will maintain hedging on our positions while the trend remains bearish."
The next day the Dow gapped lower again, down to 11,700. It soon rallied to 11,950 before dropping to 11,650. Finally the Dow surged to the 12,200 level. In our Wedensday wrap-up titled "Today was THE Day", we wrote "We have mentioned for weeks that what we needed was capitulation followed by a huge bullish rally intra-day. We never got that rally – until today! Yes today was the reversal we have been seeking" We spotted Baidu demonstrating tremendous relative strength in the midst of the chaos and suggested a bull put below the 200-day MA (the stock is now $50 above that level and the trade is already positive). Our Dupont trade still looks good. We noted NYX held up extremely and re-affirmed the benefits of long-term trading. Indeed, such trades would have allowed any investor ride through last week’s turbulence with profits on NYX.
However, we urged caution on specific stocks. On Apple we wrote "Yesterday we commented that we could not possibly view the action of the markets positively when they closed negatively for the day, even though they rallied bullish during the day from their lows. Today, Apple railled bullishly from its lows but still closed negatively. Should we view Apple differently? No!" Apple dropped $7 since then.
On Thursday we noted "Unfortunately, the leaders are not performing particularly well. Google reached its 5-day EMA today and was rejected strongly from that level….If Google remains above $582 tomorrow, the likelihood is it will follow Baidu’s action with a quick reversal bullish. However, a failure of that level could signal a continued and pronounced trend lower. Needless to say, tomorrow will be crucial for Google and the close is much more important than the open." Google did rise intra-day above $590 but…
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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...
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