What A Tease!
by Stock and Option Trades - February 26th, 2008 2:15 am
A 200-point round trip by lunch followed by a 200 point rise after lunch. We’re getting so used to these crazy days that we hardly seem surprised any more. The huge intra-day spike shown in the chart below was due to Standard & Poor’s affirming its ratings for Ambac Financial Group and MBIA.
The news came just in time for the bulls. In last Thursday’s blog we mentioned that many had called for a bearish breakdown of the pennant formation that day, but only a close below would signal to us a resumption of the bearish trend. That looked highly likely for most of Friday until Charlie Gasparino noted on CNBC that Ambac and MBIA might be saved after all. That suspicion and Standard & Poor’s affirmation today catalyzed a rally of almost 500 points in just two trading sessions!
As if that wasn’t enough, the market managed to tease us with its close today. The pennants were broken to the upside but the key 12,600 level remained firm on the Dow and the 1,380 level was not tested on the S&P 500. Incredibly, in the space of just two trading days we must now be on the lookout for a bullish reversal rather than a resumption of the bearish trend.
We maintain that it will be very hard for the major indexes to stage a strong bullish rally if technology leaders fail to participate. And today Google acted like a dog on a leash that refused to budge despite intense coaxing and tugs by the general market. It was a dismal day for Google, down a huge 4.21% or 21 points. You can see from the chart below that the volume in the last fifteen minutes was astonishingly high. A quick glance indicates that almost $250M worth of stock was sold in those final minutes.
We’re not buying the rally just yet. In fact, we are highly skeptical until bullish breakouts are confirmed. Tomorrow morning we will see the release of the PPI and Core PPI at 8.30AM EST. We will learn how confident the consumer is at 10AM. Durable Orders will be reported on Wednesday along with New Home Sales and the all-important Initial Claims will be out on Thursday. Friday will bring information on Personal Spending and Personal Income. So, there are no shortage of news events that can turn this market right back around again.
CSX performed well for us today. In…
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Monday Market Mania!
by Phil - February 25th, 2008 11:43 pm
Wheee that was fun!
On Friday at 2:14, I was cautioning one of the members not to be too bearish on the markets, especially the financials saying: "The loss of the ratings will force some reshuffling of the bonds but new bonds will be reissued by new insurers, the point is that the insurance placed on existing bonds is valid. You (since I would guess you are short) need to worry about NO cut and AA cuts which, as you say, will rally the markets. I think it is possible for a rating agency to go over MBI’s books and leave a triple A in place with good justification. The fact that the rating agency would feel compelled to elaborate the position could serve to further rally the financials."
At 2:48 today, ABKs AAA credit rating was affirmed by S&P and MBI was taken off CreditWatch, sending both companies and the financials and the rest of the market flying. While this is not a full stamp of approval by any means, it was enough to rip the Financial Sector from being down 1.8% to up 1.2% in the last 72 minutes of the day! Word is that GS is very screwed up though and our man Gasparino (who broke the rally news on Friday) is saying the vererable broker is in BIG trouble this Q and will have significant write-downs.
This morning (and for weeks) I mentioned GS was having a rotten quarter as they were simply on the wrong side of pretty much every call they made. Is it possible that they ran out of things to attack to try to pull down the rally they are short on so they have decided to fall on the sword and attack themselves? A broker like GS can make their books say anything they want and this sudden revelation of losses, after telling us all of last year they were too smart for that, just smacks of an "in case of emergency break glass" kind of plan.
When you fire off the Greenspan gun and draw a blank, desperate times do indeed call for desperate measures as I pointed out this morning the former Fed Chair is now just embarrasing himself going out and working for PIMCO and spouting the company line but Bespoke Investments pointed out that Greenspan has always been THE WORST person to take advice from as he told us to get out of the…
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Monday Morning
by Phil - February 25th, 2008 9:05 am
![[Big Money Poll Illustration]](http://s.wsj.net/public/resources/images/b-poll_illo10252002224238.jpg)
I was hoping to get a coherent picture over the weekend but after reading the WSJ, Barrons, the Economist, the Financial Times and the Investor’s Business daily I’d have to say I’m just confused.
