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Hedging For Disaster – 3 More Option Plays that Make 300% if the Market Falls – Members Only

It's been a long time since we were worried about a steep drop.

We have some very successful hedges already as I've been pounding the table on all week and the DIA June $148 puts I mentioned Thursday at .60 closed at $1.04 (up 73% in 2 days!) while the DIA Aug $147 puts I suggested rolling to went from $1.72 to $2.50 – so, "only" up 45% but up .78 rather than .44 and, with 100 contracts, that's a $3,400 difference!  The longer-term TZA October $30/37 bull call spread did little, going from $1.90 to $2 but now, if we take the DIA profits on 100 calls off the table with a $7,800 profit, that knocks $2.60 of each of the 30 TZA spreads and drops the basis to a net 0.70 credit with an upside of 3,000 x $7 or $21,000 (1,100% with the credit).

That's how we play the option insurance gain.  We take the quick, directional profits off the table and leave the long-term hedges, that pay the big bucks, on the table, in case the market suffers a sustained downturn and, if not, it's very cheap insurance and we'll easily be able to stop out the now $2 spread before it hits $1 for a profitable exit, ready to reload for the next round of insurance plays.  

SPY DAILYSince there is so much money in this kind of insurance, we don't need to pull the DIA puts immediately off the table.  We can set a stop on 1/2 $2.30 and a stop on the other half at $2 and we lock in a gain of no less than $4,300, that still leaves us with a net of .47 on the $7 TZA spreads, still with a potential gain of $19,590 if the Russell falls 5% to 934.  Note that there's no margin requirements to this kind of trade – these simple hedges can be applied to any portfolio (in proportion, of course!).  

You know I am a big fan of taking cash off the table in either direction, let's not be greedy and look at ways to "roll" our downside profits into new protective plays so we can set SENSIBLE stops on our in the money short plays (very similar to our Mattress Strategy).  I hate to have to repeat these warnings over and over again but days like yesterday make it all worth it.  As ZeroXZero said in Member Chat at yesterday's close:

Phil/  Thanks to your obsessive bearish anxiety over the last few weeks, I made money on the long side this month, phased gradually to bearish, came in net short today and managed to make money both long and short all week, ending today [and each day this week]  in the green.  I don't know how you do it, but thank you.

And that's why I do it (thanks ZZ, by the way)!  I know a lot of you are here just for the stock picks but my secret goal is to make you all better traders…  Keep in mind that Friday was the biggest market decline we've had since April, as noted on Dave Fry's charts of the SPY – so adding a layer of protection here doubles our returns if this is the first leg of a major sell-off, or it gives us a smaller hedge that we can roll up later while we take our bigger hedges off the table.  As I have to say WAY too often to Members – It's not a profit until you cash it in! 

Hedging for disaster is a concept I advocated during another "recovery," in October of 2008, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – "just in case."  That "just in case" saved a lot of portfolios!  The idea is to take disaster hedges using high-return ETFs that will give you 3-5x returns in a major downturn.  That way, 10% allocated of your portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a good buying opportunity.  At the time, I advocated SKF Jan $100s at $19.  SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting even just 5% of your virtual portfolio into that financial hedge would give you back 75% of your portfolio when you cash out. 

.SPX WEEKLYKeep in mind these are INSURANCE plays – you expect to LOSE, not win but, if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go.  I already made my call to cash out on shorter-term bullish position but we still need to protect our long-term plays, like the ones we keep in our Income Portfolio.  To some extent, they are self-hedged and well in the money but we still prefer to have a little extra insurance, to take us through uncertain times.  

The Russell has been unable to break our 1,000 target and the Dow has failed to make our 16,000 Must Hold level and the NYSE has not been close to 10,000 and, as I warned just this Thursday morning, ahead of Friday's 200-point drop, the Dow had no real support all the way to 15,200.  As it turned out, we bottomed out at 15,115 down just about the requisite 2.5% from our week's high. 

