Archive for
July 8th, 2008
by Phil - July 8th, 2008 11:53 pm
What a relief!
Let’s just hope it sticks, as I said early in the day, we still expect oil to shoot back up into inventories and it remains to be seen how far that takes the market down, possibly a lot if we get the draw-down we’ve been expecting since we first noted that the NYMEX crooks shorted crude deliveries by 20Mb for July. This is the likely spot they’ll try to forestall declines in oil due to horrific demand destruction (MA reported that drivers used 4% less gas this weekend than last year).
The EIA set their expectations for cude for the year to an average of $127 a barrel, high but still lower than where we are now and indicative of a pretty rapid drop back to the $120s as we are already into Q3 so the longer oil prolongs its "island top" the harder the fall should be on the other side.
We had a totally fantastic day with all of our portfolios making good progress. Our intra-day picks were almost perfect today with too many good calls to list as we hit the fall, the rise, the fall and the rise of the Dow right on the money as well as the fall and the rise of oil along with our usual good timing on GOOG. I have to say it was a nail-biter with the terrible looking pre-markets as we were just 75% covered on Apple and Google and we removed a lot of covers Monday afternoon but it all worked out in the end - now we just need some follow-through or we have to go back to covers…
It was very encouraging to see a relatively small rally do so much for our portfolios. The STP jumped 10%, the LTP gained 8%, the DTP picked up 27% (over 100% in week 6!), our $10KP is now $11,340 (up 20% since Friday), $25KP fought back to $30,000 (up 10% since Friday), Complex Spreads jumped 16% and even our pokey old Stocks Portfolio picked up 2%. This is good, there is light at the end of the tunnel, especially if we can get oil below $125 and hit my 11,800 target by next Friday!
Of course, all these gains can be reversed tomorrow, so let’s remember yesterday’s lecture and be ready to cover, cover, cover if we have to. We uncovered our index puts yesterday to protect our gains and my initial reaction to any…
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by Phil's Favorites - July 8th, 2008 5:05 pm
Here’s an excerpt from Brett Steenbarger’s article "Preparing for Bear Stearns II," on his blog TraderFeed. He discusses the Fed’s moves to prevent another Bear Stearns type incident. 
Thanks to an alert reader for this heads up on Fed Chair Bernanke’s recent speech posted to the FRB website. I found this portion of the speech particularly interesting:
In general, our system relies on market discipline to constrain leverage and risk-taking by financial firms, supplemented by prudential oversight when government guarantees (such as deposit insurance) or risks to general financial stability are involved. However, the enormous losses and writedowns taken at financial institutions around the world since August, as well as the run on Bear Stearns, show that, in this episode, neither market discipline nor regulatory oversight succeeded in limiting leverage and risk-taking sufficiently to preserve financial stability.
What this suggests is a likely consensus among the Fed, Treasury, and Congress that market discipline (i.e., free markets) is not enough to ensure financial stability, and the current level of regulation is not sufficient to ensure stability. It is not accidental that this speech was titled, "Financial Regulation and Financial Stability."
So what would this new, enhanced regulatory regime look like?"… click here for full article.
Brett concludes: "I suspect we’ll see the government fulfilling multiple "bridge banking" functions before the current credit problems have run their course. The big question is whether that provides confidence and security to financial markets or fear and further risk-aversion. If I were one of the shareholders or unsecured creditors referenced above, I’m not sure I’d draw solace from the new regulatory regime. The emphasis is on keeping the system functioning, not bailing out those in trouble."
My comment: I think there’s a tendency to view regulation generically as either more = good, or more = bad, rather than to take a look at the what the regulation actually is and how it’s going to work in practice (not necessarily predictable). Some is good, some is bad. Some is needed. None is bad, but none can be better than bad regulation… - Ilene
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by Andrew Wilkinson - July 8th, 2008 2:35 pm
Today’s tickers: EMC, XLE, USO, GS, WB, C, CROX, LOGI
EMC- News of the departure of VMW founder and CEO Diane Greene and a sharp cutback in its year-end sales guidance had a predictably awful effect on VMWare (whose shares paid a 25% penalty to $40, crashing through the 52 week low, and implied volatility spiraled by a nearly identical percentage rise). But it was downright deleterious for VMWare’s parent company, EMC Corp, where the perceived risk measure rose 28.9% to 51.2% -a six-month high. Compared to the 30% volatility shown by EMC shares in the past, we can conclude that the news out of VMWare has led option traders to ascribe about 61% additional price risk to EMC Corp shares over the next 30 days, with a pronounced bias to the downside. Even with its earnings report scheduled for July 23 (coinciding with the August options contract), we observed traders sell out of July 15 calls, the value of which have plummeted 86% to just 7 cents today. Fresh put buying at the August 13 and 14 strikes suggest further declines past these newest lows in the aftermath of earnings. Evidence of stability in EMC Corp’s share price surfaced further out in the option calendar, notably in January calls, where calls at strikes 12.50 and 15 were heavily bought on the offer.
