Up 1,000 Points Weekly Wrap-Up
by Phil - October 31st, 2008 11:22 pm
Well, this was certainly better than last week!
In last weekend’s wrap-up we noted the market could go either way and, after a poor start on Monday, we really pulled it together and ended up tacking on (officially) 947 Dow points (11.2%) – most of them (890) coming on Tuesday! The "good" week did not quite save us from a terrible month where the MSCI World Index fell 19.1%, Emerging Markets Fell 27%, the S&P dropped 17% and the CRB fell 22%. Even gold dropped 18.5%, the biggest monthly loss since 1983 so we need to keep this week’s run in perspective until we see some real follow-through as we enter the traditional Santa Clause Rally season.
Yes the markets were oversold but the question now is – how oversold as there is very clear evidence of declining global growth which has popped the commodity bubble but also popped the Chicago PMI all the way down to 37.8 for October (down from 56.7 in September) and our GDP turned negative (-0.3%) for the first time since poppa Bush held office in 1991 so congrats to GW for getting this one in just under the wire! Sadly, we are not alone in our suffering as the global picture is falling apart along with Japan (who has led the downturn) and the US (see chart below):
Even worse than the GDP data, is the Real Per Capita Personal Income which fell an amazing 9.6% in Q3, the largest decline since 1949. This led to a decline in the PCE of 0.3%, news which the markets shook off on Friday and my concern is that the markets were poised to paint a gain on Friday and nothing was going to stop them but what will a weekend of reflection bring?
Last weekend, we didn’t get any major government action to prop up the markets and the futures were limit down in the US on Monday morning. We recovered nicely from that and finished the day down "just" 200 points and we spend the rest of the week trying to get back to the highs of October 21st but still less than halfway back to where we opened the month on most indexes. I pointed out in Monday morning’s post that the Nikkei was clearly oversold, trading at just 0.89 times book value and the Nikkei led us…
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DiggCarnival’s dividend suspension sends option volatility raging and shares to five-year low
by Option Review - October 31st, 2008 2:01 pm
Today’s tickers: CCL, AXP, WFC, HUM, PG, BUD, HIG & PRU
CCL – Carnival Corp. – It’s a pretty nasty squall economically speaking and cruise-line companies must be wondering about the affordability of winter cruises as well as the prospects for 2009. Today Miami-based Carnival announced the suspension of its first quarter dividend, which will save the company $1.3 billion. However, the statement highlighted the desperate straits ahead that will require the skilful and precise captainship of management to avoid the rocks. It’s hard to raise cash at present. Consumers are staying at home and one would imagine that luxury items such as cruise trips could easily be foregone. Investors punished Carnival despite its strong cash flow position for today’s prudence and sent shares lower by 16.6% to $24.00. Option investors were quick to pounce and chose to secure selling rights at the 22.5, 25.0 and 27.5 lines in November, while an equally large block of 1,195 contracts was bought at the December 22.5 line where only 263 positions existed ahead of today’s reading. Greater uncertainty surrounding the outlook gave option traders reason to boost implied volatility by 27% to 94% today as shares reached the lowest value in five years. It’s not all doom and gloom though as the well out-of-the-money calls are still trading to investors expecting a rebound. Today buyers lapped up calls at the 40.0 strike in December.
AXP – American Express – Shares in credit card lender Amex have been languishing at low levels lately and are rallying a small amount in response to a 10% reduction in workforce yesterday. Option traders today sense that a weaker share price might be ahead as they deploy defensive put option positions in the January contract. Amex has reported diminishing profits in the face of increasingly difficult conditions for consumers to repay credit card debt. There now faces the real possibility that credit card portfolio underperformance might deliver a ratings downgrade and push up the cost of wholesale funding at the company and further erode profitability. In the December contract, with shares trading at $27.75, investors bought the 17.5/25 put spread at a net premium of 2.40. That transaction in about 10,000 contracts involves the sale of the 17.5 strike and simultaneous purchase of the higher 25 strike. The maximum profit on the trade is 5.1 should shares fall to the lower strike by expiration.
WFC – Wells…
Spooky Friday Morning
by Phil - October 31st, 2008 7:55 am
I’m no longer apologizing for being skeptical into the rallies.
