This week the Federal Reserve itself endorsed the Goldilocks scenario, saying growth got stronger and inflation got weaker. But the central bank kept rates steady and retained its tightening bias. The Fed also warned of wage inflation, but Friday's nonfarm payrolls report staved off any immediate threat.
Satisfied contentment powered the
Dow Jones Industrial Average
, the Dow Jones Transportation Average and the Russell 2000 to new highs during the week. The Dow came off the boil Friday, dipping slightly on more than 1% losses in
. But on the week, the blue-chip index jumped 1.3%, the
added 1.8%, and the
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 the similarities between Google and Apple,
on a collapse in China,
on Amazon and a condor and
on the plunge in home inventories.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: Google Feels Like Apple Did Before Earnings
Originally published on 1/31/2007 at 1:33 p.m.
As we await the
interest rate decision, it's a good time to discuss
(GOOG) earnings (due after the bell). Consensus estimates are for EPS of $2.90.
Cody, I believe expectations are sky-high for the search monster, and if Google doesn't beat by at least 20 cents and give analysts reason to raise guidance, it's going to get hit hard.
Keep in mind that over the last three quarters, GOOG has beaten by 32 cents, 27 cents and 20 cents, which is 16%, 12% and 8%, respectively. Interestingly, the level of upside surprise has been falling as analysts have raised estimates, and I expect that may be the case again. However, you can bet there are plenty of folks looking for GOOG to top the $2.90 mark by 10% or so, which would be 30 cents. There is no bad news expected here.
Is there a high level of bearishness surrounding GOOG? Just the opposite. Look at the way it has traded recently, and it's up nicely going into earnings. The shorts are by no means aggressive, and the amount of shares short could be covered in about one day of ordinary trading. Many of the shorts are probably just some form of hedging, so it's probably even less.
GOOG reminds me very much of
(AAPL) prior to its report, where all sorts of positives were expected. The news was darn good, but AAPL fell like rotting fruit because expectations were so high. GOOG has a similar feel to me, especially the way it is trading in front of earnings, and I'd watch for a quick reversal if it doesn't produce some truly remarkable earnings tonight.
Cody Willard's Blog: Don't Bet on China's Collapse
Originally published on 1/30/2007 at 11:38 a.m.
How about the China stock market? I was reading the
New York Times
this morning on my way to the office, and my eyes were immediately drawn to the straight-up chart of the Shanghai Stock Index. It was hard to miss, as the chart was centered on the front page of "all the news that's fit to print."
I read the accompanying article and its clear message that dangerous and disastrous speculation has run amok in the China stock markets. My immediate reaction is to "flip" Jim Yardley's analysis in the article. The author writes, "The run is particularly striking because China's stock markets have historically been stagnant financial backwaters, marred by scandal, weak oversight and fundamental contradictions." The first few paragraphs of the story tell you all you need to know about its take on the topic: that China's stock markets are in a bubble about to pop.
I finished up the newspaper at my desk and turned my attention to
The Wall Street Journal
. There, on the front page, was the headline: "Stock Frenzy in China Stokes Official Concern." Sure enough, what follows is another article that clearly implies that China's stock market is a bubble ready to pop.
I had already been hearing a lot of China-stock bashing on Wall Street, so I don't find the appearance of these articles to be particularly shocking, though their simultaneous appearance is a bit over the top. And I don't think the setup for China is one of immediate collapse anyway.
The China stock market already had a major collapse back in 2004, from which it is now rallying and sparking all this bubble talk. It's more of a discussion than a debate, because the writers of these two articles didn't leave much doubt about their take.
It's partly because of that prior collapse that I just don't buy into the idea that the Chinese markets are about to collapse. Rather, as we head into the 2008 Olympics in China, the capital flows in that country are likely to continue. As the world's investors and traders are never shy of excesses, the odds favor yet more spiking in China stocks. Certainly in the near term, with the doubling on the Shanghai index in the past few months, there's a high probability of a major pullback. But I wouldn't bet on a collapse in China in 2007.
