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Government Turnover Tuesday

Spain became the second Euro-zone country in less than a week to suffer a downgrade of its government debt, as the bloc's deepening recession eats into tax revenues and threatens the health of public finances.

[Spain Economy Chart]

Oh yes, I remember something about Obama today but forget that as a headline.  I have long preached here that there are 3 ways that our market can drop 20%:  A major bank failure, a failure by one of the Big 3 car companies or a failure by a major country.  Any one of those things can send us back to 7,000 and two can indeed take us to 5,500 but we've put off the official collapse of the Auto Industry until March and, as I pointed out last week, there is no limit to how far we will go to bail out our banks but a country is a different story entirely.

I pointed to Spain as my top concern way back on October 9th, when we discussed this issue in member chat, on the same day that Iceland's last remaining major bank collapsed and I noted that Spanish banks were loaded up with emerging market loans in Latin America and that the collapsing commodity market, which we were long expecting, was going to put that nation's banking industry in dire straits.  We are not at a collapse yet – Standard & Poor's cut its credit rating for Spanish government debt Monday by one notch to AA-plus from AAA. A default is unlikely for Spain, but the end of a decade-long housing boom will slow growth and end up straining public coffers in the euro-zone's fourth-largest economy.  S&P put both Ireland and Portugal on credit watch this month. Ireland's rating is thought to be vulnerable because of its slowing economy and the cost of an expensive bank-guarantee plan, which is about twice the size of its gross domestic product.

While we have been looking for a tidal wave of good feelings to lift all market ships as Obama takes the oath of office today, I discussed the unfolding hyper-inflation nightmare in Zimbabwe this weekend right along with Obama's poll numbers because these issues carry equal rate.  There is a harsh economic reality in global finance as money acts in a purely self-interested fashion and everything is about confidence – once a country loses that, it's very hard to get back.  Let's keep a close eye on this as gold is already flying pre-market (even as oil falls further) as a worsening global situation can derail anything Obama hopes to accomplish over here.

In other struggling European nations:  The UK is committing another $100Bn or so to it's banking sector and that is rocking the financials pre-market as RBS warned of "massive losses" of about $41Bn, but 75% of that is a "goodwill impairment charge," something our own financials may be taking down the road.  Like BAC with MER, RBS's acquisition of ABN Amro is killing them.  Fortis, who was their partner in this deal, already collapsed and took down the Dutch government last month.  Now the British government will end up owning about 70% of RBS and their stock dropped 67% in that news this morning

For U.K. regulators, it is becoming increasingly clear that the preservation of banks could require billions of pounds more over a number of years. More extreme measures could be needed, including the outright nationalization of RBS. Both the government and RBS weighed that option in recent weeks  The U.K. government "is gambling that the global economy improves and they don't have to go all the way to nationalize, but that is the direction in which they are heading," said Simon Johnson, a professor at MIT Sloan School of Management and a former chief economist of the International Monetary Fund. "But nobody is quite ready for that on either side of the Atlantic. So you've got to go through these intermediate steps."

Banks took the Hang Seng down 2.8% for the day with a wild finish in which an afternoon rally of 300 points was crushed into the bell, dropping the close below 13,000 for the first time since the Thanksgiving collapse.  The Nikkei dropped 2.3% as a stronger Yen sent exporters back towards their lows while the Shanghai bucked the wider trend and gained a point on continued hopes of massive government intervention.  Aside from the fact of the RBS nightmare (and HBC led Asia down), comments by George Soros that the US stimulus package isn't enough (it isn't) and that the original TARP program had been "carried out in a haphazard and capricious way, without proper planning."  Gee George, we knew that but… Shhhhh!  Soros also warned: "Unfortunately it was misused and the way it it was done has poisoned the well. It has created tremendous ill will toward putting up more money."

RBS. Soros and Spain – Oh my!

Consider this President Obama's first Economic Daily Briefing as he needs to hit the ground running this afternoon and, as the economic commentator on Saturday Night Live often says – "Fix it!"  As I mentioned in the weekend post, we are going to need some pretty stunning oration to overcome the extreme gravity that is keeping our stock market roller coaster at the bottom of the hill this week and we can just consider the above issues to be more weight added to our cart.  Ordinary rhetoric will not cut it – we need something spectacular, something visionary, something that resonates with the people in order to give us the boost we need to allow Obama to get the momentum he needs to get through the next 100 days.

I wanted Obama to have this job and clearly Obama wanted the job but now is the time he needs to step up to the plate and deliver.  Like a super-star athlete, the crowd is in no mood to see him swing and miss in his first trip to the plate so there is going to be a tremendous amount of pressure on Obama, more so than perhaps on any President in memory.  When Roosevelt took office, the country was already deep in a depression, things could hardly get worse.  Today we are only a mistake or two away from things getting much, much worse.

