On Wednesday, with the market recently completing a 500 point dow rally from Friday, I received a call from a friend who asked if the coast was clear to get back into the market. I explained to him that it was absolutely not a time to buy in, and interestingly enough we had a 450 point decline in the following 2 days. As I continue to repeat time and time again, the macroeconomic risks are absolutely incredible in our current environment. I simply cannot see how we're going to get through this mess without a HUGE government bailout, and even then, I still don't see how catastrophe won't ensue when the dollar gets tossed out with the trash.
Ambak, MBIA are only a sideshow here. The government states that they want to help facilitate housing price stability, by raising GSE caps and dropping interest rates. I'm going to say this now - they CANNOT and will not be able to achieve that goal. Monthly housing costs even at today's reduced prices are simply not affordable to 85% of Americans who work 40 hours a week and make between $15 to $30 per hour. And even in cases where it may be affordable, it simply doesn't make sense to devote such a large percentage of monthly income to housing payments. Even rental costs are pushing the average individual to the limit. No matter how we slice and dice the numbers, they just don't add up. Over the last 7 years, housing prices have more than tripled, or gone up 200%+, in overheated areas. Monthly mortgage payments have therefore risen over 250%. To put this into perspective - my monthly salary has risen only about 25% in the last 5 years. Never in history has housing required such a large chunk of our monthly income.
The fallout from this situation? Foreclosures and defaults will continue to roll in. Therefore rescuing ABK and MBIA by providing a few billion dollars of liquidity is not going to work. Warren Buffett himself is unwilling to touch mortgage related issues. He recently referred to mortgage assets as "toxic paper". Quite frankly, it's only a matter of time before Moody's or S+P cuts ABK and MBI's ratings. But to be honest, their demise may only be foreshadowings of even greater disasters to come. Hundreds of billions in writedowns are looming. If even high-grade AAA rated TAX FREE MUNICIPAL BONDS (close to the best of the best) have not been able to find a market in this environment (as in the Auction Rate Securities Failures), what are we to make of the trillions held in mortgage backed assets?
Friday, February 29, 2008
Doing taxes as a Trader
Is definitely more work - spent the last 2 days working on my Schedule D. Looks like the market is as volatile as ever. I think we finally got enough bad news to drag the market lower this morning. For a while it felt like bad news = good news for the market! Also, it's important to note that usually, prices move enough in a direction to cause everyone's sentiment to turn, then it finally goes the other way. It tends to frustrate the masses emotionally, and that's why investing/trading is so difficult.
Tuesday, February 26, 2008
Tuesday Feb 26th, After Market Close
We have another rally today in the markets sparked initially by IBM's buyback announcement early in the AM. I was able to do pretty well with a large long position in BIDU at 231, closed out at various prices above 239. My final sale was actually 241.62, which I am happy with, as one of my goals this year is to truly attempt to capture a larger portion of a move. Near term, the market SEEMS overbought, especially given the current environment, but I would not be surprised to see the market consolidate the recent gains tomorrow by trading fairly flat, rather than fall or rise precipitously. Tomorrow we have durable goods at 8:30 am ET, new home sales at 10:00 am.
See you tomorrow
See you tomorrow
Intraday Reverse Head + Shoulders BIDU?
The chart for Bidu this morning is looking very interesting - s
Monday, February 25, 2008
Bond Insurer Rally and the Housing Picture
We ended the day with another rally off positive news for the bond insurers ABK and MBI. S+P reaffirmed their AAA ratings, allowing them to stay in business, and temporarily aiding the value of bank-held mortgage assets. After Cramer made his statement a few weeks ago on the importance of the bond insurers to the overall health of the market, any news on the group has tended to cause a large market reaction.
My personal opinion is that all of this remains a side show, but we must continue to respect the market, and the majority of participants who also place credence on such news. The fact that the market is rallying off any signs of improvement in the bond insurer picture shows that we've been pricing in the worst. The next piece of news will most likely be the much talked about $3 billion bailout for ABK - and I also expect another rally when details of this deal hits the wires. In addition, will Moody's have something else to say about the insurers this week as well?
The housing market remains the most important unknown factor in the entire equation. More importantly, the default rate amongst mortgages will be watched closely. As more defaults come in, the credit ratings of our beloved bond insurers will continue to be threatened. Most don't believe that we are anywhere near the end here. The story remains that if housing prices don't stabilize, more and more homeowners will be worn out and forced to short sell or simply walk away. I personally think that housing prices will need to reach a point where the monthly cost of a 30 year fixed mortgage with 10-20% down is similar to the cost of renting for the same property (after tax benefits are included). The rental market is a much more fluid and dynamic environment which more accurately depicts what is truly affordable to the general public for housing. In overheated markets, there continues to exist a large gap between rent and mortage costs.
