RealMoney's Best of Blogs
RealMoney's Best of Blogs
RealMoney Staff
05/27/07 - 10:45 AM EDT
As always, RealMoney's bloggers were all over the market action this week, and we'd like to share the best of their recent commentary with readers of TheStreet.com. These posts best capture the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
Let's take a look at Rev Shark on the strange market, Steve Smith on NYSE Euronext options and Tony Crescenzi on trends with staying power.
Click here for information on RealMoney.com, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: Strange Market Brings Muted Sentiment
Originally published on 5/21/2007 at 8:25 a.m.
Happiness for the average person may be said to flow largely from common sense -- adapting one-self to circumstances -- and a sense of humor.Going with the flow is what typically makes investors feel good about the market. When things are going up and investors are along for the ride, it is difficult not be pleased. For some reason, that hasn't been happening even though the DJIA is having one of its best runs in the history of its existence. What is the problem? Why is sentiment so muted? Why aren't more folks excited about this market? There are a number of reasons that come into play that we should reflect upon when considering how the market plays out from here. Probably the foremost issue affecting investors is the disconnect between what they are seeing and hearing economically vs. what is happening with stocks. Given the issues with real estate, a slowing economy, record high gas prices, inflationary pressures and so on, it simply doesn't seem logical that the market is acting like we are undergoing one of the greatest economic booms in history. How can the market possibly be acting so well when the reality of the average investor is so different? The average investor in the U.S. is not fully cognizant of two fundamental issues, since he is not experiencing them personally. First is the huge amount of international liquidity. There are buckets of cash sloshing around out there supporting huge acquisitions and mergers every day. The money flow seems endless, but all the average investor sees is increasingly restrictive mortgage lending. He has no access to this cash so he finds it hard to understand how this money can continue to be thrown around with such ease. The average U.S. investor is also not appreciating how the global economy is driving things and making the domestic economic environment less important. The U.S. economy has always been the primary driving force behind the market -- when we sneeze, everyone gets a cold. But what is happening in the U.S. economy is now becoming secondary as huge amounts of cash from China and other booming markets are looking for a place to go and propping up things simply because they are highly liquid and are an easy place to put cash. The massive outperformance in mega-cap DJIA stocks isn't because this small group of stocks has suddenly become better values than anything else. They are moving because they are liquid and an easy place for overseas investors to put their cash. The small-caps have underperformed because the liquidity that is driving this market is so big it can only go into the biggest stock out there. It is a very unusual time in the market, and trying to figure out how much longer this action will continue is an impossible task. Given what it driving things, it could last quite a bit longer. At some point it will likely end with quite a bit of pain, but for now all we can do is stay vigilant and respect the very strong trend. We have another positive open. Overseas markets are strong on more deal news, Oil is trading up and gold is down. At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.
-- Beatrice Lillie
Steven Smith's Blog: Get Protection in NYSE Euronext With Options
Originally published on 5/22/2007 at 1:46 p.m. Cramer's bullishness on NYSE Euronext(NYX) is well documented, and it's not surprising that many investors have been following his advice and getting long the stock. The shares have bounced some $7, more than 8%, to $87 in the past week, and suddenly I'm receiving a batch of email asking for suggestions about ways to use options to lock in profits and reduce risk yet maintain upside exposure. What follows is by no means a complete list of some of the options available, nor is it specific to NYSE. Many other stocks have racked up impressive gains; for example, in the exchange space, IntercontinentalExchange(ICE) has been back on a tear, gaining $30, or 25%, to hit $150 in the past three weeks, which are more appropriate candidates for taking some money off the table. First, be clear the only thing that truly and fully locks in any current profits is selling and closing the position. Everything else is about paring the position, partial profits and reducing, not removing, risk. That means anything but selling out will cost you in some fashion, whether in the form of a higher cost basis or limited profit potential. Here are several routes to choose from, and I'm not endorsing one over any of the others: Create a calendar spread. In NYSE, you could own some June $90 calls for