Remember Operation Twist?
Last week, Freddie Mac reported record lows on rates, with the 30-year notes at 3.91%. This has not, of course, encouraged many people to go out and buy homes but it has DISCOURAGED people from putting their money into bonds and ENCOURAGED them to put their money into stocks. There is, however, a problem with this. When people put money into Treasuries, it is "locked up" for a period of time but stocks are more liquid so, as soon as rates begin going up (and they will when the panic in Europe subsides despite the Fed’s efforts), then money can come out of stocks as quickly as it went in and move into 5% paper.
See, I said 5% paper and you were thinking "Yeah, I’d like some of that." So are Trillions of Dollars worth of other investors and that means, I am sorry to tell you, that this little Federally-funded rally is full of holes you can drive a truck through.
The Fed’s stimulus plan is the central bank’s third definitive attempt to aid the U.S.’s patchy economy since 2008. As expectations grew that the Fed would act in the weeks leading up to the bank’s actual announcement, which came Sept. 21, 10-year yields dropped nearly 0.30 percentage point. Since the Fed’s official statement, yields have already risen modestly, to 2.026% on Friday, from 1.95% on Sept. 20.
The program’s final debt purchase of the year was Thursday, when the Fed bought $4.6 billion in long-dated securities. The final sale Wednesday targets $8 billion to $8.75 billion worth of notes due in 2014. It will be a holiday-shortened week: The bond market was shut Monday and will close early, at 2 p.m., on Friday.
The problem is some corners of the market think the Fed’s tools are losing their punch. The financial system is already flush with money from the bank’s previous easing programs, and analysts argue that the Fed’s extra money is increasingly less useful. Borrowing costs, for instance, are at all-time lows and yet many investors aren’t taking advantage. If Operation Twist isn’t enough to get us through 2012 – what’s going to be left in the Fed’s tool belt once the Global panic into Dollars begins to subside?
You can see, on the above chart, where the Fed announced Operation Twist in September as it allowed the oil crooks to borrow cheaply and jam prices back from $80 to $100 (25%) and that took money OUT of consumers’ pockets into Q4 but at least they were able to increase their debt load as borrowing costs came down so it all works out – for the oil companies…
Banks in Europe paid attention to my cash call this weekend and parked a record $540Bn in the ECB’s overnight deposit facility, up from $500Bn the day before. The previous record overnight deposits were $501Bn, at the onset of the Greek crisis in June of 2010 so – DESPITE all the nonsense to calm the markets – the European banks are as panicked now as they have ever been and the inter-bank lending system (LIBOR) is less liquid now than it was in the crash of 2008.
The ECB’s so-called benchmark allotment pointed to a major liquidity overhang in the euro zone’s financial system Tuesday. Benchmark allotment, which is the ECB’s estimate of the liquidity banks need to conduct routine operations, was minus €493 billion. The negative allotment figure indicates the presence of excess liquidity in the financial system. The ECB further said banks borrowed €6.13 billion from the ECB’s overnight lending facility, compared with €6.34 billion borrowed Thursday. When markets are functioning properly, banks only use the facility to the tune of a few hundred million euros overnight.
I’m sorry to be a Debbie Downer for the holidays but it’s my job to search the truth and, as I was doing research for this year’s Secret Santa’s Inflation Hedges, I discovered that I can’t advocate any at the moment because the pressure is more deflationary than inflationary and, in fact, I am leaning towards putting up Secret Santa’s Disaster Hedges for 2012 – getting in-line with the Mayans for the moment.
I’m still gathering my evidence so I don’t want to jump the gun but, as you can see from this post – I’m very much in macro mode at the moment, looking out at the bigger picture as we prepare to re-allocate our capital for 2012.
