Monday Morning - Moody’s Makes More Negative Noises
by Phil - March 15th, 2010 8:27 am
Top ratings agency, Moody’s says the US & UK are "substantially" closer to losing their AAA credit ratings as the cost of servicing their debt rose.
Under the ratings company’s so-called baseline scenario, the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K., and will be the biggest spender from 2011 to 2013, Moody’s said today in a report. “We expect the situation to further deteriorate in terms of the key ratings metrics before they start stabilizing,” Cailleteau said. “This story is not going to stop at the end of the year. There is inertia in the deterioration of credit metrics.”
Under its adverse scenario, which assumes 0.5 percent lower growth each year, less fiscal adjustment and a stronger interest-rate shock, the U.S. will be paying about 15 percent of revenue in interest payments, more than the 14 percent limit that would lead to a downgrade to AA, Moody’s said. Financing costs above 10 percent put countries outside of the AAA category into a so-called debt reversibility band, the size of which depends on the ability and willingness of nations to reduce their debt burden by raising taxes or reducing spending.
The U.S. has a 4 percentage-point band, while the U.K. has a 3 percentage-point band. “Those economies have been caught in a crisis while they are highly leveraged,” Cailleteau said, referring to the level of private and public debt as a percentage of gross domestic product. “They have to make the required adjustment to stabilize markets without choking off growth.”
So happy Monday to you! The Pound is certainly not taking this news well and has plunged to $1.505 from $1.52 in early morning trading and the Euro has flopped back to $1.37 but we are still maintaining 90.7 to the Yen so it’s actually a strong dollar day so far. Copper, which is one of our key indicators, has fallen back to $3.32 - which is great for our short plays on FCX and gold is hovering under the $1,110 line (the bullish line for gold) while silver, our tie-breaker, is just over the line at $17. Oil has been skating along at $80.67 for the weekend and gasoline is still strong at $2.25 (go VLO!) with nat gas down at $4.34
Perhaps the US should be more like China, who were going to have a budget deficit of 3.5% of GDP…
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Wrong Way Weekly Wrap-Up
by Phil - March 6th, 2010 8:34 am
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This whole week did not feel right to me.
We were too bearish as I had expected a bogus commodity rally in last weekend’s wrap-up but I didn’t expect it to persist for a week, even as the dollar held it’s ground above 80, a 10% pullback off the top, when oil was $40, copper was $1.50 and gold was $850. Now oil is $80 (up 100%), copper is $3.35 (up 123%) and gold is $1,135 (up 33%). Let’s say gold is a true indicator of dollar weakness - that means that only 33% of oil and copper’s move up can be attributed to the 10% drop in the dollar (not that even that makes sense but we’ll give it to them). Can the rest be attributed to demand?
Certainly not with copper. Global copper consumption was down 1.9% in 2009 and Q1 2010 is lower than any quarter since Q1 2009 and even Barclays’ very aggressive targets for China growth only bring global demand up 2.5% this year - whch would just about bring us back to 2007 levels of consumption. That, of course, also assumes a rebound in housing construction - something we are not seeing at the moment. Also, China spent $700Bn last year stimulating their economy and one of the ways they did this was to stockpile copper. As you can see from the chart - that too appears to be winding down and even Goldman Sachs has abandoned the bullish side of copper at this point.
Oil is just as silly. According to the EIA, global oil consumption is not expected to return to 2007 levels until late 2011 - and that is with some very rosey estimates of a global econonomic recovery - exactly the type of thing that can be derailed by high oil prices! Mighty China’s consumption is projected to go from 8.66Mbd this year to 9.13Mbd in 2011, a 500,000 barrel increase. Last week, the US had a build in inventories of 4Mb - we just send those over to China and everyone is happy! I’ve already had my say on oil demand this this weekend, so let’s just move on…
Let’s just say I’m a little skeptical about any market moves that are lead by commodity pushers at this very early stage in a recovery. Prices are not going up based on demand but on expectations of demand in the future and that’s a very dangerous game to play…
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Jobless Friday - US, Japan and Europe Add More Stimulus
by Phil - March 5th, 2010 7:43 am
Wheee - more free money!