XLE- An early-session pullback in crude oil futures and confident forecast by oil investor Boone Pickens that lower demand for oil will bring prices back to the $100 level over the next 2 years led to a degree of froth being blown from the top of the Energy Select Sector SPDR. Shares are 2% lower at $81.08 and the fact that puts are outmoving calls by nearly 3 to 1 indicates a defensive drift in the market today. One notable trade here involved a 3,200 lot put spread in the July 18 contract, with a trader buying 85 strike puts at $4.05 and concomitantly selling 80 strike puts at $1.40 for a position that first breaks even for the trader at $82.35, but sharply limits any substantial near-term downside.
USO- For further confirmation of the pullback thesis in the options market, we took at look at action in the US Oil Fund. Shares in the fund responded to the paring of oil futures with a 4% decline to $110.37. With about 100,000 options in play by the noon hour…
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by Phil's Favorites - July 8th, 2008 9:50 am
Several firms are out defending Fannie (NYSE:FNM) and Freddie (NYSE:FRE):
- Piper Jaffray notes there has been much discussion over the past few weeks about the effects of the FASB vote to potentially remove a QSPE concept from FAS 140.
In plain English, the FASB is looking to add visibility to off-balance-sheet assets, especially in the face of huge charges and capital requirements resulting from off-balance sheet assets at some of the large banks such as Citigroup.
Based on a competitors’ report outlining worst case results for FNM/FRE, on this topic, those stocks sold off by around 17% yesterday.
Piper had a discussion with a senior partner at a Big 4 accounting firm and with some industry senior executives that have been embroiled in conversations with FASB and regulators, and one thing is clear: they don’t know the end result. However, with regard to the credit card assets and the GSEs, it sounds to us like they are not the target of the accounting changes. Despite that, for GAAP accounting purposes, they may have to add those assets to the balance sheet. 
Firm doubts, especially in the midst of a credit crunch, that regulators or Congress would allow a massive imminent increase in the capital required by those businesses. A worst-case scenario for the GSEs, taking an asset that requires 45 bps of capital and forcing an increase to 250 bps of capital, would be a massive cost increase for the mortgage industry driving large increases in interest rates to consumers. They doubt that is acceptable.
They remain very cautious on the most credit sensitive names and need to feel more comfortable about the outlook for credit to get more optimistic. However, the firm believes the reason for the sell-off yesterday was likely not justified.
- Keefe Bruyette notes that FNM and FRE have both suffered significant share price declines based on possible FASB interpretations for off-balance-sheet treatment of securitizations. The firm believes this sell-off is unwarranted on this issue as the GSE regulations already have capital requirements for off-balance-sheet exposures of the two companies.
Notablecalls: The media is approaching this issue in a way less aggressive way I expected this morning. With several defenses, I suspect we will see at least an early bounce in the names. My fave is FNM of the two. Give the shorts a run for their money.
Courtesy of notablecalls
Note: All content in the Phil’s Favorites section is free — click…
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by Phil - July 8th, 2008 8:57 am
What a scary pre-market!
Continued financial panic and a commodity sell-off have sent the Hang Seng down 692 points, once again testing the March and last August lows. The Nikkei fell 326 points and came to rest on the 13,000 line but it has been much lower in March so not throwing in the towel just yet. Europe is recovering from a 2% sell-off this morning and the US futures were off 1-2% as well in very early (5am) trading.
Please make sure you read my comments from last night’s wrap-up, on what I’m seeing and what our attitude needs to be if we are to have a continued sell-off. I am still rooting for a turn-around this week but I’ve got my white flag in my back pocket if oil holds $140 and the Dow fails to retake 11,800 by expiration day next week.
In addition to the sheer panic environment of the US financial markets, I have to blame the G8 for being perhaps the lamest group of World leaders ever assembled for the market jitters we’re seeing in Europe and Asia. You have a gathering of the heads of every major power (China, India and others are included in "special sessions") and this is all they can come up with after a day of meetings: "To enhance energy security, we propose holding an energy forum to focus on energy efficiency and new technologies, which could also contribute to dialogue between producers and consumers."