Wikipedia - US average PRETAX household income here:
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
It appears low, but the median household income is $48,000, the top 20% > $88,000 (where most homeownership lies), and the top 3% = $155,000.
The median home sales price in 2007 is around 300k.
Another wildcard is the economy. In periods of recession, rents actually may go down, as individual housing budgets contract. In addition, we must pay attention to interest rate trends, as well as the availability of a 20-30% downpayment from homebuyers. The current credit crisis has drastically cut the lending environment from which buyers can qualify, basically leaving a gaping hole between would be buyers and sellers.
So what's next for the market? I continue to have a negative bias based on macroeconomic risks, as positive catalysts will be fewer and farther between as this year moves on. If and when the market breaks lower, I suspect we may not actually need a major piece of news, it will occur as a technical plunge. It's difficult to even call the market oversold at this point either. The outlook for even great companies such as GOOG or AAPL has noticeably deteriorated after their recent earnings reports. However it's important to trade with the market, and I suspect we may have some "collateral" upward movement in the market for now. Tomorrow we have the Core PPI and Consumer Confidence numbers. I think with last weeks' reaction to the CPI we will need to pay closer attention to these numbers. Remember that CPI-PPI = corporate profit margins. See you tomorrow!
My personal opinion is that all of this remains a side show, but we must continue to respect the market, and the majority of participants who also place credence on such news. The fact that the market is rallying off any signs of improvement in the bond insurer picture shows that we've been pricing in the worst. The next piece of news will most likely be the much talked about $3 billion bailout for ABK - and I also expect another rally when details of this deal hits the wires. In addition, will Moody's have something else to say about the insurers this week as well?
The housing market remains the most important unknown factor in the entire equation. More importantly, the default rate amongst mortgages will be watched closely. As more defaults come in, the credit ratings of our beloved bond insurers will continue to be threatened. Most don't believe that we are anywhere near the end here. The story remains that if housing prices don't stabilize, more and more homeowners will be worn out and forced to short sell or simply walk away. I personally think that housing prices will need to reach a point where the monthly cost of a 30 year fixed mortgage with 10-20% down is similar to the cost of renting for the same property (after tax benefits are included). The rental market is a much more fluid and dynamic environment which more accurately depicts what is truly affordable to the general public for housing. In overheated markets, there continues to exist a large gap between rent and mortage costs.
Wikipedia - US average PRETAX household income here:
http://en.wikipedia.org/wiki/Household_income_in_the_United_States
It appears low, but the median household income is $48,000, the top 20% > $88,000 (where most homeownership lies), and the top 3% = $155,000.
The median home sales price in 2007 is around 300k.
Another wildcard is the economy. In periods of recession, rents actually may go down, as individual housing budgets contract. In addition, we must pay attention to interest rate trends, as well as the availability of a 20-30% downpayment from homebuyers. The current credit crisis has drastically cut the lending environment from which buyers can qualify, basically leaving a gaping hole between would be buyers and sellers.
So what's next for the market? I continue to have a negative bias based on macroeconomic risks, as positive catalysts will be fewer and farther between as this year moves on. If and when the market breaks lower, I suspect we may not actually need a major piece of news, it will occur as a technical plunge. It's difficult to even call the market oversold at this point either. The outlook for even great companies such as GOOG or AAPL has noticeably deteriorated after their recent earnings reports. However it's important to trade with the market, and I suspect we may have some "collateral" upward movement in the market for now. Tomorrow we have the Core PPI and Consumer Confidence numbers. I think with last weeks' reaction to the CPI we will need to pay closer attention to these numbers. Remember that CPI-PPI = corporate profit margins. See you tomorrow!
Friday, February 22, 2008
Mortgage Rates and Auction Rate Securities
A lot of people have been pointing out that mortgage rates dipped to 5% after the rate cut and have now moved back into the 6%+ range. We recently had CPI numbers which showed inflation is running at over 4% year over year. Regardless of the Fed rate cuts, with inflation heading higher, it's difficult to imagine banks being willing to lend when the returns may not even match the inflation rate. The way the dollar is going, and with costs for food and energy rising as they are, it's doubtful that prices will stabilize anytime soon. We are due for more rate cuts at the next Fed meeting - (they are expected to cut another 50 bp). If rates go anywhere near 5% again, it's probably a good idea to take advantage of it ASAP. The economy and the financial environment is definitely changing for the US, and historically low interest rates may not be around much longer. It's important to remember that there was a point in time (in the 80's) when mortgage rates were 18%! Things were different back then, but it certainly illustrates the point that we've been living in a euphoric "goldilocks" economy for a while now.
