by phil - March 4th, 2014 7:11 am
That was quick, wasn't it?
What's a little invasion between friends? Apparently, it was enough to cancel the US delegation to the Paralympics (but our athletes are still going), but not much else of note happened which is why, in a "sudden" crisis, we follow the tried and true strategy of "Don't Just Do Something, Stand There!" You can follow the link to get my logic on inaction but, suffice to say, we practice what we preach!
We opprtunistically went short on oil at $105 (now $103.50 for a $1,500 per contract gain), we also picked up the USO April $38 puts for $1.25 and we went long EWG, buying 10 of the July $30 calls for $1.60 and selling 10 of the April $31 calls for 0.65 in our $25,000 Portfolio – taking advantage of what we considered to be Germany's over-reaction to the "crisis".
We also added more AAPL, of course – but we do that any time they dip, so it had little to do with the Ukraine. Going long on /NG (Natural Gas Futures) is something we've been doing since last week and that trade has been very reliable for quick $500 per contract gains ($4.55) – over and over again. That's all we did yesterday – those few trades – because it was wiser to watch and wait than adjust our larger positions, when we didn't have all the facts yet.
Germany finished down 3.44% today, France down 2.66%, Italy down 3.34%, Spain down 2.33% and London down 1.49% so either they are way too worried or we are not worried enough…
We've been improving since they closed – hard to see how we can ignore things if they have
by Sabrient - March 3rd, 2014 6:50 pm
Today brought three better than expected economic releases from Construction Spending, ISM Manufacturing, and Personal Income. The ISM figure was quite unexpected and Personal Income was well above expectations. If we ignore for a moment that the Final GDP reading for Q4 was lowered on Friday (which may or may not have been primarily caused by severe weather), we have had a week of better than expected economic numbers. Corporate earnings have also continued to exceed forecasts, albeit with a bit more cautious guidance.
Of course, none of that matters when the “war drums” start beating. Russia and the Ukraine are engaged in a serious game of “chicken” with a bear in the hen house. The Russian ruble has borne the brunt of the damage so far with a double digit drop today against many major currencies until the Russian Central bank intervened by raising interest rates from 5.5 to 7%. That’s certainly not your usual ¼ to ½% move.
The Russian MICEX fell nearly 11% to add a serious loss in equities to the equation. The ruble has been falling for some time against the dollar, but today it gapped down by nearly another 2% as markets closed. The ruble fell nearly the same amount against the Euro. Clearly, there are a lot of emotional dynamics exacerbating the abrupt fall of the ruble and the MICEX blue chips. Uncertainty is never appreciated by financial markets and nothing moves them faster than “war drums.”
It would be sheer folly to try to guess the outcome of the escalating situation with Ukraine. Who will blink first? Keep in mind that a weakening ruble brings Russia’s chief exports oil and gas to more favorable prices. However, Europe has countered with talk of UN sanctions and asset freezes. And recall that Russian oil flows through Ukrainian pipelines to most of Europe. There is enough complexity here to opt for strict caution.
Hedging with VIX derivatives paid off today. Will it again if things escalate? Perhaps. Nothing is certain except that a falling stock market always generates bargains. Our goal is to help you find some of those bargains and urge caution. What will tomorrow bring? Probably more chaotic markets.
3 Stock Ideas for this Market
by Option Review - March 3rd, 2014 2:42 pm
by phil - March 3rd, 2014 7:28 am
How long has it been since we worred about that one? For people in the Ukraine, the answer is "when did they leave?" as Russia has always had a major naval base in the Crimean Peninsula and, as I noted on Friday, they are securing their "vital interests" which, of course, makes everyone else nervous.
NATO (remember those guys?) is talking sanctions and that sent the Russian Market (RSX) down 11% this morning and the Russian Central Bank had to step in and boost rates from 5.5% to 7% to stem the outflow of money. Russia's economy ($2Tn GDP) is 50% oil and nat gas exports and tensions are a double boost for Putin, who drives up the prices (oil is $104.50, Natural Gas is $4.70 – up $2,000 per contract from Thursday Morning's Pick in the main post) and, since oil is priced in Dollars, he gets even more Rubles to play with. Where is his incentive to end the conflict?
