Archive for July 7th, 2008
Monday Mop-Up
by Phil - July 7th, 2008 11:51 pm
What a crazy day!
It was fun because we were on top of things, not trusting the rally in the morning, grabbing some GOOG puts, taking a nice GOOG spread… By 10:15 I was already warning that the financials were failing us (always know what to watch) as oil bounced (public enemy #1) and that was followed at 10:46 by Khaannn’s very good observation that the VIX was up, which I noted was a bad sign. GS collapsed around the same time and that was all she wrote for our little "rally."
Hopefully I didn’t screw up by getting a little bullish as we held 11,150 in the afternoon. I saw a continued financial panic and a commodity sell-off taking down the market - THAT’S WHAT WE WANT! Well, we’re actually done wanting the financials to go down but commodities must die. We were looking for rotation out of those groups since last summer and we sure got a rotation out of financials but ALL that money went into commodities so now we have ONE market leader that needs to give it up so the rest of the market can go forward.
So I made some good calls, blah, blah… More importantly, we should talk about your portfolios and what you are doing with them. I closed a lot of profitable positions on Friday but I think a lot of people miss the point that those are short calls and puts we SOLD to other people who PAID US crazy premiums to take short-term risks because they think they are smarter than the market. DON’T BE THOSE PEOPLE!!!
90% of the capital of our portfolios that is in play is in long positions against which we SELL shorter positions. We do have a couple of portfolios where we try to beat the market by being clever: The $25KP is getting KILLED in this market and the $10KP is lucky to be back to cash. Our Day Trade Portfolio is doing very well but you all know what a wimp I am about them, it’s mainly a series of 20% quick gains we’ve been grabbing off the table, much like Optrader’s Swing Trading Portfolio - this is the kind of strategy that does work in a horrible market like this.
We set up the Day Trading Portfolio BECAUSE we had a $100K Portfolio that was going nowhere early in the year and, at the time I said that this was…
Where’s the Rally?
by Phil's Favorites - July 7th, 2008 10:41 pm
Notable Call’s market observations, and question many of us may have been asking:
WHERE is the Rally??
A good hedgie contact with an excellent track just pinged me with the following: Hey.. wait a minute… I thought that when oil drops the market would rally?? Isn’t that what CNBC tells us??. Today I see: Oil down $5 NG down 60 cents soft commodities limit down across the board ( I think) dollar is behaving too. My guess is that this is the final blow to the bulls… they stayed long hope.. that an oil/commodity drop would spark a rally…. and NOW WHAT?? Perhaps we see the last of them simply throw in the towel in coming days.
Here is another observation………
We have FNM FRE collapsing and the market down only 100?? Could there be THAT much short interest in the market?? We may very well be pushing on a coiled spring here…. and if so… at some point we could have a massive reflex rally. I see that VIX is spiking at the same time we are approaching 1210 on the SP500.
Perhaps the simultaneous intersection of $30-VIX and 1210-SP500 could be the spark that sets it off. I wish I knew the answer to these questions. Shorts are fat and happy…. and could be getting a bit careless.
ACAS Trade Idea
by Phil's Favorites - July 7th, 2008 12:39 pm
Market Thoughts and Trade Idea: ACAS
Courtesy of Daniel Jones at Options Notions
Markets have calmed a bit since the late-June selloffs. We’d like to say the fireworks have died down, but that would be too easy (and too lame) of a pun. As this newsletter is being penned, we’re seeing oil prices heading down $4 per barrel; the market news services are pointing to a stronger dollar and reduced Middle East tensions as the prime reasons for that move. We like to think that the VLO pick from last week still has some prime merit. If oil prices start to fall in the near future, that pick will perform very well.
Was last week the "tradeable bottom" we had been looking for? It’s tough to tell based on light pre-holiday trading. We’ll only know for sure by looking in the rear-view mirror, but it sure feels like we have come through a period of maximum bearishness. All we need is a cover of a major magazine trumpeting that we’re in a bear market, and it will be all over. Newsweek’s "Recession" cover of a few weeks ago was pretty close - maybe that will have to do for now.
Today’s Recommendation: American Capital Strategies, Ltd. (ACAS)
Private equity has literally gone to the dogs this year, and our pick this week is one of the lesser-known, but higher quality names in the industry. It’s not the "rock star" type of private equity company that makes headlines on a regular basis, like a Blackstone or a Fortress Group, but it’s got some very strong internals to it, despite having been pretty much the baby that is being thrown out with the PE bathwater this year.