Another big item on the headlines recently are the lack of a market for Auction Rate Securities (ARS). I think they are undergoing a fire sale and if you have cash around - like a lot of hedge funds, they are making a quick killing in this market. They are actually great investments, but the lack of liquidity is leading to some panic selling in secondary markets by owners who need their cash. Most of these are municipal bonds which are also TAX EXEMPT, and many are paying an extremely high interest rate at this time due to the illiquid market. I wish I had that much free cash around.
Another big item on the headlines recently are the lack of a market for Auction Rate Securities (ARS). I think they are undergoing a fire sale and if you have cash around - like a lot of hedge funds, they are making a quick killing in this market. They are actually great investments, but the lack of liquidity is leading to some panic selling in secondary markets by owners who need their cash. Most of these are municipal bonds which are also TAX EXEMPT, and many are paying an extremely high interest rate at this time due to the illiquid market. I wish I had that much free cash around.
Friday, Feb 22nd After Market Close
Nice rally on the Ambak bailout news at the end of the day. I somehow had a feeling the market would rally its way out of the mess again - I was short BIDU most of the day, and managed to capture most of the profits by covering before the runup. And so we escape again. We'll see how it all plays out next week - we've yet to see the market rally without "news" - so I think we're still heading lower in the near term.
A bond insurer bailout by the banks kinda resembles bucketing the water out of a leaky boat, at best a temporary reprieve. But no matter what your opinion may be, when it comes to trading it's important to respect both sides of the battle. See you next week!
A bond insurer bailout by the banks kinda resembles bucketing the water out of a leaky boat, at best a temporary reprieve. But no matter what your opinion may be, when it comes to trading it's important to respect both sides of the battle. See you next week!
Friday, Feb 22nd Morning Update
Something tells me that we aren't going to retest the lows - we're going to blow right through it. This market is far too complacent.
Thursday, February 21, 2008
Thursday, February 21st, After Market Close
The market sold off pretty nicely today and proceeded to erase yesterday's gains. A bad report from the Philly Fed index was a possible catalyst. RIMM was in play today after providing upside subscriber growth numbers, but was not able to make any headway given the market's malaise.
Some out of the money puts are probably a good bet right now. I'm considering buying some for AAPL, maybe the 110's.
VDSI was wiped out today after missing earnings. I went ahead and opened a long position at 11.39 at the end of the day. The company has heavy institutional and insider ownership, and this MAY finally be the bottom for this one. I've been watching this one for a long time and have been waiting for a buying opportunity like today. This is still considered knife catching, by the way and the risks are still high considering the selloff.
See you tomorrow!
Some out of the money puts are probably a good bet right now. I'm considering buying some for AAPL, maybe the 110's.
VDSI was wiped out today after missing earnings. I went ahead and opened a long position at 11.39 at the end of the day. The company has heavy institutional and insider ownership, and this MAY finally be the bottom for this one. I've been watching this one for a long time and have been waiting for a buying opportunity like today. This is still considered knife catching, by the way and the risks are still high considering the selloff.
See you tomorrow!
Wednesday, February 20, 2008
The Buy Side Thesis
It has been interesting to the resiliency in the face of all the current market turmoil. As I mentioned previously, although I'm generally bearish on the market, it's good exercise to consider the other side of the coin.
True buyers (excluding short sellers) must have a thesis for their position. In light of the subprime mortgage mess, the credit crunch, and the fact that most of the nations banks have now written down practically all earned income from the last 8 years, the market appears to be holding up well. The homebuilding sector has been paradoxically rallying hard for most of 2008.
Here are a list of reasons to buy here:
1. Interest rates are low and will most likely continue to head lower.
2. Therefore, cheap capital is available.
3. We ARE or WERE in the midst of a global economic boom, until last August apparently.
4. Recent blips in the economy are more a result of the credit crunch and perceived fear by lenders due to the subprime mess rather than actual deterioration in all other parts of the system.
5. Housing will stabilize as greedy speculators are flushed out
6. There's more to the economy than housing, and frozen lenders will hate to miss out on major lending profits - given the atmosphere of low interest rates and cheap capital.
7. Lenders will therefore start lending again, only this time with higher standards, leading to better quality paper.
8. IF we are still in the midst of a global boom, the financial sector on a forward basis is CHEAP.
9. In other words, we've "fooled" the fed into cutting rates and we're at the beginnings of another boom.
10. Many players are net short - more fuel for the coming fire.
True buyers (excluding short sellers) must have a thesis for their position. In light of the subprime mortgage mess, the credit crunch, and the fact that most of the nations banks have now written down practically all earned income from the last 8 years, the market appears to be holding up well. The homebuilding sector has been paradoxically rallying hard for most of 2008.