Soros is right, I said quite some time ago that what Obama needs to do is stand up on that podium today and whip out an ovesized checkbook and start writing out about $2Tn worth of checks.  It does not look like that is going to happen.  The stimulus plan that has been presented comes to a "mere" $825Bn and I will paraphrase what the IMF guy said about England's nationalization of the banks with respect to the $2,000,000,000,0000 that Obama needs to spend: "Nobody is quite ready for that on either side of Congress, so you've got to go through these intermediate steps."  It's ridiculous to pretend that $825Bn over two years is going to solve our problems.

I'm not even sure $2Tn will help but let's not start off a new administration by being less than honest with the American people.  Franklin Roosevelt said at his inauguration in 1934:  "This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today."  He also said "I shall ask the Congress for the one remaining instrument to meet the crisis—broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe."  This is not a war that will be won by compromise and half-measures – this country needs leadership as much as we have ever needed it before and I hope Obama is up to the task!

 

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Uncovered UYG.  Will cover completely at close.

Hard to believe that PCP is up 6% on a day like today.

Kustomz,
I don’t think we are there yet. I am following X which is @ $30 and Nov low was low $20s. If this continue I can see VIX heading toward the 80s

You think we can get out this spiral, or do you think it will take a trip around the world first.  I think most other major index touched Nov low.   My obeservations, it takes a couple of days world tour to flatten the markets ….

I take that back they toched the top of the bars on the day of the low …

AAPL – Does anyone have an earnings play on it? It briefly went below the 52-week $79.14 and am considering buying it for a post-earnings pop. I expect earnings to be OK and they guide a bit lower. As long as it is not a disaster and markets do not fall much further, AAPL could bounce $5 really quickly…
I used to own AAPL but currently do not and this will be a new position.

Currently holding BK which I bought at 28 with Feb 25 callers and putters. I took out the caller today. Do I sell another caller? What to do with the putter?

 Phil I am fairly well hedged but would like some more downside coverage.  I have Jun DIA 85 P covered by Feb 83’s and Mar 83’s covered by Feb 82’s.  Any recommendation on further downside protection?
Thanks.

Trying to panic the markets
 
CDS’s on US debt is going up – One bad bond aution and we have some serious problems!

phil, any thoughts on FXP ?

IBN – Bought some here at $14.65. Perhaps trying to catch this falling knife may hurt, but braving it now. Hope to sell calls against it on a bounce later this week. Can currently get $2 for a Feb $15 call

Phil,
What would you recommend for a gamble for tomorrow in the last few minutes?

Holy $hit!  I think there is some serious panic going on in our financial sector.  Over 13 million shares of UYG traded in the last 5 mins.

Bought some UYG at 2.94 and sold Jun 3 puts and calls for 2.05!  (Thanks, Jordan). Also sold some naked UYG Mar 3 puts for $0.8 (Thanks, Phil).

RMM/Assignment,
It would be great if you get assigned early the FAS Feb 10 PUT as you gain the entire extrinsic value of around $2 currently (i.e. $2 free profit).  Then you can sell Feb 7.5 or Mar 5 PUT.
 
IBM just jumped on earnings.  Again after hours could be just noise.

RMM/Assignment,
It would be great if you get assigned early the FAS Feb 10 PUT as you gain the entire extrinsic value of around $2 currently (i.e. $2 free profit).  Then you can sell Feb 7.5 or Mar 5 PUT.

I must have hit Submit while typing the message, and my first message got posted last.  IBM beats and a bunch of people bought USO!  LOL

IBM up 5 in AH.   Maybe this will be a good up beat for the market.  Highly over sold.  TRIN very high.  Maybe get a good bounce tomorrow. 

2M audience – LOL, looks like nobody ever checked out a typical election campaign in India. 2M is decent. Try 4M, now that is when you get to flubb.

Peter D; I must have an inauguration blackout,
my FAS feb 10 putters:I sold these for 1.65$, the stockprice now is 7.6$,
option has 2.4$ intrinsic and 2 $ timevalue,
the putter can put it to me and I have to pay 10$ a share,
can you lead me to the numbers please ?