Oh thank goodness - they are proposing to have a meeting! Now this is real progress (end extreme sarcasm font). Of course they said some other things (see link) but this group oversees 1.4Bn of government petroleum reserves and houses another 2.7Bn of commercial reserves in their countries. That is a 50-day supply of oil even if the entire 86Mbd of global production were cut off dead cold. They could release just 1/10th of those reserves and flood the market with 6M barrels of extra oil per day for 2 months. Do you not think that might have some effect on the price of oil? Well maybe not since supply and demand have NOTHING to do with the price of oil but I bet it would sure cut down on some speculation when you know that 3 times Iran’s daily exports will be flooding the market every day.
Of course there is literally nowhere to put it all but THAT’S the point! Let’s…
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by Andrew Wilkinson - July 8th, 2008 7:18 am
Today’s tickers: VIX, C, NLY, FRE, FNM, AA, EWZ, JNPR, YHOO, WB, XLF
VIX- The lowly levels of late in the CBOE Volatility Index – despite gathering economic headwinds and grinding losses for stocks – have flummoxed and frustrated many market observers, who count spikes higher in the VIX for cues to capitulatory selling in the S&P that would signify a near-term bottom for stocks. Since late March, a capitulatory spike in the VIX has not been forthcoming, and even the option activity – which is useful in tracking traders’ best guesstimates at timing such a spike – has not yielded many clues. While interest has been keen, and traders have been sitting tight, on VIX calls in the mid-20’s strikes, positioning in mid-30’s strikes has been dim in recent weeks. This afternoon’s 7.8% move higher in the VIX – bringing the composite measure of volatility in the S&P index above 26 for the first time since March – may finally have sparked some expectation of a substantial move higher for the index over the next week. Heavy call buying this afternoon was noted at the July 32.50 strike, a position trading for 30 cents per contract, would require another 20% upside in the volatility reading to break even in just 8 days’ time, but switched hands more than 16,000 times this afternoon, with most demand recorded on the buy side.
C- Today’s midday reversal in stocks was attributed to very generic bearish sentiment on financials – sentiment that’s been circling the financials for months now like a black crow that occasionally swoops down to peck. And it’s pecking today. Shares of Citigroup sank 4.4% to $16.08, setting a new 52-week low as option traders positioned defensively for declines below the $15 mark over the next two work weeks. The July 15 put has traded mostly to buyers at 52 cents per contract today on volume of more than 11,000 lots, while August 15 puts have traded to the middle of the market at 96 cents. The options market is currently pricing in only about a 30% chance of that magnitude of decline by July 18, while the odds of a break below $15 before August 15 (the contract coinciding with its July 30 earnings release) are slightly better than 1-in-3.
NLY- Option implied volatility in Annaly Capital Management rose more than any other company on our platform this afternoon (surpassing even…
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by Stock and Option Trades - July 8th, 2008 3:41 am
Somewhere over the rainbow…"the dreams that you dream of, dreams really do come true…"
The gloom, the mist, the darkness, the thunder, the rain, the storm, the lightning. After the thunder rolls and the lighning strikes, the rainbow appears. Today that rainbow appeared, but you would never guess it from the final results. The S&P 500 finished down 10.59 points, the NASDAQ down 2 points, the Russell down 7 points, the VIX up a point or so and the super spike theory we predicted some weeks ago in the SKF came to fruition. So, where is the rainbow? Keep reading!
We had targeted 1,240 as a low on the S&P 500 today and that was the precise point from which the S&P 500 started to rally intraday. The NASDAQ also showed strength from near the 2,200 marker, which it hit back in January and March. Both times it rallied soon afterwards. One of our members queried why we are leaning bullish at this time when everything looks so bearish. Well, we like to stand aside at the beginning of a carnage. But as Buffett famously said (and we’ll paraphrase), if you are bullish on the markets, you want stocks to go lower!
This seems like a paradox but it is easily explained by compounding returns over time. Let’s say I see a stock trading at $20 per share and have $20,000 to deploy. (Neglecting smart risk management!)…let’s say I buy 1,000 shares. If the stock rises up to $30, I make $10,000. But what if I had been patient while the stock dropped to $15, what would the impact of buying with the stock just $5 lower have been? It turns out I could have made 100% on my investment with the stock rising to $30 instead of 50% as was the case when purchasing the stock for $20 per share. Buying after a 25% decline meant the difference between making 50% and making 100%! Now extrapolate that out further in time and you’ll see selloffs really are stock market gifts in disguise!
The sharp selloff in the Russell is also indicative of a triple bottom. We have been waiting, waiting and waiting for this moment to arrive. And now it is time to see if we do indeed hold these levels. The Russell rallied sharply off its support level and it wouldn’t be surprising to see it test that level one more time. Indeed that would…
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by Phil's Favorites - July 8th, 2008 3:17 am
Update and comments on Indymac from Mish, which, all things considered, arrive at a simple conclusion of it’s All Over, Indymac. 