While we're not expecting a huge correction (because the Fed is still very much in the game) – but it's not like we haven't had some decent ones.  You can see on the weekly SPY chart that our last two 15% market runs had 50% retracements and here we are at the top of a 20% dun-up and waiting for our first retracement.  Even in an epic bull market – retracements do happen.  Fibonacci discovered that in 1175 and those who forget the past yadda, yadda

As far as hedging goes, if you are 50% invested and 50% in cash and you are worried about losing 20% on the stock side in a major sell-off, then the logic of these hedges is to take 20% of your cash (10% of your total) and put it on something that may triple or better while the other positions lose.  If things go down, your gains on the hedge offset most of the losses on your longer positions.  If things go up, you can stop out with a 25% loss, which will "only" be a 2.5% hit on your total portfolio but it means we are breaking through resistance and your upside bets are safe and doing well.  That is not a bad trade-off for insurance in this crazy market.  Also, be aware that these are thinly traded contracts with wide bid/ask spreads and you need to use caution establishing and exiting positions.

As we are now, we were very keyed on watching the top of the April range  for support, which were at the time:  Dow at 14,800, S&P 1,600, Nasdaq at 3,300, NYSE 9,250 and Russell 950.  These are all levels that give up all of Q2 gains and are roughly the 50 dmas, but things can get far worse if we have another crisis of confidence, like we did last year (when Europe had a crisis) or the year before (when Europe had a crisis).  It's still too early to bargain hunt because that was a mistake we made in 2008 – looking for floors that never came – so we need to be judicious in our bottom-fishing expeditions.  

Keep in mind that these are 2nd stage hedges as we already have TZA hedges from higher levels (Russell 1,000, now 984) we have a Fed Beige Book next Wednesday and NFP on Friday and Fed speak could turn the market right back up but, we do need something, in case it doesn't.  That being the case, here’s a few ideas to help ride out a larger downturn as well as to protect our eventual buys:

  • DXD July $35 calls at $1.20, selling July $38 calls for .55.  This is a net .65 entry on a $3 spread so your upside is 361% at $38 (DXD is now $37.65).  If the Dow ends up holding 15,000 and moves back up, there’s a good chance you can kill this cover with a small loss as a $3 move on DXD is about 10% and that would be about a 5% move up in the Dow to new highs at 15,750 before the July $35s lose half their value (which is still more than you paid for the total spread).  You need $35.65 (+2.8%) to get your money back and that's a 1.4% drop in the Dow to 14,900, so you are well-protected for any dip below that line.  
  • TZA is still our favorite hedge and you can pick up the Oct $30/37 bull call spread for $2 and you can sell the Oct $24 puts for $1.05 for net .95 on the $7 spread, giving you 736% of upside potential and, best of all, with TZA at $31.76, you are starting out .71 in the money (67%)!  TZA drops $7.76, to $24 if the Russell goes up 8% plus these ultra-ETFs tend to decay over time but owning TZA for net $25.05 is not a bad portfolio hedge and the Russell would have to be net up 8% to 1,062 in October for this to happen and, if so, your longs should be doing well.  

When you are entering a trade like this, assume you will have TZA put to you at $25.05 and allocate how much you are REALLY willing to own.  Say that’s $12,500, which would be 500 shares and that means you can make this trade with 5 contracts at a net cost of $525 plus (according to TOS) $1,215 in margin.  This play returns $3,500 if TZA rises 16% (Russell down 5.5%) and holds $37 through the October expiration.  This hedge then, does a good job of protecting $100,000 worth of existing positions against a 5% loss for $5,000 (hopefully, you already have buy/writes that protect you from a 20% drop, so we're good for 25% total downside) - plus some margin you'd better have laying around anyway!

SDS July $37 calls at $3.30, selling July $41 calls for $1.40 and selling something you do want to buy on a market drop like KO Jan $35 puts for 0.90.  Here we are in a $4 spread for net .90 with the possibility of making $3.10 (344%) if SDS hits $41 (up $1 or 2.5% or down 1.25% on the S&P to 1,609).  We may have KO put to us for net $35.90 at that level (now $40).  

Of course, we can roll the puts down to the 2015 $30 puts (now $1.30) – which is a pretty good entry on KO (25% off)! Remember, the premise is that it's not likely to have KO go below $35, let alone $30 if the S&P is rising so your expected cost of insurance is that .90 – although you can stop the bull call spread out long before that happens.  If you are willing to own $15,000 worth of KO at around $30 in 2015, it's reasonable to take 5 of these hedges, which return $2,000 if the S&P falls just 1.25%.  The margin on 5 short KO Jan $35 puts is just $1,500 according to TOS – so not tragic if forced into the long-term short puts.      

