Wednesday Worries – Yentervention, Euro Style
by Phil - February 8th, 2012 5:16 am
78.50 on the Dollar!
The Yen finally got back to 77 and EUR/CHF back to 1.21 so my theory that the BOJ has given up on the Dollar and moved to boosting the Euro is playing out nicely.
This does not make me more bullish (expecting falling Dollar to boost the markets) because, in the grand scheme of things, this is kind of like now there are two kids building a sand wall on the beach instead of one – sure it will last longer than the wall just one kid was building but, eventually, the tide will get it anyway or, as Jimi Hendrix said more poetically: "Castles made of sand, fall in the sea, eventually."
Once you start messing around with Forex markets, you are messing with major macro forces that are hard to control. Japanese banks have $7.5Tn of Japanese bonds at 1% – what happens to the value of those bonds if the BOJ does push the Yen down 10%? Who takes that $750Bn hit? What if rates go up to 2% – what's the value of the bonds then? Who will bail out the Japanese Banks when they have a multi-Trillion Dollar (several hundred Trillion Yen) hole in their balance sheets? Do Japanese spreadsheets even have room for Quadrillions? They are going to need it!
Then there's this Bloomberg article on the Central Banks, who have doubled their balance sheets since 2006 to $13.2Tn but, magically, have caused no inflation (according to Ben Bernanke – not according to people who actually buy food and stuff). China is now sitting on $4.5Tn of other people's TBills (mostly ours) and that's up $1.5Tn in a year. The ECB is right behind them with $3.6Tn and another $1Tn supposedly coming in the next EFSF round and the Fed has $2.9Tn plus whatever nonsense they are running off book.
So, how is it that WE are the bad currency here? If the Dollar is a problem, then China, who's GDP is only about $8Tn (optimistically, possibly $5.5Tn depending on who's measuring) is almost as insane as Japanese bankers and maybe more so as they are betting on our country's ability to pay and maintain the value of the Dollar (already a fail, right?). I suppose no one can ever recognize losses and just carry more and more junk…
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DiggPfizer Options Active Ahead Of Earnings
by Option Review - January 30th, 2012 1:44 pm
Today’s tickers: PFE, ODP & MRX
PFE - Pfizer Inc. – Signs of bearish sentiment on the drug maker cropped up in Pfizer options on Monday, one day prior to the Company’s fourth-quarter earnings release ahead of the opening bell on Tuesday morning. Pfizer’s shares are down 0.40% to stand at $21.39 as of 11:50 a.m. in New York. In-the-money call selling in the weekly options may mean some traders anticipate a pullback below $21.00 in the price of the underlying by expiration. Traders sold more than 2,500 calls at the Feb. ’03 $21 strike to pocket an average premium of $0.44 apiece. Call sellers walk away with the full amount of premium in hand as long as shares in Pfizer settle below $21.00 at the end of the week. Call selling can be risky, particularly if sellers are naked short the call options and shares in Pfizer rally rather than retreat as the strategy predicts. Losses accumulate on the upside above an effective breakeven share price of $21.44. Meanwhile, a longer-term bearish play popped up in the April expiry. One investor purchased a 2,000-lot April $19/$22 put spread at a net premium of $1.09 per contract. The strategist may be outright bearish on Pfizer, positioning for a limited pullback in the shares over the next several months. Alternatively, the trader may be cautiously optimistic on the pharmaceuticals giant, establishing the put spread to hedge a long position in the underlying shares. Profits, or downside protection, on the spread kick in if shares in Pfizer drop 2.2% to breach the effective breakeven price of $20.91 by April expiration. Maximum potential profits of $1.91 per contract are available to the investor should shares in PFE plunge 11.2% to settle at or below $19.00.…
Will We Hold It Wednesday – Nasdaq 2,603 Edition
by Phil - December 28th, 2011 6:53 am
Watch the Nasdaq.
That’s the index we need to catch up to the Dow now that the S&P is halfway to goal at 1,297 (from our Must Hold line at 1,235). The Dow is in La La Land, led by MCD (up 31%), IBM (up 26%), PFE (up 24%), HD (up 20%) and KFT (up 20%) while this year’s Dogs of the Dow are BAC (down 59%), AA (down 43%), HPQ (down 39%) and JPM (down 22%).
While the losers may seem to outweigh the winners, that’s not how it works as the Dow is price-weighted so BAC dropping from $14 to $5.50 "only" costs the Dow about 68 points (roughly 8 points for each Dollar), IBMs rise from $145 to $185 added a whopping 320 points.
So a 26% rise in one component and a 59% drop in another nets out to a gain of 252 points! At the beginning of the year, they had roughly the same market cap ($150Bn) but IBM has gained $70Bn and BAC has lost $100Bn which, of course, translates into a net gain of 2% on the entire Dow – BECAUSE IT IS THE STUPIDEST INDEX ON EARTH!