Yesterday was tough as I made a series of bearish calls in the afternoon as the Dow hit 9,200 which were ingenious at 3:45 as the Dow broke 9,050 but had us very nervous as the Dow went right back to 9,200 just 10 minutes later. Still, we held fast as I have my overwhelming concern that the weekend will arrive as scheduled this afternoon and we have a tough data day today and, most importantly – we STILL have not made our levels. A buy program or a sell program can only move the market so far until it runs into real resistance and that’s what we take full advantage of with our intra-day trading.
David Fry summed up yesterday’s action perfectly: "Yep, it was that kind of day. Was there any good news to account for an up day? Absolutely nothing, unless you think the GDP data falling a little less than expected was something to place bets on. Nope, the market is just oversold and this is the end-of-month prop job mutual funds and a few others need… So desperate are bullish tape painters they ignored San Francisco Fed President Janet Yellen’s statement that “…recent economic data is deeply worrisome and the economy is likely to contract significantly in the fourth quarter.” Sure, that’s really bullish!" I also strongly recommend linking to David’s column as he has a great series of charts that give a nice overview of where we are at the moment.
We have some very scary Personal Income and Spending data hitting us at 8:30 followed by the downwardly creepy Chicago PMI at 9:45 and the gloomy Michigan Consumer Sentiment for October, which may be revised below 50, more than 10% down from September. Also sending chills down my spine was a WSJ story on the conference of the Turnaround Management Association, who are expecting a banner year in ’09. "We’re all salivating. Wait. Don’t say that," said one bankruptcy lawyer. "This is clearly the most devastating economic situation I’ve seen in my 40 years. I would say there is some distress even among the distressed-debt community," said Henry Miller, co-founder of the turnaround firm Miller Buckfire. Revenue is up by about one-third this year, he said. "Many of the patients are getting to us too late, I fear." I like that he thinks of himself…
Spreading the Wealth Around
by ilene - October 31st, 2008 1:28 am
With elections coming up and differences in economic philosophies being highlighted by recent events, the words "spreading the wealth around" sound like the beginning of a political post. Except this topic goes well beyond political ideology and into basic core beliefs about human beings.
So, here are a few excerpts from some recent articles I stumbled across at a website called Philosophy of Genetics by Will Frehley.
Spreading the wealth around
It’s human nature to believe you’re responsible for your own success. So successful people resist any sort of government action that appears to resemble "redistribution of wealth" in the form of imposing higher taxes on the wealthy and providing subsidies and social programs for the poor.
If it could be proved with certainty that people with higher drive, energy, passion, charisma and intelligence are born that way, then most people would probably agree that government redistribution of wealth was fair. Having these characteristics would often (although not always) lead to success, in the form of higher pay and social status.
However, most people don’t believe there are innate differences in talent. For the most part, people think we’re all responsible for our own success…
But in reality, we’re not only born with innate ways of understanding the world (and our strong belief in "free will" is one of those), but we also differ amongst each other…
…Ironically, we humans may never understand ourselves, if our capacity for self-understanding is itself innate (and inaccurate). Our common sense and intuition evolved not for truth and rational understanding, but for survival of the species. [My emphasis.] That’s why there’s no moral outrage at the genetic inequity, because we’re not designed to consider it.
Full article here.
Economics and Genetics
Where do our choices come from?
I’d tell you, but you’d probably disagree. Most people are not hardwired to understand themselves. Although we’re really genetic beings reacting to other genetic beings, we don’t see it that way. We think of ourselves as rational actors, acting in response to other rational actors.
Most people think we have freedom of choice, to do anything we want. The problem is, we don’t (and can’t) chose our “wants” themselves. They are part of who we are, as genetic beings. Our genes are not something we have. They are something we are…
As with quantum physics, it seems impossible to step outside the system to…
Dave’s Daily
by David Fry - October 31st, 2008 12:13 am
MARKET COMMENT
October 30, 2008. Courtesy of Dave Fry, ETF Digest.
Yep, it was that kind of day. Was there any good news to account for an up day? Absolutely nothing, unless you think the GDP data falling a little less than expected was something to place bets on.
Nope, the market is just oversold and this is the end-of-month prop job mutual funds and a few others need.
I like it since it reduces oversold levels and risks. It’s what we’ve been expecting and why we’re in cash.
What’s next? An election. Despite negative investor sentiment [just my guess so everyone calm down] toward an Obama win which seems likely, a clear win by anyone could launch a further rally and a brief honeymoon period.
