Considering the consistent focus on the resiliency of the consumer, I was surprised that the NYT and WSJ both buried the report that consumer borrowing showed back-to-back declines for the first time in 13 years.
Borrowing declined at an annual rate of $648.8 million in November after falling $8.4 billion in October. This data should provide fodder for bulls and bears alike. Barry? Cody?
Position: None
Yesterday's U.S. dollar gains were marginally extended in Asia before reversing in Europe. Strong French industrial output figures and a strong ZEW survey from Germany reinforced the euro's technical support near $1.2030. Sterling has been aided by strong BRC sales figures. Meanwhile, the unwinding of short yen positions continues to be a key market factor.
The fundamental news flow from Europe has been constructive today, but the euro's recovery against the dollar is more a reflection of the underlying sentiment rather than data-driven. France reported a larger than expected 3.1% rise in November's industrial output, more than offsetting the riot/strike-induced 2.8% decline in October. The favorable news, though, should be at least partly mitigated by the realization that 1) the November rise was a correction from the depressed October levels and 2) the pace of industrial output in the October-November period was 0.2% below third-quarter levels, suggesting the risk that rather than accelerate, the French economy may have slowed in the fourth quarter after the third quarter's 0.7% expansion. A similar pattern holds for the stronger-than-expected rise in the ZEW survey. The economic sentiment rose to 71.0 (from 61.6), representing its highest reading since January 2004. The assessment of the current economic situation also improved for the seventh consecutive month. However, there is very little new news here. Clearly, with the stock market at multiyear highs and most other economic data suggesting the German recovery is broadening and deepening, a rise in investor confidence is hardly surprising.
News from the U.K. seems somewhat more important. The surge in December retail sales, reported by the BRC, comes on the heels on data pointing to some firming in the U.K. housing market and is impacting the market's expectations for the trajectory of monetary policy. BRC sales rose 2.6% in December, the largest increase in 18 months and more than double what the market had expected. The BOE meets this week, but no one really expected a change then. Some speculation had focused on next month as the March short-sterling futures contract rallied more than 25 basis points in December. The string of recent data has prompted a swing in the pendulum of market sentiment and in the past four sessions, the rate implied by the March short-sterling futures contract has risen by 12 bp.
The clarification from the People's Bank of China of the comments posted on its Web site last week about the diversification of reserves may help take some of the steam from the dollar bears, though one wouldn't know that from reading Martin Feldstein's editorial in today's Financial Times. Feldstein recapitulates well-worn arguments about the imbalances that require at least a 30% decline in the dollar and are currently being funded near-exclusively by foreign central banks, which many not continue. The PBOC indicated that it had no intention on diversifying its stock of existing reserves, but may consider options on new reserves. The dollar firmed slightly against the Chinese yuan today and the forwards firmed (the market reduced the amount of yuan appreciation being discounted).
Position: Long Swiss francs vs. euros and long Australian dollars vs. New Zealand dollars
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Marc Chandler |
| ...And George, Not to Worry -- U.S. Consumer Alive and Well |
1/10/2006 7:36 AM EST
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On Friday, the U.S. will report December retail sales. The headline figure is expected to rise 1% which would be its strongest showing since July, which means that retail sales would have risen 1.6% in fourth quarter after a 0.2% rise in the third quarter.
Retail sales accounts for about 40% of personal consumption, which in turn accounts for a little more than two-thirds of GDP.
A quick calculation of GDP that is as accurate as most of the more complicated models can be estimated by adding the index of hours worked to productivity. After all growth has to be some function of hours worked and output per hour. The index of hours worked rose 1.8% at an annualized rate in the fourth quarter. Even if productivity is a third of the 4.7% pace seen in the third quarter -- which would be well below expectations, fourth quarter GDP is still north of 3% -- for the 11th consecutive quarter.
Is this the proverbial wall of worry?
Position: None
Good morning and welcome back to the jungle. Oil and gold, gold and oil -- sure aren't getting the press they're used to ever since that whole "stock market" thing started rallying. Meanwhile, both are moving still. Just sayin'.
As far as the consumer debt stuff -- I hate to see it decline. Such declines are indeed what the bears have been looking for. I believe the primary tenet of the bearish case on the consumer rightly depends upon a reversal of and declining debt activity. And that's what the latest data indicate. I sure won't trade off of a two-piece data point like that, especially when the companies I follow are booming in biz like they are, but that data belong firmly in the "did we finally get to the point of as good as it can get" file.
Position: None
The tech sector has been the cheapest sector since I began writing for TheStreet.com one year ago. Today, technology is 6.6% undervalued, which is the least undervalued reading I have seen over the past 12 months. Consumer Durables are in second place at 0.4% undervalued.
