RealMoney's Best of Blogs

It was a week dominated by M&A talk, primarily that of News Corp's (NWS Quote) bid for Dow Jones (DJ Quote) and then on Friday, Microsoft(MSFT Quote) and Yahoo!(YHOO Quote). Reuters(RTRSY Quote) was also approached about a buyout, but didn't name the suitor (although there were reports that it is Thomson(TOC Quote)).

With these deals and rumors of deals as the backdrop, the Dow managed to set an all-time intraday high on Friday of 13,283.31 and finish with a record close for the seventh time in eight days. For the week, the Dow gained 1.1% to finish at 13,264.62. The S&P 500 added 0.8% on the week, closing at 1505.62, and the Nasdaq tacked on 0.6%, closing at 2572.15.

Once again, RealMoney's bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the 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 difficulties of this market, Cody Willard on earnings-season themes, Steve Smith on Dow Jones and News Corp and Tony Crescenzi on the negatives in payrolls.

Click here for information on RealMoney.com, where you can see all the blogs -- and reader's comments -- in real time.

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Rev Shark's Blog: Why This Is not an Easy Market for Traders
Originally published on 5/04/2007 at 8:49 a.m.

"Just as the wave cannot exist for itself, but is ever a part of the heaving surface of the ocean, so must I never live my life for itself, but always in the experience which is going on around me."

-- Albert Schweitzer

In this environment, it is very easy to find ourselves focused on what we hope might happen rather than what is actually occurring. In a market that is seeing record-breaking runs and acting downright irrational in its refusal to rest, we have a tendency to dismiss reality and focus on what we feel would be more comfortable. We don't want to give ourselves over to the action we don't really understand or trust and ultimately that leads to tremendous frustration.

One of the hallmarks of great investors is the ability to ride a wave of seemingly irrational action. Rather than fight it and try to come up with reasons that it is doomed to fail, great investors go with the flow and profit from having the wind at their backs.

The reason this can work so well is that trends can last much longer than we believe they will. People intent on calling market turns are inevitably too early. It is in those stages when we first start thinking the market needs a rest -- but keeps going and going and going -- that the trend-riding investor makes exceptional gains.

The secret to success is to ride that momentum as long as possible but to be quick to lock in profits at the first sign of trouble. Unfortunately that is a lot harder than it sounds. When we are distrustful of the market and believe it is acting irrationally it is very easy to perceive every minor hiccup as the beginning of the end. We know it won't last, so we overreact to relatively minor issues.

Despite the hoopla and glee over this run, this is not an easy market for most active investors. Entry points are terribly difficult to find as everything looks extended and exits always produce second-guessing as stocks keep going. The key is to stay patient, respect the current trend, and don't overanticipate its end.

We have a strong start on the way as talk about Microsoft making a run at Yahoo! hits the wires and several overseas acquisitions heat up. The jobs report this morning should also generate some action. Overseas markets are trading strongly with oil and gold fairly steady. (I am going to be tied up in a meeting all morning but will check back in later.)

At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.

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Cody Willard's Blog: Takeaway Themes from Earnings Season
Originally published on 5/3/2007 at 9:34 a.m.

Earnings season is starting to wrap up. I've listened to and/or read the transcripts and analysis from more than a hundred calls, and I do believe we have some themes to take away and build our trades upon.

1. The effects of FX are the only reason that earnings growth this quarter has come in anywhere near estimates and, in fact, juiced the results right past the low expectations.
2. Commodity-caused inflation is spreading, and its impact is being felt across all kinds of sectors, from restaurants to retailers.
3. The low-income U.S. consumer is, after a 25-year boom run, crapping out. Those consumers now have far less access to capital than they did this time last year, as they're really getting crunched by the turn in the credit cycle at this point.
4. The analog semiconductors have traction and improved inventory levels. Their suppliers don't.
5. IT spending is still steadily growing, and business confidence levels are high, despite the worry over the U.S. downturn.
6. Everybody seems convinced that the nondomestic economy is on fire. It's not, but the dollar's collapse over the course of the quarter has given corporate America a built-in cushion.