The money train left the station just ahead of the US market close yesterday when the House passed a $15Bn Jobs Bill although it remains to be seen if Jim Bunning will pass it. China doesn’t need Bunning’s permission to hand out free money and they will be "allocating 63.2 Billion Yuan" to fight high housing prices by SUBSIDIZING low-cost housing. Come to think of it - I object to that! Someone in China needs a lesson in some basic economics…
The big boost this morning came from Japan, where bonds hit the highest level of the year after the Nikkei newspaper said the central bank at its March 16 meeting may discuss additional monetary easing steps. It doesn’t matter whether this report is true or not as it already did it’s job and shot the Nikkei up 223 points for the day, erasing two week’s worth of losses in a single session. It’s hard for the BOJ to get easier than our own Fed but Chicago Fed President Charles Evans said yesterday he needs evidence of “highly sustainable” growth before supporting tighter monetary policy, while James Bullard of the St. Louis Fed said the central bank should remain “accommodative” - these are, of course, the Fed’s code words for MORE FREE MONEY!
Of course, our Futures are up 1% from yesterday’s low and the commodity markets LOVE IT and oil is back at $80.65 with copper back at $3.40 despite "weak" demand in China, where stockpiles of copper are now at 7-year highs and even Goldman Sachs has withdrawn their buy recommendation on coppper because of concern that economic recovery in developed markets isn’t on “solid footing.” “About 60 percent of China’s copper is used in the power industry, and our sales to wire-and-cable users reflected that demand is rather weak,” Chairman Wei Jianghong said, while attending the National People’s Congress.
“The demand is not very strong in the first place,” Jiangxi Copper Chairman Li said in Beijing while at the congress. “But a lot of people have long positions in the market, so I think in the first half of this year, copper prices will be good.” Copper stockpiles in China jumped to 149,478 tons for the week ended Feb. 26, 28 percent more than the week ended Feb. 12, according to the Shanghai Futures Exchange. Demand from China for global supplies may weaken because prices on the Shanghai Futures Exchange are now close to those in London, discouraging arbitrage trading, Goldman Sachs analysts…
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Weekly Wrap-Up - Buffett’s Daring Derivative Deal Does Well
by Phil - February 28th, 2010 9:30 am
I was going to talk about Buffett’s annual letter to investors.
Fortunately, I procrastinated and other people did some detailed reporting like Ravi Nagarajan, Andy Fry, Scott Patterson and Joe Del Bruno - who does a great job of pointing out that Berkshire’s 4th quarter results were propped up by Buffett’s $1.05Bn gains in derivatives betting (something Buffett himself once called "weapons of mass financial destruction" but, as we well know - if you can’t beat them…), which accounted for 1/3 of Berkshire’s $3.06Bn profits.
Buffett’s biggest bet was selling a put against the S&P 500 back in March - a move I said at the time was BRILLIANT and Buffett himself now says about his own options trading: "We are delighted that we hold the derivatives contracts that we do. To date, we have significantly profited from the float they provide. We expect also to earn further investment income over the life of our contracts."
What did Buffett do? Exactly what we teach you to do here at PSW - he took advantage of an irrational move in the markets and SOLD INTO THE EXCITEMENT, getting a fat premium from some sucker that bet the S&P would not hold 666 5 years from now. Buffett effectively sold $5Bn worth of puts that expires worthless at S&P 700 between 2019 and 2027, putting $5Bn in his pocket and holding aside $1Bn in margin, which is how much he’s already ahead on the bet. Like a good options trader, he has a plan and he’s trading his plan, making sure his investment is on track and patiently letting time do it’s work as it eats away at the put-holder’s premium.
What about the risk? Well I can’t speak for Buffett’s stop-loss technique but we’re talking about a company that has (had) $40Bn in cash using their excess margin to make a $5Bn bet that the S&P would not stay below 700 for 10 years. Buffett and I both tell people - NEVER buy a stock (or sell a put against one) that you are not willing to own for 10 years. The S&P was 5% below at the time and would have had to drop, perhaps, 20% more to cost him $1Bn so let’s call the stop 550 on the S&P where Buffett risked 2.5% of his cash against a posible 400% gain on his $1Bn risk allocation over 10+ years. While it is true that if the S&P dropped 50% in one day Buffett would be in deep trouble - sometimes you do have to play the odds…
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Thursday - Bernanke’s BS Bounce Part II
by Phil - February 25th, 2010 6:46 am
Yay, more free money!