Our Members, of course, know this. I wrote "DJIA: The Most Useless, Overused Tool on the Planet" back in 2006, when GM was still part of the Dow so no need to rehash it all here other than to mention the fact that a 30-component index has made 5 substitutions in the 5 years since I wrote that article only serve to highlight how ridiculous it is to use the Dow to draw long-term conclusions. The Dow is manipulated because it’s easy to and Uncle Rupert sits with the other Masters of the Universe to decide how to use this headline tool to make things look as good as possible in the US markets.
That’s why CSCO and TRV replaced C and GM in June of 2009. C was at $28.80 and is down a bit, GM went BK from $45 (which would have been a 360-point loss in the Dow) while CSCO was disappointing but essentially flat and TRV is up $20, adding another 160 points so a 520-point swing (5%) on those substitutions alone. In September of 2008, AIG ($135 at the time) was swapped for KFT ($32). KFT is just $37.70 but AIG was…
Monday Madness – G20 FinMins Set Two Week Deadline
by Phil - October 17th, 2011 8:01 am
Two weeks!
European leaders have two weeks to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy. “The risk of a recession would be increased dramatically were the Europeans to fail to accomplish goals that they’ve set for themselves,” Canadian Finance Minister Jim Flaherty said after the G-20 meeting on Saturday.
The Brussels meeting “has the potential to turn into a positive historic moment,” Joachim Fels, London-based chief economist at Morgan Stanley, wrote in a note to clients yesterday. “But it could also easily turn into a negative catalyst.”
Europe’s plan, which has still to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($611 billion) temporary rescue fund known as the European Financial Stability Facility. “The plan has the right elements,” U.S. Treasury Secretary Timothy F. Geithner said in Paris. “They clearly have more work to do on the strategy and the details.”
The G-20 officials — who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France (and we’re fondly remembering London’s 2009 meeting with the graphic on the right) — said in a statement that the world economy faces “heightened tensions and significant downside risks.” European authorities must “decisively address the current challenges through a comprehensive plan.”
The policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender’s $390 billion war chest needs topping up. Europe’s latest strategy hinges on putting Greece, whose government forecasts its debt to reach 172 percent of gross domestic product in 2012, on a sustainable path. Austerity has plunged the country deeper into recession and provoked civil unrest that threatens political stability.
My reaction to this in Member Chat this Morning was to call for shorting the jacked up Dow Futures (/YM) at 11,600, saying:
Speaking of the illusion of power – yet another G20 meeting ends with yet another plan to have a plan but this time, for some insane reason, they only gave themselves a week to fix everything. I’ll be writing about this this morning but the gist of it is the Finance Ministers have essentially sent their own
…
F’ing Thursday – Give Us a Break!
by Phil - August 11th, 2011 8:30 am
Holy cow – when will it end?
As I mentioned yesterday, we were expecting a whipsaw after the morning sell-off and we played that perfectly with bullish trades on the DIA and OIH and, as we move up, we took bearish plays on GLL, TZA and QQQ. All good so far but then we did a little bottom fishing before wising up and shorting USO into the close – just in case. The futures were up 2% this morning at 5am and I had to warn our Members:
Overall, this is too weak to get us over the hump and we are going to have to lean a little more bearish unless we can follow Europe up 2.5% or more. Our charts will turn from "spiking low on volume" to "consolidating for a move below 20%" very quickly if we don’t gets something bullish going by tomorrow.
The Dollar was at 74.64 at the time and it’s only 75.04 now (7:50) but the futures have gone from up 2% to down 1% in less than 3 hours – that is insane! How are retail investors supposed to play this market? The average person does not have the stomach for watching their virtual portfolio’s value go up and down 5% a day – at some point they are all going to pull the plug and walk away. Of course, as I was saying yesterday – that’s just what the Banksters want you to do, assuming they know QE3 is right around the corner, accompanied by a 20%+ market rally into the year’s end.
Anyway, hope is NOT a strategy for the prudent investor so I published another set of Disaster Hedges this morning as it’s time to add a layer to our longer hedges (which are now deeply in the money). I hate to chase these plays but one thing we learned in 2008 is that there may never be a bottom (not in the short run) no matter how oversold you think things may be. Was the market wrong in 2008 to go below S&P 1,000? Well 3 years of subsequent trading seem to indicate that it was – but that did not stop us from dropping 33% lower, to 666 (the mark of the Blankfein!).
Our entire goal in a sell-off like this is to simply preserve our cash. The lower we…
S&P Downgrades US to AA+ – Tied With Belgium!
by Phil - August 5th, 2011 10:22 pm
Uh-oh!
Officials at ratings firm, Standard & Poor’s, said U.S. Treasury debt no longer deserved to be considered among the safest investments in the World. S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy long-term picture for America’s finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein.
S&P said "the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.