Symantec (SYMC Quote) confirmed some of these themes in its report last night. The backward-looking results were quite a bit stronger than expected, helped in no small way by the weak dollar.

When you sell wares in Europe and get to buy a lot more dollars at the end of the quarter with the euros in which people paid you during the quarter, that'll juice the top line. And because most of your costs are in dollar-denominated terms, that juice falls mostly to the bottom line, too. Symantec's EPS came in at 24 cents compared to the 20-cent estimate. Shocker.

The stock is up a buck pre-market, and the trading momentum out there will probably help take it into the $20s in the near term. I'll look to short this name on weakness in coming weeks, as I think its consumer product line is in dire shape against McAfee (MFE Quote) and Microsoft (MSFT Quote). Throw in the lack of traction that the Veritas purchase has had in the storage world, and you've got your layout.

Let's do a great job today.

At the time of publication, the firm in which Willard is a partner was net long Microsoft, although positions can change at any time and without notice.

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Steven Smith's Blog: The Writing on the Wall
Originally published on 5/3/2007 at 10:31 a.m.

Quite a number of readers have been asking, some in not such a nice tone, how I failed to notice and report on the unusual option activity in Dow Jones (DJ Quote) in the days ahead of Tuesday's surprising $60-per-share takeover bid by News Corp (NWS Quote).

First, let me say I'm not happy either about missing out on what is becoming a major story both in terms of the deal itself and the option angle, in which it appears someone, or some group possibly, traded on leaked or inside information.

Without completely denying I was somewhat asleep at the wheel, I'll offer some explanations as to why I did not pick up on what turned out to be unusual activity.

Not Quite Out of the Ordinary

First, Dow Jones is not a stock I follow or have on my watch list. Second, a lot of the activity occurred over a couple of days in which the volume was not particularly high, with only about 500 contracts trading on each of the preceding days. While that is above average for Dow Jones, those are not the kind of numbers that make you sit up and ask what's going on. It wasn't until Monday that a real spike in volume occurred, with over 4,800 call contracts trading.

But even this did not appear on my unusual-activity screen. Almost all of the activity, some 3,500 contracts, was in the September 45 strike. That strike already had prior open interest of some 3,600 contracts, meaning it was possibly a closing or liquidation. One of the parameters or criteria applied by most software that screens unusual activity is that the volume should be at least two or three times greater, or at the minimum, exceed the prior open interest of the strike.

Also, unless the volume is huge, like in the 15,000-to-20,000-or-more area, I tend not to focus or read too much into activity occurring in options with more than four months until expiration. Given the amount of time remaining in these options, I certainly would not draw the conclusion the activity was a play on a takeover bid. Typically, someone speculating on a takeover target will use shorter-dated options that are anything from a few days to two months away from expiring and tend to be significantly less expensive.

Some news reports think the parties involved chose the September options because they were unsure of the timing of when the buyout bid might be made. I think they chose the longer-dated options as a means of covering their tracks. It certainly looks less suspicious than loading up on out-of-the-money calls for a nickel a day or two before they are set to expire.

Looking for Clues

So, what should one look for when trying to identify unusual activity? First and foremost, look for an increase in call activity and open interest. More specifically, the volume should be at least three times the average daily volume, focused on near-term options and one or two strike prices.

Then make sure the volume is not the result of a spread trade (the simultaneous purchase and sale of similar options but that have different strike prices or expiration dates). A spread is a much more neutral trade than the outright purchase of call options. Checking times and sales will reveal if these trades are outright purchases or part of a spread.

Implied volatility, or value of the option, should increase even if the stock price does not. This indicates that the buyer does not mind paying the extra 10 or even 20 cents, which on a $1 item is a huge percentage premium to gain the leverage of options.

This rise in IV reveals the level of demand for the option. It will also give you some sense of just how large a move one expects or is needed to turn a profit.