Here are a list of reasons to buy here:
1. Interest rates are low and will most likely continue to head lower.
2. Therefore, cheap capital is available.
3. We ARE or WERE in the midst of a global economic boom, until last August apparently.
4. Recent blips in the economy are more a result of the credit crunch and perceived fear by lenders due to the subprime mess rather than actual deterioration in all other parts of the system.
5. Housing will stabilize as greedy speculators are flushed out
6. There's more to the economy than housing, and frozen lenders will hate to miss out on major lending profits - given the atmosphere of low interest rates and cheap capital.
7. Lenders will therefore start lending again, only this time with higher standards, leading to better quality paper.
8. IF we are still in the midst of a global boom, the financial sector on a forward basis is CHEAP.
9. In other words, we've "fooled" the fed into cutting rates and we're at the beginnings of another boom.
10. Many players are net short - more fuel for the coming fire.
Tuesday, February 19, 2008
Tuesday, Feb 19th, After Market Close
Looks like the market finally succumbed by the end of the day. I was able to do pretty well with a large short position in BIDU, which I closed out at the end of the day. The nasdaq was underperforming the entire day.
Tomorrow morning we have the CPI report. If the numbers come in nicely, the market might find some support as it will continue to "allow" for more rate cuts by the Fed. However, even if the inflation numbers come in poorly, I don't expect a huge market reaction, as the Fed is currently more focused on the economy rather than inflation.
Overall, still can't find a good reason to buy anything here. Possible positive catalysts/support I can imagine are:
1. Announcement of major investment in the US financial system by sovereign wealth funds overseas.
2. Large short positions in general providing support during squeezes
3. A large merger deal from last year actually going through
4. Improvement in the housing market - large number of actual completed refinancings
Reasons for fear?
1. INSOLVENCY of any nature, and resulting direct government bailout announcements
2. Further write downs
3. continued economic deterioration as evidenced by data
Bonds have really sold off lately - but the question remains whether or not this is merely a temporary reprieve in sentiment, as we prepare for further downside in the equities markets.
Tomorrow morning we have the CPI report. If the numbers come in nicely, the market might find some support as it will continue to "allow" for more rate cuts by the Fed. However, even if the inflation numbers come in poorly, I don't expect a huge market reaction, as the Fed is currently more focused on the economy rather than inflation.
Overall, still can't find a good reason to buy anything here. Possible positive catalysts/support I can imagine are:
1. Announcement of major investment in the US financial system by sovereign wealth funds overseas.
2. Large short positions in general providing support during squeezes
3. A large merger deal from last year actually going through
4. Improvement in the housing market - large number of actual completed refinancings
Reasons for fear?
1. INSOLVENCY of any nature, and resulting direct government bailout announcements
2. Further write downs
3. continued economic deterioration as evidenced by data
Bonds have really sold off lately - but the question remains whether or not this is merely a temporary reprieve in sentiment, as we prepare for further downside in the equities markets.
Where are the buyers coming from?
In the midst of all the horrors plaguing the market, somehow we still manage to rally. This is a good time to truly examine all the catalysts driving the market higher or lower. I personally feel there is no where to go but down, but the most important thing to understand is that our personal opinions do not matter whatsoever. The market will go where it wants to go. I'll probably do some research on any possible positive catalysts coming in the near future later today.
Thursday, February 14, 2008
Trade Trade Trade
I apologize again for the lack of posts. Most of my trading over the last few days has been comprised of countless minute by minute long/short scalps. BIDU and FSLR earnings definitely provided some excitement. When the market clearly has no trend, this is the only way to trade.
Overall, still quite bearish on the market in the near term. Just can't think of any catalysts to truly buy even for a short upswing. Warren Buffett offered to take over municipal bond portions of the monoline insurers portfolios. Well gee, if he were to take that, what would they be left with? Municipal bond insurance is the best paper they've got. The market rallied off the news, but lets get real here. The monolines are toast without a serious bailout of the bad mortgage paper.
A lot of people have been asking about investing in the "cheap" financials - all I can say is, avoid avoid avoid. When investing - there isn't any reason to join a crowd of unhappy people (most likely you'll get into a scuffle). Wait for an absolute meltdown before getting interested in these names. There seems to be no end to the bad news. Lets wait for something big to happen before getting in - for example a large US bank going bankrupt - causing a market meltdown.
Overall, still quite bearish on the market in the near term. Just can't think of any catalysts to truly buy even for a short upswing. Warren Buffett offered to take over municipal bond portions of the monoline insurers portfolios. Well gee, if he were to take that, what would they be left with? Municipal bond insurance is the best paper they've got. The market rallied off the news, but lets get real here. The monolines are toast without a serious bailout of the bad mortgage paper.