Phil, DRYS Jan LEAP 15 covered with Mar 15s. How much should I be looking to get to roll down to Mar 12.5? I’m okay continuing to hold the Jan 15s and selling against them?

ramana, populationwise, India is like 4 times the US, so the US 2M probably equates to an 8M audience in India 😉

Now that was an up beat report on AAPL.  Thinks it will meet or beat street.  And come out with a family of iphones later in the spring.  Even thought margins would not be so bad because of decline in material cost.   And to buy it going into earnings.  Up a buck in AH.   With a good report from IBM let’s jope we can ride this.

ajay
What is your logic with playing the Mar callers on DRYS?   Your premium collection is much faster in the front month and on the adjustments you loose less because the spreads are tighter.  30 cents on the march adjustment vs 10 cents on the Feb.  Plus the last 10 days or so the premium starts to go real fast.

FAS/RMM,
When it is exercised, the putter looses the $2 time value.  Instead of waiting 4+ weeks to get the $2, you get it instantly if assigned.
 
You’d pay $10, but your cost basis is $8.35 (remember FAS was 12.5 when you sold the PUT for $1.65, so you had a 30% discount on the cost basis).   Now, you have two options: a) hold on to the stock and you’d break even at $8.35, which could be as early as tomorrow; or b) Sell the stock at market price for $7.85, AND sell Feb 7.5 PUT for $2.5.  The loss from the first trade was $0.5, and you’d get $2.5 from the new sell, so your break even point is now $2 below current price of $7.85, i.e. break even at $5.85. 
 
This is why I like the Short Strangles, we entered the trade when FAS at $12.5, and have lowered our breakeven point to $5.85 if we get assigned today.  As long as you have the cash in the account when the stock is put to you, getting assigned early, when there is time value left, is a good thing when you sold short.

INTC Intel ticks lower in after-hours trading after Bloomberg reports INTC’s CEO told employees the co may have a loss in Q1, in an internal memo (12.86 -0.88)

Briefing.com note: In last week’s earnings release INTC did not provide specific guidance due to economic uncertainty and limited visibility. At that time the co said for internal purposes, it is currently planning for revenue in the vicinity of $7 billion (vs the $7.27 bln consensus at the time). The current consensus for Q1 EPS is $0.04.
 

Peter D; thanks a lot for explanation, I never had stock put to me, no experience, what I did not know is that the assignee gets the 2$.
I like the way you explain things.

So far earnings AH seems to be about right.   No major disappointments that i can see.  Mayeb they all guided down last qtr so this one looks ok.   See what tomorrow brings.   If we are going lower at least we have 31 days till next OE to do it in and get back to these levels or higher. Which should be plenty of time for a turn around and for Obama’s team to do something.

RMM
The other good news of getting assigned is that you wont have to worry about margin requirements.    If we go lower there will be many people getting put to.

Peter D; I get the 2$  ?? I am the assignee, the putter is the assignor ?? True ?/

RMM,
Yes, you’ll get the time value of $2.  The putter is the "Exerciser", and you got "Assigned".  Basically, instead of owing the putter $4.2, you would owe them nothing.  When assigned, your account would show no position for the Feb 10 PUT, and show the number of shares equal to 100 times the number of contracts sold. 

Peter D:
this was quite different then I thought:
if the putter wants to assign FAS at 10$, needs to buy feb put at 4.2$,
then informs BROKER I suppose, that he wants to exercise and assign, when this happens, the feb 10 put expires worthless,
I have to buy FAS shares at 10$ but also get 4.2$.

RMM,
We are talking about the same thing.  When a person exercise, they give up the long position (CALL or PUT) for the Right to Buy or Right to Sell.  When you get assigned, you pocket the entire value of the options and spend the money to buy or sell short (if you just sell existing positions, no additional money is spent) the stock at the strike price.  Your statements are correct.

Singapore Steve/DRYS – I can’t remember how I ended up with the Mar 10s, but I’ve been rolling DRYS for a while, and I rolled to the Mar 10s a while back to generate enough premium to allow me to roll myself down to the Jun 2 1/2s. After that I rolled the Jun 2 1/2s up to the LEAP 15s and sold Mar 15s, per Phil’s guidance =)

Good Morning All

Asia Markets :    Wednesday, January 21, 2009
(The following is from WSJ; please cross check with other sources to confirm.)   

Nikkei Average*                               7901.64    -164.15    -2.04%
Hang Seng*                                   12583.63    -376.14    -2.90%
China: DJ Shanghai*                        222.27         -0.53    -0.24%
Seoul Composite*                           1103.61      -23.20    -2.06%
Bombay Sensex*                             8779.17    -321.38    -3.53%
Baltic Dry Index                                  872.00    4.00    0.46%

*at Close

Asian Markets Fall on Grim Data, Financials

Continued signs of trouble in the financial sector and worrisome economic data sent Asian shares to their lowest in more than six weeks Wednesday, bolstering the dollar and other assets that shine in uncertain times.

