Archive for
January, 2009
by Option Review - January 26th, 2009 2:00 pm
Today’s tickers: CAT, GE, WYE, COV, CCI & XLF
CAT – Caterpillar Inc. – A bellwether for the broader economy, Caterpillar brought more disappointing news to the table this morning, reporting a 32% slump in fourth quarter net income and lower than expected projections for 2009. CAT estimates earnings for 2009 at $2.50 per share on revenue of approximately $40billion which was way off Wall Street’s assessment of $4.35 per share on revenue of $45billion. The five-year surge in demand for CAT’s heavy construction equipment domestically as well as in emerging markets has come to a screeching halt, prompting the announcement of 20,000 job cuts among other cost-cutting measures. The implied reading of option volatility declined from 70 to 56% after earnings while the most popular destination for option investors was at the 30 line in February and March expirations where puts were bought. In the May contract more puts were sold than bought perhaps indicating that investors believe that shares should have recovered by that point in time.
GE – General Electric – Despite a 3.7% share price rally to $12.50 today, possibly attributable to affirmation from S&P that GE won’t lose its AAA-credit crown on account of last Friday’s fourth-quarter earnings results, option investors can’t seem to get enough downside protection. The February 10 strike is heavily-trafficked in Monday morning activity where more than half of the 63,000-strong volume was initiated by interested buyers at a volume-weighted average price of 37 cents. The share price would need to decline to $9.63 before buyers break even on the deal at this stage.
WYE – Wyeth – Pfizer confirmed last week’s deal broken by the WSJ, when it provided a sweetener to its quarterly earnings saying it would pay around $50 per share for Wyeth. The combined drug manufacturer would have 17 products generating in excess of $1 billion in annual revenues. Wyeth’s shares were slightly higher at $44.10 while once again its option activity was active with almost 30,000 lots in play within the first hour of trading. Since the deal involves a $22.5 billion consortium loan by Pfizer, there is possibly some risk that the deal isn’t struck until the signatures are dry on the paper and hence shares in Wyeth are not fully valuing the proposal. The February 45 strike was option traders target today as they bought around 8,000 lots at the prevailing 70 cent premium.…
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by ilene - January 26th, 2009 1:34 pm
As go the SOX, so goes the Nasdaq? Rob Hanna provides evidence. 
Courtesy of Rob Hanna at Quantifiable Edges
I’ve discussed in the past the fact that strong SOX action can often be a good harbinger for the the market. While both the S&P 500 and the Nasdaq failed to gain even 1% on Friday, the SOX rose more than 4%. It’s especially unusual for the SOX to post such strong gains without bringing the Nasdaq composite along with it. It has provided a nicely bullish expectation for the Nasdaq going forward.
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by ilene - January 26th, 2009 12:27 pm
Financing for organized Chp. 11 bankruptcies is drying up. So now what?
Courtesy of Michael Panzner at Financial Armageddon
Some might describe it as paradoxical, Daliesque, or poetic justice when a company whose liabilities far outweigh its assets can’t get the financing it needs to declare Chapter 11 bankruptcy.
Regardless, it says something about the alleged recovery in credit and other markets that some optimistic analysts claim is on the horizon (as well as the overall state of the economy) when lenders who have top priority in such proceedings are unwilling (or unable) to stump up the cash.
In "Liquidation Risk Grows as Finance Dries Up," the Financial Times reports on the latest developments.
US companies face a greater risk of liquidation because sources of finance to let them reorganise under the country’s bankruptcy code are drying up in the global financial crisis.
In the US, companies on the verge of insolvency can restructure themselves under a Chapter 11 bankruptcy protection process, sometimes taking years.
But the credit crunch has severely limited the availability of so-called ‘debtor in possession’ financing that is vital to give them this second chance.
With previous big providers of DIP financing, such as GE Capital, shying away from the market, companies may have to rely on their existing lenders, says Standard & Poor’s, the rating agency.
It said on Friday there had been no substantial increase in DIP volumes in 2008, in spite of a jump in the number of bankruptcies, highlighting the reluctance of banks and investors to finance companies in bankruptcy.
Steven Smith, global head of leveraged finance and restructuring at UBS in New York, said this cycle was likely to see more liquidations than in the last three combined.
He said: “The lack of DIP financing available is an issue for the American economy because of the potential job destruction that could result.”