American Capital Strategies (ACAS) is a principal investment firm specializing in management and employee private equity buyouts, acquisitions, recapitalizations, mergers and acquisitions, add-on acquisitions, securitizations, special situations, growth capital investments in middle market companies, early stage in mature private and public companies, corporate divestitures, acquisitions of portfolio companies of private equity firms, acquisitions of family-owned or closely held businesses, change of control, or the exit of minority shareholders, going private transactions, and ownership transitions.
The Special Situations Group invests in troubled and distressed situations including operational turnarounds, auctions, corporate and orphan carve-outs, portfolio add-ons, complex management buyouts and provides debtor-in-possession (DIP) financing, exit, mezzanine for sponsored buyouts, second lien refinance, and direct lending to distressed companies.
The Second Lien…
In thin-volume session, option traders see more peril ahead for regional banks
by Andrew Wilkinson - July 7th, 2008 10:18 am
Today’s tickers: ZION, KEY, JEF, AKS, DIA, RIO, NVDA, VCLK, BIG
ZION- Despite welterweight volumes trading on an abbreviated pre-holiday session, option activity in regional bank suggested more punishing declines in store when the market resumes trading after the weekend. Implied volatility is higher across the board and put trading is elevated on most sector names after Zions Bancorp shares tanked 14% on talk of its exposure to bad home loans in Arizona and Nevada. This followed comments from an analyst at Stifel Nicolaus as quoted on Bloomberg. Implied volatility in Zions Bancorp is up 27% today and a read of the option activity shows buying at the July 25 and 22.50 strikes, implying further erosion under these new lows. Other sizable spikes in implied volatility were observed in Corus Bankshares and Keycorp – while many these companies are due to report earnings before expiration, explaining some of the positioning (i.e. Zions Bancorp), the skew to puts has been fairly consistent throughout the sector.
KEY- As we observed above with Zions Bancorp, bad news out of one regional bank has lent an extremely defensive posture to activity in other regional bank names. KeyCorp option implied volatility rose 14.7% to 85.5%, even as shares tweaked out a half-percent gain to $11.17. While today’s volume was thin at just under 8,000, puts outtraded calls by 8-to-1 with fresh buying in 10-strike puts in the July and August contracts, suggesting erosion below the 52-week low of $10.80 over the next two weeks – even before Keycorp numbers are out on July 22 (corresponding with the August option series).
JEF- Option volume in Jefferies Group, the investment bank and institutional securities firm, rose to 6 times the normal level as shares traded flat at $15.88. The action here appeared to settle on the July 17.50 straddle, where a 4,000-lot position traded to the middle of the market at a combined premium of $2.30. Jefferies is due to report earnings on the eve of July contract’s expiration, which suggests a trader making an earnings-related volatility play. Implied volatility on all Jefferies Group options ticks in at 71% against a historic reading of 58% the underlying shares, a disparity that has remained largely stable since mid-June. This straddle position, if purchased, would protect the buyer in the event of a break to the upside past $19.80 or below $15.20 to the downside – well within the range of…
Notable Calls on Solar in Spain
by Phil's Favorites - July 7th, 2008 10:13 am
Solar In Spain: Are Stocks Pricing In An Unlikely Worst-Case Scenario? - Cowen & Co
Courtesy of notablecalls 
Cowen notes Solar stocks have been pummeled by concerns about a potential sharp drop in Spanish solar subsidies. In firm’s view, a proposed 2009 cap of 300MW is unlikely to become law, as it would cause significant job losses and business closures. Unemployment and economic growth are the major issues for the Spanish government. The power sector has accumulated a large deficit, because regulated prices have not kept pace with fuel costs, underscoring the case for renewables.
They see Outperform-rated thin-film players ENER ($64) and FSLR ($253) as best-positioned, but believe Outperform-rated ESLR ($9), SPWR ($64) and STP ($35) are also oversold.
Modules are fungible across PV markets, so they believe that 2009 industry volume of about 9GW is achievable, but a smaller Spanish market implies lower ASPs (perhaps down 15% for c-Si players, vs. our prior 10% est.). ENER and FSLR have not seen ASPs skewed upward by Spain and have higher gross margin. Moreover, ENER benefits from higher roof and BIPV tariffs. SPWR and STP should benefit from a lower blended-cost silicon portfolio next year, while ESLR has no spot-poly exposure and should see margin expansion from the ramp of Quad-ribbon technology and the new Devens plant.