Lastly, the volume should occur in large blocks of 100 contracts or more. This would suggest institutional buying, rather than retail customers trying to find the next hot stock. I hate to say it, but the institutions tend to be the smart money.

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Tony Crescenzi's Blog: Nothing New from New-Home Sales
Originally published on 5/4/2007 at 11:57 a.m.

In April, payrolls expanded the least since November 2004, increasing just 88,000, not far from the consensus forecast of +100,000 or the whispers among investors, based on economic derivatives traded at the Chicago Mercantile Exchange. Net revisions to past months were -26,000. Wages increased a tame 0.2%, one-tenth of a percentage point lower than expected, and the year-over-year gain fell to 3.7% from 4.0%, two-tenths lower than expected.

The headline numbers and the details of the employment report are unlikely to disrupt current trends in the financial markets for a few reasons.

First, the markets were braced for weakness, as evidenced in part by this morning's economic derivatives auction at the CME. In the auction, which ended a half-hour before the employment report's release, investors were betting on a payroll gain of 80,000, or 20,000 below the economists' consensus.

Second, the wage figure was market-friendly. It will be combined with recent good news on the inflation front, including the April consumer price index (core prices increased just 0.1%), the core PCE price deflator for April (it was unchanged), and the first quarter's productivity report, which was much better than expected.

Third, recent economic data have been more upbeat, including the two ISM indices, factory orders and jobless claims. Investors are betting that economic growth might be accelerating a bit.

Investors are generally willing to accept the idea that the extraordinary weather conditions experienced in early April may have had a significant influence on the economy. They would rather combine March and April than look at April in isolation. This is an exercise that many have used when analyzing retail sales. For payrolls, a similar analysis will be applied.

This means that the March-April average of 133,000 will be given more weight than the 88,000 gain. To underscore the influence of seasonal factors, note that the actual payroll gain in April was 833,000 before seasonal adjustment knocked the figure back to 88,000. This shows that there's normally a large increase in jobs in April, mostly because of the climate change. This means that some of these seasonal jobs may not have been added as quickly as normal, given the weather, thereby reducing the job count for the month.

Construction Jobs

The construction sector saw a job loss of 11,000 in April following an increase of 50,000 in March. The sector has experienced a job loss of just 4,000 so far this year, mostly because losses in the residential sector have been offset by increases in the nonresidential sector. Losses still seem likely to accelerate once the number of homes under construction falls, but they'll probably be less than many have been expecting for three reasons.

First, the commercial construction sector is providing a major offset to losses in the residential sector. Second, there was a shortage of skilled workers at the peak in housing market, meaning that fewer layoffs are needed now. Third, many workers in the construction trade are immigrant workers receiving pay "off the books." This means that layoffs in the construction trade will be unrecorded.

Two Big Negatives

Although most will save the negatives about the latest report for another day, it does have two elements that make the job situation look worse than indicated by the headline data.

First, there was a sharp decline in household employment, with a loss of 468,000 in April compared to a gain of 335,000 in March. There has been no net gain in household employment over the past five months. The household survey is often overlooked, but I have put more weight on it in the past as a gauge of job creation in new industries and new businesses. The household survey picks up job changes in the small business sector that the payroll survey misses, because it surveys people who might be employed at businesses that are too new to be part of the payroll survey of establishments.

Second is the fact that the government added a record 317,000 jobs to the tally in order to account for jobs that its survey might have missed. Each month, the government makes an assumption in its so-called birth/death model for jobs created via the net change that occurs in business formation. The problem is that when the economy slows, the government is more likely to overestimate the actual amount of new net business formation, especially given the recent slowdown in the housing market. As fewer communities are being built, fewer strip malls and the like are probably being built, which could put the actual amount of net business formation below the government's estimate.

These are important negatives, but probably topics for another day. For today, the markets have the memory of more upbeat data still in their noggins and will stick with their recent investment game plans.