After two days of minor advances, on Friday the
caught a bid and jumped 153.35 points to 12,961.98, its third-straight record close. For the week, the index was up 2.8%. The
finished the week up 2.1% at 1484.35, while the
added 1.4% on the week to end at 2526.39.
bloggers were all over the market action, and we'd like to share the best of their commentary this week with readers of the
. 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
on trading an emotional market,
on Google's M&A,
on the options angle of the
on U.K. bonds' effect on U.S. bonds.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: The Morning After the Party, the Big Sober Up
Originally published on 4/17/2007 at 8:03 a.m.
"The economics of emotions will not allow a man to remain in love for too long a time."
-- Carlton Simon
Strong moves in the market like yesterday are often a product of a circle of emotions. The more buoyant the market becomes the more positive emotions grow and the more buying pressure increases. Fear and worry about being left out dominate the action.
Unfortunately there is often a tendency to look for profound explanations to try to explain what is happening rather than just appreciating that it really is more like an adolescent smitten by a new love. Trying to apply logic to the situation is futile and misleading. In fact, the worst thing that you can do is try to justify the situation by looking for logical explanations rather than simply appreciating that feelings are running high.
There is nothing wrong with jumping in and taking advantage of an emotionally charged market. The danger comes when you start thinking that something is different and that the strong emotions will continue far into the future. Market players, like any other human being, simply aren't capable of sustaining strong emotions for too long. They flare up for a short time and then quickly dissolve and morph into something else that can be sustained for a longer time period.
Yesterday was a good day for the bulls but it wasn't anything new or unusual. There was no profound change in market character. It was a brief love affair that may persist for a while or die suddenly. Don't be tempted to read anything else into it.
In fact, the economic data due out this morning and the earnings due after the close are the things that are really going to give us insight into this market. Yesterday's dalliance will need to face some cold hard facts today. They might lead to further excitement or they may cause a reassessment of the behavior.
There is no question that the bulls have the momentum but there are plenty of hurdles ahead. In addition, we are becoming extended if not downright frothy and we probably need some consolidation soon to remain healthy.
Keep cool, calm and unemotional about the market and don't start thinking that there is something different this time.
We are slightly weak in the early going on higher-than-expected CPI in the UK, which is pressuring European stocks. Oil is trading up and gold is trading down.
Cody Willard's Blog: Google's M&A Touches Off Next Net Bubble
Originally published on 4/16/2007 at 12:10 p.m.
Echo Techo Bubble, here we come!
for $3.1 billion. Most everybody thought the DoubleClick auction would result in the company being sold for about $2 billion. They were only off by 50% -- $1,000,000,000 or so.
I've heard one recurring theme from folks around each of Google's two most high-profile acquisitions, YouTube and now DoubleClick -- "Google was willing to pay just about anything to add these properties to its sheets." Sound like we might be heading into bubble territory?
YouTube hardly had a business model and was only about a year old when Google paid $1.7 billion for it. Most folks thought the company would be worth a billion or less.
DoubleClick is an ancient company by Internet standards, but the company's been unable to compete effectively in Web 2.0 against the titans like Google. That $3.1 billion price tag for DoubleClick values the company at 12 times sales and 45 times EBITDA. Most established companies like DoubleClick trade at 10 to 15 times EBITDA, maybe 20 times if you're really stretching it.
Google's paying not just for traffic, but it's also paying
for networks that have hit critical mass. YouTube's become the de facto standard for Web-based video sharing. More videos get uploaded to that site than anywhere else, so more people go to that site than anywhere else, so more videos get uploaded to that site so more people go there... We call that a "positive feedback loop."
DoubleClick, after being one of the very few Internet ad companies to survive the great dot-com crash of 2000 to 2002, has a very wide-reaching network through which it can sell and display its ads. With those silly-looking multiples it's playing, Google's obviously not just using standard fundamental valuation metrics to value DoubleClick.
Most of the Street looks at this giant price tag on DoubleClick and thinks that Google was willing to juice it mainly to keep competitors' hands off it. That's certainly true to a large extent, as underscored by the recurring theme I mention above.
