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Weekly Recap: Options
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zigzagman		Posted: Saturday, November 22, 2008 8:15:54 PM
Rank: Advanced Member Joined: 8/14/2008 Posts: 314 Location: Memphis		A horrible experience this year for investors got even worse this week. The losses in the major indices were material and new lows were set in this bear market move. In fact, with the losses seen this week, the entirety of the gains recorded during the bull market move from the October 2002 low to the October 2007 high were wiped out at one point and the S&P fell to levels seen in 1997. Uncertainty continued to be the albatross around the market's neck as some key corporate developments (or lack thereof) and a number of economic releases fed the market's concerns about not knowing how deep and how long this economic slowdown will last. Among the more stunning developments this week was the collapse in Citigroup's (C) stock price. To be exact, Citigroup plummeted 60% to $3.77 per share, or nearly the equivalent of its ATM fee. Balance sheet concerns were at the heart of the sell-off as burgeoning reports of growing weakness in the commercial loan category fanned fears that Citigroup, and the financial sector, would need to raise a lot more capital to offset losses. Citigroup bore the brunt of the selling, though, as its management rankled investors Monday when it didn't indicate senior managers would forego bonuses this year, yet announced plans to cut up to 52,000 jobs from the bank's payroll. That was dumb corporate development #1. Dumb corporate development #2 was the CEOs of the major U.S. auto makers flying to Washington on private jets to beg Congress for billions of dollars of taxpayer bridge financing to avoid bankruptcy. That PR debacle went hand-in-hand with an inability of the executives to provide any clear sense of how they would restructure their businesses so that they wouldn't have to return to Washington to ask for more money six months down the road... or ever. Congress withheld any financial aid for the time being, saying it needs to see an actual turnaround plan from the auto makers before it can consider providing the auto makers a lifeline. Congress, reportedly, will take up the matter again in early December. Despite that fiscally prudent position by Congress, the fear of the multiplier effect of a bankrupt auto industry prevailed and compounded this week's selling interest. The Fed added to the market's concerns with sizable downward revisions to the central tendencies of its economic projections for next year. Specifically, it was noted in the minutes for the Oct. 28-29 FOMC meeting that the central tendencies for real GDP growth in 2009 were lowered from 2.0% to 2.8% to -0.2% to 1.1%. The projections for the unemployment rate, meanwhile, were raised from 5.3% to 5.8% to 7.1% to 7.6%. Fed officials felt real GDP would contract somewhat in the first half of 2009 and then rise in the second half of the year. Given recent economic and earnings reports, the market didn't embrace the forecast that conveniently anticipated the economy returning to growth mode in the second half of next year. Right now the prevailing economic view for the market is half empty because it hasn't found much in the hard economic data to think otherwise and this week's reports didn't help at all in that respect. Industrial production increased 1.3% in October, yet that move was regarded as aberrant since it reflected a snapback from the shutdowns related to hurricanes Gustav and Ike and given the market's understanding that the manufacturing sector is in retrenchment. On a related note, housing starts continued to decline, falling 4.5% in October from the prior month to a seasonally adjusted annual rate of 791,000 units. Building permits, meanwhile, declined 12% to a seasonally adjusted annual rate of 708,000. The starts number provides another weak data point for fourth quarter GDP calculations while the permits number portends continued weakness for housing starts in the months ahead. Separately, weekly initial jobless claims surged 27,000 to 542,000, ensuring that we'll see an 11th consecutive decline in nonfarm payrolls when the November data are released. Continuing claims jumped to 4.012 million from 3.903 million and reflected the difficulty of finding a new job. The good economic news this week was found in the inflation reports. Producer prices declined 2.8% in October while consumer prices declined 1.0%. That good news didn't hold much sway, though, as a nervous market was quick to consider it a by-product of the economic weakness and a precursor possibly to a deflationary environment. Good news was limited during the week. Hewlett-Packard (HPQ) provided some preliminary earnings guidance that was very reassuring, only it was soon discounted as being company-specific. However, the market, which was languishing Friday, did cheer the news that New York Fed President Timothy Geithner is going to be nominated by President-elect Obama to be Treasury Secretary. Geithner is highly regarded by the financial community and, given his current position at the Fed, is considered to have a very competent understanding of the issues gripping the capital markets. His appointment, then, was heralded as allowing for a smooth transition of what promises to be an extremely complex and important job in the immediate future. Prior to the news of Geithner's selection, the S&P was down approximately 1.0% in Friday's trading. It ended the day up 6.3%. The Friday rally took some sting out of a hurtful week. Of course, we've seen relief rallies before end up being short-lived. We don't know what the coming week brings, but taking things one week at a time is all the market appears capable of, or willing to do, at this point. That's understandable given the fluidity of developments in the political, financial