What about a bet to the long side? Well, if the
had also featured a China stock-bubble story on its front page, I'd probably go ahead and make a long-side bet, had we a full trifecta. As it is, I just file this away as another indicator of the negative sentiment that pervades most investment media and the general public. It's a bullish indicator, at that.
Steven Smith's Blog: Fly a Condor on Amazon Earnings
Originally published on 2/01/2007 at 4:28 p.m.
is set to report earnings after today's close.In
this video, I discussed a strategy based on expectations that Amazon's price would move more than 6.5%, which is now being priced into the February options.
But one theme developing during this earnings season is that the resulting price moves for many high-profile companies, from
, have been less than the options market has expected. This means the more profitable approach has been to use strategies that are done for a net credit -- selling option premium on expectations that the post-earnings decline in implied volatility will be greater than and offset any resulting change in the price of the underlying stock.
Let's walk through an example: With Amazon now trading around $38.50, one could sell the $37.50 put for around $1.40 and the $40 call for a around $1.20 per contract. In other words, one can sell the February $37.50/$40 strangle for a $2.60 net credit.
The premium collected represents the maximum profit that would be realized if shares of Amazon are between the two strikes of $37.50 and $40 at the Feb. 19 expiration. I would look to cover net credit positions once they achieve 75% of the maximum profit; in this case, that would mean buying the straddle back for a net debit of 70 cents. Also, try to avoid "naked" positions that have the potential for unlimited losses.
The simplest way to cover the strangle or straddle would be to turn it into a condor. This is accomplished by buying both puts and calls with strikes that are further out of the money. In this example, that might mean buying the $35 put and $42.50 call for a net debit of $1 for this strangle. This creates an iron condor for a net credit of $1.50.
The maximum loss is now limited to $1 and is incurred if shares of Amazon are below $37.50 or above $42.50 at the expiration. In this sense, that condor has a built-in stop loss. That can be very helpful and prevent one from panicking in case the stock has some wild swings in the immediate aftermarket trading once the news is released.
Tony Crescenzi's Blog: Incomes Catching Up to Home Prices
Originally published on 2/01/2007 at 10:54 a.m.
The spate of economic news released at 8:30 a.m. was bullish for the bond market, but not substantially by any means; some of the news is actually bearish for the bond market over the medium term. Bullish for bonds was the 0.1% gain in the core PCE (personal consumption expenditures) deflator, which was one-tenth of a percentage point smaller than expected.
Also bullish was the jump in the number of people continuing to receive jobless benefits (continuing claims), which increased to a 1-year high. Still, with incomes gaining at a healthy pace (5.9% growth year over year) and jobless claims still relatively low, the conditions for a meaningful bond rally are not present in today's data.
As I mentioned, jobless claims were low in the latest week, but the number of people continuing to receive jobless benefits was high. Claims were just 307,000, below forecasts by 8,000, and 7,000 below the six-month average. In contrast, continuing claims jumped 71,000 to 2.553 million, the highest level since the week ended Jan. 13, 2006.
As I noted many times in 2006, by definition jobless claims measure joblessness, and only implicitly do the data tell us anything about the pace of hiring. This means that it is possible for jobless claims to be low and yet hiring to be low. In a slowing but expanding economy, companies will retain workers, keeping both layoffs and jobless claims low, but also cut back on hiring, resulting in modest payroll gains, as has been the case for the past year.
Personal income and consumption increased as expected in December, increasing 0.5% and 0.7%, respectively. The accurate forecasts are not surprising given that the data were incorporated in Wednesday's GDP report. Nevertheless, it is notable that personal income was up 5.9% on a year-over-year basis in December, comfortably above its 15-year average of close to 5.2%.
The above-trend gain helps to explain much of the resilience seen in consumer spending in the face of headwinds such as high energy costs and the weak housing sector. With respect to housing, the income gain is important: Personal income and home prices both tend to increase about 5% per year, so with prices falling slightly, incomes are slowly catching up to prices.
It will probably take as much as a year to complete the process and close the gap that developed during the run-up in prices. For perspective, note that a 10% gain in incomes (two years' worth) would boost incomes by $1.1 trillion, money that can help make housing more affordable.