Barring some immediate disaster this week (and we are short already), our Secret Santa Hedges for 2011 are 4 for 4 with all 4 of our trades up well over 100% and XLF and XLE both at max returns with DBA just off our $29 target at $28.60 but that only applies to very greedy people who didn’t take this trade off the table in August, when DBA was $34 and we soured on the sector. I’ll do a full write-up as we officially close out that portfolio this weekend but, as I said, I can’t in good conscience replace it with 4 more bullish positions for 2012 as I’m not finding 4 things to be bullish about.
We’ll see how Europe acts this week but already they are not acting "fixed" and, if a Trillion Dollar commitment can’t cheer them up – what will it take?
Let’s be careful out there!
Top picture credit: thestreet.com
Cooling Off chart from the Wall St. Journal
Cartoon credit: Bizarro Comic
Very nice article from Zerohedge. Nice perspective amongst all the negativity we read.
http://www.zerohedge.com/news/guest-post-why-am-i-hopeful?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Oil Lines
R3 – 100.52
R2 – 100.32
R1 – 100
PP – 99.79
S1 – 99.46
S2 – 99.26
S3 – 98.93
This being the first trading day, these lines are usually not very reliable!
This is an interesting stat – since the price increase in Netflix, people have been streaming more and going back to previous highs. Maybe it was the plan to get rid of the DVD altogether!
http://techcrunch.com/2011/12/26/people-spend-twice-time-netflix-hulu/
And Hulu seems to be losing steam:
Some European news – over the weekend Spain predicted at least 2 quarters of negative growth and a bad 2012. Not surprising given the austerity measures being announced.
On the other hand, my sister told me that they are passing a new measure in Spain that should help small businesses – apparently up to now, businesses had to pay the VAT due on invoices they produced the same year the invoice was issued. It’s OK if you get paid quickly, but apparently, payment terms are getting longer and longer and my sister was telling me that she was paying VAT for invoices that would not get paid until 2013! Crazy stuff… She had to borrow money to pay that VAT. Now the VAT will be due when you get paid! Needless to say, these changes will be welcome.
Ginormous graphic about drug prices in the US as compared to Canada (from Barry):
http://www.ritholtz.com/blog/2011/12/why-americans-pay-so-much-for-brand-name-drugs/
Phil, Looks like we lucked out on the Jan 68 Call as it’s cheaper today than anytime Friday. Do you still want to buy it back?
Britain loses spot as sixth-largest economy to Brazil
http://www.telegraph.co.uk/finance/economics/8977834/Britain-loses-spot-as-sixth-largest-economy-to-Brazil.html
Looks like the 3 day weekend did some decay damage on the short options!
For those brave enough to short the FAS 60/72 strangle over the weekend, it was selling for around $0.70 on Friday and can be bought back for $0.44 today. Not bad….
What a difference a week make with the AAPL portfolio – good job by lflan!
stjeanluc
Remember I still have the 62/67 Dec 5 FAS stangle 62p sold for 1.15 now .51 and the 67c sold for 1.51 now 1.60 Shuold I close it and set up an other play or stick arround?
FAS / Yodi – You could close it now. It’s a win anyway and setup another play with more upside protection.
I am holding DIA Jan $118 puts, in at $1.81 now $0.88. Any advice on whether to DD or roll to $120 puts?
FAS Strangle Experiment – Being already Tuesday (faster decay…), I am selling a FAS 63/72 strangle for around $0.70 or so.
stjeanluc
Thanks What play do you suggest for this week? FAS strangle
Good morning!
I hope everyone had a nice Christmas. I’m around today but likely not tomorrow morning as I’ll be heading up to ski but then I should be back on-line in the afternoon and more or less available on Thursday and Friday for all you hard-core traders. My excuse is I have a lot of reading to do to get my head around 2012 – what’s yours?
What we have to do this week is hold those lines (whichever ones each index is over). The NYSE had such a struggle getting over 7,473 it would be tragic if they blow it (over by just 20 at the moment) but notice the Dow consolidated right at that +5% line in early November AND early December so that line (12,170) should be taken very, very seriously and failure there is not an option.