In other words, the ship is sinking and the captain and crew are doing nothing but rearranging the deck chairs. S&P was supposed to release this report this afternoon (Friday) but the Treasury Department caused a delay by arguing the math the S&P was using (a $2Tn discrepancy). At 8pm, the S&P decided the Treasury was wrong and went ahead and released the report, not only downgrading our Debt to AA+ but giving us a NEGATIVE OUTLOOK as well. Now we have to contemplate what the effect of this change may be…
Let’s first keep in mind that this was expected. In fact, it’s ridiculous how long it took for someone to downgrade us. JPM estimates that $4Tn worth of treasuries are pledged as collateral by borrowers such as banks and derivative traders. The change in status from one ratings agency is unlikely to trigger any immediate covenants (a primer on Sovereign Debt Ratings) but it may take only one more before borrowers are required to come up with many, many Billions of Dollar of cash or securities to keep their creditors at bay – essentially – it’s a margin call on America!
Well, I say this was expected but I mean by us. We cashed out today (see morning post) but Little Timmy Geithner, who blew his chance this week to resign with America’s credit rating intact under his watch, was on Fox News in April SPECIFICALLY stating that there was "NO RISK" that the US could lose it’s AAA rating. Read the article or watch the video –…
Tuesday – Testing our Reference Levels (as predicted!)
by Phil - May 17th, 2011 8:36 am
Wheeeee – this is fun!
It’s always fun when the market does what you predict it’s going to do. Last Wednesday I said we were going to see a pattern in the indexes that was going to look like the "M" in the McDonald’s arches and Stock World Weekly did a nice job of illustrating it this weekend, which I put up in yesterday’s post as well. At no point did we change our mind but we did change direction as we bounced around within a fairly tight intra-day trading range but our macro picture remains intact and now those patterns are looking very obvious on the charts.
In last Thursday’s post, I had mentioned: "those Ms are going to look dangerously sloppy (more bearish) if they can’t at least round out the top today" and that’s where we are now, with sloppy M’s that may not even hold our reference levels, which were our old breakout levels that we had hoped would support the broader rally.
Of course we didn’t have much adjusting to do (which is why we’re just having fun with day trades) while we wait for the pattern to complete because it was the Wednesday before that, on May 4th, when I called the bottom on the Dollar and, therefore , a top on the market.
Right in the main post (which is Emailed to Report-level Members and above at 8:30 every weekday) I suggested the TZA June $37/42 bull call spread at $1. This one is going very well as TZA is already at $36.65 and the spread is at $1.35, up 35% in 2 weeks – now THAT’s a hedge! Our offset to that was to sell the weekly RUT $825 puts at $1.15 and they did, as expected, expire worthless that Friday which made the whole trade a free ride with a .15 credit and up 1,000% so far. Notice how that’s a great cover because if the RUT went up, for sure we keep the $1.15 and we have a free hedge but if it went down but held our levels (it did) we still get a free hedge and, if it went down and exceeded our expected range, then we have $5 coming to us from the spread to help pay for a roll.
Other hedges we took that day in Member chat were GLD Aug $135…
Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
Demand for GM Calls Rises as Analyst Upgrades Lift Shares
by Option Review - December 28th, 2010 4:16 pm
Today’s tickers: GM, CECO, PFE & EDMC
GM - General Motors Co. – An onslaught of analyst upgrades for General Motors sent the automaker’s shares higher and kicked bullish trading in its options into high gear today. GM’s shares increased as much as 3.00% to secure an intraday high of $35.64 as of 12:55pm. The car and truck manufacturer was rated new ‘outperform’ with a target share price of $43.00 at Credit Suisse, new ‘hold’ with a 12-month target of $38.00 at Soleil Securities, new ‘buy’ with a target share price of $45.00 at Citigroup, and was rated new ‘overweight’ at JPMorgan Chase & Co., Barclays PLC and Morgan Stanley, among others. While near-term calls were active during the session, it was a large print in March 2011 contract calls that caught our eye. It looks like one bullish player scooped up 10,000 calls at the March 2011 $38 strike, which is more than two times greater than the 4,463 lots of previously existing open interest at that strike, for a premium of $0.85 per contract. The call buyer stands ready to profit should GM’s shares jump 9.00% over the current price of $35.64 to trade above the effective breakeven point at $38.85 before the contracts expire in March. It looks like General Motors may report fourth-quarter results at some point on March 10, 2011.
CECO - Career Education Corp. – Put buying observed on the beleaguered provider of for-profit education services on Monday continued this morning as shares in Career Education Corp. slipped 1.6% lower to $19.95 in the first half of the session. Investors positioning for shares in CECO to decline significantly in the next couple of months purchased at least 2,000 puts at the February 2011 $17 strike for a premium of $0.39 apiece yesterday. Today, bears once again targeted the same February 2011 $17 strike, buying up more than 2,400 puts for an average premium of $0.49 each. Put buyers paying $0.49 in premium per contract are poised to profit should Career…
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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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