So desperate are bullish tape painters they ignored San Francisco Fed President Janet Yellen’s statement that “…recent economic data is deeply worrisome and the economy is likely to contract significantly in the fourth quarter.” Sure, that’s really bullish!
I was day-trading most of the day and got pretty bored with what was light volume action until 3 PM when some bears emerged from their lairs and slammed indexes hard. A battle royal ensued between bulls and bears until the final minutes when bears were vanquished. “Stick Save” bulls!
A special thanks to subscriber and blog reader David Hurwitz who tries diligently to get me “correct” volume and breadth data since Yahoo/Finance data is usually off. Today for instance they have advance/decline data flip-flopped. Anyway Dave is pictured below and his important data follows.
Something to consider as a possibility is to be long TIPs given the 5-year issue is yielding more than the conventional treasury of the same maturity. At the same time you may wish to short the treasury security on the assumption that future inflation is baked-in to future bond prices [lower] given large supply issuance. Further, the treasury may be loathe to issue TIP securities given their understanding of future inflation prospects based on current inflationary policies designed to rescue the economy.
iShares TIP which has a maturity duration…
Behold…The Decabox
by ilene - October 30th, 2008 3:56 pm
This is fun, from Howard Lindzon’s site.
Behold…The Decabox!
Nobody does it better than the people making the Daily Show:
Genius.
Ridiculous Numbers
by ilene - October 30th, 2008 3:34 pm
GDP Negative as Consumer Spending Falls 3.1%
Courtesy of our friend Mish, at Global Economic Trend Analysis
The US economy is sinking fast. We did no need to see the GDP numbers to know that but the figures are out. Here are the Third Quarter 2008 Advance GDP Numbers.
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.
The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.
Most of the major components contributed to the downturn in real GDP growth in the third quarter. The largest contributors were a sharp downturn in PCE for nondurable goods, a smaller decrease in imports, a larger decrease in PCE for durable goods, and a deceleration in exports. Notable offsets were an upturn in inventory investment and an acceleration in federal government spending.
Final sales of computers contributed 0.06 percentage point to the third-quarter change in real GDP after contributing 0.17 percentage point to the second-quarter change. Motor vehicle output contributed 0.09 percentage point to the third-quarter change in real GDP after subtracting 1.01 percentage points from the second-quarter change.
Ridiculous Numbers
Notice how an "acceleration in federal government spending" made a positive contribution to GDP. All government spending, no matter how wasteful or unproductive, is assumed to provide a positive contribution to output.
Motor vehicles adding to GDP is absurd, as is final sales of computers. Computers are hedonically adjusted (all finished items are but computers are the worst offenders). For those not familiar with the term here is how it works. Computer are getting more powerful every year and prices are dropping as well. For example a computer today sells for $500 that would have cost $10,000 ten years…
Greasing the Slide
by ilene - October 30th, 2008 2:39 pm
Courtesy of David Gordon, The Deipnosophist
Greasing the Slide
Regular readers know my regard for James Surowiecki; every now and then, though, he really creases the net. Such as the New Yorker essay below (link embedded); in particular, his penultimate and final paragraphs.
-- David M Gordon / The Deipnosophist
NewYorker
The Financial Page
November 3, 2008
Greasing the Slide
by James Surowiecki
“Death by a thousand cuts.” “Fire-sale liquidation.” “A vortex of selling.” No matter how people described the market collapse that hit a month ago, the message was the same: it felt like there was nowhere to go but down, and it felt like we’d be going there forever. (Given last week’s dip, it still does.) Beginning on September 29th, the U.S. stock market fell on nine of the next ten trading days, plummeting twenty-six per cent; then, after a short, sharp rally, it lost ten per cent more in less than two days. Explanations for the crash often focussed on the hysteria and panic that periodically seem to seize investors. But the madness of crowds wasn’t the whole story. In a healthy market, there are countercyclical forces—mechanisms and institutions that go against the general market trend and encourage diversity of thinking—that make it harder for feedback loops and vicious cycles to take hold. Lately, though, many of these institutions and mechanisms have become procyclical: instead of countering trends, they amplify them.
