While the subprime mortgage industry was on investors' minds this week, the rise in the Chinese stock market, as well as a carefully worded
statement went a long way toward easing fears.
On Wednesday, the Fed basically walked the line, leaving room for a possible rate cut, but maintaining vigilance in terms of inflation helping the market to rally as some more of the previous three weeks' volatility lessened a bit.
ended the week with a five-session winning streak, as Friday saw the index add 19.87 points to finish the week up 3.1%. The
added 1.57 points, rising 3.6% for the week, and the
tacked on 4.44 points to close up 3.5%.
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 this week's
on what the future holds for Adobe,
on post-Fed adjustments and
on the central bank's lack of neutrality.
Click here for information on
, where you can see all the blogs -- and readers' comments -- in real time.
Rev Shark's Blog: Rethinking Yesterday's Fed Rally
Originally published on 3/22/2007 at 9:03 a.m.
"Always mystify, mislead and surprise the enemy if possible."
-- Stonewall Jackson
Market players were surprised yesterday by a kinder and more dovish Fed. At first many were confused by the subtle changes in language in the policy statement. There was still acknowledgment that inflation is an issue that hasn't gone away but the wording was changed in a manner to indicate that the Fed was now more open to the possibility of rate cuts in the future.
This was unexpected and it sent bulls scrambling to add long exposure and shorts scurrying to cover. Unlike most Fed announcements, there was no market whipsaw. We went straight up and didn't even pause for a breath because so many were poorly positioned.
The question now is, where do we go from here? The biggest positive for the market is that there are still many who are improperly positioned for us to suddenly resume an uptrend after a sharp but very short-lived correction. The market has not been following the technical analysis script and that is causing some consternation.
The main reason things have not been playing out as many were anticipating is because so many market players became so negative and cautious so quickly. It was highly unusual that sentiment become negative so fast.
Because so many had become so cautious so fast the selling pressure quickly dissipated. Those who were fearful had already acted on their emotions and there was no one left to pressure things down. Combined with continued high levels of liquidity the market began to climb back up slowly and steadily. There were still plenty of doubts going into the Fed announcement and when the surprise news hit, the rush was on.
There are still plenty of folks ill-prepared for further strength and this is likely to keep support under this market. The dip buyers are not going away especially because buying weakness lately has proven to be the road to profits. Until they suffer some consistent failures they are going to keep doing their thing.
While there is plenty of poor positioning to support the market, it isn't all positives out there. The whole premise for the buying yesterday is questionable. The Fed's increased dovishness is likely due to concerns that we may have some problems in the housing market and a slowing economy. The Fed is not signaling the end of the worries over inflation but reiterating the need to provide stimulus should economic problems deepen.
So although we might have a questionable foundation for continued strength, market players are so badly positioned, dip buyers so confident and liquidity so prevalent that the downside is likely to be limited. That doesn't mean we won't pull back after such a euphoric move, but those looking for the market to quickly fall apart again are likely to be disappointed.
We have a flat start to the day as emotions cool. Overseas markets had strong sympathetic action and oil and gold are up strongly.
Cody Willard's Blog: Is the Adobe Monopoly Safe?
Originally published on 3/23/2007 at 11:55 a.m.
I received an email the other day that asked, "Is Adobe's competitive advantage patent protected or marketplace protected?" While
Flash technology is obviously patent protected, so is every other video technology out there. So what is it that makes Adobe's Flash a virtual monopoly on the browser-based online-video market? Since Adobe has 99% of the market place for online embedded video playing, every company that develops websites that play video, as I learned when I started building BoomRev.com last summer, has to use Adobe's technology to remain compatible with that market. This kind of self-perpetuating positive feedback protects Adobe's monopoly.
So what would make my thesis of Adobe being a major beneficiary of browser-based video wrong? First, Adobe's monopoly would be busted if the entire browser-based video experience we know today doesn't survive. Instead of searching and navigating the Internet based on text as we currently do, a company could develop a ground-up video-centric experience.
The original function of the Internet browser was to display and navigate a text-centric networked world. We are now moving into the video-centric networked world. What if there is another Netscape coming down the pipe that will blow apart the paradigm of the browser and Internet as we currently know them? Such an event would obviously undermine Adobe's dominance in the online-video market.
Another potential threat to their monopoly is if the television networks, Hollywood studios and the consortium they're trying to build together decide to freely distribute their content online, but using a different technology, such as
Windows Media or something entirely proprietary of their own?
These content owners have so much valuable content and so much at stake in terms of future revenue that it is possible that they, perhaps with a company like Microsoft, could decide to distribute their content on the Internet exclusively in a non-Flash-compatible format.
A marketplace attack on a natural technological monopoly like Flash like this would succeed only if the attackers had a multiple more of power than the distributors. For example, YouTube is obviously a very powerful entity. They receive hundreds of millions of visitors per day, and with a captive audience like that comes a lot of power.
Fox and other commercial content owners recognize that there is a major power shift under way.
While the online video-distributor-centric plays, such as YouTube, Adobe (via Flash), and others are worth billions of dollars in market cap combined, the content owners' content alone is worth hundreds of billions to a trillion dollars. Right now the content distributors are losing the battle to the content creators as best seen by YouTube taking down content. This outright attack on the de facto standard in the marketplace, if successful, would put my thesis of Adobe benefiting from the online-video revolution at risk.
I strongly doubt the attack is successful, though, and I think flash-powered video viewing is in secular growth mode for many years to come. So I'll stick with Adobe.
At the time of publication, the firm in which Willard is a partner was net long Adobe, Microsoft and News Corp., although positions can change at any time and without notice.
Steven Smith's Blog: Let the Adjustments Begin
Originally published on 3/22/2007 at 9:24 a.m.
It's the day after Ben Bernanke let the doves fly, and the stock indices are peacefully hovering where they were before the nosedive was induced by China and the subprime mortgage meltdown. Yes, the VIX is also back to its new "normal" -- though historically low --level of below-teenage numbers.
For traders, today presents some difficult questions. Do you use yesterday's rally as a chance to bail out of some positions and take profits? Or is this a time to hold firm, figuring you've weathered what might be the worst of the storm?
For those who use options, there are a much greater number of choices. While that provides more flexibility, it also makes the answers less clear-cut.
One of the first and simplest approaches is to use a replacement strategy -- that is, sell out long stock and replace it with call options. This reduces your risk, but also maintains upside exposure. The second approach would be to create a married put -- that is, buy put protection on stocks or funds you own. This also comes with some premium cost that raises the effective cost basis, but it leaves you with unlimited upside potential.
Things become more complicated if you are starting with strictly option-based positions. Do you turn straight long call holdings into a spread by selling a higher strike? Do you roll the position to a higher strike? Do you just sell a portion of the position?
The first way to go about answering these questions is by asking yourself what you'd do if you had no current position on right now. If you wouldn't buy or get long this morning at current levels, the answer is simple: Close the position.
In deciding how to take partial profits -- such as by creating a spread or rolling to a higher strike, again, ignoring sunken costs or paper profits -- applying the "would I initiate such a position now?" litmus test can help you arrive at the proper decision.
The biggest mistakes come in the form of turning existing open-ended positions into spreads to reduce the risk, but it comes at the cost of limiting profits. That's usually not worth it.
For example, assume you had bought XYZ's $50 calls for $2 per contract. On Wednesday's close, they were worth $3.50 per contract. You then notice the $55 calls are trading at $1 per contract and you figure you can create a spread for a net cost of just $1 for the $5 spread. Risking $1 to make $4 sounds good, right? But you still have your $2.50 profit at risk.
Again, any adjustment should be viewed from the perspective of whether you'd establish that position as it's currently priced. In this example, spending $2.50 to make $2.50 is not that attractive.
Generally speaking, selling a portion of the position or rolling to a higher strike is a preferable way to lock in gains, reduce risk and maintain profit potential.
Tony Crescenzi's Blog: The Fed Is Not Neutral
Originally published on 3/21/2007 at 4:41 p.m.
The notion that the
has shifted to a neutral directive is extraordinarily faulty. There was a good rally on the short end of the yield curve, but it wasn't vigorous enough to suggest that investors truly feel there has been removal of the Fed's
tightening bias. Only the
tightening bias has been removed with the removal of this portion of the Jan. 31 statement:
The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
A neutral directive today's was not. In a neutral directive, the Fed would have said as it did in February 2005 that:
The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal.
Today, the Fed did
say that the risks were equal but instead that the predominant risks were toward higher inflation.
Stocks were poised to rally either way so long as the Fed stayed out of the way. I mean this for equities globally. Three reasons: China's back to the highs, yen-carry fears have faded, and big brokerages continue to report no problems from subprime lending, further isolating the problems to poorly managed situations outside the realm of the banking and brokerage sector.
The Fed avoided two errors. First, the Fed did not shift fully to neutral, as I stated above. Had it done so, inflation fears would have ratcheted up in the bond market. Inflation fears were already rising, and they rose again today with the change in the explicit language. Treasury inflation-protected securities are now priced for a greater amount of inflation expectations than at any time in seven months.
Second, the Fed acknowledged the recent signs of economic slowing, particularly in housing. Had the Fed failed to do so, cries that the Fed was "too tight" would have resulted in weaker economic assessments, hence hurting equities.