Another nice thing about this trade, in a vacuum, is that – IF we have a catastrophic failure that forces you to buy 500 shares of KO for $30 – there's a pretty good chance you will have collected that $2,000 from the SDS spread and that means you are buying 500 shares of KO for net $13,000 – just $26 per share!  

Another way to hedge SDS if you are not margin constrained is by selling SPY puts.  SPY Jan $122 puts are $1 so a net of 0.90 on the above spread and you KNOW the puts are rollable and, of course, the SPY puts CAN'T go in the money until AFTER you make $5.27 per spread.  What you are playing for here is that the S&P will drop 1.25% but not 25% (and, assuming a roll, 35%).  

I'm sure some of our more savvy traders have already realized that once SPY drops 10%, we can simply add more hedges and at 15%, more hedges and at 20%, even more hedges to protect against getting too burned on the short puts.  Layering in our Disaster Hedges is always a good plan.  After all, that's what these hedges are as we've already got plenty of hedges like this from when the market was 15% higher!  

The great thing about this kind of play is that, if the S&P goes up, the insurance is half price as the short puts expire worthless.  You can even stop out the July $37 calls at around $1 and you end up with something in your pocket as a reward for all your hard work.  

Keep in mind that this is insurance, not betting.  These are hedges that are meant to perform for you if your upside bets don't work out and will hopefully not cost you too much money when your upside plays go well.  If your upside plays are sensibly hedged, like our buy/writes that pay at least 10% a quarter in a flat to up market, then this kind of sensible insurance is all you should need to offset reasonable dips in the market.  It doesn't mean you don't need stops.  

As with all of our protection plays, if we become more confident that the market will NOT collapse, then we simply take them off the table with a small loss and that makes us more bullish but having a few hedges like this in your portfolio can do a lot to cushion the blows from any major market sell-offs. 

I cannot remind you enough though that these are insurance plays and they are not ideal for rolling or adjusting and you should EXPECT to lose money if the market heads higher – much the same as you expect to have "wasted" your life insurance premium for the prior year every time you celebrate another birthday….

As with life insurance, it may make you feel good to walk around with $50M worth of protection in case you get hit by a bus but – is it realistic?  Look at your portfolio and think about what kind of protection you REALLY need.  If you have $100,000 worth of May buy/writes that are good for a roughly 15% dip in the market, then you don't really need ANY protection against a 15% drop.  If the market drops 25%, then you will lose 10% on what you have now.  If the market drops 40%, then you lose 25%.  We all learned how valuable it can be to simply stay even in a major market drop as opportunities abound then so simply putting 5% away on hedges that will pay 25% back when the market drops 40% will let you cash out with 100% of what you have now and go shopping – that's all insurance needs to do!

Disaster hedges are a good exercise in managing your portfolio but, unfortunately, like Auto insurance, you just pay and pay and pay until you have that accident.  So safe driving!

 

 


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  1. pstas

    Jason Zweig, “Time is the novocaine of markets: After a long enough period passes without further severe losses, the memories will blur and the pain will fade.”

  2. grenowoods

    Man, it sure isn't fun when a credit card company suddenly rejects an auto renewal. I got an email about it and so I tried it twice manually this morning and it failed both times. Unfortunately I'm in the middle of nowhere in northern Alberta, at an oil company camp, and although I have satellite internet access, my cell phone doesn't work in my room. So I had to go to a particular spot outside and be one with the black flies and make a call. After the usual menus, on hold music and an increasing swarm of hungry black flies, I finally got to talk to a person who eventually put me through to the security department. They finally explained that when I tried the renewal they questioned the authenticity of Phil's Stock World on my  first attempt and then they questioned my authenticity on the second attempt. I convinced them that both parties were authentic and they assured me that there would be no further issues. I gladly exited black fly land and went back to my laptop indoors. The renewal failed again twice so I had to repeat the above process only I was on hold for much longer, much to the delight of the black flies. When I finally spoke to a real person again I explained my black fly dilemma but that didn't speed things up. The security department said that they had no idea why it wasn't working and could I try it again while she was on the phone. I explained that my phone wouldn't work where my laptop is and vice versa. Okay, so she promised it would work and that she would monitor the transaction. Eureka, it worked. Now everyone is happy including the black flies. BTW, the credit card company thinks that Phil's Stock World is an electronics store.