AAPL over $400 is a green light for the Nasdaq to catch up to the Dow and we should be very concerned any time the Nas doesn’t outperform this week. Oil is back to $100 but not a clever short with the Dollar below 80.20 and, clearly, they are still pushing the markets into the year end so, tempting though it may be – it’s not yet time for bearish betting – we’ll just keep pushing the lines, following the indexes higher until they fail to hold up and THEN we will short with good stop lines to guide us.
This is the year end rally and this last week of the year is usually bullish, it’s next month I’m worried about (and next year!).
Tuesday’s economic calendar:
9:00 S&P Case-Shiller Home Price Index
10:00 Consumer Confidence
10:00 Richmond Fed Mfg.
10:00 State Street Investor Confidence Index
10:30 Dallas Fed Manufacturing Outlook
At the open: Dow -0.18% to 12272. S&P -0.15% to 1263. Nasdaq -0.16% to 2284.
Treasurys: 30-year +0.16%. 10-yr +0.09%. 5-yr +0.05%.
Commodities: Crude +0.03% to $99.89. Gold -0.76% to $1596.35.
Currencies: Euro flat vs. dollar. Yen -0.16%. Pound -0.2%.
Market preview: Stock index futures and European shares are a hair lower in slow post-holiday action. Sears (SHLD) is off 15% premarket as poor results will lead to the closing of 100-120 stores. The early data shows EU banks took their massive ECB borrowings of last week and deposited the funds right back with the central bank. Later: Consumer Confidence, Richmond Fed, Dallas Fed.
wrote some open UCO 46 calls for Jan.
Tuesday pre-market – – 12-27-2011
Dr. John L. Faessel
ON THE MARKET
Commentary and Insights
Quote of the day
“It is dangerous to be right when the government is wrong.”
~ Voltaire ~
~
The Dow breaks out to Cycle Highs
Gold falls below 200-day moving average to 5-month lows
EuroLand Bond Yields remain the Market Driver
Italy 10-year (gross) bond yield – 6.95% off from 7.26% on 11-24
Spanish 10-year (generic) bond yield – 5.24% – off from 6.7% on 11/24
Today’s market backdrop has European markets up slightly as the Key Italian Bond Yield moves higher again. Today the S&P Case-Shiller home price index and consumer confidence will be released. Worry re home prices has S& P futures off 3 points. It’s a short week and light volume and tepid moves are likely.
On Friday the Dow Jones industrial average broke out to new cycle highs climbing 1% with 28 of 30 issues higher. The market rose on very low and well below average volume despite mixed economic data, capping the week with gains. Durable goods and new-home sales up 4% data beat estimates of 1.6%, although consumer spending and personal income came in below expectations.
It was a good week as The Dow Jones Industrial Average, rose 3.6%, to close at 12,294.00. The Standard & Poor’s 500 rose 3.7%, to 1218.64, while the Nasdaq Composite added 2.5%, to 2618.64.
The Market picture remains constructive as "price" broke above the apex of a triangle / coil. The "sure bet" Santa Claus rally seems to be muted, but let’s not argue with Price. The Dow at new cycle highs looks good on the charts.
Again: “From a technical perspective the key declining Tops line resistance at (SPX) 1314ish that comes off last July’s top tick will be the overriding wall of resistance.” Correspondingly the lower trend line off “the” lows of 10/4 and 11/28 is at (SPX) 1193.
The BARRON’s Confidence Index * moved higher to 67.3% from their cycle lows of 66.9% the prior week. In June and July it was a relatively healthy 77.
_____________________________
The (SPX) closed last Friday at 1265
Short term price support in the S&P 500 (SPX) is at 1252.
Important pullback low support of last Monday is at 1202 –
then at pullback lows of 1229 registered on 12/21.
Support from a minor ascending lows line is also at 1202.
50-day moving average support is at 1233.
The 200-day moving average support is at 1259.
Price support at 11/28 lows is 1158.
Deep price support at the October 4th lows is at 1074.
