It wasn't an easy week to be a bull. After a relatively flat start, the stock market retreated from recent gains and sold off sharply ahead of the weekend.
Friday's selling mood was spurred by comments from two
members. Dallas Federal Reserve President Richard Fisher said the current direction of inflation was pleasing, but he wouldn't rule out another Fed rate hike "if inflationary winds gain the upper hand." St. Louis Fed President William Poole said that "the inflation rate is likely to fall into a reasonable range this year." Poole warned that "if, however, core inflation seems to be settling at a rate above 2%, then such an outcome would be unacceptable to me."
This week, investors also had to absorb earnings reports from companies such as
, as well as surging oil prices, which pierced the key $60 level but settled late Friday below it.
was lower for the week by 72 points, or 0.6%. The
slumped 16 points, or 0.6%, and the
fell 10 points, or 0.7%.
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 importance of staying nimble,
on the "return of the bears",
on playing the real estate game and
on tightening standards for home mortgages.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: In This Tape, Stay Nimble
Originally published on 2/06/2007 at 9:38 a.m.
"Our dilemma is that we hate change and love it at the same time. What we really want is for things to remain the same but get better."
--Sydney J. Harris
Present market conditions present a particularly difficult dilemma for investors looking to make some moves. Although conditions are good and stocks are acting well, they are technical extended, momentum has slowed and good entry points are becoming increasingly hard to find. On the other hand, the market is not rolling over or falling apart. If you are trying to short this action you are fighting an uphill battle. If you are making money, it is on the long side.
Unfortunately, better buying opportunities aren't likely to arise until the market suffers some selling first and it simply is showing no signs of doing that. We can still knock out some long-side trades but we are relegated to a short-term approach now. There simply are not many good opportunities to put substantial capital into longer-term plays. The setups just aren't there because so many stocks have already made big moves.
Markets like these, while challenging, can be quite profitable if you approach them properly. If you keep time frames short and are constantly looking to move on to the next trade, you can rack up some good gains. The trick is to not be so aggressive that you give back a big chunk when we get a turn downward.
The market is extended but traders are still doing their thing and that creates some opportunities for those inclined to play that game. Eventually the bears will have a chance to make some money on the downside but that time is not now.
Overseas markets were strong overnight. Oil and gold are up. The big news event will be Cisco earnings tonight and that may help techs stay steady today.
At the time of publication, De Porre had no position in stock mentioned, although holdings can change at any time.
Cody Willard's Blog: The Bears Are Back
Originally published on 2/08/2007 at 12:45 p.m.
The bears are back. That's all I can tell you.
I suppose I know why they've suddenly decided to get more vocal and start pounding the table about impending economic and market collapse, but that's what my inbox is filled up with today. Retail traders and hedge fundies alike are trying to explain to me why, as one writer put it, "The debt bomb clock is ticking."
It's news from
that brought the bears out in force to tell the world that the end is nigh. Here's what they're looking at.
This was taken from a
"New Century Financial sank 24% early Thursday after warning of an unexpected fourth-quarter loss. The Irvine, Calif., subprime lender cited 'the increasing industry trend of early-payment defaults.' New Century expects to post a fourth-quarter loss, where Wall Street analysts were looking for a profit of $1.08 a share. The company also 'expects to record a fair value adjustment to its residual interests to reflect revised prepayment, loss and discount rate assumptions with respect to the loans underlying these residual interests, based on indicative market data.'"
Folks, this a tiny little company that does a total of $2 billion in sales per year. It's not exactly
blowing up today, all right?
This one is from a
"HSBC, in an unprecedented statement to the market, said bad debt charges for the group as a whole will be 20% higher than the average analyst forecast of $8.8 billion, taking the total charge for the year to around $10.56 billion. The warning from the world's third-largest bank comes ahead of the group's annual results, due to be published in early March, and follows a December trading update that was already bearish on U.S. mortgage debt."
Don't you love the reporter's implications of how bad this data must really be with the phrase "in an unprecedented statement to the market"? It's apparently never been this bad! Subtle commentary like this has me calling the media perma-bearish these days.
At the risk of getting bashed even more from the suddenly vocal bear camp, I'll just point out that the $1.8 billion of bad debt charges that HSBC is adding to its previous guess is about one-tenth of the valuation that
just lost after its blowout quarter a few weeks ago. And I'd also note that the $1.8 billion of bad debt is only seven times the upside in sales that
showed last night in its report. Excuse me if I don't run for the hills in a panic over the consumer.