  3. yodi

    grenowoods
    What a great story. Just cold have happened to you in Mexico. However my wife here in Germany tried four time to pay with Visa and MC and was rejected four times with the remark to try a valid card!!!! Many stores here do not even accept a credit card due to their high charges. Only Euro card is accepted. Great card to have you can pay anything with it. All payments something like paying PSW would be done here with an automatic banktransfer. This applies to many things, no one pays with checks any more.

  4. grenowoods

    Yodi – what's a check? Always good to tell the credit card company when you're going to travel. Although I just moved across Canada and they didn't even blink. My son went to Europe last year and I finally convinced him on his departure day that he should tell the bank that he'd be using his credit card there. They told him that if he hadn't told them that every transaction would have been rejected.

  5. 1020

    Gentlemen! – problem solved….. ;)
    http://www.youtube.com/watch?v=Xe1Aolxoiik

  6. denlundy

    China Federation PMI and HSBC PMI preliminary numbers diverge. Federation number shows slight May increase while HSBC fell to 49.6 from 50.4 in April. The decline, if confirmed later today will be the gauge's first drop below 50 since October.
    Weak reading will contribute to sell off.

  7. yodi

    grenowoods
    Just to say we always advise the bank AX they throw you out here if you show that card due to high charges.

  8. grenowoods

    BTW, nice hedges. I especially like TZA.

  9. zeroxzero

    As my house is 200 yards from the Atlantic Ocean in hurricane alley, I tend to watch the weather most than most.  What's happening in the western U.S. is statistically off the charts.  I'm not the sensitive sort, but it's hard to believe that global warming isn't widening the probability envelope of weird weather.  Last year's superstorm that hit NYC — a tropical hurricane on one side of it, a major blizzard on the other, encompassing an area equal to 1/3 of the U.S. at its peak, was apparently a portent. 
     
      It might all be just a statistical outlier, but the above-average temperature measures would argue against that. And the 2012 hurricane season was extremely active, tied with 1887, 1995, 2010 and 2011 for have the third-most named storms on record.  You don't need a weatherman to know which way the wind blows, it seems.
     
      I rent an apartment in Miami Beach for reasons unrelated to actually wanting to live there, and I'm just astounded that the whole place is no more than 12 feet above mean sea level [at best] with zero sea walls.  As is the rest of Florida as well, it seems:  http://www.climatecentral.org/news/the-future-is-now-for-sea-level-rise-in-south-florida/
     
    The torpor in our capitol over what is obviously a nationwide threat to America's well-being is disconcerting.  But not surprising, given the dysfunctional political system we seem to have evolved.

  10. zeroxzero

    Here's a nice snapshot of weather across the U.S. right now:  http://www.wunderground.com/?MR=1

  11. jromeha

    Greno- great story! 
    Zero, agree. I remember driving on some highways with water on both sides. It felt like the ocean was higher than the road. Creeped me out. We definitely need to be proactive in this issue but I don't ever see it happening. 

  12. zeroxzero

    Financial Times

    June 2, 2013 8:02 pm
    Google set to pass Apple as app platform
    By Tim Bradshaw in San Francisco
     

    Apple is set to lose its crown as the world’s most popular app platform to Google in the next few months as its rival rapidly closes the downloading gap with the iPad maker. The moment marks the end of one of Apple’s longstanding advantages, amid formidable competition from Samsung and new devices from Google’s Motorola.

  13. denlundy

    HSBC China PMI comes in at 49.2.  Lowest reading since September.

  14. phil

    Sorry about your credit card hassle Greno.  I'll see about accepting BitCoins for future transactions.  8)  

    It's funny how it's so hard to live without a credit card when I'm old enough to remember when having one was a rarity. 

    Asia is pretty flat so far this evening – our futures up about 0.25% – nothing very exciting.  Gasoline down to $2.74, that's nice.  Oil $91.70 but nat gas and metals holding steady, as is the Dollar (83.30).  

    Thanks Greno. 