Notablecalls: I don’t have great conviction in this one but we may see a slight bounce in the Solars in the n-t.
Monday Morning Markets
by Phil - July 7th, 2008 9:16 am
Finally it’s earnings season!
Now we get a chance to see what all the fuss is really about. Is Meredith Whitney exaggerating the losses to be reported by banks by tens of Billions or just Billions? Are energy and commodity prices destroying all of corporate America or "just" the companies that are directly affected like Transports and the retailers who need their customers to have cash at the end of the week?
We have a fairly light economic calendar this week with Pending Home Sales, Wholesale Inventories and Consumer Credit tomorrow followed by Jobless Claims on Thursday and finishing up with Import/Export Pricing, the Trade Balance, Michigan Consumer Sentiment and the Treasury Budget on Friday. None of those are likely to be huge market movers so our focus will be on earnings and, of course, the price of oil, which looks like it will open at about $143 this morning.
Sadly, we have to wait until Tomorrow evening to hear from AA, our first heavy-weight to report in. Tomorrow morining we get a report from freight car manufacturer GBX (expectations are very low for them and I think they are oversold at $18, making the spread of the Jan $20s and the Aug $20s for $1.15 a good play), personal care and houseware distributor HELE (also oversold at $16, you can buy 5 Aug $15s for $1.82 and sell the 5 July $15s for $1.52 for a net of $0.61 per contract, a fairly low-risk spread. There is also a nice butterfly possibility which we’ll have to see about during the day) and PBG, the Pepsi Bottling Group, who should give a good enough report that I like the Aug $30s at $1.12, selling the July $30s for .77 for a net of .35 per August contract. As with HELE, it’s a good one to leave 20% naked.
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During the day on Tuesday we here from CBSH, who are way underpriced at $38.80 but have no options so not that much fun to play. After hours we will hear from AA and ZZ, someone’s idea of an alphabetical scheduling joke I assume. We’ll go over the rest of the week in depth as it moves along but it’s certainly going to be exciting.
Oil is now down $4.63 to $140.69 ahead of the open at 9:15 and it’s really perking up the markets. This will be fantastic for our USO puts, which we went heavy on last week as…
The After-Hours Oil Scam
by Phil - July 7th, 2008 8:23 am
A huge effort, hopefully a last hurrah, was made to get oil up to MS’s $150 target for the July 4th weekend but, ultimately, they failed and a quick look at the chart for USO will show you why. There was only 1 day in the last 5 in which regular NYMEX trading ended positive. ALL OF THE OTHER GAINS IN CRUDE WERE MADE IN VERY THIN AFTER HOURS TRADING.
We can’t print intra-day NYMEX volume numbers as they are "proprietary" and no one knows what goes on on the ICE or the Dubai Exchange but if you have in intraday chart of USO that shows after-hours action, you’ll see what we see at the NYMEX (USO is an ETF that mirrors NYMEX trading). In a typical day the NYMEX trades 240M barrels in the form of 240,000 1,000 barrel contracts at $8,750 per contract of margin to control $145,000 worth of oil (1/16th). The margin requirements were raised from 1/30th to 1/15th in an attempt to forestall some of the speculation, the contract margin is set for the month so it reflects 1/15th of the month’s open, not the current price.
For the second week in a row, the vast majority of the gains made on the NYMEX were made in "electronic trading sessions" as the NYMEX is open 23 hours a day and floor trading shuts down at 2:35 each day, there is plenty of time for all sorts of shenanigans in the off hours.
Again, I am going to use the USO to discuss this as most people can view that chart, I am hoping later this week that one of our Congressional representatives will be producing the NYMEX numbers and entering them into the official record. What we have here is a shocking example of how this scam is being perpetrated on the American people and, since we are NOT talking about a lot of trades, it should be relatively easy to round up the people placing these orders and start asking them some pertinent quesitons.
Looking at the USO on 6/25 we see that they opened at $110.27 (corresponding to crude at $138) on Wednesday the 25th and, after the 10:30 inventory report showed a surprising net 3.7M barrel build in inventories, very quickly dropped down to $107.25 in very heavy trading. Volume was 13,947,500 in USO that day, and it closed at $108.81 after what we at PSW affectionately call "the closing pump" as…
Commodities Regulators
by Phil's Favorites - July 7th, 2008 5:48 am
Excerpt from an article Commodities Regulators, posted on Naked Capitalism by Yves Smith.
Quelle Surprise! Commodities Regulators Lack Adequate Information About Their Markets
"One of the polarized and emotionally charged debates these days (Cassandra compared it to Israel vs. Palestine) is whether the runup in oil prices is due to speculation or fundamental forces. And these extreme views tend to drown out notions that complex phenomena or conflating factors might be at work.
One way to get to the bottom of this would be to look at data. But as we’ve noted, the information on oil is dubious at best. Consider this 2005 interview of peak oil proponent Matt Simmons (hat tim Jim Bianco):
"One of the more intriguing stories in "Twilight in the Desert’, Simmons’ new book on the state of Saudi fields, is paucity of reliable data on Middle East production in general and Saudi production, specifically. Simmons is one of the first people to point out the fact that much of the data underlying "official" production numbers are unreliable, based largely on the findings of Petrologistics, a "powerful" information collecting company located over a supermarket in Geneva, Switzerland.
According to Simmons, this company is usually the first one the media "glums" onto each month when the latest Middle East production numbers are released. This data, he alleges is gathered from a worldwide network of harbor "spies" located in the world’s top oil export countries.
"They look through a pair of binoculars and a sort of a gauge in their windows to check [tanker] plumb lines as to how much oil is being loaded into the tankers. And [Conrad Gerber's] story is he can’t disclose the names of his harbor spies; he can’t even call them at home because when he used to do that, one of them got killed…
‘We have an energy data system created today that is simply rubbish.’"..
From the Wall Street Journal (Commodities Regulator Under Fire):
"Plaguing both sides of this debate is a shortage of data about a thriving sector of the market: the customized market for derivatives known as swaps. Wall Street banks such as Morgan Stanley and Goldman Sachs have developed swaps to allow pension funds, hedge-fund traders and commodity companies to bet on prices among themselves, largely outside the regulatory surveillance of the CFTC.
Investors can make larger trades through swaps dealers than they could make directly on a futures exchange. Until this month, the CFTC has not required Wall Street swaps dealers to…
SRS Trade Idea
by Phil's Favorites - July 7th, 2008 2:20 am
Trade Idea, courtesy of Allan, SRS - Ultrashort Real Estate ProShares.
SRS
Before delving into the fundamentals here, take a look at the above chart. Technically, it is about right where it was last November when it started a 67% run from around 90 to around 150. This is not a guarantee that it will run 67% from current levels, but it is a decent roadmap for trading purposes.
The Stock: SRS - Ultrashort Real Estate ProShares
Dow Jones U.S. Real Estate Index:
Breakdown
Finally, let’s look at the charts of the three largest components of the Dow Jones US Real Estate Index:
With technicals on the side of this trade, let’s turn to the fundamentals. As described above, SRS is another Ultrashort ETF that inversely tracks the price movement of the Dow Jones US Real Estate Index.
Here is an excerpt from a recent article by TradeRadarOperator, at Trade Radar, which points out huge institutional ownership of SRS:
Even banks like the ProShares Ultra-Short Financial ETF
I recently visited the OwnershipAnalyzer.com site and did a little poking around to see who might be the largest investors in various ETFs. It is interesting to note that the largest institutional holder in the ProShares Ultra-Short Financials (SKF) is the European bank UBS (UBS), which at the end of the first quarter of 2008 owned over 318,000 shares. UBS is not alone.
Other financial institutions on the list of owners, albeit with much smaller stakes, include Oppenheimer (OPY) (not surprising since Oppenheimer is the home of the bank-bashing analyst Meredith Whitney), Jefferies (JEF) and AIG (AIG) among others. Were these banks just hedging or taking a bearish stance on their own industry?
Were these banks just hedging or taking a bearish stance on their own industry? (emphasis mine)
Even more extensive is the list of banks making bearish bets on real estate…
The Trade: The trade here, going long SRS, is a bet on the worsening of the Credit and Real Estate markets as reflected in the Dow Jone U.S. Real Estate Index. I don’t forecast, so there is no way I have any special insight into the worsening of those markets. But the charts above don’t lie. Prices have broken down on the index as well as on the chief components of the index and have broken out on the inverse of the index, SRS.
The market is coming back from the July 4th holiday week in a severely oversold condition and is ripe, under normal…
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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...