and economic spheres. Yet, for those willing to consider a longer-term view, it's hard not to be struck by the valuation disparity between stocks and bonds. The earnings yield for the S&P 500, based on the latest available calendar 2009 consensus earnings estimate of $85.73 provided by Thomson Reuters, is 10.7% versus the 10-year Note yield of 3.20%! Of course, investors know that consensus number is going to come down, so there isn't any faith in its value. Even so, if one took a draconian approach and assumed the consensus estimate comes down 50%, the earnings yield based on Friday's closing price would still be 5.4%. The yield spread underscores the significant, long-term value stocks provide relative to bonds at current prices, but that matters little in emotion-charged markets where capital preservation is all anyone cares about. Not that anyone can blame an investor for favoring such an approach. There are so many big, worrisome issues that need confronting right now that it makes it exceedingly difficult to have anything other than the most cautious view. We will get through this period. We always do. How long it takes is the great unknown, so there isn't any strong conviction yet in buying stocks. Still, the widening valuation disparity between stocks and bonds supports the notion in our estimation that an attractive buying opportunity is availing itself for the investor with a long-term orientation (i.e., someone who thinks in increments of 5 years rather than 5 days or 5 minutes). --Patrick J. O'Hare, Briefing.com http://finance.yahoo.com/marketupdate/update www.stock-market-lessons.com
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zigzagman		Posted: Monday, December 01, 2008 1:05:16 AM
Rank: Advanced Member Joined: 8/14/2008 Posts: 314 Location: Memphis		Weekly Recap - Week ending 28-Nov-08 The Thanksgiving holiday made for a short week of trading, yet the major indices still made huge moves that no doubt left investors something added to be thankful for when the closing bell rang Friday. Government action was a key catalyst for this week's rally, as a rescue of Citigroup (C), the unveiling of President-elect Obama's economic team, and an $800 billion plan of attack for getting credit flowing smoothly again for consumers drove a continuation of buying efforts that perked up in the prior week after the S&P 500 hit a new low for this bear market and touched levels seen in 1997. The gains were extreme in many cases. The market itself soared 12%; however, it ended the week at a level that was 21% higher than the low seen only five sessions ago. The financial sector played a huge part in the big gains. Buyers returned to the beaten-down area after the government said it would provide a guarantee for the bulk of $306 billion of troubled assets identified at Citigroup. In turn, the government also said it would take an additional $20 billion of TARP funds and inject it into Citigroup by purchasing the bank's preferred stock. While there were other provisions for the relief the government provided to Citigroup, the main thrust for the market was (a) that Citigroup wasn't going to be allowed to fail (b) that Citigroup wouldn't have to sell core assets at distressed prices to raise capital (c) that common shareholders were spared in the rescue plan and (d) that it was reasonable to expect other financial companies would get similar guarantees if need be. On the heels of the Citigroup rescue, the Federal Reserve, in conjunction with the Treasury Department, announced Tuesday that it is creating a new $200 billion facility focused on getting liquidity flowing in key asset-backed securities markets that help facilitate auto loans, student loans, credit card loans and small business loans. In addition, another $600 billion will be allocated for the purchase of direct obligations of government-sponsored enterprises and mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae in an effort to help drive down mortgage rates and improve conditions in the housing market, which lies at the heart of the financial crisis. Word of the latter initiative did help drive down mortgage rates and improved the general tone of the market, as there was a measure of relief in the thought that the government is finally concentrating its attack in the right place. Even so, there remained an underlying sense of skepticism with respect to the stock market rally given that more bad economic news was heard and knowing that past rally attempts following government rescue plans have all failed. Furthermore, there was reason to question the sustainability of the rally considering the 10-year note yield reached its lowest level on record (2.91%) in the midst of it and that Libor rates went up across a number of time horizons, including the widely-watched overnight and 3-month rates. If there were strong conviction behind the idea that the latest initiatives were going to be successful in getting banks to lend willingly again, it seems that Libor rates should have come down. The wrinkle here in assessing the situation is that banks typically aim to bolster their cash holdings to meet increased year-end funding needs, so it is too presumptuous at this juncture to think the bump in Libor rates meant there wasn't confidence in the government's efforts to inject liquidity into the financial system. That could be the case, yet there won't be a better understanding of the matter until after the new year. For this week anyway, participants largely set aside such concerns and took advantage of deeply marked-down equity prices. To wit, Citigroup surged 111% this week while General Motors (GM) jumped 71%. Pulte Homes (PHM) and Goldman Sachs (GS), up 50% and 48%, respectively, were examples of other big gainers. From an economic standpoint, there wasn't much good news. Q3 GDP was revised down to -0.5% from -0.3%, durable orders slumped 6.2%, existing home sales fell 3.1%, new