    Threat/ZZ – Unless we want to go the Holland route – there's not much we can do about it if sea levels actually rise significantly.  Florida will just be gong, as will much of coastal US.  The thing that needs to be done, if it isn't already too late, is make dramatic cutbacks in greenhouse gasses and hope things stabilize if left alone for a while (kind of the way we save endangered species once in a while).  Of course, if we do that and Europe and Japan do that – it still doesn't matter unless the EMs and China do it too.  We already had our industrial revolution and now the only hope we have is to deny them theirs (or find a different way to fuel it fast).  

    Of course, God forbid we allow those Liberal Hippies to set the agenda.  Our profits would plummet!

    Apps/ZZ – What matters is who's capitalizing on it.  These numbers games are very distracting as Android is more like Linux vs MSFT – sure, you root for Linux to kick their asses but, 20 years later, Linxux has made millions and MSFT has made many 10s of Billions.  At this point, there are too many apps but the point remains that Android has miles to go before they catch up on the revenue front.  

    PMI/Den – It's still better than expected thanks to the poor flash number a couple of weeks ago:

    China's HSBC PMI for May falls a bit more than the "flash" read tipped off 10 days ago, coming in at 49.2 from 50.4 (flash came in at 49.6). The downward revision "suggests a marginal weakening of activities toward the end of May, thanks to deteriorating domestic demand conditions," says HSBC. "Beijing needs to boost domestic demand." Reaction is muted: Shanghai (FXICAF+0.2% and Hong Kong (EWH+0.6% in early trade. The aussie (FXA) knee-jerks down a few pips, but is +0.4% on the session at $0.9618.

    China's official PMI rose more than anticipated, up 0.2 from April to 50.8 in May and raising optimism that the world's second-largest economy may be stabilizing. The reading is 0.3 higher than expected. The picture should get rounded out on Monday with the release of the HSBC survey of small and private firms. Related ETFs:FXIMCHIGXCPEK. 

    9:28 PM The Nikkei is lower by 2.2% in Tokyo, but Nikkei 225 futures are actually higher by 0.2% on the session as the early dive is not as bad as might have been expected by Friday's close in the States. It may be helping S&P 500 (SPY) futures, which are ahead by 0.3%.

    Recently, the market learned that youth unemployment in Italy hit 40% in April to go along with a 36-year record high of 12% overall unemployment. Never fear though, Italy's trade union CGIL is out with its estimate of when the Italian economy will recover pre-crisis (un)employment levels: 2076, a mere 63 years from now. (original article)

    Gold will continue to trend toward $1,000 by 2015, Nouriel Roubini predicts. Key reasons: Credit crisis risks have subsided; inflation is under control despite QE; investors crave income-generating assets; the "return to the gold standard" argument is dead. (ETFs: GLDIAUDGPSGOLUGLPHYSAGOLDGLUBGDZZ,GLLDGZUGLDDGLDDBPGLDI)

  15. zeroxzero

    Apple/Android Apps:  It's hard to catch you asleep at the wheel, Phil!!   To wit:   " “It’s not always true that the revenue will be less on Google,” says Vincent Hoogsteder, Distimo’s chief executive, noting that some apps, such as Whatsapp Messenger, make more from Android in certain countries, such as Spain and Italy"
     
    "However, at $5.1m, the daily revenue of the top 200 grossing apps in the US App Store is still more than four times larger than the equivalent on Google Play, according to Distimo’s estimate. Apple said last month that it had paid out more than $9bn to developers though the App Store since launch, after taking its 30 per cent cut of each app sold."  http://www.ft.com/intl/cms/s/0/b0ab10ac-ca60-11e2-8f55-00144feab7de.html#axzz2V4eYy6bx

  16. zeroxzero

    China not good:  FT 11PM Sunday:   "Investors are getting a good read on the health of several Asian economies today as HSBC releases manufacturing activity surveys for a range of countries."
     
    "And the news out of China is not good. The bank's manufacturing purchasing managers' index (PMI), a closely watched measure of factories' order books and future business, has provided the worst snapshot of business conditions in seven months."
     
