Ten Percent Tuesday Top Off
by Phil - October 28th, 2008 11:03 pm
Wow, what a day!
We were expecting a 1,000-point rally on the Fed cut but we weren’t expecting it all on the day AHEAD of the cut. Luckily we played the day perfectly as we nailed every move. At 10:02, with the Dow at 8,500 we didn’t like the consumer confidence numbers and I said to members: "Check out this chart and then buy shorts!!!" That led to a retest of our 8,200 line but by 10:54 I was already calling for shorting the SKFs and going long on UYG as I said to Jordan about my 10:02 call: "That was just my day-trade call at that moment (now 200 points ago) on that news. Overall, I’m still hoping we hold our bottoms and consolidate for a proper move up but, meanwhile, there’s no reason for us not to take advantage of these little 200-300 point moves when we can."
In the same comment, with the Dow still at 8,238 I said: "I think if we turn red here it may get ugly but if the Fed is going to announce a cut at 2pm, I would think the EU would want it pushed up to a pre-market coordinated announcement so it will more likely hit well before then… I don’t feel it in my bones but it does look like they’re testing a low again so we’ll just have to see what we hold. Maybe they rally back to even though ahead of the close in order to set up momentum for a big rally on a coordinated rate cut but it’s the same old plan as usual for us, we pick up some upside plays around 8,200 if we hold it and wait for a bounce to cover." Well what a bounce we got today!
Just 10 minutes later, at 11:04, we got our bullish signal and I said: "FXI back to $20.35, that’s expecting it to snap right back down 15%, not likely and a good deal to cover with the $20 calls at $2.50. We held 8,200 nicely! Of course, falling off 8,500 means we need to get to 8,260 or it’s just a weak bounce so let’s watch that line closely." You can see on the day chart of the Dow how we tested right around that line prior to retesting and finally breaking back over 8,300 at 11:30. This is why these reviews are important, we need to go over what works (and…
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Trading Losses at Banks
by ilene - October 28th, 2008 6:37 pm
Note on trading losses at banks, courtesy of Mish. Why are banks involved in trading all sorts of assets on leverage?
Equity trading losses at Deutsche Bank, Citigroup, Credit Suisse
Bloomberg is reporting Deutsche Bank Derivatives Loss May Top $400 Million.
Deutsche Bank AG, Germany’s biggest bank, lost more than $400 million on equity derivatives trades as stock markets headed for their biggest rout since the 1930s, two people with direct knowledge of the matter said.
The loss, equal to almost half of the Frankfurt-based company’s second-quarter revenue from equity sales and trading, is a black eye for Richard Carson, global head of equity derivatives, and may signal more job losses at the bank.
"Everybody assumed most of the job cuts would be in fixed income, but when you incur a loss of more than $400 million in equity derivatives that might warrant cuts across asset classes as well as fixed income," said Bahadour Moussa, who specializes in derivatives recruitment at London-based Pelham International.
The stumble in derivatives is one of the biggest in sales and trading since Jain and Michael Cohrs, 50, took over the investment bank in 2004. Two years later, the bank’s sales and trading were dragged down by losses from trading stocks for its own account.
New York-based Citigroup Inc. said on Oct. 16 revenue from equity trading fell 54 percent in the third quarter on losses in convertibles, holdings of government sponsored enterprises and proprietary trading.
Credit Suisse Group AG said last week 1.7 billion Swiss francs ($1.5 billion) of trading losses contributed to its second unprofitable quarter this year.
Deutsche Bank said in July second-quarter revenue from equity sales and trading dropped to 830 million euros from 1.4 billion euros in the same period a year earlier as demand for equity derivatives waned.
"The dislocations on capital markets in September must have had a catastrophic impact on the business" at Deutsche Bank, Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets, said in a note to investors.
Raise your hand if you think banks ought to lend money, hold loans to term, and not get involved in derivative trading, equity trading, commodities trading, currency speculation, holding assets in SIVs off their balance sheets, sponsoring hedge funds, and scores of other things the average Joe on the street would not think that banks do.
The real killer in the above is excessive leverage. Leveraged bets and a run on the bank is what sank Bear Stearns and…
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The Layoff Lie
by ilene - October 28th, 2008 2:16 pm
Here’s a quick note from Howard Lindzon who’s equally unenthused about the GM loan for the s*-squared merger as Greg Newton (prior post).