I do expect this ongoing boom, which is already several years old, to end someday. But I'd also remind everyone that most all of the pundits and traders who are trying to get us to panic over this stuff today are the same folks who were trying to get us to panic over it last year and the year before and the year before that.
I hear ya', bears, and thanks for writing. But I'm sticking with my bullish thesis.
At the time of publication, the firm in which Willard is a partner was net long Google, although positions can change at any time and without notice.
Steven Smith's Blog: Playing the Real Estate Game
Originally published on 2/08/2007 at 8:53 a.m.
The bidding war for
Equity Office Properties
( EOP) finally came to a conclusion yesterday, but will this also bring to a close the incredible price run for commercial real estate properties and REITs? Some believe this record-setting $39 billion buyout will mark the top for this sector, which, as measured by the
iShares Dow Jones Real Estate Trust
, has gained some 90% over the past two years.
REITs have obviously performed well, but one of the biggest price drivers has been takeover activity, which has pushed valuations to frothy levels. With the Equity Office deal complete and the bidding for
( MLS) nearing a conclusion, one has to wonder if, now that returns on investments are less attractive, the takeover activity and the accompanying rise in prices will cease.
The End Is Near, Not Here
However, many analysts argue that while the boom may indeed end eventually, the time is not now. In fact, some make the case that the cash buyout for Equity Office, which takes it private, will spark the shares of many other publicly traded REITs.
They point out that nearly half of Equity Office's shares were owned by funds with a dedicated allocation to the sector, meaning that about $18 billion needs to find a new home quickly. In addition, Equity Office was the second-largest component of the IYR, representing 4.8% of the exchange-traded fund.
Some evidence of this reallocation could be seen yesterday as shares of
, the loser in the bidding war, jumped almost 7%.
There certainly seems to be plenty of money still looking to be invested in commercial real estate companies, but I believe the gains in price will slow. In fact, I see a good chance for a pullback at some point in the next few months.
Options Play Can Deliver Returns
Without trying to time the market too finely, here's one way to play the scenario of further near-term price gains followed by a correction. You could use options to employ a form of a calendar spread in the IYR.
Specifically, I would look to buy the March $96 calls for about $1.25 per contract and simultaneously sell the same number of contracts for the September $100 calls for around $3 per contract. This creates a diagonal calendar spread for a $1.75 net credit.
The position would benefit from a near-term rise in the share price of IYR. The plan would be take profits on a near-term rally by selling the March calls before their expiration and remain short the September calls on the belief that IYR will not go much above the $102 breakeven point, or about a 10% rise from current levels.
If you want to avoid having a naked short position, you could buy a higher-strike call in the September options to create a vertical spread. This would be a limited-risk bearish position.
Since both the calendar spread and the vertical spread are net credit positions, they would both benefit from time decay -- that is, you could profit even if shares of IYR remain around current levels or even move moderately higher but remain below $100 before the September expiration.
Tony Crescenzi's Blog: Bank Lenders Fret Over Outlook for Credit Quality
Originally published on 2/05/2007 at 3:21 p.m.
The Federal Reserve just released the results of its quarterly survey ofsenior loan officers. The results indicate that banks substantiallytightened their credit standards for mortgages to individuals, with thepercentage of banks that tightened standards reaching the most since 1991.Lending standards tightened on the whole, although only slightly, and insome lending areas standards actually loosened.
This shows that banks areprimarily concerned with the real estate market and not the overall economy.Nevertheless, in separate questions, banks expressed far more concern aboutthe possibility of credit deterioration than of the possibility of improvedcredit to suggest that banks are leaning much more toward tightening lendingstandards then loosening them.
Bank lending standards for large and middle market firms (those with salesover $50 million) were "tightened somewhat" by 5.3% of respondents, twopercentage points lower than in October, and standards were "eased somewhat"by 5.4% of respondents, a decline of three percentage points. This showsthat very little has changed in what many see as a superfluous creditsituation.
Bank lending standards for smaller firms (those with sales under$50 million), were also little changed. Hence, banks continue to makecredit readily available to businesses.
It's a somewhat different story for bank lending standards on real estateloans to both businesses and to individuals. Fully 33.3% of respondentssaid that they had tightened lending standards for approving commercial realestate loans. That's an improvement from October's 40%, but still muchhigher than the 7% of banks that eased lending standards. For residentialloans, 18.2% of respondents said that they had tightened their lendingstandards compared to 8.7% in October.
Only 1.8% of respondents said thatthey had eased lending standards compared to 3.8% in October. All of thesefigures are in contrast to stable credit standards for consumer loans ingeneral. This shows that banks are much more worried about housing thanthey are of the consumer in general.