Tuesday Tear-Down - What is Value?

by Phil - October 7th, 2008 11:54 pm

Holy cow!

I was, ironically, at the Value Investing Congress today where some of the best hedge fund managers in the world like Bill Ackman, Jeffrey Schwarz and, Leon Cooperman to name a few share with about 1,500 investors their thoughts on the market as well as giving us overviews of their portfolios. The investors I spoke to at the conference were definitely "shopping" as most of them see a great opportunity to deploy cash in the market but I wondered how much of that was reflected by the fact that they had been sitting at a conference with a lot of rich people for 2 days and not watching the markets, like I had been until 11am.

As we discussed in my morning post, investors were not going to be happy with anything less than a massive rate cut (and I’m not sure even that will give us more than a short boost) and we didn’t get it yet and the market fell apart. Bernanke’s 1pm remarks were the last straw and sent the Dow tumbling below 9,800 and we have now logged our worst annual decline since 1937.

Since I wasn’t going to be around for the day and the futures were looking good at 9am, I posted a list of downside and upside plays for members saying: "I’m heading off to the Investor Conference about 11 but let’s keep an eye on the 10,000 mark to see which way the wind blows. On the Dow downside, 9,800 provided some support so holding that would be nice if we do head back down." That was at 9:22. By 9:36, despite opening higher, I was already not happy, saying: "Not too much strength here, just a follow-through of yesterday’s bounce, a good time to look at a few of those put plays."

The downside plays (hopefully tomorrow we’ll have reason to use the upside) were the USO puts I had mentioned in the mornng post along with DXD Jan calls, DIA Dec puts and, of course, the good, old reliable SKFs. The market cooperated by giving cheap entries as it continued to rise, as much as 10,118 at 9:43 where I said: "Oh this is just crazy." 11 minutes later, we were already off the high and I said: "There are so many things that are insanely underpriced but this rally is being sold into already so I think it’s just some bottom fishing programs driving the market but no change of sentiment…

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Bank of America dividend cut and earnings news scuppers buoyant tone

by Andrew Wilkinson - October 7th, 2008 2:35 pm

Today’s tickers: BAC, AAPL, GE, VIX, HA, AMT, BCO

BAC – Bank of America – A dividend cut has hurt shares at BAC today sending its shares lower by 15.2% to stand at $27.40. Its option volume is highlighted on our market scanner depicting it as one of the most active today with 235,000 contracts traded. With its shares heading to a two-week low, demand for protection from options has helped lift option implied volatility up 9% to stand at 98.5%.The October 25 strike puts were largely bought at a premium of 1.30 implying a breakeven value of $23.70 at expiration. Bearing in mind that the July low for the stock was set at $18.45, activity of put buying at the November 15 strike stands out today.

AAPL – Apple Inc – Options in Apple are active again but with little footprint left. Overall volume of 178,000 contracts included what appears to be a credit call spread at the January 150/170 strikes involving equal amounts of 10,000 lots. While the 150 strike traded to the middle of the market at 2.29, the 170 strike traded at a premium of 1.04 and were bought. With Apple shares trading at $95.17 (down 3%), this investor might be betting that shares won’t recover by more than 50% by expiration. So long as the stock remains below the lower strike on this combination, the investor retains the net credit of 1.25 per contract. On both of these out-of-the-money contracts the entire premium consists of only extrinsic value and its time value erodes by the day.

GE – General Electric – Shares of industrial conglomerate GE are higher by some 2.9% to $22.00 today, while implied volatility has contracted by 11% to 63.5% after shares reached rock-bottom on Monday at $19.72. Overall options volume of 89,000 lots ensures them a placing on the most active market scanner. Some optimism may have returned to equity traders but option investors were more cautious. They sold October calls at both the 20 and 22.5 strike while October 22 puts were bought.

VIX – CBOE Volatility index. – Options volume eased somewhat on VIX options today as equity indices stopped falling. The activity stood out in the October VIX options, where despite a decline of 9% in the underlying index to 47.36, premium on October calls rose. The reason behind the rise is due to the fact that the October future also rose to 37.70 (+0.9%).…

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Notable Calls: Tid-bits

by ilene - October 7th, 2008 9:42 am

Early Morning Tid-bits:

Courtesy of Notable Calls

- Goldman Sachs downgrades First Solar (NASDAQ:FSLR) to Sell and adds to their Conviction Sell List

NC: The stock will get hit today in a major way. There is little support for FSLR in this mkt. I would not be surprised to see the stock hit par in the coming months. Note that SPWR gets the boot from GSCO as well. Piper lowers FSLR tgt to $250 from $350.