Lenders, even those with priority claims, face big losses, if a company cannot reorganise and liquidates.
Senior lenders to retail companies would recover less than half of what they would if the company reorganised under Chapter 11, according to S&P.
Debtors also face the highest rates yet for DIP financing. The risk premium a debtor has to pay on the loan has more than doubled since 2001-2002, the height of the last downturn, according to Dealogic…
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by ilene - January 26th, 2009 12:10 pm
Michael Steinberg suggests raising the strike price on warrants the gov’t received for TARP funds would imply the value of the underlying assets is way above current market valuations, thus invoking a high level of confidence in the company and its survival. This would cause shorts to rush to cover their short positions. One problem I see with this proposal is that the tax-payer takes on more risk, and there is inherently less upside. Michael believes this will be balance out by the positives, I’m not convinced. Any thoughts? – Ilene
Courtesy of Michael Steinberg at Click Broker
Bloomberg reports “Summers Says TARP to Be ‘Very Different’ Under Obama.” The director of the White House’s National Economic Council stressed transparency, accountability; and the push for banks to leverage TARP funds into consumer mortgages and car loans. Larry Summers said that the Obama Administration was not out to benefit financial institutions, but “of course we need to stabilize financial institutions — without a stable financial system the economy can’t work.” Summers refused to provide any detail on President Obama’s plan or even philosophy for strengthening financial institutions until after New York Federal Reserve President Timothy Geithner is sworn in as Treasury Secretary. I guess with Geithner the Senate will be voting on a "pig in a poke".
While the Administration is getting its lipstick ready, I would like to suggest dramatic policy change that would jumpstart private investment in our banking and insurance systems. The Treasury, FDIC and Federal Reserve should raise the strike prices on the warrants they received for TARP and other programs to the estimated value of these companies in normal times. If a conservative estimate of a shrunken Citigroup (C) in normal times would be $20 per common share, investors would know the government would not dilute until the shares reach that level. Above that level it would be an opportunity for Citigroup to raise capital from whoever bought the warrants from the government. This would end the fears of nationalization and cause a short squeeze as the shorts attempt to cover. Moral hazard on the shorts – what a concept!
Raising the government’s strike price would do more to prevent short raids and build investor confidence than…
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by ilene - January 26th, 2009 10:29 am
Here’s an article by Mish rebutting Adam Hamilton’s argument that big inflation is coming. 
The growing legions of deflationists see an unstoppable depression-like deflationary spiral approaching like a freight train. They cite some convincing data. The stock markets have been cut in half in just a year. In the past 6 months, some key commodities prices fell farther and faster than they did in the entire Great Depression. House prices are down by double digits across the nation, with no bottom in sight. And credit is a lot harder to come by today than in any other time in modern memory.
My Comment: Well yes, that is convincing data. Indeed a perfect 15 out of 15 conditions experienced in the great depression are happening today as discussed in Humpty Dumpty On Inflation.
Of course Humpty Dumpty can and does pretend that deflation is specifically about money supply, totally ignoring credit. And those same Humpty Dumpties were amazed by the collapse in commodities and were crushed shorting treasuries because they did not see this coming.
In light of these universal falling prices, how could we not be entering a sustained deflationary period? The case may seem airtight, but I’d like to offer a contrarian view in this essay. Believe it or not, despite 2008’s price collapse there is plenty of overlooked evidence suggesting big inflation is coming. You won’t hear much about this on CNBC, but it could have a big impact on your investments in the years ahead.
My Comment: I am not sure what Hamilton means by "sustained". We have been in deflation for about a year, and maybe it lasts another, or five. Then again, perhaps we drift in and out of a slow growth recessionary period much like Japan for a decade. We have to take this one step at a time.
Inflation and deflation are purely monetary phenomena. Inflation is not just a rise in prices, lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply.
My Comment: That last sentence puts the cart in front of the horse. Inflation is not
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by Phil - January 26th, 2009 6:23 am
Wow, the last week of January already?
This year is already flying by and we’re heading into a February with just 19 trading days so just 39 trading days until March options contracts expire – how’s that for perspective? Let’s keep that in mind with the VIX still near 50 as these fat premiums may not last forever so we may want to move away from February sales early, especially in cases where we get a near double for selling 39 days vs. the 19 days that remain in the current expiration period.
