Let's not make this more complicated than it needs to be.
A weak Dollar lifts the markets and, this morning, the Dollar fell from 79.50 at yesterday's close to 79 at 6:45 and that's why, despite earnings disappointments from both INTC and IBM, the Futures are up slightly 3 hours before the open. As you can see from the chart on the right, to say there's a strong inverse correlation between the Dollar and the S&P is quite the understatement. Over the longer run – the effect tends to wash out but, over the short run, it's an almost perfect match.
Of course, this also has a very direct effect on commodity pricing and part of the reason for the Dollar's big sell-off last night was the much-better-than-last-time performance of Barack Obama in the second Presidential Debate as the future of the Fed and all that free money hangs in the balance.
After the first debate, two weeks ago, Romney clearly won and has made it known that he will kick both Big Bird and Big Ben to the curb as soon as he gets in office – that sent the Dollar up from 79.10 to 80.21 (up 1.4%) last week and dropped the S&P from 1,460 to 1,430 (2%). After last night, Romney looks to be back off the table and that leaves the Dollar to resume it's downward slope – giving another lift to the markets.
At the same time, Moody's left Spain's credit rating above junk this morning and that's lifting the Euro to $1.31 and the Pound is moving in lock-step at $1.61 BUT the Yen dropped 0.5% to 78.63 and it's not likely the BOJ will let the Dollar slip below 79 as that makes Toyotas and Sonys more expensive just ahead of the holidays. Also, the Nikkei finally got back to 8,850 last night and you know they hate to lose that line.
So get set for some heavy-duty Global Market Manipulation by our Central Banksters as everyone but Europe tries to race for the bottom. Europe, interestingly enough, doesn't mind a strong currency as they are fuel and goods importers and most of the goods they export are "luxury" class and less susceptible to currency fluctuations. With strong intra-zone trading the backbone of the EU economy, it doesn't matter where the Euro is trading from that perspective either and, of course, the SNB works very hard to keep the Euro up against the Franc. Almost as hard as the BOJ works to keep the Yen weak against the Dollar…
That means we'll take this morning's open with a grain of salt as the 0.5% dive in the Dollar since the close SHOULD have the markets gapping up at least 0.5% but it's hard to imagine that INTC and IBM won't put a drag on both the Dow and the Nasdaq (and the SOX) with their less than exciting reports. IBM alone is down $7 pre-market and that's over 50 Dow points right there – in the very least, we're going to take a bite out of yesterday's momentum.
I mentioned in yesterday's morning post we were playing AAPL bullish and the Nov $660 calls jumped from $13.63 at the open to $20.70 at the close, up 51% for the day and that was a gain worth protecting, of course. The TNA Oct $61 calls I also mentioned in the morning post finished the day at $1.10 but we took .95 and ran – up 111% from our last entry at .45. In fact, our last trade for the day in our $25,000 Portfolio was a bearish one as we picked up the weekly DIA $135 puts at .65 as we were worried Romney would win again and tank the markets – we won't be sticking with them if the Dollar stays down this morning, though. In the Morning Alert to Members, we also put an earnings play on ISRG:
ISRG – Looking at UNH's numbers and XLV in general, I would think ISRG is doing well. The stock is low in the channel, right at the 200 dma, I think the way I would play them for earnings is to set up an April $510/485 bear put spread for $10 and sell the Oct $500 puts for $11 so a net $1 credit on the combo and ISRG would have to be below $475 before you're down more than the $25 you make on the spread and, of course, the short puts are rollable and we like the company. Let's do 2 of these in the $25KPA to see how it goes.
ISRG had a nice beat last night but not good enough to justify the run-up into earnings and they were back to $510 after hours which is, of course, PERFECT for our bet. The Oct $500 puts should expire worthless and whatever value remains on the bear spread, plus $1, will be our profit – times 200, of course, for 2 contracts in the spread – hopefully about $2,000 in profits for the day's work. These are the kind of quick earnings plays we love and, so far, this earnings season has been a lot more reliable to predict than the last.
It looks like we're getting past BAC's earnings without too much damage, EPS was 0.07 vs 0.00 expected but Revenues missed by 7.5% and I'm more than a little concerned that 83% of the Mortgage Loan volume is refinances because what we're doing here (and this goes for all banks) is borrowing business from the Future because every home you refinance at 3.5% is a home that will not be coming back to you for 3 decades for another loan, once they start moving back to more normal (unsupported) rates.
The banks are also locking in 30-year periods of low returns on their loans and, of course, it doesn't take much inflation to wipe out all of their gains. All this refinancing at lower rates is also bad for REITs, who are very out of favor at the moment but there are some that make good long-term entries for the patient investor.
NLY, for example, has fallen to $15.50 and their board got fed up and approved a $1.5Bn share buyback (10% of float) yesterday so probably $16 this morning. They still pay a $2 dividend and you can buy the stock for $16 and sell the 2015 $13 puts and calls for $4.85 and that drops your net cash outlay to $11.15 with an obligation to buy another round of shares at $13 if NLY finishes below. That would put you in 2x at net $12.08, which is still 25% below $16 and you only have $11 cash in the stock so that $2 dividend becomes an 18% annual bonus while you wait.
Meanwhile, September housing starts are up another 15% to an annualized 872,000 vs 765,000 expected so a really nice beat and that should pop the Futures. Even better, permits jumped to 894,000 vs just 810,000 expected so a 10% beat there as well.
As of this moment (8:40) it's not reflected in the Briefing.com chart but I'm sure you can imagine the impressive uptick 872,000 will give us. More employment, more housing – I'm sensing a trend. Poor Jack Welch must be turning over in his grave.
Tomorrow we get the Philly Fed, which may turn positive after last month's -1.9 reading and also we'll see Leading Economic Indicators, which also should turn positive based on the improvements we're seeing in recent data. The last data-point for the week is Existing Home Sales on Friday and next week we continue in the housing vein with the MBA Mortgage Index, New Home Sales and the FHFA Housing Price Index – all on Wednesday along with another Fed decision that afternoon. Thursday will be Durable Goods and Pending Home Sales and Friday we get another look at Q3 GDP, which will possibly be revised up from 1.3%.
Unfortunately, Germany revised their GDP down for 2013 this morning, from 1.6% all the way down to 1% as austerity blows up right in their face. This year is projected to be an equally anemic 0.8% so and optimist could say things are picking up but 2010 was 4.2% and last year was 3% so basically, it's just sad. "Germany is navigating stormy waters because of the European sovereign debt crisis and an economic weakening in emerging nations," Economy Minister Philipp Roesler says.
That being the case, it's a good idea to reiterate yesterday's trade idea for a TZA hedge from afternoon Member Chat to lock in our current gains:
Ultra hedges/Bdon – You just can't beat TZA at $15. The Jan $12/15 bull call spread is $1.50 so 100% upside if TZA simply doesn't go any lower. If they do go lower, you can sell the April $11 puts, now .50 for $1 (the Apr $12 puts are .92) before your $1.50 is even out of the money and then you'd be in the Jan $12s at net .50 and worst case is you get assigned at net $11.50 in April but, of course, you can roll or simply accept the assignment and cover and then you have more long-term protection.
While the US is clearly improving – we're simply not out of the woods yet internationally and an economic collapse in Europe or Asia will send people flying back to the Dollar – and you know what that will do to the S&P!
GOOG vs AAPL Premium pricing question,
Something that I just noticed as I'm trying to rationalize the Oct $750 Call premium pricing on GOOG in my mind…..
GOOG $755 Call pricing: this week $20.00 and Nov $25.80….. difference of $5.80 for 28 days
AAPL $645 Call pricing: this week $4.55 and Nov $24.95….. difference of $20.40 for 28 days
Is there really such a vast volatility difference between GOOG and AAPL or is this due to GOOG's earnings being tomorrow as opposed to AAPL's earnings being Thursday next week? And if it is the latter, can we expect much better premiums for AAPL next week that we can take advantage of beginning tomorrow when the next week options are open, to improve our 25kp AAPL trade position?
sank1/GOOG,
Regarding your question why your GOOG calendar currently shows a loss: It is exactly because GOOG's earnings are tomorrow after the bell. On Friday morning you'll see volatility being crushed and your calendar will catch up, hopefully the way you intended it to!
The phenomenon you are experiencing is discussed in Jeff Augen's books (e.g., 'The Volatility Edge in Options Trading').
In a nutshell, when a company has earnings shortly before OPEX, the increase in volatility can outweigh the theta decay, leaving the value of your options more or less unchanged. Augen actually proposes BUYING a straddle a couple weeks before earnings, because it does not significantly lose value and can benefit from any larger move before the event, giving it a very high risk to return ratio. If there is no significant move, the straddle can be bought back right before earnings announcement.
"As the 2012 Election quickly nears, so does the best three consecutive month span for the S&P 500, November through January."
Iflan,
What is your position on the Apple article posted by Phil at 5:50pm ?Apple $1000: Why it's time to buy (Bullish cross)
Good morning!
Futures flat with the Dollar back down to 79.065 after topping out at 79.25.
Oil $92.57 with 85,000 contracts remaining so they cleared 30K yesterday and figure they can have 25K left on Monday so they need to knock off 60K more in 3 sessions – that's not so hard….
Gold still having trouble staying over $1,750, silver $33.16, copper $3.75 on much better China news, nat gas $3.46 and gasoline collapsed to $2.77, finally down enough to affect pump prices.
China GDP came in at 7.4%, a big relief even though you can't trust the numbers. Nikkei up huge, just under 9,000 as they pushed the Yen all the way to 79.26 (up 1%/weaker).
3:54 AM Asian stocks rise following China's data dump in which GDP growth fell again but other figures showed that the worst may be over. However, EU shares aren't convinced and open flat-to-lower following recent gains and ahead of an EU summit today. Japan +2%, Hong Kong +0.5%, China +1.2%, India +0.6%. Euro Stoxx 50 -0.25%, London flat, Paris -0.2%. Frankfurt flat, Madrid -0.7%, Milan -0.4%.
Europe is flattish in the majors with Italy and Spain giving up 20% of their huge gains of the past few days -still very strong and we're still 1% behind UK and Germany and 2.5% behind France and Italy (+4%) and Spain (+7%) are leaving us all in the dust:
No reason for us to have a bad day unless we get a negative earnings surprise. Consumer Comfort at 9:45 should be improving, the Philly Fed at 10 should be improving and that should be confirmed by Leading Economic Indicators at the same time. 10:30 is nat gas inventories and that's when we'll watch for an oil sell-off and, after the close, we get the Money Supply and the Fed Balance Sheet.
Then it's Google time!
6:00 AM Overseas: Japan +2.00%;. Hong Kong +0.48%. China+1.24%. India +0.97%. London +0.12%. Paris -0.09%. Frankfurt+0.28%.
Big Chart – Nas still stuck in the mud at the 50 dma thanks to AAPL and INTC and RUT picks a funny time to get cautious but at least they're over their 5% line at 840 so it's up to the Nas to make a 46-point move higher to confirm (and GOOG and AAPL can do that for them) and then we're back to Dow 13,600 or bust.
In the Futures, 13,500 is the 13,567 line on the index so let's watch that carefully as it obviously needs to break over or it's going to be another disappointing day. VZ was totally in-line so no pressure on the Dow there. We're waiting for TRV, who have very high expectations and may disappoint and UNP, NOK, MS, NUE, PM, KEY & DO are big enough to affect some of the Dow components so not much to do but wait for the results.
Insurance/StJ – Buyer's remorse is right. What a total catastrophe that would be.
GOOG/Sank – Those Analyze things don't work very well when there are outside considerations like earnings or other events affecting the prices. Of course, that's why we're able to take advantage of them selling the ridiculous premiums to suckers who rely on calculators to buy option. The spread you bought is not that good because earnings are tonight and the spread is on the money so, if GOOG pops $50 to $800 tomorrow, you will have to pay your caller $50 and, if you are lucky, your calls will be worth $55 because earnings are gone and your premium will wash out too. And, of course, it's not likely you have $100,000 sitting around so you're going to have to sell them both at the same time so you can't even take advantage of the momentum. Since this is a trade where you'll be lucky to make $5, what do you really gain by playing it? If GOOG drops $50, your calls will be as worthless as the ones you sold and again, a loss. The best you can hope for is a flat-line where the Oct calls expire worthless and then hope you hold more than $6 in value on your longs so, essentially, you are playing GOOG to be flat – in which case you could have just sold the Oct $725 puts for $7.50 and the $780 calls for $8.50 so you collect $16 and any move GOOG makes under $41 is a win. You could do that and just roll the losing side and it's probably a better percentage play overall.
And what Wappler said.
Interesting idea for playing GOOG:
So now you've paid $41.60 and $755 flat nets you $70 (up 68%) and you do better than even on anything between about $725 and $785 and, of course, with spreads like this, you have a very good chance of retaining 50% of value on the losing side and that would be $52.50 (up 26%).
It's the kind of trade you run in a hedge fund, looking to make a quick 10% but should be interesting to watch how it works, maybe we can use it on something else after a few dry runs.