Japan’s Nikkei ended 2 percent lower, hitting a two-month low on rekindled fear about the global financial sector that sent banks sliding. Tech shares extended losses and exporters slipped as the dollar remained below 90 yen.

South Korea’s KOSPI finished 2 percent lower with banks hurt by worries about restructuring costs after they decided to extend credit lines to troubled ship makers and builders.

Australian stocks closed at their lowest in nearly two months, down 1 percent, led by losses in global miner BHP Billiton after its plans to cut operations and jobs stoked concerns the global recession will further dent company profits. Bank stocks fell more than 3 percent.

Hong Kong shares were down 2.9 percent, following new profit warnings from Chinese resources and financial companies amid fresh worries the global financial crisis is far from over. Index heavyweight HSBC Holdings lost a further 4.3 percent after sliding as much as 8.8 percent on Tuesday, battered by worries the UK-based lender may have to raise a massive amount of capital to offset losses as more loans and mortgages go sour.

Singapore’s Straits Times Index slipped 1.1 percent, after the government said the city-state was in its worst recession ever.

China’s Shanghai Composite Index edged down 0.5 percent, but textile and property shares were strong on hopes for government support those industries. The official Shanghai Securities News reported that China’s National Development and Reform Commission, the top planning agency, would soon submit to the State Council, or cabinet, a proposal to aid the country’s textile industry, after China announced plans to bolster its steel and auto sectors.

Bombay Stock Exchange closed at 8736.44, down 364.11 points or 4 per cent. The index touched a low of 8734.93 and a high of 9051.31 in day’s trade. Across the board heavy selling and formation of new short positions in index heavyweights saw benchmarks end at lowest level of the day. Power, banks and oil&gas stocks were the worst hit while Fast Moving Consumer Goods (FMCG) stocks ended with marginal gains.

Banks Lead Euro Shares Lower; Barclays Falls

European shares were down early on Wednesday, with the beleaguered banking sector leading the fallers as fears the industry needs to raise further funds deepened.

The pan-European FTSEurofirst 300 index of top European shares was down 1.9 percent at 760.01 points, losing ground for the ninth time in 10 sessions.

The banking sector was the biggest faller on the index. Barclays fell 26 percent to their lowest level since 1985 as the threat it needs to raise funds or could be nationalized continued to dog the bank. Lloyds Banking Group, Commerzbank, Deutsche Bank and BNP Paribas lost between 7.1 percent and 15.4 percent.

KBC Groep fell 9 percent after its chief executive told Belgian daily newspaper De Tijd, in an interview published on Tuesday, that the Belgian banking and insurance group is not seeking cash from the government, but does not rule out needing fresh funds in the future. Belgium is mulling a second bailout for its troubled banking sector, whose shares have come under renewed pressure in recent days, Finance Minister Didier Reynders told Belgian news agency Belga on Tuesday.

Credit Suisse fell 3.8 percent after the Handelszeitung newspaper quoted a bank insider as saying Switzerland’s second-largest bank could report a full-year loss of up to 6 billion Swiss francs ($5.25 billion).

However, Societe Generale gained 3.4 percent after it said it expected a full-year net profit of about 2 billion euros, below the average market forecast, but calmed fears of losses and a capital increase. Shares in Royal Bank of Scotland rose 6.8 percent.

After banks, energy shares took the most points off the pan-European index as crude hovered at about $41 a barrel amid fears of a deep recession.

BG Group, BP, Royal Dutch Shell and Total were down between 1.5 percent and 1.9 percent.

There were only a few sectors which gained on the index. Telecom equipment maker Ericsson soared 9.6 percent as it posted fourth-quarter operating earnings above market expectations and said it would continue cutting costs across the group.

French peer Alcatel-Lucent rose 4.3 percent.

The number of Britons claiming unemployment benefit rose for an 11th consecutive month in December, while the total number of people out of work surged close to the 2 million mark, official data showed.

Across Europe, the FTSE 100 index was down 1.3 percent, Germany’s DAX was 1.4 percent lower and France’s CAC 40 was down 1.9 percent.

Dollar Climb Knocks Pound to 7 1/2-Year Low

Sterling tumbled on Wednesday, hitting a 7-1/2-year low against the dollar, as intensified risk aversion drove investors back into the U.S. currency which reached its strongest levels against the euro in six weeks.

The pound extended deep losses on the view that an ailing UK financial sector will keep the economy weak despite bank bailouts, fiscal stimulus and drastic interest rate cuts. A surge in UK joblessness also kept sterling weak.

Sterling [ 1.3761    -0.0163  (-1.17%)    ] fell more than 1 percent to $1.3715, its weakest since mid-2001.