Indymac has been notified that it is no longer considered a "well capitalized bank". A Stakeholder Letter" posted on Indymac’s Corporate Blog describes the grim situation.
As we stated in our financial update on May 12, 2008, we have been working with our investment bankers to raise additional capital. To-date, we have not been successful with these efforts, and, while we will continue these efforts with our bankers and others, we don’t expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets.
My Translation: "Don’t expect miracles. They are not coming"
We expect our loss for the second quarter to be larger than Q108, but it is difficult at this time to be more precise given the significant uncertainty surrounding accounting estimates, fair value accounting and other accounting matters.
My Translation: "We will stretch accounting rules as far as we can, but right now, things look hopeless, even to us."
Based on information we have provided to our regulators, they have advised us that we are no longer “well capitalized”, which we stated on May 12 was a possible scenario.
My Comment: The stock market figured out Indymac (IMB) was not well capitalized sometime around October of 2007. Except for one sharp bear market rally in January, the stock has been in a freefall ever since. The share price is now 71 cents, down from about $25.
Without an external capital raise, the traditional way to improve safety and soundness is to sell assets and shrink the balance sheet, which in normal times generally has the effect of improving capital ratios and bolstering liquidity. Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further.
My Comment: Indymac needs to consider the strong possibility that its loan portfolio is of negative value and that they would have to pay someone to take it.
A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to…
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by Phil's Favorites - July 8th, 2008 2:13 am
Excerpt from an article written by Felix Salmon. Great last line, "Because when there are billions of dollars to be made by breaking the rules, you can be sure that the rules will end up being broken." - Ilene
"Ryan Chittum asks if we want to know what caused the global credit crisis, and suggests that if we do, we should "start here", with a 22-page report about subprime lender IndyMac from the Center for Responsible Lending and former WSJ reporter Mike Hudson.
The report certainly manages to be both shocking and depressing at the same time. But by this point it’s well known that subprime lenders often behaved in an irresponsible and predatory fashion. What’s more, that behavior wasn’t a cause of the global credit crisis, so much as a symptom of it.
As Wolfgang Münchau says in today’s FT:
If this had been a mere financial crisis, it would be over by now. The fact that we are suffering its fourth wave tells us there might be something at work other than merely financial euphoria and bad regulation.
This is true, even if you don’t buy Münchau’s assertion that the real cause of the crisis was New Keynesianism and the dynamic stochastic general equilibrium model in particular. I would rather place the blame at the acceptance of models in general. Gillian Tett explains:
This decade, financiers have invented so many brilliantly clever mathematical tools to repackage risk that the industry has slipped, almost unthinkingly, into an assumption that "credit" is a collection of abstract equations, stripped from any human context.
Thus banks have become so dazzled with their powers that they have ignored how they interact with the rest of society - or how the tribal aspects of their own institutions can create dangerous traps…
The reason that IndyMac was writing so many horribly bad mortgages was that there was no shortage of investors willing to trust models telling them that the bonds secured by those mortgages were incredibly safe…
In other words, IndyMac’s behavior was certainly irresponsible, probably illegal, and also entirely predictable…
Hudson concludes his report by calling for "rigorous oversight" of lenders, and "rules that will prevent such disasters from happening again". But that’s only half the solution. The real art is to try very hard to design a financial architecture where rules and incentives work with each other, rather than in opposition to each other. Because when there are billions of dollars to be made by…
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by Phil's Favorites - July 8th, 2008 1:25 am
Trade idea, courtesy of Allan. Shorting Potash Corporation of Saskatchewan.
Q: Hey Allan, what about using the daily chart for intra-week entries?
A:
Alrighty then, let’s take a look at the POT daily chart:
We can see here on the daily chart that POT has already dropped out of a three month channel and is sitting right upon it’s 50 day moving average. This is good; the moving average will either provide price support, or, momentum arising from the break of the channel will overpower whatever support there is from the moving average and POT will begin a cascade lower.
If you pull up a quote of POT on Yahoo Finance, this is what you will see right under the quote:
Story after story exhorting the benefits of owning POT, including a plug from our least favorite curmudgeon on the planet, Jim Cramer. Enough said?
The Trade: POT is setting up for a short, or is already set up for a short, depending whether on a daily or weekly chart. In either case, a drop from current levels, 209-210 to under 200 will confirm a weekly trend line break and suggest a significant drop in price.