But Google's also the only company smart enough and disciplined enough to recognize and then leverage the principles of Metcalfe's Network Law, which states that the value of a network (such as the proprietary ad network that DoubleClick runs) is essentially worth the square of the numbers of outlets on it. Combining that network with Google's own makes this property worth more to Google than anyone else. And Google will juice the EBITDA potential of DoubleClick immediately upon closing and integrating this deal.
Google's sweet multiple and outsized market cap give it a great currency for when it or its target wants to use stock for these deals. But the company also has billions upon billions of actual cash on the balance sheets to use. That enables Google to really be more aggressive than others on these deals. But the others, such as
(buying Fandango.com, for example),
and so on, are all sitting in their offices this morning agreeing that they can ill afford to let Google get the next property that comes up on the block.
Thus we continue to head for my Echo Techo Bubble. I've made a couple more buys of late along this theme, and I'll highlight them for you this week.
At the time of publication, the firm in which Willard is a partner was net long Google and Microsoft, although positions can change at any time and without notice.
Steven Smith's Blog: Sallying into SLM Options
Originally published on 4/16/2007 at 3:30 p.m.
The stock indices are off their session highs, but are still holding onto solid gains that leave the bulls sitting in the catbird seat. My sense is the shorts are basically trying to decide if they should cover some more now or hope for late-day selloff. Either way, that sets up buying pressure and a likely ramp into the close. The equity-only put/call ratio is down to 0.57, its lowest intraday reading in over seven weeks.
Some readers have been asking about the
deal and why the stock is trading at $55, or about a $5 discount to the $60-per-share buyout bid. They also want to know whether this makes the purchase of call options a good opportunity, especially since this is a cash deal, so the $60 price should stick.
Acquisitions that use or include stock will often trade at a discount because the value of the shares being used as currency can fluctuate. In this case, there are two main reasons why Sallie Mae is trading at a discount:
First, the deal still faces regulatory approval so there is some risk it won't be approved. That explains why the out-of-money puts, such as the May $40s, which are likely to be worthless, still carry some value of around 20 cents per contract. That represents the risk premium of the deal falling apart.
Second, this deal is not expected to close until late 2007, so much of the share price discount represents the carrying cost of holding the stock for what could be up to seven months. The best way to see how this is priced in is to look at the option chain. You can see the value of the $55 calls increases over time, from 30 cents for the April options that expire this coming Friday up to $3.50 for the ones that expire in January 2008. Meanwhile, the value of the $60 is basically 30 cents for every month from May through the January 2008 expirations. This little bit of premium represents the possibility the takeover price might increase. The numbers show that traders think the probability of that occurring to be very low.
As to whether owning these options is a good trading opportunity, the calls have pretty much priced in the takeover being completed, but do offer a way to capture the last few dollars at a much lower risk than owning the stock. But the discount is not as great as first appears. After all, the price of the option does have its own carrying cost of tying up capital. If you buy the put to create a collar and remove the downside risk of the deal falling apart, your returns are further diminished by their cost. But note, SLM does not pay a dividend, so you would not be missing out on any distributions by owning the calls.
The lottery ticket play or best risk/reward is to buy some cheap puts and hope the deal gets squashed.
Tony Crescenzi's Blog: U.K. Bonds Lift U.S. Bonds
Originally published on 4/18/2007 at 12:44 p.m.
The U.S. Treasury market is being helped today by a rally in the U.K. bondmarket, which is being fueled in part by the realization that futureinterest rate hikes are now fully priced in.
Rates on 90-day sterlingfutures, which carry an open interest of 2.8 million contracts, are down asmuch as 6 basis points, reflecting the perception that rate hikes beyond therate hike expected from the Bank of England on June 6 are not bakedin the cake.
This is despite the release today of minutes from the Bank ofEngland's April 4 policy meeting, which indicated that the BOE was poisedto raise its benchmark rate by 25 basis points to 5.50% in response to newinflation data released yesterday indicating that inflation reached a 10-yearhigh in March.
If the BOE does in fact raise interest rates by a quarter-point, itsbenchmark rate would be above the
benchmark rate, the fedfunds rate. For today, though, the sharp drop in U.K. rates is impactingTreasuries. This should not surprise given that more of the world's dollarsare deposited in the U.K. than in the U.S.
The Treasury market is also being helped by today's weaker data on mortgageapplications as well as the sense that the April economy will be hampered byunusual weather conditions, which will make the month of May easier tonavigate.