Deepest ascending lows line off the (SPX) 666 (of 3/6/2009) is at 1109.
Declining tops resistance is at 1226.
Key Price resistance is at S&P 500 (SPX) 1266 and 1293.
Last Friday’s key indicators and metrics:
· McClellan Oscillator is Neutral @ plus 148
· VIX – 20.73
Looks like Trader’s Anonymous again today….
Phil
Are you waiting out the USO Dec 30 $38 puts (now .24)? Or DD here and try to get out even?
WCP Moves:
Good morning. PP for today…and watch out, VIX is up 5%.
STJ, your the go to man….any info on how many of the DOW stocks at or near 52 week highs?
Spain/StJ – That’s going to be a huge boost because, essentially under the new rule, the businesses have pre-paid a lot of VAT and will be recouping that money as the invoices fill. It won’t change the balance sheet but it will give them a pop in cash flow for a quarter.
Great drugs graphic. Amazingly, I’ve been pointing this stuff out for years but it seems to drive Conservatives into a frenzy when I insinuate that the American private health-care system is not cost-effective at all and, in fact, leads to massive consumer abuses that simply are not tolerated in other civilized nations. It’s the same drugs, made by the same companies in the same packaging but in Cuba or Mexico or Canada – it’s as little as 1/10th the price!
Daimler overtime
Mercedes sells a lot of cars to Greece, but although it is many years since I was there, most of them were diesel taxis. The question is whether orders represent affluent buyers wanting new Mercs, or increased demand for public transportation. What is the currency advantage or disadvantage for German auto makers versus their Japanese rivals? Most of the pick up trucks in Greece are Nissan, Mazda, or Toyota. Pick up trucks are the ultimate in low cost public transportation in rural areas, including in Florida, where seat belt laws are suspended for passengers (and dogs) in the back of pick up trucks as this considered an economically necessary form of transportation for agricultural workers. (In Haiti I have seen a ridiculous number of people clinging to pick up trucks, but let’s not even go there.)
Phil Good morning NLY I was call on NLY 2014 15c sold for 1.93 as expected actually NLY was 16.94 Today trading at 16.27 shall I wait for a further drop to refill ?
Hi Phil,
I hope you and everyone else had a nice holiday.
Are you looking for a low volume Bot move up this week?
rustle123: generalities
rustle, since I don’t see you making comments trying to fix hopeless positions or with a sense of panic I have the impression you know what the hell you’re doing so I pay attention to the ideas you are good enough to share. I would like to know, in very general terms, what your overall position is generally. I know you don’t trade futures but do you have a percentage mix of equities, bonds, options and cash that you would say is a fairly typical allotment for the funds you manage? If now is not a typical time how are you positioned relative to the norm?
Thanks for your input.
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Merry Christmas Phil. Hope you had a great weekend.
I need advice though I should have asked this a long time ago.
I got a tip from you a year ago to sell some puts for EGLE and leave then along.
They were arounf $4 then now I am the happy owner of 1000 EGLE at $1
The reason I didn’t panic is because how could a big shipper like them go under, but they price just keeps going lower. What gives ? are they going to 0 ? what should I do ? what should have done ?
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Merry Christmas Phil. Hope you had a great weekend.
I need advice though I should have asked this a long time ago.
I got a tip from you a year ago to sell some puts for EGLE and leave then along.
They were arounf $4 then now I am the happy owner of 1000 EGLE at $1
The reason I didn’t panic is because how could a big shipper like them go under, but they price just keeps going lower. What gives ? are they going to 0 ? what should I do ? what should have done ?
Phil/drugs
Good points,and consider that here in the Dominican Republic people can buy most drugs over the counter without a prescription (of they are not narcotics) and buy only the quantity that they want, sometimes with advice from the pharmacist. "Given me 10 capsules of Amoxycillin for my sore throat." "You would be better off taking xyz." Consider simply the cost of a visit to the doc to get a prescription or a prescription refill, when they may also order some blood work (more money) before they will let you have the drugs. So you may be out $150 before you even get the medication.