The overvalued sectors are basic materials by 12.2%, energy by 7.5%, public utilities by 6.0%, consumer non-durables by 6.0% and capital goods by 5.5%. The other sectors are overvalued by less than 5.0%, consumer services by 1.4%, finance by 4.7%, health care by 0.6% and transportation by 3.4%.
With basic materials the most overvalued it is not surprising to see disappointing earnings from Alcoa (AA:NYSE) after the close on Monday, and the earnings warning from Phelps Dodge (PD:NYSE) this morning.
Position: None
Two weekly surveys of retail sales, the ICSC and the Johnson Redbook, showed a 3.1% and 3.5% weekly gain respectively in chain store sales. Both cited shoppers redeeming gift cards in the post-Christmas season, as the reason for the sales increase, which was up some 3.3% on year-over-year basis.
The bigger question is if stores have managed their inventories and sale promotions so that they get additional, and higher margin sales, from those coming in to redeem gift cards.
Position: none
My take on the consumer debt issue is that I couldn't care less, because I feel it is more important to focus on the performance of individual companies rather than what some subjectively constructed number supposedly says about an industry. At any point in time, no matter what is happening with the economy, there are certain things that consumers will still buy like crazy. The most important thing is not how big the overall pie is, but who is getting their first bite and/or taking share from someone else.
Position: None
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Jim Cramer |
| Downgrades galore! |
1/10/2006 9:51 AM EST
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More downgrades, this time UTX? I mean come on, these are buys
Position: none
United Health should be a place to go today. you have an upgrade, you have good things happening, and you are backstopped by the Morgan piece. I think this stock finishes up nicely today
Position: unh
Another one to buy, i spy the GS buyback putting in a nice bottom on that one. Another go to place...
Position: none
Take a look at the contracts Foster Wheeler got today.. refining upgrades, plastic plants.. this is the kind of stuff that is so right here, and the stock is still dirt cheap...
Position: fwlt
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Cody Willard |
| Angry Google-ites and Google-Haters |
1/10/2006 10:30 AM EST
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My emails from the Google column are a trip. The bulls are almost in disbelief that anyone would ever break rank and say sell some. The bears of course are angry that they thought it was Jim Jones handing out the Kool-Aid at $95 a share, $195, and $295 a share. I think it was Bill Cosby, if i may stretch my analogy. Point is -- wow, is this stock ever an emotional battlefield. Emotions are the enemy.
Position: Long GOOG
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Steven Smith |
| In-the Money Calls Not Always Best Call |
1/10/2006 10:39 AM EST
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Lenny Dykstra's article on in-the-money calls provides a good explanation of why he opts for options that have intrinsic value rather than using the more speculative out-of-the money "lottery tickets." But a back-of-the envelope analysis of his Symantec(SYMC) trade reveals he might have been better off buying a higher strike or shorter-term call.
Lenny says he bought the April in-the-money $15 calls for $3.40 and sold them at $4.20; a profit of 80 cents or a 23% return.
Based on the prices and dates he supplies I used a purchase date of 12/15 with the share price at $17.50 for calculating alternative approaches. To make an apples-to-apples comparison we assumed that in each the same number of option contracts was purchased, meaning we always "controlled" the same number of shares.
One could have bought the April at-the-money $17.50 calls at $1.40 and sold them at $2.60; a profit of $1.20 or an 85% return. Clearly better in both absolute dollars and percentage return. And the lower initial cost means less risk.
One could have bought the April out-of-the-money $20 calls at 65 cents and sold them for $1.15; a 55 cent profit or 84% return.
One could have looked at the nearer term Feb at-the-money $17.50 calls for $1.25 and sold them for $2.40, a $1.15 profit or 92% return.
The purpose of this of this exercise is not to prove one approach is better than another, especially when taking into account comfort levels, but to point out that it is worth going through some what if scenarios to see which option would produce the a greater return for less risk given a specific investment thesis or market outlook.
Position: none
In these down tapes the aggressive buybacks stand out like sore thumbs -- check out Sears (SHLD:Nasdaq) to go with Goldman Sachs (GS:NYSE). Some guys just know how to buy.
Position: SHLD
I'd noted in the New Trades column that I was holding calls in both Broadcom (BRCM:Nasdaq) and Marvell (MRVL:Nasdaq). I'm scaling out of about half of each of those, and adding Texas Instruments (TXN:NYSE) to the sheets.