Take, for instance, the credit rating agencies, which investors rely upon for evaluations of companies’ creditworthiness and general financial well-being. They are supposed to be a kind of early-warning system for investors, evaluating the health of companies in a way that’s insulated from prevailing market trends. Yet many studies have found that rating agencies are more likely to upgrade companies when investors are bullish and downgrade them when investors are bearish. This makes rating changes less useful to investors and also means that they push the market in the direction it’s already going. On October 9th, Standard & Poor’s announced, late in the day, that it was considering downgrading G.M. That helped an already shaky market fall four per cent in the final hour of trading.
Wall Street analysts have also been good at pouring gasoline on a raging fire. Analysts’ ability to take the long view and scrutinize company fundamentals should make them a counterweight whenever…
Insurer sees more covered calls in play on rosy comments from CEO
by Option Review - October 30th, 2008 1:53 pm
Today’s tickers: ACE, SPLS, YHOO, EMC, OI & GS
ACE – ACE Limited – Comments out of the CEO’s mouth on Wednesday helped push shares sharply higher at multi-line insurer Ace. Mr. Greenberg noted that the soft patch in his company’s business line was more than likely over and that the government bailout program had removed excess industry capacity. As such he’s insisting that business managers at the company simply say “no” to clients’ bargain requests. As shares rose, we noted some sizeable action on December calls, which were sold by a customer. Today we’re picking up more of the same this time at a higher strike price. With shares at $57.00 an investor is likely buying the stock and writing calls against it at the 65.0 strike at a premium of 1.30. Yesterday’s surge on heavy volume took shares from $47 to $58 and the 60 strike call was written. An optimistic buy-write strategy would make a total return on the combination of 16.3% if the share price reached the 65.0 strike price and confirmed Mr. Greenberg’s optimistic assessment of the business operating environment. Implied volatility is running at around 47% at that strike. If the share price does achieve its gain to where the calls were sold, the investor is prepared to deliver the stock to the call buyer.
SPLS – Staples Inc. – The price action of shares at Staples does look like a nice bottom formation and today’s confirmation from the company that it will meet analysts’ expectations have added to the rosy picture as shares jump 13.7% to $18.13. The company is also discussing the integration of its Dutch acquisition at a meeting in Boston today. We’re watching options in Staples as one of the most actively traded contracts today where morning volume surpassed 41,000 lots. That compares to existing open interest of 178, 684. Most actively traded today are calls at the December 20 line and puts at the 17.5 line where volume of 9,000 each side smacks of a strangle. Implied volatility has come in from 85% to 75% recently and today’s activity could indicate more volatility selling with the investor making the statement that shares will remain within the strangle range. If they do the investor gets to pocket the combined 3.0 premium. That gives the seller $3.00 above and below the range before being proved wrong on the strategy.
YHOO –…
Economy Contracts
by ilene - October 30th, 2008 1:16 pm
Tim Iacono reports on the latest GDP numbers:
Economy contracts, spending turns negative
Courtesy of Tim Iacono, at The Mess That Greenspan Made
The Commerce Department reported that real gross domestic product fell at an annualized rate of 0.3 percent in the third quarter, driven by a sharp slowdown in consumer spending.
The broadest measure of economic activity in the U.S. was down significantly from a second quarter growth rate of 2.8 percent and real growth has been negative in two of the last four quarters.
Overall economic growth during the last year remains positive at 0.8 percent, however, this was aided by the $150+ billion economic stimulus plan earlier in the year.
Consumer confidence has recently fallen to record lows and this is evident in the personal consumption component which posted its first decline since 1990 and its biggest decline in 28 years, dropping at an annualized rate of 3.1 percent.
Bloomberg reported spending on non-durable goods, items such as food and clothing, fell at an annualized rate of 6.4 percent, the sharpest decline since 1950.
As shown below, it was the decline in consumer spending that drove overall growth into negative territory during the third quarter as government spending and net exports both made large positive contributions and private investment was only slightly negative.
Note that this is the "advance" estimate for GDP, the first of three readings for the third quarter, to be followed by the "preliminary" estimate next month and the "final" estimate in December. There are often large revisions between the "advance" and "preliminary" readings as incoming data replace sometimes unreliable proxies for some components.
While the news for the third quarter was bad, the fourth quarter is shaping up to be much worse with initial estimates for economic growth between minus 2 and minus 4 percent with a further slowdown in consumer spending expected.
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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
(