Not saying that the US system isn’t infinitely superior, but it does come at huge cost. Incidentally lab work is much cheaper in other countries too. Part of the reason for this is that companies like Quest Diagnostics can charge insurance companies and government providers very steep fees.
We should probably adopt the Singapore health system in which everyone has mandatory payroll stoppages that go into medical expense accounts, but each patient/consumer is responsible for making his or her own payments out of that account. Apparently this keeps the costs down very effectively and they have world class medicine too.
DIA/Cjji – If they are a hedge, I would keep the hedge. As you see above, we took advantage of the strong open to improve our losing DIAs but it’s an aggressive gamble. You can sell the weekly $122 puts for .55 at the moment and you can roll up to the Jan $122 puts for .90 so I would do the roll and hold off on the sale as maybe you will get the chance to sell lower puts or maybe you won’t have to cover at all if the 600-point run in the Dow since last Tuesday has a good pullback.
Meanwhile – Dollar 80.15, oil $100.54, gold $1,597.
Phil, unfortunately I missed buying back the WCP FAS JAN12 $72 short calls for a buck. I am hoping for a dip next week. Any suggestions?
Phil- I’m sitting in a navy terminal in Norfolk waiting to begin my 3-day trek to Leipzig, Bishkek, Bagram, and finally Kabul. I don’t leave until after the market closes and so I’m looking for you to build on your legendary status today! 🙂
Holding in cash, Phil………….no OIL shorts so far. patience is a virture, sometimes. Thx
jromeha – have a good trip out there and get back safe.
Have a safe trip Jrom… and keep in touch! Going for a year?
Yup, computing is getting smaller and cheaper:
http://www.engadget.com/2011/12/27/visualized-ibms-1956-hdd-packs-5mb-of-storage-requires-forkli/
That would make my 64GB iPad at $500 millions!
Jromeha- I am reminded of this quote:
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“People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.” — George Orwell
Be safe and thank you for your service.
jrom – safe trip and come back soon!
Scott/St John thx for the wishes…. I’m a finance dude so i definitely dont have a dangerous job. the most dangerous activities I’ll ever do is the travelling around the country for QA and inspections.. It is scheduled for a year but with our drawdowns etc i definitely could be come home early…
Lincoln/Generalities
I have some bonds but generally do not like them and think they are a waste. There are safer and better ways to see much more income. Bonds are probably only 3% of portfolio mix so very little anyway. Generally I always like to have 30% in cash and right now that number is probably double in most accounts some even close to 70%. I have some main equities I hold and write covered calls off every month like Merck, Sherwin Williams, Exxon and a couple of others but I trade a lot of ETF’s and write a tremendous amount of premium whether it’s open calls, puts or doing BCS.and then when I buy SCO or TZA and TNA or EDZ, I scale in at 1/4 to 1/5 of a position at a time. 95% of the time I never get to full position because I’m taking profits and sometimes (especially on SCO) I hold 1/4 to 1/3 of the position while trading another of the same amount constantly lowering my cost then when oil has it’s nice dump, I get rid of it all (recently sold all remaining stock at mid 43’s then started rebuying low 38’s and only have 1/4 position right now.) Currently I have many 36 SCO puts for Jan, UCO 34 puts for Jan, UCO 45 calls for Jan and covered SCO 43 calls at a 65% profit that I wrote when SCO was in the 43’s. I’m also hoping IMAX drops to 17’s or very low 18’s and will start writing 17 puts and buying some stock on that too.
rustle123: generalities
rustle, since I don’t see you making comments trying to fix hopeless positions or with a sense of panic I have the impression you know what the hell you’re doing so I pay attention to the ideas you are good enough to share. I would like to know, in very general terms, what your overall position is generally. I know you don’t trade futures but do you have a percentage mix of equities, bonds, options and cash that you would say is a fairly typical allotment for the funds you manage? If now is not a typical time how are you positioned relative to the norm?