‘Too Small To Fail’…The Layoff Lie
A rare great post from Valleywag. Owen sums up perfectly how I feel about all the poser CEO these days:
I’m declaring the layoff window shut. Big companies lay people off because of economic conditions; startups lay people off because their managers have fundamentally misjudged some aspect of their business. Any startup CEO who lays people off, from here on out, should be held accountable for his own mistakes. Blaming the economy for your cuts? So mid-October 2008.
New Rule: It takes $4 and a web connection to start a web business these days. If you need more, you must start-up a biotech company looking to clear ‘adult’ acne or cure cancer.
In fact, screw most of the bullshit CEO’s blaming the economy for the layoffs too. They took their bonuses and wrote their books for profit during the boom. Give those back before you layoff one more person.
‘Too Big To Fail’ is the big myth that’s been busted the last few years. There are a ton of companies that YOU think are too big to fail, that WILL fail and soon. In fact, the sooner they do it, the better. The market creeps lower because we doubt the government will let them fail.
Airlines keep failing and the government keeps trying to save them. That’s why the skies are filled with planes from 1970.
GM’s Rick Wagonner, who I would not let manage Mahalo’s 401k plan, is in Washington pleading his case for the latest ‘SHIT Squared ‘ merger. I want to punch him so f#$@king hard it hurts. What a putz. They have not made a product that anybody has wanted in decades so what does money do except put off the inevitable. I say build some airports and fix some cities and give us health care rather than save this POS business. It’s no more socialist to give away cash to people on the streets than to save GM.
Those part of this community know that the ‘funding window’ is not shut for businesses ‘Too Small to Fail’.
Also amusing, by Howard Lindzon, a recipe for blowing up a hedge fund: Dissecting Hedge Fund Blow-Ups.
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Bait-and-Switch
by ilene - October 28th, 2008 12:55 pm
Greg Newton, at NakedShorts, writes about the possible GM $5B loan.
Bait-and-switch obviousness shock
NakedShorts’ Obviousness Rule rule states that, even if things are obvious, they are not officially true until some official writes for, or talks to, an official news organization to tell everybody something that everybody already knows, but doesn’t dare say.
So, the payoff for two generations of indescribably incompetent management, with a salving back-hander for Stephen Feinberg & His Three-Headed Friend.
The US Department of Energy is working to release $5 billion in loans to General Motors Corp, according to a person familiar with the matter, a move that could help ease the way for the auto maker’s discussed merger with Chrysler LLC…
…The $5 billion would come from the pool of $25 billion in low-interest loans…aimed at helping Detroit retool plants to meet new fuel-efficiency standards. [Emphasis added]
Stunning. Especially since, under the calm and steady hand of Treasury secretary Hank Paulson, the Emergency Economic Stabilization Act of 2008 has already morphed from “getting money to banks so they can start lending” to “getting money to banks so they can start buying each other, thereby generating untold billions in investment banking fees for the Friends of Hank.”
In a related development, Weapons of Mass Destruction have not been found in Iraq.
Source:
US may give GM billions in loans
by Deborah Solomon and Stephen Power, The Wall Street Journal Oct. 28 2008.
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Mixed bag of options trading at Fifth Third Bank
by Andrew Wilkinson - October 28th, 2008 11:44 am
Today’s tickers: FITB, HRB, GM, SAP, C, FTR, FHN & INTC
FITB – Fifth Third Bank – Now that Fifth Third has requested a $3.4 billion loan from the government as part of their $250 billion giveaway, investors – or possibly short sellers – have plowed back into the stock today sending shares 16.2% higher at $9.39. Option-related activity paints a more interesting picture. At the November 10 strike, it appears that sellers of puts might be taking profits since this series is the most populated in the ticker. At the 7.5 and 5.0 strikes, investors are getting long of puts on today’s relief. The December contract is again busy on put activity at both 5.0 and 10 strike, but most have traded to the middle of the market. In the January contract it appears that one investor is more optimistic that the worst of the news will be over in the New Year. The action suggests a credit put spread at the 5.0/7.5 strikes with the higher strike sold at a premium of 2.0 against the insurance of the 5.0 strike at 1.30. The resultant 70 cent credit goes to the investor in the event the shares are higher than 7.5 at expiration with a maximum loss of 1.80 at or below the 5.0 strike in the event the situation becomes graver.
HRB – H&R Block – Three weeks ago when shares in tax accountant H&R Block were trading as high as $19.60, an investor bought some 10,000 November 20 strike puts at a premium of 1.75. Today shares are trading at $15.70 making these puts even deeper in-the-money and our market scanning tools have picked up what looks like a calendar roll out of this position and into the January 17.5 strike. The investor looks to be taking profit on the initial put option position with today’s premium of 4.30 and rolling down the strike to pay 3.40 for more protection should the prospect for shares keep looking bleak. The investor is already buying in-the-money puts and the premium today already contains an intrinsic amount of $2.05 given where shares are trading. Despite the fact that implied volatility reached its maximum at 87.8% when the initial put protection was bought, the trader still benefits from the decline in the share price. Today’s implied volatility stands at 72.2%.
GM – General Motors – With the auto sector set post its most dismal performance in many…
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Dividend Yield
by ilene - October 28th, 2008 11:33 am
Although valuation appears to play no role in daily stock prices right now, James Picerno provides evidence that valuation does eventually matter. Looking at the dividend yield/return ratio (below), you can see that dividend yield is positively correlated to the subsequent 5-year return. This is one factor that can be used to assess valuation and predict future returns for long-term positions.
WHAT, IF ANYTHING, CAN DIVIDEND YIELD TELL US?
Courtesy of James Picerno, the Capital Spectator
It’s been known for some time–decades, really–that relatively high dividend yields tend to precede relatively high returns in subsequent years. Graham and Dodd’s Security Analysis suggested as much about the relationship between valuation and return. More rigorous studies of the valuation phenomenon (of which dividends are only one measure) arrived in the 1980s, when a number of new research efforts found a strong relationship between relatively undervalued equities and higher prospective return.
One review of the possibilities came in a 1984 Journal of Portfolio Management article: "Dividend yields are equity risk premiums," by Michael Rozeff. He explains that "the evidence dictates" that dividend yields can be used to time purchases. He warns against reading too much from specific dividend levels for establishing absolute buy and sell signals. He also counsels readers away from trying to profit from dividend-yield signals in the short term. Nonetheless, the basic premise, if not exactly original, reflects economic common sense, Rozeff argues:
My evidence indicates that returns increase continuously and monotonically as dividend yield in the prior year increases. My theory that the dividend yield is a measure of the ex ante risk premium explains why this is so. High returns tend to occur when the environment is perceived to be so risky that investors demand a high premium for holding stocks. Low returns tend to occur when the environment is perceived to hold such little risk that investors demand a low risk premium for holding stocks.
Subsequent studies lend support to the idea that valuation overall matters. For example, Robert Shiller, in Irrational Exuberance, argues in favor of return predictability based on valuation parameters. One example comes by way of a diagram in the book that plots price-earnings ratios against subsequent 10-year returns based on buying the S&P Composite Index (a proxy for U.S. stocks) at a given p/e ratio. The relationship, which draws on more than 100 years of market history through 1989, shows a "moderately strong" link between low p/e ratios and relatively high returns,…
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Turnaround Tuesday Morning???
by Phil - October 28th, 2008 8:40 am
We are way up in pre-market trading (200 points at 7 am).
Yesterday was a crazy day and at 1:37 (after a very good morning of bottom fishing), with the Dow at 8,550 I had to warn members: "Don’t forget that if you were crying this morning when the pre-markets were down 300 points, this is a good opportunity to add some downside protection! Watch the 2.5% line on the Dow and 900 on the S&P and you can stop out or cover on the bear side but we need more volume and more reason to put a real rally together." That was good timing as the Dow dropped 400 points into the close from there but, much like we weren’t buying the rally - we weren’t going for the last leg of the drop either, which we decided looked a little forced at the end.