The Journal surveyed economists and came out with a very dreary outlook for the first half of the year. The Economist says "the fears over the municipal-bond market in America look overdone." The Financial Times shows food inflation is so out of control that the World Food Program will have to ration aid to starving people while Barron’s interviewed David Winters, who said that "We view this as a gigantic after-Christmas sale. There has been a lot of indiscriminate selling at any price." Not exactly the clarity I was hoping for!
I’ve been siding with Winters for the past few weeks but things are still looking very scary out there and we are by no means out of the woods and are unlikely to be for some time. Patience is going to be key to navigating this markets and we will need to adjust our trading strategies to reflect the flat but choppy nature of this directionless market. Trader Mike pointed out that: "Skittish. Confused. Insane. One or maybe all of those words describes the current market environment" and illustrated the point with this S&P chart, which shows it simply flatlining into a range:
Fortune had a fantastic interactive timeline called "50 Years of Market Swings" that really puts our current "downturn" into perspective and it’s very, very amusing to see the patterns formed by the election of certain parties and the NEGATIVE performance of the market while they are in power but, since it’s only Monday and we save politics for the weekend, I won’t attempt to draw any conclusions as to which party has a long history of economic destruction.
They had a swingin’ time over in Asia this morning with the Nikkei jumping 414 points but getting a minor rejection ahead of the 14,000 mark. The HSI dropped 35 points but fell 300 points from the gap open, finishing below the critical 23,300 line. Banking shares let Tokyo higher and the market there also got a boost from speculation that China’s Sovereign Wealth Fund would be investing $10Bn in the Japanese markets. I don’t really see how this is news since they have $200Bn to invest and Japan is 1/10th of the global economy but I guess anything is a reason…
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Inflation Nation
by Phil - February 25th, 2008 7:59 am
As you may know, I’m a big fan of inflation. I think inflation is the best way to pay off our national debt (makes it a smaller percentage of the GDP) and the only people who really hate inflation are the people who lend you money. They get paid back in dollars that are worth less (worthless?) than the dollars they lend you.
That’s why the Federal Reserve, a bunch of Bankers, spend day and night combating inflation. They’re not doing it for you - you borrow money! They are doing it to make sure that your mortgage stays at 30% of your income. If you keep getting raises due to inflation that mortgage (and you should always have a fixed, of course) might go down to 10% of your income over time leaving you with extra money. Extra money is the kind of thing that turns the working class into the liesure class and, despite the lip service paid to the concept, no one in power wants true upward mobility in this country.
Too much inflation leads to high interest rates which causes consumers not only to borrow less (gasp!) but to save more. I remember a time when you got a CD that paid 12% AND a toaster for putting money in the bank! Now you get 3% and a $1.25 fee for reviewing your statement - and they wonder why Americans save less!
You often hear that we are not a nation of savers but Americans have deposited $1.5T since 2002, bringing our people’s total savings to just under $4 Trillion, about as much as the rest of the planet combined! While it may be a small part of our total income, it’s quite a large total income to begin with!
The joke is that we are being paid less money for our savings than at any time since 1960 so again I will point out that you are being fed a line of crap by bankers! They are holding $4T of your money and paying you 3% interest yet if you want to buy a home you must pay 7% (plus fees!). It is also worth noting that, DESPITE 2.25% of recent Federal rate cutting by Bernanke and Co., actual lending rates on 30-year mortgages have remained at 6% - THE SAME PRICE AS THEY WERE WHEN FED FUNDS WERE AT 5.25% (now just 3%).
The Fed Funds Rate, the rate on the money the Fed loans directly to bans, is…
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Introduce Yourself
by k1 - February 24th, 2008 7:31 pm
Go to the K1 Project Main Page
We’ve been kicking around the idea of having a place to post a small biography
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Wild Weekly Wrap-Up
by Phil - February 24th, 2008 3:57 pm
Woo hoo, we fininshed the week up 33 points!