A lot of people have been asking about investing in the "cheap" financials - all I can say is, avoid avoid avoid. When investing - there isn't any reason to join a crowd of unhappy people (most likely you'll get into a scuffle). Wait for an absolute meltdown before getting interested in these names. There seems to be no end to the bad news. Lets wait for something big to happen before getting in - for example a large US bank going bankrupt - causing a market meltdown.
Sunday, February 10, 2008
Feb 11-15th, The Coming Week
From recent market action, I'm not too optimistic about the coming week. It's difficult to see how we'll avoid a retest of our panic lows of a couple weeks ago. We've got a number of economic reports this week, including retail sales/business inventories on Wednesday which will probably carry a lot of weight. We've also got industrial production, capacity utilization, and preliminary Michigan Sentiment numbers on Friday, not to mention options expiration. Personally, I would avoid "investing" in anything here until I see that the market can demonstrate strength in the midst of bad news. I would call it "market sensitivity". Currently we're in an ultra sensitive state - any bad news can lead to a precipitous drop. Eventually the market will become "insensitive" to further bad news, representing "priced-in" risk. So I'd pay close attention to economic data and resulting market reactions over the next few weeks. Once the market can shrug off bad data, or even move up, it's probably safer to assume that we've found a short term bottom. You can find a list of upcoming economic releases at most financial portals, including finance.yahoo.com.
Speaking of Yahoo - it will be interesting to see the market's reaction to YHOO's rejection of MSFT's $44 billion bid tomorrow morning.
Speaking of Yahoo - it will be interesting to see the market's reaction to YHOO's rejection of MSFT's $44 billion bid tomorrow morning.
Friday, February 8, 2008
Importance of a Balanced View
One of the most important lessons to learn in trading is to always maintain a balanced view. In the development of a trader, I think it's ok to be "bullish" about certain equities, but one must always remember to ask "what could go wrong with this picture?". If you've noticed, whenever I express a positive opinion on a certain stock, I always try to also provide the downside scenario. If, as an investor or a trader, you cannot come up with at least a few downside risks to each long investment you make, you're probably being overly optimistic, and should your investment lose value, you're more likely to hold onto it instead of respecting stop losses and admitting defeat. There simply is no such thing as a "sure thing" in the stock market. Buyers and sellers exist for this exact reason. In fact, stocks are bought and sold whenever the buyer believes that there is no further downside, and the seller believes there is no further upside. That means that when you buy a stock, the individual who sold it to you has a completely opposite opinion!
In the early days of my trading career, it was very easy to become attracted to "hype" and "news". I can't tell you how many "hot" stocks have turned into major trading losses. Nowadays, I generally approach both hype and news with extreme caution. In fact I prefer to avoid trading names with recent news, as it tends to throw a wrench into the natural movement of a stock. Whenever "news" is out, it's important to objectively analyze its contents, and ask difficult questions. Skepticism is a necessary trait for successful investors. I think it's common for many to wake up to CNBC in the morning to find the big premarket gainers, usually due to an "analyst upgrade", "positive preannouncement", "successful clinical trial", "exciting new product/alliance". It's important to realize that such announcements are enticing new investors to trade stocks in which they have no prior experience, usually a recipe for disaster.
I believe it's important for traders to understand and participate in short selling. Although it is true that short selling has its own types of inherent risk (unlimited losses, brokers may force cover, etc.), a trader who is able sell short as well as buy long maintains a more balanced perspective. Permabulls (those who only initiate buy orders) are always disappointed when they miss a market rally, or whenever a stock moves higher without them. They find it hard to understand that markets can move down beyond their expectations. Permabears (short sellers only), the opposite. A true trader, who is able to employ both tactics, sees opportunity in all market trends. The market inherently moves up and down, but having a one sided bias leads to a great deal of confusion and inflexible behavior which is never good for any trading account. Many professional traders actually reverse directions completely in the course of a trade (after buying a stock, selling it for a profit and going short, and vice versa.) Always strive to maintain a balanced perspective.
In the early days of my trading career, it was very easy to become attracted to "hype" and "news". I can't tell you how many "hot" stocks have turned into major trading losses. Nowadays, I generally approach both hype and news with extreme caution. In fact I prefer to avoid trading names with recent news, as it tends to throw a wrench into the natural movement of a stock. Whenever "news" is out, it's important to objectively analyze its contents, and ask difficult questions. Skepticism is a necessary trait for successful investors. I think it's common for many to wake up to CNBC in the morning to find the big premarket gainers, usually due to an "analyst upgrade", "positive preannouncement", "successful clinical trial", "exciting new product/alliance". It's important to realize that such announcements are enticing new investors to trade stocks in which they have no prior experience, usually a recipe for disaster.