- Morgan Stanley reits Overweight and $175 tgt on Monsanto (NYSE:MON) noting soft commodity price bearsare lurking around the wrong stock. While they do not foresee a $3 bushel of corn, the firm notes they have always modeled Monsanto’s pricing power as if the farmer was only going to realize $3 corn (and $8 soybeans). The market appears to have a dispositive view (i.e., expecting $3 corn and for it to result in demand destruction for Monsanto’s products)

Firm believes that farmers will earn a 72% ROIC on the triple stack in F09 at $3 corn (and would still earn a 45% ROIC at $2 corn) and therefore see little risk of demand destruction should new crop corn prices decline further from their present position.

NC: I think MON should be on your bounce radar today.

- FBR is upgrading Freeport-McMoRan Copper & Gold, Inc. (NSYE:FCX) to Outperform with a $85 tgt with a view that the stock is oversold and that the risk/reward is now compelling. Valuation multiples have contracted significantly, and free cash generation is strong even if copper prices were to contract further.

NC: This is a major call in my opinion. When was the last time you saw this one upgraded? FBR has been skittish on the space for quite a while. FCX is trading around 5x 2008/2009 EPS. This one could reach $48-$50 level in a jiffy.

- RBC Capital is out with some positive comments on Research in Motion (NASDAQ:RIMM) saying the BlackBerry 9530 Storm, RIM’s first widescreen/touchscreen Smartphone, is expected to be announced this week (possibly Wednesday in London) in a joint Verizon/Vodafone/RIM press conference. Launch still expected 1st week November; they expect 850k Storms shipped Q3/Q4, and 3-4M units FTM. Exclusively at Verizon/Vodafone (who do not carry the iPhone), Storm may be aggressively marketed by these carriers and RIM into the holidays.

Maintains Sector Perform and $90 tgt.

NC: I think you should add RIMM to your bounce list. The stock acted very nicely yesterday. We may get some follow-through today.

Hope it helps,

NC

…

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Testy Tuesday Morning

by Phil - October 7th, 2008 8:40 am

Was Cramer right yesterday?

Should we all be removing what we need to live on for the next 5 years from the market? He made that statement on yesterday’s Today Show and, when Ann Curry asked him "Even if you would take a tremendous loss in selling your stocks at this decline, you say take it out?" Jim’s answer was "I don’t care. I do not care where stock have been, I care where they are going, I do not want people to be hurt in this market." It’s good that Jim doesn’t care as there was a low-volume, massive sell-off that was indicative of retail capitulation followed by strong waves of program buying indicative of Jim’s hedge fund buddies jumping in and scooping up the bargains.

At least Cramer gave us a good bottom test so we should thank him for that, I drew up a new Big Chart last night and it is truly terrifying how far we have fallen and even more terrifying when we look at Asian markets and see how far we may still have to go if things do not turn around very soon. Both the SOX and the Transports are more than 40% off their highs of last year and the SOX are teetering right on the 50% line at 274. If they go down, there is not much hope for the broader markets and it will be time to re-up our ultra-shorts for the next leg down. The TRANQ (Nasdaq Transport Index) is already below 40% after dropping 72 points yesterday (and that is AFTER a 100-point recovery) and, if they don’t retake 1,868, I wouldn’t put much stock in a "recovery."

Let’s keep in mind that last week we were worried about breaching the 25% lines on the Dow and the Russell as a sign that we’d get a broader decline. As I said last Tuesday morning: "The Dow MUST NOT cross that 10,644 line again as it’s a long, long way to the bottom that is being shared by the Hang Seng and the Shanghai at 50% off the highs (that would be Dow 7,000!)." Unfortunately, we coasted along that line last week, before we well and truly gave it up on Friday and now we need to get it back before we can really do anything more than day trade to the upside.

The upside will be severely tested this morning as BAC pre-announced a lower profit and cut dividends…

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Fix the Money

by ilene - October 7th, 2008 4:09 am

In the search for the root causes of the global financial crisis, Tim Iacono at The Mess That Greenspan Made, looks at the lack of sound money.

No, we need to fix the money. Literally.

Yes, there’s a reason there are still so many Ron Paul for President signs up in peoples’ front yards even though the Texas Republican long ago gave up his bid for the Presidential nomination.