The pair has fallen more than 7 percent so far this week, its biggest weekly slide since late October.

Sterling dropped across the board, hitting a record low of 123.01 yen [123.73    -1.23  (-0.98%)   ] against the low-yielding Japanese yen, which tends to rally during periods of risk aversion.

The euro [1.0654    -0.0136  (-1.26%)   ] rose more than 1 percent to 94.10 pence, its strongest since the start of the month and inched closer to a record high around 98 pence hit last month.

Despite the euro’s gains against sterling, the single currency fell to $1.2845 on electronic trading platform EBS, its lowest level since Dec. 9.

This boosted the dollar across the board, pushing the U.S. currency as high as 86.504 against a basket of currencies, its highest level since early December.

Against the yen, [ 89.93    0.20  (+0.22%)   ] the dollar was little changed at 89.90 yen.

The euro has been hurt lately by sovereign debt rating downgrades to euro zone member nations including Spain, and deteriorating economic prospects, which analysts say could hasten monetary easing by the European Central Bank. Speaking before a committee of the European Parliament, ECB President Jean-Claude Trichet on Wednesday played down the threat of deflation, while rebuffing rumors that some euro zone member would leave the union given the financial crisis.

 

Oil Rises Toward $42 as Slowdown Weakens Demand

Oil edged above $41 a barrel on Wednesday, as further evidence emerged of a deepening global slowdown that is crushing demand for fuel.

U.S. light crude [ 41.42    0.58  (+1.42%)] for March delivery rose on its first day as the new front month contract. The February contract, which expired on Tuesday, settled up $2.23, or about 6 percent, at $38.74 a barrel, on short-covering.

London Brent crude [ 43.8    0.18  (+0.41%)] traded higher.

The International Monetary Fund is set to sharply cut growth forecasts this month and the world will not return to strong growth for two to three years, IMF Managing-Director Dominique Strauss-Kahn said on Wednesday. The International Energy Agency (IEA), a leading energy watchdog, last week joined the ranks of forecasters predicting a fall in global oil demand this year in light of the slowing economic outlook. The IEA sees demand falling by 500,000 barrels per day (bpd) in 2009 to 85.3 million bpd.

OPEC is fully enforcing its deepest ever oil supply curbs, which should be enough to boost prices, the group’s president, Angolan oil minister Botelho de Vasconcelos, told Reuters on Tuesday. But prices remain at levels not seen since 2004.

China, one engine in the six-year commodity price rally that started in 2002, was expected to release fourth-quarter GDP data this week that economists say will show 7.0 percent growth, the slowest pace of expansion in nearly a decade for the world’s third-biggest economy.

A Reuters poll of analysts forecast that crude oil stockpiles in the United States, the world’s biggest energy consumer, rose by 1.4 million barrels last week, with distillate stockpiles seen down 1.4 million barrels due to cold winter weather.

Gasoline stockpiles are expected to be up 2.1 million barrels, up 5.1 million barrels from a year ago.

Data will be released on Thursday, a day later than usual, following the U.S. holiday on Monday.

Gold rises, aided by safe-haven buying

Gold recovered early losses to firm in Europe on Wednesday, boosted by interest in bullion as a haven from risk, but remained off the previous session’s 11-day high as the euro gave up gains versus the dollar.

Gold was quoted at $860.20/862.20 an ounce at 0941 GMT against $855.20 late in New York on Tuesday.

The rally came despite the U.S. dollar’s rise against major currencies especially the euro and sterling. The gains have been purely supported by fresh asset allocation and investment demand.

Investment in bullion exchange-traded funds, which issue securities backed by physical stocks of the metal and are seen as a relatively low-risk investment, was one of the key drivers of Tuesday’s price gains. The world’s largest gold-backed ETF, New York’s SPDR Gold Trust GLD, said its holdings rose 1 percent on Tuesday to breach the 800-tonne barrier for the first time ever.

Among other precious metals, silver climbed to $11.42/11.50 an ounce from $11.11 late in New York on Tuesday.

Platinum was relatively steady at $932/937 an ounce from $937.50, while palladium was unchanged at $182/187 an ounce against $182.

Good Morning everyone.
 
 
 
UK getting thumped again this morning. Down 1.4% but off its lows. Will it hold 4000 ?. Banks getting hit again. Barclays down another 20%. Pound getting hammered again. Well below 1.4 now at 1.376
 
 
 
US futures looking better. But nowhere near enough to recover yesterdays mayhem. Still bottom hunting I think.

Good morning.
 
Phil, I think I should have paid more attention to your announcement yesterday that preferred shares of JPM, and others?, were being sold off.  What can you tell us about what you saw?  Thanks.

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