We had lots of fun getting there though with a 250-point top to bottom move EVERY SINGLE DAY. It just doesn’t get any better or worse than that, depending on what type of trader you are. Friday was the worst as we fell all the way from Thursday’s hopeful open at 12,500 all the way to the pit of despair at 12,155 at 3:10 Friday afternoon only to finish back just under 12,400 so quickly that we didn’t even have time to enjoy it (but it really saved our portfolios for the week!).
I mentioned in the morning that the sell-off was overdone at 12,250 and another 100-point drop in the morning did nothing to change my mind but I kept up that theme all day during member chat and, fortunately, we maintained a fairly bullish outlook and stuck to our guns during the sell-off. As we have now delayed the launch of the basic membership site unitl March 7th and we have some comments available on the free site, I will tell you to read the Friday post and comments if you want to see how we handled the day, rather than rehash it here.
On Friday the 15th we were in absolute pain and just wanted the week to end as we dropped from a high of 12,627 on Wednesday the 13th all the way down to 12,216 in intraday action on Friday. Let’s remember that that sell-off was caused by the anticipated St. Valentine’s Day Massacre of Bernanke and Co as they addressed the Senate Banking Committee and a lot of the residual selling sentiment is based on the fact that Bernanke must face Congress in what used to be called Humphrey Hawkins testimony when Greenspan used to do it but, after seeing Bernanke’s inept handling of the testimony, Mr. Hawkins apparently came back from the dead to demand his name be disassociated from that circus.
It’s the Congressional report that has all three rings of the circus in action with our Congresspeople really representing the full gamut of the American people, many of whom, unfortunately, aren’t very knowledgable about banking. Unfortunately, you don’t have to pass a test of any sort in order to waste everyone’s time - you only need to be elected to Congress! Of course, we also get to see another episode of "When Ron Paul Attacks," that’s always fun!
The next day (the last day of the…
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The St. Petersburg Lottery (In Reverse)
by OptionSage - February 24th, 2008 12:29 pm
‘The St. Petersburg Lottery’ is based on a theoretical lottery game that has an infinite payoff. You pay a fixed fee to enter the game of chance in which a coin is tossed until a tail appears. Each time a head appears, the pot is doubled and, at the end of the game, you win whatever is in the pot.
If the first bet is for $1, this means that, with 50/50 odds in the first round, you can win $1. The next time around the probability is 25% but you can win $2. When the probability is 1/8th you can $4 and so forth. Knowing how the game is played, what would be a fair price to enter the game?
What we know about the game is that only unlikely events (low probabilities) yield high prizes. When famed mathematician Bernoulli addressed this problem, he conjectured that people tend to neglect unlikely events.
While mathematicians have since conducted experiments to counter Bernoulli’s claim, stock market practitioners have served only to prove his point through spectacular failure.
One famous hedge fund comprised former Vice-chairman and head of bond trading at Salomon Brothers, John Meriwether, Nobel Prize Winners in Economics, Myron Scholes and Robert Merton, as well as principals such as Eric Rosenfeld and Larry Hilbrand.
The fund began with just over $1bn of investor capital and operated strategies that were almost a reverse of the St. Petersburg Lottery. Rather than seeking extraordinarily high returns with low probability, the fund engaged in strategies that would return very small capital amounts with very high probability.
The premise of the fund’s investing strategy was that long-dated bonds issued a short time apart would tend to become identical over time. However, the rate at which these bonds approached this price would be different, and high-liquidity bonds such as US Treasury Bonds would approach the long-term price more quickly than illiquid bonds.
The firm reported annualized gains of over 40% initially but, as the capital grew, management decided to engage in non-directional strategies which demanded they take highly leveraged positions to make a significant profits and which were outside their area of expertise.