We have to consider – what would it take for the markets to get MORE volatilie? Last week was devoid of data but this week will be exciting with Existing Home Sales and Leading Economic Indicators at 10 this morning, Case/Shiller and Consumer Confidence tomorrow, Crude Inventories and the Fed on Wednesday, Durable Goods and New Home Sales on Thursday and Friday we finish the week with Chicago PMI, Michigan Sentiment, Employment Cost Index and the Advance Q4 GDP – which will make everything else irrelevant so strap in for a wild ride!
We also have earnings from about 1/3 of the S&P 500, highlighted this week by CAT, HAL, MCD and AXP today; DAL, BTU, X, VLO, VZ & YHOO tomorrow; T, BA, COP, GD, LM, PM, ALL, BXP & SBUX Wednesday; MO, BUD, CL, EK, F, OSK, RDS.A, TXT, UA, AMZN, SPWRA and YRCW Thursday and XOM, CVX, HON and PG on Friday. XOM and CVX together on Friday (15% of the Dow weighting) have me really, really, REALLY worried that we’ll get a -5% GDP along with poor earnings from them and people are going to act like the world is ending so it’s going to be a tricky play this week but lots of fun playing the ultras.
After not hitting our levels last week we shifted to Neutral at 2:21 on Friday and picked up DIA puts for protection and we are sincerely hoping that this down 7% (so far) January market is not the much-discussed "January effect" as, statistically, January is THE BEST month of the year for the markets. It would be quite a feat to just get the markets back even in the next 5 days, let alone come up with a finish that would be encouraging for the rest of the year. Many companies that have reported so far have been hit by the violent swings…
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by ilene - January 26th, 2009 1:34 am
Mish on Peter Schiff’s wrongness…
There are numerous YouTube videos, articles, and references to Peter Schiff being "right" rapidly circulating the globe. While Schiff was indeed correct about the US imploding, most of the praise heaped on Schiff is simply unwarranted, and I can prove it.
First, let’s start with a look at the claim being made. Peter Schiff concludes many of his articles, books, etc. with the following statement.
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly.
Highlight in red is mine.
I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.
I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff’s investment thesis was flat out wrong.
I have an actual portfolio statement from one of Schiff’s clients at the end to discuss, for now let’s discuss the main points of Schiff’s thesis.
Schiff’s Overall Thesis
- US Equity Markets Will Crash.
- US Dollar Will Go To Zero (Hyperinflation).
- Decoupling (The rest of the world would be immune to a US slowdown).
- Buy foreign equities and commodities and hold them with no exit strategy.
Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.
Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.
What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.
In other words, Schiff failed where it matters most: Peter Schiff did not protect his client’s assets. Let’s take a look how, and more importantly why, starting with charts of various foreign indices.
click on any chart in this
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by ilene - January 25th, 2009 6:27 pm
James D. Hamilton argues that private banks and other companies in line for bailout money is itself evidence that the taxpayers’ interests are not being protected. 
Courtesy of James D. Hamilton at Econbrowser
If everybody wants a bailout, that’s a good indication that we’re making some mistakes.
Let’s start with first principles-- why are we talking about huge potential transfers from the government to private companies in the first place? My starting point would be the observation that U.S. output is falling significantly below what America is capable of producing. The problem is not that labor and capital are physically incapable of producing more, but instead that certain key institutions have existing legal commitments that they are unable to fulfill. Foremost among these would be in the financial sector, where liabilities threaten to exceed the market value of assets, preventing the entire sector from functioning properly. But also prominent are other crucial industries, such as the domestic auto manufacturers with a very significant burden of debt and obligations to current and retired workers. We need an unambiguous resolution of this problem, allowing these institutions to return to productivity. The sooner those unpayable commitments can be resolved, the better off we’re going to be.
How do you solve the problem of unpayable existing obligations of institutions that otherwise have the resources to make a productive contribution to total economic surplus? That of course is the function that our bankruptcy system is intended to provide. In a typical bankruptcy, the company’s owners and senior management get wiped out, some crumbs are left for creditors and workers, and hopefully the most valuable underlying assets get reallocated to alternative productive use. But bankruptcy is a very clunky process with lots of deadweight costs in and of itself. We should have significant concerns in the present environment about the possibility of such costs leading to spillover effects, forcing other institutions into bankruptcy that otherwise might have remained solvent.