A small but growing number of individuals in this country are beginning to understand the fundamental problem the nation faces in grappling with a financial system that seems to have run amok once again and, not surprisingly, is being treated with the same palliatives as the last time it ran amok, which, of course, is what got us into the current mess.

It’s good to see items like this Wall Street Journal op-ed from last week (a piece that seems to have a renewed life on the internet this week) as it is a sure sign that more and more people are starting to understand the real root cause of the current crisis which is certainly not falling home prices.

See, there it is - right there in the title.

Loose Money And the Roots Of the Crisis
No one can believe in the omniscience of central bankers anymore.
By JUDY SHELTON

The world is not ending. Despite the wrenching turmoil in global financial markets and morbid allusions to the death throes of capitalism, it ain’t over. Not until people quit believing in themselves, not until people quit believing in a better future.

But the whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money — "artificial" because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions — More regulation! Less complex financial instruments! – let’s not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange — the measure, the standard, the store of value — which defines the very substance of the economic contract between buyer and seller. It is the…

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Rate Cut?

by ilene - October 7th, 2008 3:37 am

Discussion on a potential rate cut - is it on the table? By Tim Duy, courtesy of Tim and Mark Thoma’s Economist’s View.

Fed Watch: Where Is The Rate Cut?

Tim Duy says the Fed may not cut the target interest rate at its next rate setting meeting:

Where Is The Rate Cut?, by Tim Duy: On the surface, the case for a rate cut seems obvious. But, despite an extraordinary and historic two weeks on Wall Street, Bernanke & Co. have failed to deliver. And perhaps the lack of action today, a day of panic in global equity markets, is telling us something about policy – don’t look for a rate cut, at least not yet. Maybe we should be listening.

If there is one thing the Fed has taught us in the last year, it is that they are inclined to meet periods of financial turbulence with a rate cut. Hence growing expectation for a rate cut, expectations that were only heightened by the string of data that confirmed for almost all remaining doubters that the US economy had slid into recession by at least the third quarter, if not much earlier. Last week’s employment and ISM reports for September appeared to seal the deal on that call.

Relatively dovish Fed-speak appeared to confirm these expectations. And if a rate cut was coming, why wait until the end of the month, especially when equity markets needed a boost of confidence? Yet no rate cut emerged. Instead, some Fed speakers have come out against a rate cut, such as St. Louis Fed President James Bullard and Richmond Fed President Jeffrey Lacker. To be sure, perhaps they are simply out of step with the Board. But perhaps the Fed has come to the conclusion that, at least for now, interest rates are not the problem, especially since, relative to the rate of decline in the real economy, the Fed is well ahead of where it would normally be at this point in the cycle.

It is arguable that rate cuts have done little to stem the tide of deleveraging that is ravaging the banking system. Indeed, despite a policy path that appears determined not to remake the Fed’s mistake during the 1930’s by taking rates down quickly and flooding the financial markets with liquidity, the crisis continues unabated, as if the more the Fed does, the more financial markets need done. To be sure, perhaps…

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Recap: Bulls win???

by ilene - October 7th, 2008 3:15 am

Trader Mike’s right, the 3 to 4% losses today seemed pretty good by the time of the close.

October 6, 2008 Recap: Bulls win??? »

Excerpt: "You know things are bad when 3 to 4% losses feel like a victory for the bulls. Today was the type of day that many traders, myself included, like to see when the market’s trying to bottom. The market sold off extremely hard for most of the day and then we got a “snapper” rally in the last hour. The Dow jumped almost 400 points from 3:00 to 3:30. That type of rally can really get the bears on the defensive (buying), especially those who over-reached.

Speaking of over-reaching bears… I always like to watch my site’s referral logs on days like today and I was a little surprised at what I saw today. For most of the day my “inverse ETF” list got a lot of traffic. Usually when I see over 25% of my traffic going to that page it’s a good sign of a short-term bottom."…

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Tuesday Tear-Down - What is Value?

Bank of America dividend cut and earnings news scuppers buoyant tone

Notable Calls: Tid-bits

Early Morning Tid-bits:

Testy Tuesday Morning

Fix the Money

No, we need to fix the money. Literally.

Rate Cut?

Fed Watch: Where Is The Rate Cut?

Recap: Bulls win???

October 6, 2008 Recap: Bulls win??? »

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