home sales dropped 5.3%, personal spending declined 1.0%, and weekly initial claims, while improved from the prior week, continued to register a reading above 500,000. The consumer confidence report, remarkably, showed an increase from the prior month as falling gas prices helped sentiment, yet the confidence reading remained at historically depressed levels. That the market managed to look past any worrisome news, including a well-orchestrated terrorist attack in Mumbai, India, suggested it had gotten to a point where prior selling efforts had been exhausted. The selling this month has been significant, too. Despite the big gains in this final week of trading, the market still declined 7.5% in November. The coming week is sure to bring more Christmas music... and a test of the newfound bullish bias. --Patrick J. O'Hare, Briefing.com http://finance.yahoo.com/marketupdate/update www.stock-market-lessons.com
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zigzagman		Posted: Sunday, December 07, 2008 3:54:42 PM
Rank: Advanced Member Joined: 8/14/2008 Posts: 314 Location: Memphis		Weekly Recap - Week ending 05-Dec-08 Ever find yourself acknowledging that you don't know whether to make heads or tails of something? That pretty much sums up the market these days. It is struggling for direction as it tries to assess whether the market falling as much as 53% from the all-time high reached in October 2007 has adequately discounted all of the lousy economic and earnings news we are now hearing and will continue to hear. And boy was there lousy economic news this week. The ISM Index, a survey of national manufacturing conditions, got things started Monday as it fell to 36.2% -- its worst reading since 1982 and well below the 50% mark that is seen as the dividing line between a manufacturing sector that is expanding or contracting. That was part of the reason why the market fell apart Monday, dropping 8.9% on the heels of a five-session winning streak that saw the S&P gain as much as 21% from its Nov. 21 low. Unfortunately, there were several other reasons for the selloff. First and foremost, the weakness was consistent with the market's inclination to sell into strength. Beyond that, selling efforts were greased by another bearish call on the financial sector's prospects from influential Oppenheimer & Co. analyst Meredith Whitney and speeches from Fed Chairman Bernanke and Treasury Secretary Paulson that suggested more could still be done to jumpstart the credit market and the broader economy. It is good to know, of course, that more can still be done, but with all that has been done thus far, it was a bit unsettling for the market to think that more still needed to be done. That thought alone provided a good enough excuse to sell into the prior week's strength. The NBER, meanwhile, finally made its official recession declaration, saying the recession in the U.S. began in December 2007. This was cited as a major reason for Monday's selloff, but that was giving the NBER headline more credit than it was due since the market reached the conclusion the economy is in recession a long time ago. Bernanke's observation that the Fed, with limited room to cut rates further, could follow an unconventional method of buying large quantities of long-term Treasuries to drive down rates, and pump money into the banking system, simply played into the market's concerns about the length and depth of the recession. At the same time, his remark fueled a run on Treasuries during the week that saw the yield on the benchmark 10-year note hit its lowest point (2.505%) in over 50 years. There was enough going on Monday to call it a week; fortunately for the bulls, there was a lot more trading action to come. Fortunately for the bulls, too, the trading action didn't necessarily follow form with a lot of the major headlines. Auto sales were dismal in November, highlighted by a 41% decline in GM's sales. The Beige Book reported an overall weakening in economic activity across all Federal Reserve districts. The ISM Services Index hit its lowest level on record. According to Thomson Reuters, November same-store sales declined 2.1%, which was the worst reading since it started collecting data in 2000. Continuing claims for jobless benefits reached a 26-year high. The percentage of loans in the foreclosure process (2.97%) hit a new record in the third quarter. Research In Motion (RIMM), Merck (MRK) and DuPont (DD) all issued earnings warnings. AT&T (T) announced plans to cut 12,000 jobs and several other companies said they would also be trimming their payrolls. The worst headline of the week, though, was Friday's news that nonfarm payrolls declined by 533,000 in November, the largest monthly decline since December 1974. Downward revisions to the October and September reports were also made, bringing the cumulative 3-month job loss to 1.28 million. The unemployment rate in November rose to 6.7% from 6.5%. As one might expect, the employment headlines pushed the major indices lower in early trading Friday. The Dow declined as many as 257 points; however, it soon reversed course and actually ended the day with a 259-point gain. The silver lining for some in the ugly jobs number was that it seemed to ensure there would be a very large stimulus package passed when President-elect Obama takes office in January. Remarkably, after suffering the huge loss Monday, the market traded in a pretty resilient manner the rest of the week. We won't say that it completely ignored bad news, but it certainly didn't get too bent out of shape by bad news. It wasn't all bad news this week either. General Electric (GE) reaffirmed its dividend is safe, mortgage applications soared 112% from the prior week, Black Friday sales were said to be stronger than expected, and a number of central banks, most notably the Bank of England and the European Central Bank, made aggressive cuts to their key lending rates. There