Position: Net long BRCM, MRVL, TXN
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Robert Marcin |
| Homebuilding Trade Just Getting Started |
1/10/2006 10:46 AM EST
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The "soft-landing" trade in the homebuilders is just beginning. Another major builder, D.R. Horton (DHI:NYSE), announced solid fundamentals with strong revenues, profits and orders.
Man, did I take grief when I put this trade on, from Cramer (since retracted) to Kass, and every commentator in between! Everybody knew the housing market would implode and the stocks would plunge. Once again, the consensus was wrong.
As the large national builders report strong results in a flat housing market, the shares should rally big time. They should at least get to the p/e ratios of steel stocks, 10 times earnings. I am still kicking myself for missing that group! Take a look at those stocks! Homebuilders will look like those charts in the next few months.
With no more housing bubble and a friendly Fed, the stocks have nothing to hold them back. And they should respond very positively to the upcoming earnings reports.
The lesson here is not in the trade itself. Things could have gone differently. It's in the analysis and logic of the bet, something the bears did not get. Note that for future reference.
Position: Long homebuilders
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Barry Ritholtz |
| Consumer Spending and Housing Correlation |
1/10/2006 10:56 AM EST
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Historically, consumer credit has roughly tracked overall changes in house prices. In other words, the consumers' ability to borrow -- and then go out and spend -- has been highly correlated to real estate changes (and hence, the importance of interest rates).
In the attached chart, courtesy of Michael Panzner at Rabo Securities, the year-on-year changes in the U.S. Office of Federal Housing Enterprise Oversight's quarterly house price index is overlayed on a graph of consumer credit outstanding as a percentage of nominal GDP.
In a healthy environment, you see real (after inflation) wages rise, and consumer spending going higher along with that.
In a stimulus-driven environment like we've enjoyed for the past three years, instead of real wage growth, there's been a lot of consumer borrowing propelling their spending. I expect as the borrowing slows down, so too will the consumer spending.
I don't see how to put a positive spin on that.
Position: None
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Jim Cramer |
| Hysterical -- UARM |
1/10/2006 11:57 AM EST
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How hysterical is it that Under Armour (UARM:Nasdaq) keeps going up with these five neutrals. Maybe I have to play "Break the Analyst" again tonight! Hoo-hah!
Position: None
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Rev Shark |
| bad karma--UARM |
1/10/2006 12:26 PM EST
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Crowing about a good trade and baiting those who see it differently? Is the top in yet? In my experience that is the sort of behavior that generally leads to being taught a quick lesson in humility by the market. .
I believe strongly in the concept of 'karma' when it comes to the market and try to cultivate some modesty. It seems to me that the market hates hubris and when you get to the point where you not only are happy about your trade but rubbing the nose of those who disagree with you in the dirt then you are likely to pay a price.
Of course as I say in my column above no style is inherently correct but I think its appropriate for me to point out how the style of doing a happy dance on the backs of your critics is not one that works for me and many others.
Position: None mentioned
Rev, if you would allow your bias against me to drop, I believe that you would understand that all I was saying was that one of these analysts has to break ranks and go positive.
I think that if you have "real" problems with me, you should take them off-line, as I am always reachable by email and have been a continued supporter of your efforts on this site. I would think that if I were really doing the so-called victory dance, I would have money on the line.
Position: None
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Cody Willard |
| Apple Takes on the World (and Is Winning!) |
1/10/2006 12:31 PM EST
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Holy cow, that's some monstrous guidance out of Apple (AAPL:Nasdaq). I had huge expectations for the quarter. I'm down at TheStreet.com headquarters filming a video clip that will be published here on the site in just a bit, so all of my notes aren't in front of me. But that's almost a 20% beat on the top line as I read it. And 14 million iPod units?
I bought back the part of the PortalPlayer (PLAY:Nasdaq) I trimmed yesterday. And then some.
Wow. Again. I feel like a broken record with that word already in 2006.
Position: Net long AAPL, PLAY
Apple (AAPL:Nasdaq) is an amazing franchise; I predict more number bumps tomorrow. Can I say that Rev? And the stock motors still higher.
Position: None
Southern Peru Copper (PCU:NYSE) is now best of breed, replacing Phelps Dodge (PD:NYSE)!
Position: None
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Rev Shark |
| In the Words of Michael Corleone: 'It's Not Personal, It's Strictly Business' |
1/10/2006 12:49 PM EST
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Jim, I think you are a great investor and communicator but like all of us you can be even better. I work hard to cultivate a high level of calm and objectivity, and I try like hell to avoid emotionality. When I see posts that strike me as being unduly emotional, I tend to react because I know what it is like to fight to keep calm, and I want readers to understand the value of doing that.