    "HSBC's survey, which focuses on smaller, privately owned companies instead of China's state-owned behemoths, dropped to a reading of 49.2 for May, sharply below the April figure of 50.4. A reading below 50 indicates business is contracting.  The HSBC data contradicted a similar survey issued by the Chinese government over the weekend. The official manufacturing PMI reported a reading of 50.8 in May, up from 50.6 in April"
     
    "Divergences in the two manufacturing indexes are not unusual, given the government survey includes more data from state-owned enterprises. Still, the official PMI figures may raise eyebrows given that business at Chinese steel mills, which should boom if factories are active, is declining. Chinese steel producers are selling iron ore, the main steel-making material, back into the market because they have no need for it."

  17. yodi

    Italia Unemployment 12% youth 40.5% they all on vacation to Germany selling icecream (8

  18. shadowfax

    Not looking healthy to me with Japan down 3.5%, oil at 91.50, China is bust. But we are supposed to believe that BIG BEN will give more so the bad news is good.
    Glad I held 1/2 my IWM puts but what about those Tuesdays? Sell the 3rd of June and prepare for the end of gravity?

  19. phil

    Good morning!  

    They Nikkie did that BS where they held up during hours and then dropped off a cliff again, this time down 335 to 13,125 and down exactly 2.5% for the session.  These are just bots running programs when we obey the 5% Rule that closely but keep in mind that also means the bots are running programs to fake out traders during the day before they run their real program after hours.  That's about as fake as a market can get.  

    They Yen, meanwhile fell (got stronger) to 100 on the button – blowing all the gains since early April.

    Europe is weak, down 0.5% to 1% and our Futures haven't reacted much yet but S&P failing 1,630 (/ES) is the line I'd play to the downside.  Oil is bouncing up to $92, so we'll see how that goes and the Dollar is right on the 83 line – fakely propping things up so under that line is bullish (fakely but bullish) and over is not at all good.  Dow might fail 15,100 but now 15,122 so the S&P is a better short but the Dow would confirm the move. 

  20. phil

    Apps/ZZ – That's about $4.5Bn for AAPL, not a bad little side business!  The thing is that AAPL is filtering IPhones and iOS and their App Store to the high-end market, who have .99 to blow on an app.  And, of course, there's iTunes – still the gold mine.  AAPL's crazy logic is "why host and serve up all those apps, music and movies that don't make money?"  

    I know, they are so silly!  That's why they have to spend 4 times longer counting their money than Google, even though GOOG has a market cap of $289Bn vs AAPL's $422Bn.  AAPL just doesn't understand how the market works these days – it's better so give stuff away to lots of people for no money (or even taking a loss like AMZN or NFLX or TSLA) than it is to sell something to less people and make tons of money.  That's because lots of people MIGHT give you lots of money one day while less people may switch to a free platform – see, you can't win in the market by making money…

    China/ZZ – Slow motion train wreck. 

    LOL Yodi – I hope they are finding work somewhere.  

    Tuesday/Shadow – If we have another big down day today, maybe a bounce on Tuesday to rope in some of the people who are still in dip-buying mode.  Lots of Fed speak this week – we'll have to stay nimble but feels good to have a lot of protection. 

  21. phil

    Europe got worse but it's getting better now that PMI data is out.  I don't think it's very exciting but it's better than expected and that's what counts:

    Monday's economic calendar:

    9:00 PMI Manufacturing Index

    10:00 ISM Manufacturing Index

    10:00 Construction Spending

    2:43 AM Japanese stocks suffer another day of sharp declines, although Hong Kong rises slightly and China is flat following mixed PMI data over the weekend. "The (Japanese) market has yet to bottom, and volatility will likely remain for another month," says asset manager Yoshihiro Okumura. Japan -3.7%, Hong Kong +0.2%, China-0.1%, India -0.3%.

    Japanese companies cut capital spending 5.2% on year in Q1, although that wasn't as bad as the forecast for a 5.5% fall, nor the Q4 reduction of 7.2%. On quarter, investment fell 0.9%. Corporate profits rose for a fifth quarter in a row in Q1, increasing 6% on year, but sales declined 5.8%. "Companies are not confident in the economic outlook, as we haven't seen a clear signal of a solid global recovery," says UBS economist Daiju Aoki.