Thanks for your input.
Dr John/Rustle – I’m a little disappointed with that "let’s not argue with the price" attitude. While I agree it’s dangerous to bet against technical action, some of our best opportunities come from betting against hollow technical moves.
USO/DC – Good question. As above, I’ll be happy to get out even there as I think the DIA puts have a better probability of coming back to a point we press.
Cars/JMM – Hard to get good overall data (another cool thing about having a fund is you can pay for research!) but let’s not forget all these individual car companies showing good numbers is partly the result of consolidation since the big crash. Although they still exist, Saab, Mazda Subaru and Chrysler have lost significant market share that is being picked up by other brands so their "record sales" may not translate into record auto sales overall. A lot of manufacturers slashed product lines as well and that must have reallocated some customers. Taurus, for example, used to be Ford’s biggest seller – now gone.
SHLD still dropping!
NLY/Yodi – So you got net $16.93 for it, right? If you buy back now ($16.33) you can only get .85 for the July $16s. which is net $15.50ish so not bad.
This week/Exec – I think they will try to push the markets higher. The volume is very dead with 22M on the Dow at 11:15 but I also think it is madness for Funds not to cash and cover into the weekend so I think moves up will be sold into and today will give us a clue as to who has more willpower in that struggle. As you can tell by the DIA adjustment earlier – I’m kind of still leaning bearish as long as the Dollar is holding up.
EGLE/Micro – We gave up on EGLE, which were from our $25KP earlier in the year and one of our big losers. There is a massive, generational glut of shipping capacity and, of course, low demand for the same and it is possible that this situation does not improve next year (or the one after that). That’s why we finally gave up, EGLE didn’t have any real prospects in our time-frame of 1 year. I still like EGLE and here’s a short illustration of why:
Company
1-Month Price Change (%)
Return on Equity*
1-Year Revenue Growth
Source: S&P Capital IQ. *Latest quarter.
For the TA people out there…
http://www.bespokeinvest.com/thinkbig/2011/12/27/dow-reverse-head-and-shoulders.html
Phil/Higher,
I agree….it seems they do it every year when the volume tapers out.
I guess the standard game plan is to run it up on low volume. They’ll probably have there accomplices on CNBC talk it up the next few days, then pull the rug out in early January.
Phil/Dr. John
I agree with you completely and picked up some EDZ today.
CNQ- Canadian Natural Resources- I am looking at this for long term play on oil/oil sands. Anyone follow them or have an opinion?
Drugs/JMM – It’s not superior when, as you note, a pharmacist is perfectly capable of asking you the same 5 questions a doctor can to prescribe flu medicine but without all the expense. If that doesn’t work ($10 worth of pills) THEN you can go to a doctor but our ass-backwards system has people lining up in doctors offices where they mix all their communicable germs for the hour-plus that they wait together in a tiny room (even if they have an appointment) only to have the doctor scribble on his little pad for $150 and then the pharmacy charges another $50 to fill it. Multiply that extra $200 cost by 50M people and you get an idea of why health insurance is so needlessly expensive in this country.
I agree that Singapore has a better system but so does EVERY OTHER COUNTRY – we have the most expensive care by a mile and we’re not even near the top in outcomes – it’s pathetic.
FAS/Hemas – FAS is only at $66.87 and I’m a bit more bearish now over the next 3 weeks so I’d give them a chance to expire worthless or at least come back below $1. The Feb $80s are a better than even roll so you do have a bit of leeway, even if FAS does pop 10%.
Legend/Jrom – LOL! Well have a good trip and WTF with 3 days to get to Kabul? Travelocity shows an Air India flight leaving from Newark at 8:37 that gets you to Kabul at 1pm tomorrow. It’s $2,286 even with the last minute booking and I’ll bet the army is spending a lot more than that to ship you there.
Owell/Pstas – Paraphrased by Nicholson too: