After a volatile couple of weeks, stocks rallied and U.S. Treasury bond yields soared Friday morning after government jobs data matched estimates. The early gains faded, however, on the belief that the jobs report makes a Federal Reserve rate cut less likely, and the market ended little changed on the day.
Dow Jones Industrial Average
added 15.62 points on Friday to finish the week up 1.3% at 12,276.32. The
gained 1.2% for the week to 1,402.85, and the
rose 0.8% to 2,387.55.
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 knowing when a fallen momentum play can turn profitable,
on the end, and the beginning, of video as we know it,
on buying calls vs. the underlying stocks and
on the jobs report and rate-cut odds.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: When a Broken Stock Becomes a Value Play
Originally published on 3/05/2007 at 1:29 p.m.
One of the issues that traders face in a market that falls apart like this one is to what extent you adhere to strict technical rules vs. taking advantage of market inefficiencies that result when there is panic in the air.
In extremely weak markets, thinly traded stocks can take huge hits as there are no big institutional buyers interested in accumulating on weakness. Sellers end up dumping into a black hole and bids simply disappear.
This approach can be quite dangerous because these sorts of meltdowns can continue unabated for quite some time, and what looks like a great bargain can become a far better one. The key is to make sure you don't become too aggressive too fast and to look for signs that support is beginning to form.
I have a number of these extremely thin stocks that I follow closely while holding small positions. For example,
(CKSW) is a low-priced Israeli software company that has show excellent earnings and revenue growth for four quarters. The stock was even purchased by momentum investor Louis Navellier; however, in this market environment, it has little buying support and has pulled back at 25%.
The chart has no nearby support and can easily trend lower. Sooner or later, value buyers will step up, and if you are familiar with the situation and watch it carefully, you can make a great buy.
What this approach is all about is identifying the point at which a broken momentum stock becomes a value play. It isn't easy to do, but in a market like this, pricing become highly inefficient in smaller stocks and can give good opportunities to the astute trader.
At the time of publication, De Porre was long CKSW, although holdings can change at any time
Please note that due to factors including low market capitalization and/or insufficient public float, we consider CKSW to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices
Cody Willard's Blog: The Slow Death of Broadcasting
Originally published on 3/06/2007 at 1:13 p.m.
and its Bell brethren got word that the
Federal Communications Commission
will try to help them get video broadcast rights in disparate municipalities around the U.S. I have two words for you: "Who cares?!"
The traditional, commercial video world needs to be bifurcated into two distinct sectors: production and distribution. For the first hundred years of video technology's existence, both video production and video distribution were very capital-intensive businesses. Those very high capital costs created huge barriers to entry. That's why there's so much wealth in Hollywood, where the content gets produced, and at the cable networks, where that content gets distributed.
A few years ago, I
frequently wrote about how capital barriers to entry for video production have collapsed with the advent of quality inexpensive digital cameras and cheap computing power. That explains all the current buzz about user-generated content.
But capital-intensive commercial content production isn't going to change. We "end users" will never be able to finance big, episodic commercial content, and video production will always require staffs of actors, managers, producers, and so on. That's partly why I keep saying that video production and content ownership are safe havens in the ongoing video sector disruption.
More important to investors, the next phase of the video revolution isn't about production. The next phase is all about distribution of that video content. And there's no protection -- save for regulatory -- for those content distributors. All those video-distribution platforms like
and Verizon and satellite networks like
cost tens of billions of dollars to build.
The problem for these video-distribution companies, which I've also been writing about for years, is that the Internet's ability to deliver video over standardized connections (provided by these same companies) is driving the cost of distribution to zero.
Companies like Joost and BoomRev.com (full disclosure: I'm founder) are distribution outlets the likes of which have never been conceived by these old world video distributors. The costs to host and deliver quality video content (and by quality, I mean both the HD-quality video of Joost and the infinite programming options at BoomRev.com) are collapsing, as the video is streamed over the same Internet connection that you use to read this Web site.
We'll continue to see a lot of blustery proclamations about copyright protection from both the production and distribution sectors. The commercial content owners should and will be paid by any site (or other distribution technology that hasn't been invented yet) that distributes this content as it generates enough traffic to go mainstream. The studios and
YouTube are simply fighting over the details of that revenue-sharing.
The content owners' longtime distribution partners are political entities, as the opening paragraph of this post underscores, and we can expect Comcast and Verizon to stop fighting each other and turn their sights on the real threat to their payback on wasted video-distribution platforms. They'll soon enough figure out that the real threat is open-Internet distribution of the content, which they're accustomed to having government-enforced oligopolistic control of distributing.
In fact, when they finally start working together in D.C., that's probably the time to start shorting them. The market will finally start discounting the fact that they have zero chance of ever getting the return on those bad broadcast investments.
I've been saying it for years: Broadcast is dying. Joost and the rest of 'em will put it out of its misery.
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: Consider a Replacement Strategy
Originally published on 3/09/2007 at 10:19 p.m.
In light of the market's recent volatility, it might be a good time to use options in your portfolio. Specifically, consider employing a replacement strategy. That simply means selling the stocks you own and replacing them with call options.
This accomplishes several things. First, it reduces the capital requirement because the cost of the option will be far lower than the price of the underlying shares. This should help free up money to diversify your portfolio further and go shopping on the next pullback.
Of course, the cost savings and risk reduction will be a function of which strike or option you choose to buy. You'll have to decide how far in or out of the money you want to go, which expiration you want and/or how much time you'll buy.