During the day, as fatigue was setting in among the bottom-fishing crowd, I made my extensive bottom case for the markets (along with what turns out to be the play of the day, picking up FXI at $20) and, at 12:15 I summarized my point by saying: "I’m not saying anything will turn around right now but the point is we can buy low and get paid to wait by selling premiums. We’ve seen how fast this market can whipsaw up and I wouldn’t be too surprised to see even the anticipated Fed cut Weds boost us 1,000 points by Thurs. Whether or not we hold it is another story but this is starting to look more and more like rotation out of commodities and into some very beaten down stocks. Can they get more beaten down? Sure - but then we buy more and sell more premium. Don’t forget there is the old saying that "you can’t fight the Fed" but this isn’t just the Fed, this is the entire G7 acting in unison to move the markets. Perhaps the global crisis is so severe that not even that will help but, if so - then nothing really matters anyway does it?"
![[Asia markets rally]](http://s.wsj.net/public/resources/images/OB-CO651_astox1_D_20081028061802.jpg)
So that’s what’s guiding our plays for the past few weeks but we remain EXTREMELY skeptical of rallies that can’t break our levels but it sure does make for an exciting trading environment. As expected, anticipation of another round of globally coordinated rate cuts is sparking off a rally but the extent of the rally is pretty impressive with the…
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Dave’s Daily
by David Fry - October 28th, 2008 4:35 am
MARKET COMMENT
October 27, 2008, Courtesy of Dave Fry, at ETF Digest
Before the open things looked bleak as Asia and Europe equity indexes were being pummeled. Surprisingly US markets rallied quickly off the pre-open and opening lows on not much news until positive home sales data gave bulls another reason to pump things. We turned positive, but in the end, no one wanted to stick around on the long side and stocks were in a sharp free-fall into the close.
Volume was respectable but breadth continued showed continued distribution.
The following chart may be the only chart you need to see. I posted Wednesday the 10-year monthly chart and here it is refreshed.
I know everyone is looking for bottom-picking opportunities; is sitting on stock they still wish to sell; waiting for a rally and so forth. Below is a weekly chart of the NDX 100 Index with Tom DeMark “weekly sequential” annotations. I won’t go into how these are calculated but I wish to draw your attention to the “8” under the last price bar. This means that this week barring a moon shot higher of 500 NDX points a “9” will appear. This often signals the end of whatever trend is in place but not always. Not always? Yep, when trends are very strong few technical indicators function well and this impending “9” could see the market blow right thru it lower.
The chart below is from our internal proprietary systems with DeMark overlaid. It is deliberately abbreviated but I just wanted to point out the current condition on weekly charts from last week.
I’ve used the above image of our little horror film friend to describe US consumers. You can’t stop ‘em from shopping. There have been continuing reports of his death but then that sequel keeps returning. Now, unless the Fed and Treasury mail out Christmas gift cards to taxpayers from Walmart et al, the dude is toast.
The week is young but the month is old. October has been lethal to investors. Most technical analysis is nearly dysfunctional as the velocity of the decline is too rapid for most indicators to be effective. It has been routine for the DJIA for example to experience 400-500 point intraday swings. That’s why we’re featuring “monthly” charts to give us a better perspective.
It’s also why we’re almost 100% in cash.
Now we have the Fed meeting and an…
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Hedge Funds
by ilene - October 28th, 2008 3:31 am
Greg Newton, of NakedShorts, reports that Calpers, the largest public pension fund, is unloading stocks to raise cash to meet its obligations.
‘Hedge funds’ dumping stock latest
As always, prices move, and then comes the news:
"The nation’s largest public pension fund, known as Calpers, is unloading stocks in a falling market to make sure it has enough cash to meet its obligations.
The pressures come as the California Public Employees’ Retirement System has had to raise cash to fulfill commitments to private-equity firms and real-estate partners. The giant fund’s predicament is another sign of how the market selloff is tightening the screws on pension funds nationwide…
…Calpers said it had $188.8 billion under management as of Wednesday [Oct. 22], down 21% from the end of June."
"The attempt to pin market chaos on hedge funds is, in my view, giving them rather more credit than they deserve. There are a lot of moving parts and hedge funds are just one of the moving parts in what’s going on in the market at the moment."
More astute still? Let’s start with Calpers’ (former) chief executive officer Fred Buenrostro and (former) chief investment officer Russell Read, whose legacy contribution was to ramp up Calpers’ commodity — err, make that ‘inflation-linked’ — investments beginning in late 2006, hitting the eject button?
(What's this?)
(market folly, 3/9/10)
(market folly, 3/2/10)
(Random Roger's Big Picture, 2/18/10)
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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
(