Oh not for you (unless you are a banker) but for all of Ben’s best buddies as the Fed Chairman promised yesterday to maintain "exceptionally low levels of the federal funds rate for an extended period." He can do this because, according to Bernanke:
Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers’ unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively stable.. the range that most FOMC participants judge to be consistent with the Federal Reserve’s dual mandate of price stability and maximum employment.
See! I bet you didn’t realize how well things were going, did you? Oil going from $70 to $80 in 15 days isn’t inflation - it’s SUBDUED! Up from $37 last February and March - SUBDUED - As in, DUED, where’s my money???
I mean come on people - he says it right here in one of the early paragraphs (before people start to nod off) - the cost of shelter (ie. your home’s declining value) is heavily weighted in the CPI and since your home is worth less (worthless?) and will remain so for some time - that offsets all the other nasty inflation that is eating into your paycheck.
Aside from the fact that this assumes your home is something you will be buying at a discount TOMORROW as opposed to something you overpaid for yesterday, the whole measurement that Bernanke uses to define success is ridiculous. Housing makes up 42.7% of the CPI, Transportation makes up 17%, Food makes up 15% Medical Care is 6% and Clothing is 3.7%. That’s 85.4% so we’ll call "other" 14.6%.
Now, let’s say you, like most Americans, already own your home. That means what you pay on a monthly basis doesn’t change. Let’s say though, that the cost of Transportation goes up 20% (3.4 out of 100) and Food goes up 20% (3) and Medical Care goes up 30% (1.8) and Clothing goes up 10% (0.4) - that would be an increase in…
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Testy Tuesday Morning - Coincidence or Confidence Game?
by Phil - February 23rd, 2010 8:21 am
What will hold up?
As you can see from our chart set, our major indices are trading very much in synch, more likely than not propelled by trade-bots that already have the next 25 trading days already mapped out to take us through the end of the quarter. Of course you can argue that it’s perfectly natural for 8 of 9 different indexes to follow virtually identical patterns as a result of the random trading of millions of individuals trading Trillions of Dollars worldwide and that’s your perogative. I prefer to think of it as one giant scam and then figure out ways to make a little money off it for ourselves…
Several times last week I said to members I thought "THEY" were running the market higher so they could sell calls to suckers at high prices but, in general, the move was "fake, Fake, FAKE." What do we do in the face of flagrant market manipulation? What do you think we do - we play along! We don’t complain about good manipulation when we see it - we join in! Don’t be confused by the fact that I complain about it in my morning post - once the bell rings we move right to the other side of the table and happily run with the wolf pack. We’ve tried to fight the power - it’s not fun, nor is it profitable…
We remained fairly conservative last week and, as I discussed in our "Weekend Trend Spotting" post, we are more inclined to believe we are in a range that centers around 10,400 than about to break back over 10,700. The bounce zones we predicted when we first began to sell off in January are finally being tested (red lines on above charts) but the 5% line (blue lines) are still exerting a pull and we NEED some healthy consolidation in between those blue and red lines if we are ever going to get serious about making a real move higher.
Speaking of healthy consolidation - Congrats to our own David Ristau of the Oxen Group and all the members who played along with yesterday’s specially featured selection of SAH. David nailed it in his 1pm post (also sending out a 1:06 Alert to our Members) and put us into the stock right in his target range at $9.45 and it looks like we’re getting a nice 3-cent beat this morning (20%) and this should be a very nice 5% day-trade gain. We also played the longer-term March…
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Prior Weekly Wrap-Up - February Expiration Day Special!
by Phil - February 19th, 2010 7:17 am
I didn’t get to do a wrap-up last week so we have a lot of trades to go over and, with expiration looming and the Fed tightening, I thought it would be good to just get the list out on Friday so we can adjust our rolls to March where neccessary (in bold under appropriate positions).