There is a good case to be made for bringing the taxpayers in as a fifth player at the negotiating table along with owners, creditors, management, and workers. There are likely going to be instances in which a modest taxpayer contribution, in conjunction with substantial concessions from the other four parties, could end up
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by ilene - January 25th, 2009 4:19 pm
In defense of China, the responsibility for the financial crisis does not lie with China. Meanwhile, the very people who caused the financial crisis are being appointed by Obama to decide how to respond to it. 
Courtesy of Willem Buiter, writing in the Financial Times, at Willem’s ft.com/maverecon blog.
Timothy Geithner, the nominee for US Treasury Secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency”. In the US, the words “currency manipulation” are fighting words. If the US administration were to formally name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.
The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. The section dealing with the exchange rate, bilateral current account balances and the overall current account balance is a monument to economic illiteracy.
Under the Omnibus Trade and Competitiveness Act of 1988, “The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”
“If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.”
Should the US Treasury officially determine China to be a currency manipulator, the US Administration can unleash a range of remedies, including antidumping measures, countervailing duties, and safeguards. Although the World Trade Organization permits certain retaliatory responses from importing
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by ilene - January 25th, 2009 1:59 pm
Corey Rosenbloom at Afraid to Trade reviews the XLF Financials, including an Elliott Wave analysis.
Courtesy of Corey Rosenbloom at Afraid to Trade
With a very volatile week behind us, let’s step back and take a look at the XLF Financial Sector from its 2007 peak to present.
XLF Financial SPDR:
The XLF actually topped in May 2007, five months ahead of the October 2007 stock market top which underscores the assumption that Financials lead the broader market. If they continue to lead, then we’re not in a positive scenario for equities.
Price broke the November lows last week to carve in a fresh low at $8.00 per share (a level 77% off its highs), which by no means is bullish. The one slight optimistic picture is that we painted a hammer or dragonfly doji candle at these lows, though that by no means is a good enough reason to buy.
We see price as beneath all three key moving averages on the weekly chart, and they are in the most bearish orientation possible, though we are extended roughly $6 beneath the falling 20 week EMA which one would think would signify ‘oversold’ conditions but look at the 3/10 Oscillator – it is indicating that we’re not quite oversold and that we would have a bit more to travel down before we registered a new low. Anything else would result in a positive divergence, which might actually be what happens.
Notice that the oscillator made a new momentum low in November, signaling lower prices were yet to come – they came this week.
A few readers have asked me to do an Elliott Wave count on the XLF and here is one interpretation – albeit a bearish one – on the XLF. You’ll need to click on the chart for a larger image.
XLF Possible Elliott Wave Count:
What I’m showing is the more bearish of the two possibilities, similar to that on the S&P 500. I’m showing us as having completed a fourth wave up within a larger (circled) Wave 3 down and that we are currently in fractal 5th of larger scale Third Wave down which is likely about to complete. The only two labels missing from this count at the end (right) would be the (5) and then
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January 27th, 2012 1:40 pm
Reminder: David is available to chat with Members, comments are found below each post.
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January 27th, 2012 12:55 pm
Courtesy of ZeroHedge. View original post here.
Submitted by Tyler Durden.
In an effort to reach the angry mob, CNBC's Rick Santelli goes all Sesame Street on the numbers behind the US Debt Ceiling Rise. Focusing for two minutes on what this practically means for every man, woman, child, and politician, the shouting Chicagoan points out that when the US breaches this new limit then the world's entire population will be on the hook for $2,346 each (and $52,409 per US person).
...
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January 27th, 2012 12:35 pm
Courtesy of Doug Short.
The Weekly Leading Index (WLI) growth indicator of the Economic Cycle Research Institute (ECRI) posted -6.5 in its latest reading, data through January 20. The latest public data point is a reduced contraction from last week's -7.6 (a slight downward revision from -7.5). This is the highest level (i.e., least negative) since early September. However, the underlying WLI declined fractionally from an adjusted 123.3 to 122.8 (see the third chart below).
Early last December Lakshman Achuthan, the Co-founder of ECRI, spoke with Tom Keene on Bloomberg Television's Surveillance Midday. You can watch the video on the ECRI website here, with bold heading Recession Update. The eight-minute video is well worth watching in its...
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January 27th, 2012 11:15 am
Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Some combination of better made cars, and less Americans able to pay new car prices has conspired to push up the average age of U.S. vehicles to a new record high. Reflecting this sea change, one of the best investment g...