was also a report that the U.S. government is exploring the idea of implementing an initiative that would help drive mortgage rates for conforming purchase loans as low as 4.50%. Speaking of driving, the CEOs of the Big Three automakers returned to Washington this week to continue their plea for government aid. There wasn't any closure on the matter, but given the November employment report, it strikes us as likely that Congress will ultimately agree to provide a lifeline of some sort. So, a week that began with a whimper -- or really a wail -- ended with a bang. Between Tuesday and Friday the S&P 500 increased 7.3%. The financial sector, after suffering a 17% decline on Monday, ended 0.8% higher than its closing level last Friday. The retail sector, meanwhile, tacked on 6.0% this week as oil prices slumped another 24% to $41.55 per barrel. Because of the large loss on Monday, the market still ended down for the week. Given the escalation of bad news during the week, though, it was a moral victory of sorts that the market recouped a significant portion of Monday's losses amid a lot of discouraging headlines. The feeling isn't quite like Harvard beating Yale 29-29, but it's close knowing how the week started and considering it's tough to imagine the body of news getting much worse in the coming week. http://finance.yahoo.com/marketupdate/update www.stock-market-lessons.com
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zigzagman		Posted: Sunday, December 14, 2008 3:44:24 PM
Rank: Advanced Member Joined: 8/14/2008 Posts: 314 Location: Memphis		Weekly Recap - Week ending 12-Dec-08 We concluded last week's recap with the thought that it was tough to imagine the body of news getting much worse this week. It's all a matter of perspective, but let's take a look at some of the major headlines from a week that had an ample amount of bad news. -- Media giant, Tribune Co., filed for Chapter 11 -- 3M, FedEx, Texas Instruments, Kroger, Nucor, and Electronic Arts issued earnings warnings (note the diversity of industry groups here) -- Dow Chemical said it will cut 11,000 jobs; Rio Tinto said it will cut 14,000 jobs; and Bank of America said it will cut up to 35,000 jobs over the next three years (many other companies also announced job cuts) -- Weekly initial jobless claims were 573,000 (a 26-year high) while continuing claims hit 4.43 million (also a 26-year high) -- Yields on the 1-month and 3-month T-bills both went negative for a time, indicating a willingness on some investors' part to pay the government for holding their money versus the other way around -- Illinois governor Rod Blagojevich was indicted amid several allegations that included a charge he tried to sell President-elect Obama's vacated Senate seat -- JPMorgan Chase CEO Jamie Dimon said November was a terrible trading month for the bank, that December hasn't been much better, and that it's possible U.S. home price could fall another 20% -- November retail sales declined 1.8% from October and were down 4.7% in the 3-month period ending in November from the 3-month period ending in August -- Former Nasdaq Chairman, Bernard Madoff, was arrested on allegations he orchestrated a $50 billion Ponzi scheme -- After being approved in the House, legislation that would have provided $14 billion in financial aid to the automakers was voted down in the Senate, raising the risk of imminent bankruptcy filings in the auto industry There were some positive developments, like Procter & Gamble reaffirming its earnings guidance and core producer prices moderating. Also, there was a positive buzz Monday over the news that President-elect Obama favors a massive stimulus package when he takes office that centers around improvement to the nation's infrastructure. Mr. Obama didn't provide a specific price tag, yet his acknowledgment that his aim is to jumpstart the economy now and worry about the budget deficit later suggests it will be a big number. Many economists think it will be at least $500 billion. Again, depending on one's perspective, this could be viewed either positively or negatively. Currency traders didn't seem all that enthused by it as the dollar index dropped 4.0% this week. The stock market, though, rallied on the news Monday before giving way to a roller coaster trade the rest of the week. The volatility was nothing new to this market, although there was a new pattern that emerged, which was that the stock market digested all of the bad news with a sense of aplomb. Despite the topsy-turvy trading action at times and a preponderance of headlines that skewed to the negative side of things, the S&P 500 ended the week modestly higher. It wasn't that long ago that this battery of bad news would have produced a week of material losses. In this respect, it can be argued convincingly that sentiment has improved. However, the piling up of bad fundamental news and the continued flight-to-safety trade in the Treasury market leaves plenty of room for second-guessing whether this newfound perspective can be maintained. The current take on things, though, is that bad news just isn't carrying the shock value that it used to. Consequently, the market's resilience in the midst of the bad news is attracting buyers who see this behavior as a sign of a bottoming process. Looking ahead, the Bush administration's decision on whether to use TARP funds to help the automakers and the success, or lack thereof, of GMAC's bid to become a bank holding company should get things started in the coming week, which will also produce the industrial production report (Monday), earnings reports from Best Buy and Goldman Sachs (Tuesday), the FOMC meeting (Tuesday), the OPEC meeting (Wednesday), General Electric's Annual Outlook Meeting (Wednesday), and a quarterly options expiration (Friday). http://finance.yahoo.com/marketupdate/update www.stock-market-lessons.com
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