In 1998 the hedge fund had just under $5Bn in equity and had borrowed an astounding $124Bn. It’s derivative positions off-balance sheet had a value of approximately $1.25 Trillion. These comprised interest rate derivatives as well as equity options.
The strategy employed was in many respects similar to selling out-of-the-money options naked. The…
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As possible split draws credibility, May calls draw volume in bond insurers
by Andrew Wilkinson - February 22nd, 2008 2:25 pm
Today’s tickers: ABK, MBI, INTC, DELL, DNA, NAK
ABK, MBI – Early morning news reports suggest that bond insurers MBIA and Ambac may be becoming more disposed to the idea of splitting their municipal bond units from their toxic, CDO-exposed structured finance divisions . A plan to this effect was first floated early this week by activist shareholder William Ackman, who has been shorting bond insurers. Initial response to the plan from MBIA and Ambac was cool, as it was believed that splitting the companies would amount to little more than a concession of defeat, rewarding Ackman’s own bearish bets. With no firm plan for a bond-insurer bailout in place, however, market pragmatists are suggesting that a split is more or less inevitable. Earlier today, CNBC reported that officials at both bond insurers are beginning to tinker with the scenario of possible downgrades of the bond insurers by Moody’s S&P and Fitch, and what the loss of a triple-A rating would mean in terms of competition with higher-rated companies, such as the initiative launched by Warren Buffett. Bearing all this in mind, we were interested to see option traders in both insurers recalibrate bullish positions in the March and May contracts. With shares in Ambac trading 7.5% lower at $8.54 today, we observed heavy buying at the March 10 call strike, which may have represented closing purchases given the 24% discount in premiums, or could be traders looking to position ahead of an imminent ratings announcement. Calls bought at the May $10 strike, meanwhile, were indeed fresh positions, bought for $1.65.
In MBIA, meanwhile, a similar dynamic emerged. With shares down 5.8% to $11.20, the 46,000-plus options trading in the bond insurer made it one of the most active tickers on our platform, with March 12.50 calls trading nearly 10,000 times for $1.18 – down 25% from yesterday’s value owing to the decline in share price. New positions were entered in the May 11 calls for $2.38.
INTC – Earlier this week it emerged that chip giant Intel has been subpoenaed by the New York State Attorney General’s office in an antitrust probe similar to one underway with the European Commission, which charges Intel with using unfair market practices to muscle its rival AMD from the European market. The European probe escalated earlier this month with a raid on Intel’s German headquarters. Shares in Intel are down 3%, more than twice the decline on the…
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Friday Morning
by Phil - February 22nd, 2008 8:59 am
Well another week bites the dust and, thankfully, this was a short one.
We have little good to say about this week other than we didn’t break below last week’s lows (yet) and there is nothing wrong with forming what is turning into a month-long solid base at 12,200. There are very few prolonged consolidations that lead to a sell-off so the longer we don’t go down, the better our chances of going up.
We really, really need an easing of energy prices to get us back on track in the broader markets and we will continue to sell any commodity led rally and buy into any commodity based sell-off until somebody wins this tug of war. We bought QID puts on Wednesday morning and QID calls yesterday morning and yesterday afternoon we were back on the puts - buy and hold isn’t even a real possibility for a market that was down 200 last Thursday, flat Friday, up 150 then down 250 on Tuesday, up 250 Wednesday and down 250 yesterday, finishing, as we noted in last night’s Big Chart Review, pretty much right back where we started from.
We got a small break in oil yesterday but much of that has been reversed in thin overnight trading. We had another huge build yesterday and Rowan Menzies, head of research at Commodity Warrants said: "People have got to start being more concerned about demand, especially now that you got the inventories going up and up every week." "Refineries are curtailing output for economic reasons. There’s weak product demand and they are responding by reducing output,” said Tim Evans, an energy analyst at Citigroup Global Markets. Total implied fuel demand is down 1.1% over the last four weeks from a year earlier. Gasoline inventories climbed 1 million barrels to 230.3 million, the highest since February 1994. “Gasoline supplies are near the highest level ever, and crude oil supplies are still gaining,” said Kyle Cooper, director of research at IAF Advisors in Houston.