Perhaps I should be more respectful of someone who obviously can make a highly emotional state work for them in a positive way. But I believe you are truly unique in that regard. Most folks don't benefit from that sort of behavior or thinking and I believe it is worth pointing out.
The only reason I go after you now and then is because of the great influence you have, and I think the other side of the picture often is left out. I'd love to have a full-out debate with you over any number of topics.
Position: none
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Steven Smith |
| Juniper Downgrade Marks Bottom?
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1/10/2006 12:55 PM EST
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In what might prove to another example of perfect timing, yesterday Prudential downgraded the Juniper (JNPR:Nasdaq), causing its shares to hit a seven-month intraday low of $20.43 and sending people scurrying into the put options, with open interest in the January $22.50 puts increasing some 30% to 23,000 contracts. But the stock closed above support at $21, the shares are as high as $22 today and it looks like a two-day key reversal and a bottom have been put in place. Today the most active strike is the January $22.50 call, with over 3,5000 contracts traded.
Position: None
I posted an article on Dec. 27 on uranium stocks and lamented how many of them had been delisted or were relegated to penny-stock status. So the following news headline scrolling by on Bloomberg caught my eye:
"International Ranger Corp. To Acquire Advanced Uranium Property"
International Ranger is selling at 4.9 cents a share. If the world is going to go more nuclear -- and I believe it will -- aren't we going to need some better-capitalized mining firms?
Position: None
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David Merkel |
| Leave It to the Good Hands People |
1/10/2006 1:33 PM EST
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Allstate (ALL:NYSE) running today because of their expanded reinsurance program, which makes it a less risky company. Funny that less risk means people will pay more for the shares. Also, some of the new policies introduced by Allstate are more customizable, which for the personal lines business is an improvement (if Allstate can manage the added complexity, and make it simple enough for policyholders).
I still believe Allstate is the best large- or mid-cap stock in the personal lines space. It is my only double weight in my broad market portfolio, and it is one of my bigger holdings in the hedge funds. At 9.1 times 2006 earnings, and 8.8 times 2007 earnings, it is cheap.
Position: Long ALL
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Dick Arms |
| See You in La Jolla |
1/10/2006 1:46 PM EST
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I'll be speaking this evening at a dinner meeting sponsored by the San Diego Technical Analysts Society at Trophy Restaurant. We're convening at 5:30 p.m. PST. Would be glad to see any RealMoney readers who can make it.
Position: None
Ah, it's never easy, is it? I stopped myself out of the new PortalPlayer (PLAY:Nasdaq) stock I bought today when it turned red. Mea culpa. Still holding common and calls, though, just not the stuff I bought today.
Position: Net long PLAY
Apple (AAPL:Nasdaq) blows the mind. And with Intel (INTC:Nasdaq)-based computers now offered, any held-off purchases will give way to a new halo effect. So many ways to win with Apple (now where have I heard that before?)
Hey, check out TSC's video clip today. I talk Broadcom (BRCM:Nasdaq), Marvell (MRVL:Nasdaq) and Texas Instruments (TXN:NYSE). The content revolution happens before our eyes. Be a part of it -- or get out of the way!
Position: Net long AAPL, BRCM, MRVL, TXN, INTC
Lazard pushing for a Time Warner breakup. I actually think this is a big waste of time and money and will generate a ton of fees for the investment banks (i.e. Lazard) that are involved with no tangible benefit to shareholders or customers.
Jeff Bewkes, former head of HBO, and Time Warner's new COO, said at today's Citigroup Media conference, "the question is, if we separate, would that hurt or help that performance ... We haven't seen any material gain that we could give you by doing that."
Viacom has tried the breakup route and the combined shares are down since the announcement. The big question is - why is Time Warner down when all the news is so good? Time Warner has been valued in the same spot for the past year or so and in that time all of their divisions have been doing well and AOL has gone from being perceived as having negative value to being valued at (by Google) $20bb. So what's wrong?
I think the general feeling is that "old" media is dead and that Time Warner, starting with their failed Pathfinder venture and then culminating with the AOL merger, just doesn't get it. This couldn't be further from the truth at this point but thats the market perception. Over the next year we should continue to see AOL execute and content from the other divisions find their way towards generating revenues online. When that happens, the stock will kick in.
Position: none
I've commented pretty much every day this year about how emotions are really flying high. As the banter on the site today --- from guys who are bullish! -- reflects, there really is a lot of tension out there on the Street. The shorts are on a different emotional plane entirely in 2006. Meanwhile, I really thought we'd see bigger pullback than this. As you can surmise from my quick stop loss on that PLAY trade earlier, I'm tightening up the stops, tightening up the reins. And here another late day rally starts? Wow. (And with that, I'm banning that word from my vocabulary for the next two weeks.) I might have to run at the close. Have a great night.