One of my general rules of thumb is to avoid going any deeper than one strike in the money. Otherwise, you're basically replacing stock with a highly leveraged financing tool in which the value of the option will move on a 1-to-1 basis with the price of the stock. A 5% decline in the stock will result not only in an equal loss in dollars in the option value but also, on a percentage basis, in a possible loss of 25% or more. That is certainly not risk reduction.
Another of my guidelines is to buy an option that has at least four months remaining until expiration. This provides enough time (hopefully) to rise through a rough patch while not suffering too much time decay. Time decay really kicks in and accelerates once you get about three weeks away from expiration, so at that point, I would consider closing the position or rolling it into a longer-dated option.
Most importantly, when choosing the number of contracts to purchase, use the delta-equivalent share count,
the amount of money invested in the underlying shares. For example, if you own 1,000 shares of
Chicago Mercantile Holdings
-- which has been on a real roller-coaster, going from $590 down to $500 and back up to $565 in the past six months -- you would not buy $565,000 worth of call options.
Instead, you might look at September $570 calls, which are now priced at around $45 per contract. These at-the-money options have a delta of 0.5, meaning that for every $1 move in the stock, you can expect a 50-cent move in the option. So to have the equivalent of 1,000 shares, you might buy 20 contracts.
But because delta will increase as the share price rises, I'd suggest only buying about 15 contracts. This would be a $67,500 total cost for the 15 contracts. While that's certainly a big number, it only represents about 15% of the cost of the shares.
Remember, the delta also declines as the stock price falls, so just as gains and position size accelerate on rallies, the losses and exposure diminish as the share price declines. If you look at a lower-priced stock, the numbers become more palatable.
The biggest drawback of the replacement strategy is that the premium you're paying for the options can be a significant hurdle to achieving profitability. In the example above, the $45 option price represents an 8% premium or price hurdle. But that's certainly not insurmountable for a stock that has gained more than 500% in the past three years and is capable of 25% price moves in a matter of months.
Tony Crescenzi's Blog: Even the Fed was Hiring in February
Originally published on 3/09/2007 at 12:09 p.m.
Today's employment report makes clear that the net impact from the weakening of the housing sector continues to be offset by strength in other sectors. To be sure, job losses related to the sector were large in February, with the construction sector seeing its biggest job loss since 1991, but the losses have not been enough to overwhelm the net picture.
Interestingly, today's report would have been even stronger if not for the influence of unseasonable weather. In response to today's report, odds of a
rate cut have fallen sharply, with the bond market once again pushing its rate cut expectations into the second half of the year.
Payrolls expanded by 97,000 in February, 2,000 more than expected; the two prior months were revised upward by a total of 55,000 jobs. As usual, the service sector was responsible for the gains, with the biggest gainers in the leisure and hospitality industries (+31,000), and in the health services industry (+32,000).
There was also a sturdy gain of 21,000 jobs in the restaurant sector; a gain of 11,000 in the arts, entertainment, and recreation sector; and a gain of 29,000 jobs in the professional and business services sector, consisting of gains in accounting and bookkeeping (+6,500), architectural and engineering services (+3,700), and management and technical consulting services (+5,800).
Even the Federal Reserve was hiring in February, adding 300 workers, the Fed's biggest hiring spree since December 2001, when the gain was also 300 workers and the biggest since August 1998.
Some are commenting on the 39,000 gain in government jobs, which was about 15,000 more than normal, but there is really nothing unusual about it. State and local governments are experiencing a surge in tax receipts. Data from the National Governors Association indicate that 46 of 50 states met their budget forecasts last year and that states planned to boost nominal spending by 7.0% this year, a solid level compared to the 30-year average of 6.4%.
Housing-Related Job Losses
The housing industry's downturn had its biggest impact yet on employment, with the construction sector posting a job loss of 62,000, the most since December 2001. Some of that loss was almost certainly because of the unseasonable weather. There are several points of evidence on this front.
For starters, it is notable that the nonresidential sector posted a job loss of 25,000, even more than the residential sector, which lost 21,000. The nonresidential sector had been seeing gains of about 10,000 per month and it is widely felt that the sector is holding up relatively well, so February's job loss likely reflects impact from the weather.
To add to this, it is notable that the Bureau of Labor Statistics said that there were 3.8 million people who experienced part-time work problems, compared to just 731,000 last February, reflecting factors such as early-leave policies for government employees (teachers, for example). There was also an increase in the amount of full-time workers unable to work. This figure increased to 522,000, the most since 1994.
With today's loss in construction jobs, the sector has lost about 110,000 jobs in the residential construction sector, a loss of about 4%. This is a sharp downturn compared to losses that occur in other sectors during economic recessions, but still not as much as the 16% average decline seen in all downturns since 1973 -- with the exception of the last recession, when job losses in construction were small.
Interestingly, any problems that may have occurred in the subprime sector were hidden by gains in other industries. This makes sense, since there are thought to be only 50,000 to 100,000 jobs in the subprime mortgage financing sector. This is evidenced by an increase in jobs in the credit intermediation sector, and by the small loss posted by the real estate and rental and leasing sector, a sector that includes jobs at real estate brokers.
Wages are now up 4.1% vs. a year earlier, not far from December's peak of 4.3% and the 24-year high of 4.4% set in 1998 and 1990. The current level is about a percentage point above the long-term average.