I believe it's important for traders to understand and participate in short selling. Although it is true that short selling has its own types of inherent risk (unlimited losses, brokers may force cover, etc.), a trader who is able sell short as well as buy long maintains a more balanced perspective. Permabulls (those who only initiate buy orders) are always disappointed when they miss a market rally, or whenever a stock moves higher without them. They find it hard to understand that markets can move down beyond their expectations. Permabears (short sellers only), the opposite. A true trader, who is able to employ both tactics, sees opportunity in all market trends. The market inherently moves up and down, but having a one sided bias leads to a great deal of confusion and inflexible behavior which is never good for any trading account. Many professional traders actually reverse directions completely in the course of a trade (after buying a stock, selling it for a profit and going short, and vice versa.) Always strive to maintain a balanced perspective.
Friday, January 8th, Morning Update
Apologize for the lack of updates. Once again, work has been incredibly busy and I haven't been able to stay involved as much as I'd like.
Quick update - I sold ICE at 123 yesterday, from the purchase at 117. It went a lot higher, but thats the way the market goes. CME also rebounded as much at 60 points or so. I was able to catch some of the upside but mainly stayed on the sidelines, as I usually don't trade CME. Don't play with what you don't know.
Things are not looking to good right now. I continue to reiterate that we are running out of catalysts to prevent a retest of our recent lows. It seems persistent short covering is helping the market stay afloat, but how much longer will this environment hold? Yesterday was probably the most manic depressive day I've seen in the market in a while - green and red all day. Eventually one side will need to give. We'll see how it turns out. If you're a long term investor, there is absolutely no reason to get involved here. Next week is options expiration.
This morning, I sold BIDU short at 236.75, covered at 231. Thats probably going to be it for the day.
Quick update - I sold ICE at 123 yesterday, from the purchase at 117. It went a lot higher, but thats the way the market goes. CME also rebounded as much at 60 points or so. I was able to catch some of the upside but mainly stayed on the sidelines, as I usually don't trade CME. Don't play with what you don't know.
Things are not looking to good right now. I continue to reiterate that we are running out of catalysts to prevent a retest of our recent lows. It seems persistent short covering is helping the market stay afloat, but how much longer will this environment hold? Yesterday was probably the most manic depressive day I've seen in the market in a while - green and red all day. Eventually one side will need to give. We'll see how it turns out. If you're a long term investor, there is absolutely no reason to get involved here. Next week is options expiration.
This morning, I sold BIDU short at 236.75, covered at 231. Thats probably going to be it for the day.
Wednesday, February 6, 2008
CME down $103
It may seem like the end of the world for this stock, but percentage wise, about 17%, since it closed at $588 yesterday. As I mentioned previously, you can look at it as a $58.8 going to $48.5 or a $5.88 stock going to $4.85. When you see those numbers some of you will probably notice that you've seen many $5.88 stocks go to $4.85 fairly regularly. Whereas the $103 dollar drop in CME will probably get the headlines. This is the dangerous volatility I generally like to avoid in low priced stocks.
My personal opinion of CME's fiasco? I think even if they were asked to keep their clearing business separate, it would definitely lead to a decrease in overall margins over the long haul, but there are most likely a number of options available. And that's only if the DOJ letter even leads to a formal action, which could take years. Even in a worst case scenario, CME will probably need to sell their clearing business which could unlock a great deal of value.
As a side idea, I would look at a little known company named PNSN (Penson Worldwide), a pureplay clearing firm. They just beat earnings nicely and was up about 20% today. The CME news might just spike some interest in this long beaten down company.
My personal opinion of CME's fiasco? I think even if they were asked to keep their clearing business separate, it would definitely lead to a decrease in overall margins over the long haul, but there are most likely a number of options available. And that's only if the DOJ letter even leads to a formal action, which could take years. Even in a worst case scenario, CME will probably need to sell their clearing business which could unlock a great deal of value.
As a side idea, I would look at a little known company named PNSN (Penson Worldwide), a pureplay clearing firm. They just beat earnings nicely and was up about 20% today. The CME news might just spike some interest in this long beaten down company.
Tuesday, February 5, 2008
CME ICE NMX
Major drop in the exchanges due to news that there may be possible legal action to disallow the ownership of clearing houses within the exchange, due to blockage of competition. I think the exchanges are a buying opportunity here, as I doubt this will actually come to pass. They are down about 7-10% today, but caution is warranted, due to the size of the fall.
Update
I'm in a very small position ICE at 117.25
Update
I'm in a very small position ICE at 117.25
Tuesday, February 5th, After Market Close
The market fell fairly dramatically today due to the ISM number. I think as I've reiterated before, the market will continue to be ultra-sensitive to economic data. In addition, it's good to remember that fed rate cuts will not be there to save the market every time something like this occurs.