    4:21 AM It's a sea of red on the screen in Europe as stocks follow Japanese shares lower – albeit not as sharply – despite some rather upbeat eurozone PMI data, especially in Spain. "Fed uncertainty continues to keep traders in a bipolar state," says Capital Spreads trader Jonathan Sudaria. EU Stoxx 50 -1.3%, London -1.8%, Paris-1.4%, Frankfurt -1.1%, Madrid -1%, Milan -0.8%

    With nominal Q1 GDP growth of $140B vs. $340B in new Treasury debt, Liam Halligan wonders just how real the recovery is.

    “With the outstanding volume of government bonds greater than ever, interest rate risk is at a record high," the Bank of International Settlements warns, noting that interest rate sensitive assets could experience a "bumpy ride" as central banks attempt to normalize policy. "Volatility per se is not necessarily bad," the BIS' Stephen Cecchetti says, but should things go wrong, potential losses on assets which have benefited from easy money policies will be widespread, affecting "banks, households, and industrial firms."

    YTD junk bond issuance hits $254B globally, up 53% Y/Y. In the U.S., issuance is up 24% at $130.6B in the first five months of the year and some say the frothy market (see: 5% yield barrier broken) is ripe for a correction. In fact, data suggest cracks are already starting to show in the secondary market: investors pulled a combined $660M from HYG and JNK last week, as fears mount regarding the dreaded "taper". (Previously: Lousy month for high yield; anomalous high yield/ muni spread tightens) 

    Under 50 still contraction:  Eurozone manufacturing PMI rises to a 15-month high of 48.3 (flash 47.8) in May from 46.7 in April, with the downturn easing across the bloc, although price deflationary pressures remain as input costs and output prices fall further. The data "still suggest that GDP is likely to have fallen 0.2%" in Q2, says Markit, extending the eurozone's recession into a seventh quarter. (PR) 

    German manufacturing PMI climbs to 49.4 in May (flash 49) from 48.1 in April as the sector enjoys moderate rises in production and new orders. Input costs drop at the steepest pace in almost two years, although employment continues to fall. "Germany's manufacturing sector achieved a pronounced change of momentum in May," says Markit, with the data "much less downbeat" than in April. (PR)

    French manufacturing PMI rises to its highest level in year in May, increasing to 46.44 (flash 45.5) from 44.44 in April as output and new orders fall at weaker rates, although the job shedding persists. "The latest data suggest that the manufacturing downturn is easing, but conditions nevertheless remain tough," says Markit. "The current 15-month period of falling output (is) the longest since the start of the survey in 1998." (PR)

    Spanish manufacturing PMI jumped to its best level in two years in May, increasing to 48.1 from 44.7 in April as new orders surged 6.5 points to 49.5. To poop the party a bit, its worth noting that manufacturing still contracted, while Markit expressed concern that the sector is reliant on exports, with domestic demand showing "little sign of revival." (PR)

    China's HSBC PMI for May falls a bit more than the "flash" read tipped off 10 days ago, coming in at 49.2 from 50.4 (flash came in at 49.6). The downward revision "suggests a marginal weakening of activities toward the end of May, thanks to deteriorating domestic demand conditions," says HSBC. "Beijing needs to boost domestic demand." Reaction is muted: Shanghai (FXICAF+0.2% and Hong Kong (EWH+0.6% in early trade. The aussie (FXA) knee-jerks down a few pips, but is +0.4% on the session at $0.9618.

    China's official PMI rose more than anticipated, up 0.2 from April to 50.8 in May and raising optimism that the world's second-largest economy may be stabilizing. The reading is 0.3 higher than expected. The picture should get rounded out on Monday with the release of the HSBC survey of small and private firms. Related ETFs:FXIMCHIGXCPEK. 

    Carlyle Group (CG) has agreed to sell a 27-story office and retail building on Madison Avenue near Central Park for $1.3B, the highest amount paid of a commercial property in Manhattan in over two years. Carlyle bought the tower in 2008 for a reported $680M, although it's not clear what the private-equity firm's profit on the building is, as it invested additional money in the property. The buyer is a venture of Crown Acquisitions and Highgate.

    The General Motors Building in Manhattan has become the most valuable office property in America after the families of Chinese property developer Zhang Xin and Brazil's Safra banking empire acquired a 40% in the 50-story skyscraper for $1.4B. The sellers were a group of Persian Gulf interests, some of whom are represented by a Goldman Sachs (GS) fund. The other 60% is being retained by Boston Properties (BXP). Reports of the deal, which values the GM Building at $3.4B, follow news that Carlyle is selling a 27-story Manhattan building for $1.3B.