In our Feb 7th Wrap-Up, I was gung-ho bullish saying "It’s Only a 55-Point Drop You Wimps!" and we had been BUYBUYBUYing at the bottom all week, especially Wed-Fri as the market spiked through our projected support at Dow 10,000 but not enough to change our minds as we bottom-fished on AAPL (2 trades), ABX, ACOR, AKAM, AMED, BRK/B (2), C, CCJ (3), CSCO, DELL, FXI, GE, GOOG, IBM, LLY, LOW, NLY, TBT (5 times!), TM (3), TNA, USO (yep, we wen long oil) and UYG. To say we were weigting bullish by that Monday was an understatement as we has finished the weekend in a bullish stance and were relying on our disaster hedges to protect us.
Those disaster hedges are an interesting set to look at, especially now that we’ve recovered 400 points:
- DXD July $27/33 bull call spread at $2.50, now $2 - down 20%
- We can roll the $27 calls to the $25 calls for $5 to widen the spread and drop our b/e from $29.50 to $28.50
- EDZ July $3/8 bull call spread at $2.10, now $1.60 - down 23%
- EDZ Apr $10 calls sold for .70, now .15 - up 78% (pair trade)
- SDS 2011 $36/40 bull call spread at $1.30, now $1 - down 18%
- We can roll the $36 calls to the $33 calls for $1.10
- TBT Jan $35/45 bull call spread at $6.30, now $7.40 - up 17%
- TBT March $50s sold for .65, now $1.22 - down 87% (pair trade)
This is what is great about disaster hedges. The potential upside on these spreads, if the market headed south was up about 100% on the 4 trades so a commitment of 5% of your portfolio to each one (20%) would give you back 40% of your portfolio in cash if the markets tanked. Already, after 2 weeks, we have the markets heading in the opposite direction and what is the cost? Not even 20% of the 20% you may have allocated, a 4% insurance premium while the 80% of the portfolio that is bullish caught a huge rally up and this insurance is still good through July!
Monday (2/8) Market Movement
I pointed out how much chart people love…
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Fifty Basis Point Friday - China Puts First Pin in the Bubble
by Phil - February 12th, 2010 8:19 am
Thank you China!
I had put out a post last night detailing how we ended up short at yesterday’s close and at 3:21, when I published it as I was checking the Asian markets (don’t ask, I keep strange hours) it looked like I had called it wrong as the Hang Seng went into lunch up over half a point and commodities were still hanging tough after yesterday’s ridiculous run up. In fact, at 12:07, in Member Chat, I just so happened to say: "Copper $3.13 - ridiculous… Very annoying movement, not very playable like this as it can all crash back down again very fast."
Fortunately, we let our levels be our guide and cashed out our long DIA day trades in my 1:41 Alert to Members as we hit our Dow 10,165 target from the morning post. We flipped bearish to the DIA $100 puts at .62, which should have a nice open this morning. We had an FCX short play with the $70 puts that I couldn’t bring myself to let go of, even after they broke over our $72.50 stop line and my 1:50 comment on that position was: "I’m in a 4x position at avg. $1.16, now .71 so not good but I think copper run was BS so I’m willing to stick it out but very happy just to get even now. I think a big squeeze was put on commodity bears today with no energy reports to point out the demand destruction. Copper up from $2.93 yesterday to $3.13 today after taking two weeks to fall that far on the way down - that is nonsense! If I were not full I would roll up or DD but, as I said, I’ll just be happy to get back out and, if not by tomorrow, I’ll sell some other sucker my puts and roll to March."
Needless to say, despite having a rolling plan to turn the trade into a spread, I was not a happy camper as things held up into the close and then, through lunch in Asia and into Europe’s open. My closing comment to Members at 3:44 had been: "I’m still generally suspicious that we’ve had such a strong day on very low volume (Dow 136M at 3:40) when there was a storm. An amazing coincidence if nothing else…. The fact that it was led by BS commodity sector making a radical move up on NO news at all (in…
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Weekly Wrap-Up, it’s Only a 55-Point Drop You Wimps!
by Phil - February 7th, 2010 12:19 pm
That’s right, I said WIMPS!