Some of my favorite stocks are now back in discussion after the plunge today:
ICE closed at 124.65. As explained previously - even companies marked for a buyout can continue falling if market conditions are bad. We have news out after hours that BHP Billiton is offering 3.4 shares for each share of Rio Tinto. Once again, I think the lack of a cash component in many buyout offers we're seeing is troubling. However, what else do we expect in this liquidity environment?
EJ is now at 17. Btw, they priced a secondary offering at $17 (7 million shares I believe). These shares will be available for trading "on or about february 6th" according to the prospectus. Most of the proceeds will be going to the company for continuing operations, which is a good thing. They will most likely have a blowout quarter, as they preannounced back late last year, but this is expected. For those of you who have had experience with secondaries, one common scenario is that a stock will fall in anticipation of the shares coming public, but in fact finds a bottom via this process and moves higher after the offering is complete. I am a bit disappointed that they had to price the secondary at $17, given that the stock had risen above $30 last year. Many investors find it bearish that they opt for a secondary at a time when their stock price is low, because it might reflect a "need" for the cash. (Why now, do they anticipate the stock to fall further?) Their balance sheet "looks" great after the secondary- they will have $384m in cash, or roughly $4/share. We'll see how this one plays out, but once again I am a long term bull on this one. I don't think the China real estate story is over yet, I think the bad publicity from the troubled US housing market might just be giving us an opportunity here.
MA closed at 206.8 after having risen as high as 222 after earnings. This one will continue to be hammered whenever we have bad economic data, as many investors view MA as highly dependent upon the strength of the economy.
Some of my favorite stocks are now back in discussion after the plunge today:
ICE closed at 124.65. As explained previously - even companies marked for a buyout can continue falling if market conditions are bad. We have news out after hours that BHP Billiton is offering 3.4 shares for each share of Rio Tinto. Once again, I think the lack of a cash component in many buyout offers we're seeing is troubling. However, what else do we expect in this liquidity environment?
EJ is now at 17. Btw, they priced a secondary offering at $17 (7 million shares I believe). These shares will be available for trading "on or about february 6th" according to the prospectus. Most of the proceeds will be going to the company for continuing operations, which is a good thing. They will most likely have a blowout quarter, as they preannounced back late last year, but this is expected. For those of you who have had experience with secondaries, one common scenario is that a stock will fall in anticipation of the shares coming public, but in fact finds a bottom via this process and moves higher after the offering is complete. I am a bit disappointed that they had to price the secondary at $17, given that the stock had risen above $30 last year. Many investors find it bearish that they opt for a secondary at a time when their stock price is low, because it might reflect a "need" for the cash. (Why now, do they anticipate the stock to fall further?) Their balance sheet "looks" great after the secondary- they will have $384m in cash, or roughly $4/share. We'll see how this one plays out, but once again I am a long term bull on this one. I don't think the China real estate story is over yet, I think the bad publicity from the troubled US housing market might just be giving us an opportunity here.
MA closed at 206.8 after having risen as high as 222 after earnings. This one will continue to be hammered whenever we have bad economic data, as many investors view MA as highly dependent upon the strength of the economy.
Tuesday February 5th, ISM bomb
Apologize for the lack of updates. Work was extremely busy yesterday.
As mentioned last friday - the market was in overbought territory, and we're seeing an expected pullback.
ISM was released earlier than expected this morning, and came in at 41, a much worse than expected reading. Very interesting reading - not sure if it's accurate, but the market is using it as a good excuse to take profits.
Another volatile day. Eventually the market will stabilize, but meanwhile traders are making the most of it.
GOOG is showing some relative strength today. It has dropped over 250 points in 1 month, and "looks" oversold. Don't know if the market can recover from the bad data, but if it does, GOOG could rally quite nicely.
As mentioned last friday - the market was in overbought territory, and we're seeing an expected pullback.
ISM was released earlier than expected this morning, and came in at 41, a much worse than expected reading. Very interesting reading - not sure if it's accurate, but the market is using it as a good excuse to take profits.
Another volatile day. Eventually the market will stabilize, but meanwhile traders are making the most of it.
GOOG is showing some relative strength today. It has dropped over 250 points in 1 month, and "looks" oversold. Don't know if the market can recover from the bad data, but if it does, GOOG could rally quite nicely.
Friday, February 1, 2008
Friday February 1st, After Market Close
Another wild day in the markets. After reversing my trades on BIDU and GOOG in the morning, I actually went long a large position in BIDU at 265 and sold 2 lots between 272 and 273 for a sizeable gain. I also have established an entry long position in EJ at $18.28. Overall this has been a great week for trading.