    GE doesn't produce oil or gas but it's betting big on the U.S. energy production boom, planning to invest billions to develop improved methods in fracking and horizontal drilling. It's an energy agenda even environmentalists can love, especially GE's planned new research facility in Oklahoma that seeks to use cutting-edge energy science to improve fracking wastewater cleanup and cut drilling-related air pollution.

    Gold will continue to trend toward $1,000 by 2015, Nouriel Roubini predicts. Key reasons: Credit crisis risks have subsided; inflation is under control despite QE; investors crave income-generating assets; the "return to the gold standard" argument is dead. (ETFs: GLDIAUDGPSGOLUGLPHYSAGOLDGLUBGDZZ,GLLDGZUGLDDGLDDBPGLDI)

    Glencore Xstrata (GLCNF.PK) and Blackstone (BXmay bid for Rio Tinto's (RIO) 59% stake in Iron Ore of Canada, sources tellWSJ. RIO put the position up for sale earlier this year. Some say Blackstone is the more likely suitor given that Glencore is still busy integrating Xstrata. The Journal notes that mining companies are becoming "more cautious on bidding for new assets [as] investors demand restraint on spending [amid] falling commodity prices" (previous). Bankers say this has opened the door for private-equity.

    It now seems safe to say that Boeing's (BA) Dreamliner is pretty much back in business. Various airlines put the aircraft back in service this week, and Saturday will mark the resumption of international flights by All Nippon Airways (ALNPF.PK) and Japan Airlines. China also joins the list of nations flying the Dreamliner, with China Southern Airlines taking its first delivery Friday (nine more are on order).

    It was a heart in mouth moment for Boeing (BA) yesterday after Japan Airlines took a 787 jet out of service due to a sensor indicating a problem with the Dreamliner's brand new battery box. However, the issue was merely due to some tape that hadn't been removed after testing, with the battery showing "no abnormality." Japan Airlines and other carriers have only just returned the 787 to passenger flights following the long layoff caused by the plane's battery failure.

    Intel (INTC) might be a double in the next five years, writes Jack Hough in Barron's, as the company racks up market-share gains in tablet and smartphone chips, sees big demand for lucrative server chips, and PC sales stabilize. Then there's the company's capital spending-spree – it should cut manufacturing costs and allow more wins in high-end foundry contracts, including from Apple which has been forced to use Samsung for the work.

    Satellite operator DirecTV (DTV) and two other unidentified suitors have reportedly bid over $1B each to acquire Hulu. The owners of the online video service, which are News Corp (NWS), Disney (DIS) and Comcast (CMCSA), have received seven offers for the company, and intend to cut the shortlist down over the next few weeks. Previous reports have said that other bidders include Yahoo (YHOO), KKR (KKR) and Time Warner Cable (TWC).

    Apple (AAPL) roundup: 1) Apple is due to go to court today over allegations that it conspired with five publishers to raise e-book prices. Apple is facing the suit alone after the publishers involved settled with the Justice Department. 2) Apple reportedly signed a licensing deal with Warner Music over the weekend as it looks to launch a music-streaming service at its developer conference next week. Apple still needs to finalize agreements with Universal Music Group and Sony (SNE). 3) Google (GOOG) is set to seize Apple's crown for mobile apps in the next few months. While Apple downloads tops those of Android by 50B to 48B, the monthly rate is 2.5B vs 2B in Android's favor.

    The ITC has delayed until Tuesday a verdict on whether Apple (AAPL) has breached Samsung (SSNLF.PK) patents in the iPod Touch, iPhone and iPad. The ITC, which was supposed to have ruled on Friday, didn't provide a reason for the postponement. In a preliminary decision in September, an ITC administrative law judge cleared Apple of violating the IP.

  22. phil

    Strong bounce already, Europe turned around and up half a point now.  

  23. Rms5114

    Phil,
    Any late thoughts on adjustments to the hedges?  DIA. Aug $147 P,  TZA. Jul. $34 C
    thanks,

  24. Burrben

    I sold those USO's for .45 from .25.  Gas money for the week

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