I have never heard so much whining and crying and complaining about a market drop as I have the past few weeks. Last week, I pointed out that we had only fallen 105 points from the prior week (10,172 to 10,067) and this week we fell ALL THE WAY to 10,012 to finish the week and you would think the world was ending (again) from the way the MSM has been acting.
By Friday the panic was palpable as we gave up Monday and Tuesday’s bogus gains to test new lows for the year - testing, in fact, the lowest levels the market has hit since last November and I pointed out in Friday’s post that it reminded me of when BSC and LEH went under and everyone panicked and sold Financials off to the point where Warren Buffet was willing to give GS $5Bn AFTER they bounced 50% - THAT’s how undervalued the financials were in November of 2008.
What do we do while people are panicking? We BUY! We don’t BUYBUYBUY like Cramer’s Pavlovian Peons but we sure do BUY and take some nice entry positions with sensible hedges. I was finally motivated to finish updating our Buy List on Friday and 18 of our 38 positions were highlighted (immediately actionable) on Friday. Sure they may go lower, but we’re buying them with 20% buffers built into the positions and then we can double down if they drop 40% (back to Nov 2008 lows) and then we’ll have our entries down 10% from the lowest levels of the past decade or so that we can hold until the next decade - what’s there to panic over?
If I wanted to buy IBM in January but thought it was a little pricey at $134, why would I not be HAPPY to have the opportunity to make an enty at $122, back at where they were pre FABULOUS October earnings? I can buy IBM for $122 and take advantage of the panic-induced VIX at 26 to sell July $125 calls for $6.60 and the July $120 puts for $6.65 for a net entry of $108.75 with a call away at $125 for a $16.25 profit (15%) in 5 months. If IBM should fall below $120, we will have a second round of the stock put to us as $120 for an average entry of $114.38, another 6.2% lower than it is now. If we were more worried, we…
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VIX Draws Large Bearish Put Play
by Andrew Wilkinson - February 2nd, 2010 5:28 pm
Today’s tickers: VIX, MS, BAC, UNG, SU, RL, GIGM, FCX, CVS, SPF & DOW
VIX – CBOE Volatility Index – A massive bearish put position initiated on the VIX today is a bullish sign for the S&P 500 index. The VIX fell more than 6% during the current session to stand at 21.21 as the past two day’s uptick in equities serve to dissipate some of the fear and uncertainty felt by investors during the prior trading week. One investor anticipating further downside movement for the VIX picked up roughly 103,000 puts at the March 20 strike for an average premium of $0.70 per contract. The put options position the investor to accrue profits beneath a VIX reading of 19.30 through expiration. It appears the investor expects the so-called fear-gauge to head in the direction of the index’s 52-week low of approximately 17.49 attained on January 19, 2010. But, the VIX must fall another 9% from the current reading in order for the investor to breakeven by expiration. Furthermore, today’s reading is still 21.25% greater than the 52-week low described previously.
MS – Morgan Stanley – Global financial services firm, Morgan Stanley, attracted the attention of bullish options investors in afternoon trading. Shares are currently trading 1.00% higher at $27.83 with roughly one hour remaining in the trading day. A bull call spread stuck out like a sore thumb in the scantily populated March contract on the stock today. One investor purchased 5,000 calls at the March $28 strike for a premium of $1.35 each, and sold the same number of calls at the higher March $31 strike for an average premium of $0.34 apiece. The trader paid a net premium of $1.01 per contract for the spread, but stands to accrue maximum potential profits of $1.99 per contract should Morgan Stanley’s shares rally up to $31.00 ahead of expiration day. The call-spreader breaks even on the transaction as long as MS’s shares rise 4.25% from the current price to $29.01 before the options expire.
BAC – Bank of America Corp. – Optimistic sentiment on Bank of America appeared in the August contract today amidst a 0.65% improvement in shares of the underlying stock to $15.52. One bullish trader initiated a call spread to position for upward movement in BAC’s shares by expiration. The investor purchased 4,000 calls at the August $16 strike for an average premium of $1.52 apiece, spread against the sale of 4,000…
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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
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