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 was folded into CIBC a long time…

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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 and meeting the cost in part via…

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Thrill a Minute Thursday

by Phil - March 27th, 2008 8:48 am

Strap on your safety belts, here we go!

It’s going to be a wild day as the panic is being shoved down our throats with the WSJ leading things off with rumors of a hedge fund collapse at JWM Partners, which is headed by the John Meriwether, the guy who busted Long-Term Capital Management and gave us our first great hedge fund crisis. 

Aside from the fact that I find it impossible to feel sorry for people who give money to the same guy, WORKING IN THE SAME OFFICES, that caused a global financial panic in 1998 with his stupendous losses - this is also not news, just an expected side-effect of the municipal bond markdowns and it would be a bad idea for investors to pull out now but you don’t get that impression from the Journal, which takes several opportunities to remind readers that Monday is the deadline to request capital withdrawals.

We expected today to be a bad day since the weekend as we have the GDP report, which, of course, shows 0.6% growth as it’s the same number as we got in the last 3 preliminary reports so why would it change? 

In addition to Meredith Whitney’s gloom and doom prophecies yesterday, Paulson decided it would be a good time to threaten the finanicals with greater scrutiny and David Merkel wrote an excellent summary of the current financial environment so I’ll keep quiet about it and move on to today’s business but we went with XLF calls amid all the carnage and picked up more C as it all just seems cheap to me.

Asia was mixed this morning with Hong Kong up just 47 points and the Nikkei down 102, still pretty much mirroring the Dow but the Shanghai Composite dopped a whopping 5%, bringing mainland China’s market down to the lowest point since April 9th, with all of last year’s gains being erased.  PTR fell 8.3% despite another huge jump in oil and China Pacific fell another 7.5% as Baoshan Iron blew earnings and dropped 9%.  China Construction Bank fell 5.5%, Air China dropped 9.1%, Ping An Insurance fell 6.1% and China Shenhua Energy dropped 9.8%.  You would think something like this would be bigger news over here, but I have yet to hear a word about it on CNBC or any television station.

Remember folks, our goal is that US equities just look "less sucky" than other markets - I think…

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