Asia gave back most of Thursday’s gains into their weekend this morning as Japan cut its assessment of their economy in the face of slowing US demand. Due to rising fuel costs, Japan ran it’s first trade deficit ($739M) in a year and the IMF dropped Japan’s growth forecast from 1.7% to 1.5%. Consumer spending, the biggest chunk of the economy, is "almost flat," the report reiterated. Growth in corporate profits "appears to be pausing." Housing construction…
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Thursday Thump
by Phil - February 21st, 2008 11:24 pm
I’ll keep calling the Thursday wrap-up "Thursday Thump" until everyone starts recognizing a pattern!
Last week it was the St. Valentine’s Day Massacre that caused the drop as we fell from 12,550 at the open to 12,350 at the close while people talked about how crappy the economy was. Today we fell from 12,500 to 12,250 as the Philly Fed Index fell to -24, the lowest reading since 1991. It was far worse than the -10 expected but only a little worse than last month’s -21. Leading Economic indicators also declined but that was expected and Jobless Claims FELL 9,000 to 349,000, still a good 51,000 off "recession levels."
Unfortunately, since it was Thursday the market was in no mood for good news so we fixated on the bad with a very broad sell off on low volume - which is in line with my theory that we are clearing out the last of the suckers this week. If people were looking to get out of the market you would expect a little more volume on the 250-point rallies as people take the opportunities to get out while the getting is still good…
Energy traders were gettin’ today with a quick pullback to $98 and I never mind a market sell-off that is led down by the energy sector (especially when we’ve been shorting them). Other commodities started falling as well but we are very unlikely to get follow-through into the weekend and we’ll very likely finish this short week pretty much where we began it and pretty much exactly were were were last Tuesday, when we last ran the big chart:
|
|
|
Week’s |
25% |
20% |
Feeling |
200 |
|
Index |
Current |
Move |
Terror |
Horror |
Better |
DMA |
| Dow | 12,284 | -44 | 10,644 | 11,354 | 11,808 | 13,373 |
| Transports | 2,606 | 90 | 2,336 | 2,491 | 2,591 | 2,844 |
| S&P | 1,342 | -3 | 1,182 | 1,261 | 1,311 | 1,488 |
| NYSE | 8,977 | -109 | 7,790 | 8,310 | 8,642 | 9,775 |
| Nasdaq | 2,299 | 21 | 2,146 | 2,289 | 2,380 | 2,614 |
| SOX | 351 | 4 | 419 | 447 | 465 | 472 |
| Russell | 696 | 3 | 642 | 684 | 712 | 800 |
| Hang Seng | 23,305 | -384 | 24,000 | 25,600 | 26,624 | 24,364 |
| Nikkei | 13,500 | -479 | 13,725 | 14,640 | 15,226 | 16,729 |
| BSE (India) | 17,349 | -741 | 15,900 | 16,960 | 17,638 | 16,545 |
| DAX | 6,828 | -11 | 6,088 | 6,494 | 6,753 | 7,704 |
| CAC 40 | 4,847 | -96 | 4,626 | 4,934 | 5,132 | 5,752 |
| FTSE | 5,913 | -136 | 5,066 | 5,403 | 5,619 | 6,435 |
That’s right you wimps, while we added a red box to the BSE, the Nikkei and the Hang Seng, Europe held their levels and NONE of the US levels fell. NONE! I read the very entertaining comments about bearish wedges forming "everywhere" with no comment of my own in last night’s chat as I’m not really a TA guy and I do respect the charts but I also think fundamentals do trump squiggly lines over time, it’s just the short-term we have to worry about.
Have no doubt about it, the Hang Seng and the Nikkei are in very bad shape and if the CAC crossed that last line I will be VERY concerned about the international trend but our premise for being bullish is that the US,…
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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
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