Position: Net long play
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Aaron Task |
| Lenny Dykstra Responds to Steven Smith |
1/10/2006 3:57 PM EST
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Lenny asked me to post the following:
Before I explain why Steven Smith's "Monday Morning Quarterbacking" about my column is wrong, let me first go on the record:
I welcome everybody's questions, good or bad, regarding my "in-the-money call strategy." This strategy is not for everyone, but it is for those of you who want to make money and limit your risk.
Also, Steven is one of my many teammates at TheStreet.com, so this is nothing personal. But when we are on the field, business is business!
Steven misses the whole point of my column, which is: We were buying a "whole bunch of time," approximately five months for this particular call, with "very little in premium."
His calculation regarding a better return on an "at-the-money call" or short-term call is easy after the stock has appreciated!
Remember, we are trying to "stack the odds in our favor" by going out further in time. Everyone knows if you buy an at-the-money call you have a chance for a higher profit percentage. But that goes against my whole point of the column, which is: We want to buy time to limit risk and increase our chances to make money. His example has much higher risk.
Let's start off by first using his "apples to apples" comment. He is picking a price of $3.40, the Nov. 25 price I state in my column, but he is using a purchase date of Dec. 15 for his price.
If he wants to compare "apples to apples," I sure don't want to know where he shops!
Symantec (SYMC:Nasdaq) April 15 calls on Dec. 15 were $2.95, not $3.40. Here is some simple math: $4.20 minus $2.95 equals $1.25 in profit. That's a 43% gain.
More importantly, Steven misses the whole point of my column: buying a "whole bunch of time" approximately five months for "very little premium."
Remember, we are trying to "stack the odds in our favor" by going out further in time.
Because I went out five months, the people who bought the April $15 calls didn't have to panic, like they probably would have when the stock went down to $16.32.
If you bought a "nearer term," or an at "the-money call," like Steven suggested, some people wouldn't have had a chance to panic, because their option expired worthless!
For the people who would have bought his "nearer-term" call, they would have been putting the "P" in panic. Trust me! I know this because I received numerous emails that said: "Should I sell the SYMC April 15 call, it is way down?"
Position: playing messenger
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Steven Smith |
| Whole Foods Dividend Drives Call Volume |
1/10/2006 4:10 PM EST
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People never get tired of looking for free money, no matter how slim the odds. Today we saw massive call volume in Whole Foods (WFMI) people look to capture the dividend ahead of tomorrow's ex-div date. The Jan. $72.50 traded a whopping 280,000 contracts on prior open interest of just 2,1000 contracts. Overall over 500,000 in-the-money calls traded, all in a attpemt to capture the 15 cent quarterlt dividend, which as the linked article discusses, usually less than 1% skate through un assigned, and when commissions and carrying costs are included hardly seems worth the effort.
Position: none
Lenny, first let me stand corrected on using a Dec. 15 date; on further review you clearly state that your purchase date was Nov. 28. My mistake. That said, I was not trying to second-guess your approach or question the obvious success you have had using in-the-money options.
I also appreciate that you make clear that this is your preferred strategy and were kind enough to refer anyone with questions regarding using anything other than deep ITM to me or should take a look at the OptionsAlerts Newsletter. To that end, I thought it would be helpful to illustrate how, by applying various scenarios to different strikes and different time frames might be helpful in choosing which strike best aligns with one's investment thesis.
For the most part, I am agreement with you in terms of buying time, and using options that have some intrinsic value. My columns consistently warn against using options as lottery tickets, and have stated that one of the biggest mistakes people make is buying "cheap" short
-term out-of-the-money calls in hopes of a big percentage return.
In fact, the numbers I ran show that the out-of-the-money calls delivered a worse performance, in terms of absolute dollars and percentage returns, than the ITM or at-the-money calls. Also, be clear that my comparison used the same April expiry dates you employed, so I don't think one would have been shaken out or would have had to panic on a selloff, especially considering they had purchased lower-cost options and therefore had less at risk. Again, my intention was not to second-guess, but to use a real example to illustrate part of the process for determining which option provides the best balance of a high probability of profitability, limited risk and potential for maximizing gains.
Position: none
Steve/Lenny: Just a quick note that I will address this issue next Tuesday. On balance, I come down with Lenny on favoring ITM options. I discuss the entire strike selection process in my book, if I may stoop to shameless plugging.
Position: None
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