around $2.50 per contract. This would reduce cost, provide some downside protection and capture some time decay/premium. It does cap your upside by creating an effective sale price of $92.50 per share. That means you'd maintain another $5.50, or 6.5%, of upside over the next month even if the stock rises above $90 and the calls are assigned and the stock called away. Of course, you can always make another adjustment such as rolling to a higher strike to stay long the stock. Replace the stock with call options. Just how much risk you want to remove and how much upside you believe the stock could achieve will determine which strike price to use. This is definitely a situation in which I would endorse the use of in-the-money calls, because it makes use of the financing tool aspect that the leverage options provide. For example, you can buy the December $80 calls for about $14.40 per contract. This means you are paying about $7 in time premium but have reduced your risk about 80% while maintaining nearly the same upside potential over the next seven months. Just be sure to buy only the number of calls that equate to the number of shares you own, not the dollar amount. That is, if you own 1,000 shares of NYX, I'd buy 10 call options, which will cost about $14,500. I wouldn't buy $87,000 worth of calls, which would be about 60 contracts. Create a married position by purchasing some puts. Or reduce the cost by buying a put spread. For example, the September $85/$75 spread is trading around $2.50. This basically locks a sale price at $82.50 while maintaining unlimited upside. Be aware, this does raise your cost basis and the spread only offers protection down to the $75 price level. Buy the above put spread but also sell a call spread to finance that cost. I'm thinking in this case that you could sell the July $95/105 call spread for $1.50. That would reduce the cost of the put spread to just $1, or lock in a sale price of $84 per share. The upside has a little bit of a curve between now and the July 20 expiration. It's clear to $95, takes a dip as shares pass across $100 or the middle of the spread and then becomes wide open again above $105 or after the July expiration. The put protection remains in place until the September expiration.
Tony Crescenzi's Blog: Four Trends With Staying Power
Originally published on 5/25/2007 at 12:14 p.m. Most times, weaker-than-expected existing home sales and a surge in inventories of unsold homes would have spurred a rally in Treasuries, especially if prices were at the lower end of their trading range. Worries about the economy might also have surfaced in the stock market. Not so today. Treasuries have languished, trading slightly lower much of the day, and equities have been resilient. The relatively weak performance reflects a continuation of several themes: Economic growth might accelerate. Cutting significantly into economic growth in recent quarters have been drags from cuts in business inventories and residential construction. The combined drag cut about 1.5 percentage points on average from GDP in each of the past two quarters. The drag now seems likely to shrink or disappear by the second half of the year. Inventory investment appears to be rebounding, as evidenced by numerous data on the factory sector. Residential construction is falling at a slower pace, as evidenced by recent data on housing starts, which indicate that early in the current quarter, starts are running above the first-quarter average. These factors, combined with evidence of a rebound in capital spending, make it likely that second-quarter GDP will be better than in the first quarter, when the economy expanded at a 1.3% pace (soon to be revised slightly lower). Whether the pickup will last is an open question, but the math points to a higher print for GDP, something the bond market is uneasy about. Prospects for a rebound are significantly reducing the odds of a near-term rate cut and the odds of a single cut occurring by year's end have fallen slightly below 50%. Today's housing figure did not change this view because of the general view about a pickup in growth. The equity market is OK with this because of the tradeoff with corporate profits. If the bond selloff deepened, the economic rebound would take on a negative bent. Competition for capital. Equities are performing well worldwide, which is pushing up real rates in the bond market, the amount of yield that investors demand over and above the inflation rate. Investors want compensation for the opportunity cost of holding bonds instead of stocks. Diversification of central bank assets. Evidence that suggests central banks are interested in diversifying their reserve assets continues to mount. A chief worry in the bond market is China's efforts at diversification, evident most clearly in its interest in Blackstone Group. Inflation trends will be sticky. Illustrating the generalized uptrend on inflation worldwide is the continued rise in industrial materials prices. Most indices for industrial materials prices are at or near their all-time highs. The inflation uptick is probably secular, although it is being held down in the U.S. by cyclical forces.