Our Futures (7:15) are down about 1% across the board but the Russell is down 1.5%, at 1,164, which is fantastic for us as TZA (ultra-short Russell ETF) is our primary hedge and just Friday morning we added this one in our Member Chat Room:
TZA – Well, I'd adjust that now to April $14/17 bull cal spread at $1.05, selling $14 puts at .50 for net .55 on the $3 spread. That's nice weekend protection.
As I mentioned in Friday's post, and pretty much every day last week, we were worried about the market topping out and we were worried that the "rally" was nothing but weakly supported window dressing into the end of the month and I called for cashing out our bullish short-term positions into the move back to the market tops. Now we'll see if I was right. If it wasn't the Ukraine, it probably would have been something else taking down the markets – it was simply time.
Dave Fry's RSX chart does not include today's 11% drop, that's 2.5x more than Friday's drop – back below that $22 line that held up last May and the October before that. Our markets quickly…
by ilene - March 3rd, 2014 2:54 am
By John Mauldin
John is in Florida and feeling a bit under the weather, so this week we’re bringing back one of his most popular letters, from December 2007. In the letter he discusses the work of Professor Graciela Chichilnisky of Columbia University, one of whose key insights is that the greater the number of connections within an economic network, the more the system is at risk. Given the current macroeconomic environment, it is important to remind ourselves of how complacent we were back in 2007 and how it all fell apart so quickly, just as John outlined in this rather prescient piece.
This is a theme to which John has returned again and again, pointing out that reforms such as Dodd-Frank (the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010) fell well short of solving the problem of excessive interconnectedness among global financial players. It shored up the big “sandpile” rather than breaking it up into smaller, more manageable sandpiles. Now, if the Chinese, Japanese, and/or European sides of the sandpile should avalanche, the whole US side is likely to go, too.
John will be back next week with a report from Washington DC and the next installment of his series on income inequality.
How does the risk of default in California or Thailand get spread throughout the world, causing problem in money market funds in Europe and Florida? Yes, we can trace the linkages now, but was it possible to predict the crisis beforehand? And can we use what we learn to predict and hopefully hedge ourselves from the next crisis? Why do these things seem to be happening with more frequency? This week we are going to look at some economic theories that will give us some insight into the above questions. As it turns out, the more that individuals hedge their risk in economic markets – the larger and more interconnected the network – the more the entire system is put at risk. There is a lot of ground to cover, so we will jump right in.
Before we get to the economic theory, let’s review part of a letter I wrote in April of
by Sabrient - March 2nd, 2014 11:58 pm
Courtesy of Sabrient Systems and Gradient Analytics
Facing formidable resistance and the threat of an ominous triple-top sell signal if bulls lost their battle, U.S. stocks appear to have successfully navigated a critical crossroads by finding the wherewithal to break out to new highs, with blue skies above. Among the ten U.S. business sectors, the performance leaders last week were Consumer Services, Consumer Goods, Industrial, and Financial. Now the question is whether stocks can confirm the nascent breakout in the face of yet another new crop of global and domestic challenges. “Inclement weather” has been both real and metaphorical, and both are impacting the economy.
Internationally, China just reported that their official non-manufacturing (i.e., services) PMI rose to 55.0, which should help alleviate some of the concern about an economic slowdown there. However, after conducting a successful Winter Olympics while preventing a devastating terrorist incident, Russian President Putin has now turned Ukraine’s internal struggle over their future direction into a major international incident. Secretary of State Kerry said that the G8 countries were prepared to isolate Russia economically, including bans of travel visas, freezes on assets, and limitations on trade.
Domestically, the severe weather that has hamstrung much of the country for months has now sucked final holdout California into the maelstrom, with torrential rains and mudslides — as well as powerful waves that did a good bit of damage to some of the popular beachside restaurants here in Santa Barbara.
However, as spring emerges and the clouds clear, there will be a lot of catching up to do, particularly in the housing industry, which bodes well for GDP growth. Also, the Fed remains accommodative, and in fact, with inflation still exceedingly (and for the Fed, uncomfortably) low, there’s a chance further tapering might be slowed until the economy shows it is indeed ready to roll post-winter. Note that Treasury yields continue to fall.
Furthermore, short interest remains high, which has been consistently supportive of the bull market so far. It is reflective of a cautious market that is hedged for downside. Market breadth has been strong. Corporate profits, stock buybacks, and M&A activity are robust, and cash is plentiful. On the other hand, revenue growth and hiring is still slow, stock buybacks don’t boost GDP, and much of the M&A is for intellectual property with uncertain payout — witness the Facebook (FB)…