POT is an expensive stock and the drop on the weekly chart could be close to 100 points. A September 180 put costs about $1,000. If POT drops to 150 in the next three months, this put will triple. A December 90 put costs $40, if POT drops to 150 in the next…
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January 7th, 2009 2:20 pm
Somber Thoughts for the New Year
Will There be a Recovery?
Courtesy of PAUL CRAIG ROBERTS writing at CounterPunch
Economists will scoff at the question in the title. But that’s because they are trying to fit the present into the past.
In the past recoveries were routine, because recessions were temporary restraints resulting from the Federal Reserve putting the brakes on an overheating economy. By restraining the supply of money and credit, the Fed caused inventory buildup, layoffs, and a halt to price rises and union wage demands. With the economy cooled by unemployment, the Fed would take off the brakes. Interest rates would decl...
more from Ilene
January 6th, 2009 4:08pm
The alternative energy sector has been heralded by many as an investment opportunity in the US over the next four years. The rationale:
1. Fossil fuels are declining in supply and are environmentally destructive. While there are those who dispute this, there seems to be enough of a "green movement" that demands alternative energy.
2. Because fossil fuels are declining in supply, they will rise in costs,thus fueling an economic need for alternative energy solutions. This seems to be questionable of late, as gas prices have fallen sharply in the US.
3. US President-elect has made government investment in alternative energies a priority.
While there are scientific arguments for and against alternative energies, the "green movement" seems to be quite strong, suggesting strong consumer demand, and Barack Obama's stimulus plan suggest this the US government will look to feed this demand.
How can investors profit from this?
GEX: The Alt...
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By Andrew Wilkinson
January 7th, 2009 1:34 pm
Today's tickers: LAMR, WFC, HBC, MON & FDO
LAMR – Lamar Advertising – The fact that a recession is eating away at advertising revenue doesn’t seem to worry an investor today who sold a strangle on Lamar, which operates outdoor billboards in the U.S. and in Canada and Puerto Rico. The company’s share price is already well off its $44.48 peak and indeed has rebounded from an $8.69 low recently, which is possibly what this option investor has his or her eye on. The trade involved the simultaneous sale of July calls with a 17.5 strike and puts with a 12.5 strike for a gross premium of 4.50 per contract. Both contracts saw volume of 9,775 lots as the investor appears to be selling volatility, which currently registers a reading of 85%. Such volatility boosts the value of option contracts and in this case the invest...
more from Andrew
January 4th, 2009 8:16 pm
Let's start the new year with a new post and a new portfolio.
2008 was an amazing year for us with the portfolio up 725.49%. We have to be thankful for all this volatility! Let's hope 2009 is very good to us as well.
Thank you to everyone who participates in the comments in the optrader's section, we have a smart group of people, with great ideas.
Live portfolio and comments are only available to members of the swing trading portfolio.
To learn more about the swing trading portfolio (strategy, membership etc.), please click here
- Optrader
...
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January 5th, 2009 1:37 pm
-“Volatility is lower evidenced by the VIX in the mid 40s. The chart indicates the same with narrowing of the bollinger bands and the formation of a symmetrical triangle. Volume has been extremely low for the most part due to the holiday season. I feel that we will go up to test the 9000 area. Note how the market reacts at that level to give you clues on further movement.”
The DOW closed last Friday 12/26 at 8515 and finished this week at 9035.
Middle East turmoil translated to a DOW drop of 32 points to open the week. It was a light volume affair primarily due to the holiday season.
Stocks rose Tuesday amidst a $5 billion capital infusion into GMAC. It now appears unlikely that GMs demise is imminent. The DOW posted a 184 point gain.
The market closed 2008 on a positive note with the DOW moving up 108 points. The VIX continued to drop and Initial Jobless Claims improved. 2008...
more from Robin Hood
December 20th, 2008 2:19 pm
As 2007 drew to a close, Phil predicted ‘Asian-style’ moves in US indexes and I wrote an article projecting 2008 would be a very difficult year to trade due to ‘unprecedented volatility’. As 2008 draws to a close it looks like both predictions were realized but pleasure does not necessarily accompany vindication. As John Maynard Keynes wrote:
“It is usually better to be conventionally wrong than unconventionally right”
In short, when you are right about bad news, little benefit is experienced because so many will have suffered whereas being wrong with the crowd means comfort in numbers.
As I watched CNBC’s Year in Review last night I was struck by how many times the commentators noted that nobody could have foreseen the carnage. In fact, many were anticipating a recovery in the middle of the year including Hank Paulson! When history judges such projections unfavorably, credibility quickly diminishes.&...
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About Phil:
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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