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January 27th, 2012 10:05 am
Courtesy of Benzinga.
Shares of battered tech company Research in Motion (NASDAQ: RIMM) are seeing much strength during Friday's trading session.
Fairfax Financial Holdings released a 13G filing with the SEC this morning, in which they disclosed a 5.12% stake in Research in Motion.
Currently, shares of Research in motion are up over 4% at $16.85. Over the last year, Research in Motion is down over 72%.
Research In Motion Limited is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. RIM provides platforms and solutions for access to information, including e-mail, voice, instant messaging, short message service.
...
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January 27th, 2012 12:00 am
Top 5 RisersStockRatingAnalysis
ASBCBUYMany analysts are expecting higher than previously expected long term growth from Associated Bancorp, and its near-term earnings outlook is also improving.
CZZSTRONGBUYThe recent earnings history for Cosan Ltd shows significant improvement while projected valuation continues to rise.
STLDBUYProjected value continues to rise for Steel Dynamics while long term increases in earnings growth are also becoming more widely expected.
PSESTRONGBUYAn increasingly attractive expected long term growth rate and a significantly higher projected valuation from just a fe...
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January 26th, 2012 6:16 pm
Courtesy of John Nyaradi.
Major markets and major index ETFs corrected slightly today after the stock market’s euphoric party yesterday Major markets suffered a slight hangover today, as the S&P 500 dropped .57%, the Dow Jones Industrial Average dropped .18%, the NASDAQ dropped .46% and the Russell 2000 Index dropped .34%, after yesterday’s crazy Fed and Tech Sector induced Wall Street Party. The NASDAQ, in particular, partied very hard, so hard in fact that the NASDAQ reached its 11 year record high.
The major market index ETFs were hungover too as the SPDR S&P 500 ETF lowered .51%, the SPDR Dow Jones Industrial ...
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January 26th, 2012 1:38 pm
Today’s tickers: DB, ATHN & LSI
...
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January 23rd, 2012 8:56 am
Reminder: OpTrader is available to chat with Members, comments are found below each post.
This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.
Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.
To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here
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January 22nd, 2012 10:09 pm
Here is the virtual portfolio weekend update. Basically a recap of the positions and some notes about the trades. As usual, I'll post the previous week's P&L for comparison. Not the greatest of week in general!
AA Money
Only transaction last week as we bought back the AA Feb 9 puts on Tuesday for close to a 70% profit. The idea is to sell another set of put as soon as we get a chance.
Previous week P&L - $400.00
We lost some ground this week, but we'll keep on selling premium!
FAS Money
We also lost some ground in this virtual portfolio, but we have sold plenty of premium for the coming week. A little correction would go a long way to help! On Wednesday we sold the FAS Feb 72 puts (already good for 50%), on Thursday we added the Jan4 78 calls and on Friday we had to roll the Jan 78 puts to the Jan 80 puts. We were hoping for these ones to expire worthless on Friday, but a late stick killed that hope.
Previous week P&L - $4372.00...
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January 22nd, 2012 2:52 am
NEW: Elliott and Ilene are available to chat with Members regarding topics presented in SWW, comments are found below each post.
Here's the latest Stock World Weekly. We discuss the Fed's next move, and it's new policy for more QE-cating. Brief review of Sabrient's trade ideas for 2012 (already doing well) and a few new buy-writes from Phil and Pharmboy. Enjoy! (Feedback appreciated - give some life to the comment section below.)
Click this link for this weekend's newsletter, and sign in or sign up.
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January 18th, 2012 1:09 am
Reminder: Pharmboy is available to chat with Members, comments are found below each post.
Finding new and exciting Biotech companies that target novel mechanisms is like trying to find a needle in a haystack. Sure there are many companies working on cutting edge science, but investing in those companies to reap the rewards of their work is a very dangerous game. More often than not, companies fail because the mechanism does not pan out, the compound(s) do not have pharmacokinetics (get into the body or last very long in the body), or an adverse event happens that knocks years off a development timeline. In addition, the stock can be manipulated by market makers so investors don't know which way is up. I approach investing in biotechs as a long term prospect. I continue to like our current portfolio of biotech companies (join in chat for many of those plays), and we continually add/subtract shares and sell/buy options on ...
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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...
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