Near term - we need to understand that the market has had a strong rally this week. On the positive side, we've seen somewhat of a broad rotation out of technology (+3.7% on the Nasdaq 100) and into the financials (+4.8% on the S&P), as evidenced by the outperformance of the beaten down financial sector. Even with the gains in the NDX, looking at the leaders, you would wonder where the gains are coming from, as GOOG, AAPL, RIMM, AMZN remain fairly beaten down here. On the more bearish note, the gains in the S&P should be expected, given that interest rates fell 125 bp in less than 2 weeks. In fact, you might argue that they have not rallied as much as they should have. In addition, many names are now either brushing up against or have just rallied past their 50 day moving average, by spiking through the 5,10, and 20 DMA. From intraday low to high, the Dow has rallied over 1100 points. It looks as though the market could be due for a breather. I think many of the shorts have probably given up at this point and this may be the perfect short entry if this market is to continue downward.
Volume wise, we actually had some decent volume in the last 2 days in the financials.
Overall I would be careful here if I was long this market and have a short term trading perspective. In bear markets, if you look back in chart history, there are very sharp rallies but ultimately they fail. The environment remains treacherous and I would not be surprised to have some nasty headlines come out before the market opens on Monday. Be careful out there and have a great weekend. I'll probably be back with some thoughts if time permits.
Near term - we need to understand that the market has had a strong rally this week. On the positive side, we've seen somewhat of a broad rotation out of technology (+3.7% on the Nasdaq 100) and into the financials (+4.8% on the S&P), as evidenced by the outperformance of the beaten down financial sector. Even with the gains in the NDX, looking at the leaders, you would wonder where the gains are coming from, as GOOG, AAPL, RIMM, AMZN remain fairly beaten down here. On the more bearish note, the gains in the S&P should be expected, given that interest rates fell 125 bp in less than 2 weeks. In fact, you might argue that they have not rallied as much as they should have. In addition, many names are now either brushing up against or have just rallied past their 50 day moving average, by spiking through the 5,10, and 20 DMA. From intraday low to high, the Dow has rallied over 1100 points. It looks as though the market could be due for a breather. I think many of the shorts have probably given up at this point and this may be the perfect short entry if this market is to continue downward.
Volume wise, we actually had some decent volume in the last 2 days in the financials.
Overall I would be careful here if I was long this market and have a short term trading perspective. In bear markets, if you look back in chart history, there are very sharp rallies but ultimately they fail. The environment remains treacherous and I would not be surprised to have some nasty headlines come out before the market opens on Monday. Be careful out there and have a great weekend. I'll probably be back with some thoughts if time permits.
Riskiest trade here it goes
Long BIDU, Short GOOG - going to test the longshot. BIDU has a much lower float than GOOG and today is as good as any day for the thesis to play out. Will reverse this trade if price action doesn't play out...
This is probably the riskiest trade ever, because the "correct" thing to do is buy GOOG and sell BIDU.
On a correlated pair like BIDU and GOOG, it's extremely difficult for them to break out of the correlation. There are programs written to trade the pair and maintain the spread. But when it is broken, it can pay off big. I would say I've got less than a 10% chance of this working out, and it may be too obvious and too soon for this to play out today.
This is probably the riskiest trade ever, because the "correct" thing to do is buy GOOG and sell BIDU.
On a correlated pair like BIDU and GOOG, it's extremely difficult for them to break out of the correlation. There are programs written to trade the pair and maintain the spread. But when it is broken, it can pay off big. I would say I've got less than a 10% chance of this working out, and it may be too obvious and too soon for this to play out today.
Friday, February 1st, Amazing Morning Premarket
Absolutely incredible
1. MSFT's $31 buyout offer for YHOO - a 60% premium
2. CNBC states group of banks looking to bailout portfolio insurers.
3. Futures up massively
4. Jobs report comes and -17k vs 70k ouch - however prior was revised to 82k vs 18k
Funny how I mentioned BIDU vs GOOG last night, didn't expect the YHOO catalyst to take a step so quickly in that direction - BIDU was trading as high as $300 this morning +$20 on the buyout announcement, while GOOG traded in the $518 range, down greater than -$40 on missed earnings.
We've got another wild day coming up.
1. MSFT's $31 buyout offer for YHOO - a 60% premium
2. CNBC states group of banks looking to bailout portfolio insurers.
3. Futures up massively
4. Jobs report comes and -17k vs 70k ouch - however prior was revised to 82k vs 18k
Funny how I mentioned BIDU vs GOOG last night, didn't expect the YHOO catalyst to take a step so quickly in that direction - BIDU was trading as high as $300 this morning +$20 on the buyout announcement, while GOOG traded in the $518 range, down greater than -$40 on missed earnings.
We've got another wild day coming up.
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