The market played the waiting game a bit this week as ambiguity set in. Wednesday's FOMC minutes provided little clarity regarding future moves as its forecast remained the same.
Caution is currently the name of the game, as any number of crises -- from a housing market meltdown to consumer weakness -- occupy the minds of market players. There was a little good news to solidify things on Friday with raised guidance from
and favorable comments from
With this as a backdrop, the indices finished the week with slim gains, but near their highs, after a decent end-of-the-week rally brought them to levels not seen since mid-February. For the week, the
was up 0.4%, while the
gained 0.6% 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 gaming earnings,
on Google vs. Yahoo!,
on Nasdaq's continuing acquisition attempts and
on the continuing decline of the dollar.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: Don't Think You Can Game Earnings
Originally published on 4/10/2007 at 9:31 a.m.
"Don't wait for extraordinary opportunities. Seize common occasions and make them great. Weak men wait for opportunities; strong men make them."
-- Orison Swett Marden
Earnings season starts tonight with a report from
followed later this week by reports from
. The great bulk of earnings kicks in next Tuesday and most of the S&P 500 will report within two weeks after that.
The big question for us is how we position ourselves as earnings reports hit. Many market players tend to feel that because earnings often serve as a catalyst for a big move that the smart play is to take positions in front of the news. Unfortunately, that often is nothing more than just a gamble without any discernable edge.
Investors often fool themselves into believing they have some special insight into earnings. Even though analysts and huge funds who talk to management every day are incapable of consistently predicting earnings and how they may play out, many average investors who rely on Yahoo! message boards for information are confident that they know what is going to happen as earnings reports hit.
The fact that it is nothing more than a coin toss and that they may get it right just by chance is what makes this thinking particularly dangerous. After getting lucky a few times with a bet on earnings, many investors are emboldened and become increasingly aggressive in trying to find opportunities from which to profit.
The one big thing that most of them fail to consider is that even if they are correct that a company may issue a good report, many other investors are likely to think the same thing. So they tend to bid up the stock in front of the report and if things do turn out as hoped there is inclination to sell the news and lock in gains quickly.
Predicting what a company might report is only half the battle; you also need to predict how a stock will react. There is not always a direct correlation between a "good" report and positive price action.
There is still plenty of action during earnings season for the aggressive investor even if you resist the temptation to bet on earnings reports. Buying or shorting after a report has been issued can be a very effective strategy; the market seldom fully prices in the full impact of news immediately. If you are familiar with a company and study the report, you can often make some excellent trades by aggressively buying after the news is out. Even if a stock moves up sharply it can continue to move for days as the market gradually revalues the situation.
There is no need to make wild gambles during earnings season. There will be plenty of opportunities after news has been issued to make some money. Unfortunately, there will always be those who just can't resist the temptation to make bold bets even when they have no edge. (And it is often these undisciplined folks who make trades after the fact much more profitable.)
We have a quiet start this morning with very little news on the wires. Asian stocks were mostly down while Europe was up on some deal news. Oil is bouncing back a little after a huge drop yesterday and gold continues its upward march after a slight hiccup. Goldman has removed
from its "Conviction Buy List."
Cody Willard's Blog: Battle of the Search Giants
Originally published on 4/12/2007 at 12:43 p.m.
Wednesday's episode of "Cody & Task," I talked about the idea of staying long and/or building my
position while shorting
. The big problem with shorting Yahoo! is that it's positioned to benefit greatly from the secular growth of advertising on the Internet. About 5% of all advertising is now done on the Net, but the medium should pick up another 45 percentage points over the next decade or so.
But Yahoo! just isn't run as well as Google is -- not even close. Yahoo!'s market share of search continues to fade slowly, in large part because the company has confused consumers about what it really is. Is Yahoo! a search engine? Is it a content producer? Is it an old-fashioned portal like Excite? Or is it some combination of all of the above? And how can I tell when it's serving as an objective conduit to information vs. trying to point me to something it created and has a vested interest in showing me?
Google is flirting with some of these same issues as it develops its video businesses and buys sites like YouTube. Try it yourself -- do a video search on Google for any celebrity and see how many Google-controlled YouTube video results show up vs. those from non-Google properties like MetaCafe, DailyMotion and
RevolutioNetwork.com. I know that Google is losing its objectivity in organizing the world's content, but at least it's closer to staying trustworthy than Yahoo!.
That's the long-term thesis for why I think Google will have more upside over time than Yahoo!. Shorter term, there's also some compelling logic.
For one thing, I can't remember reading one single pessimistic or negative review of Yahoo!'s Panama ad platform. That, along with the rallying stock, raises expectations, so anything less than awesome results and outright earnings momentum from Panama's rollout will likely hit Yahoo!'s stock. The commentary from Yahoo!'s executives has also been full of optimistic rhetoric about how great the response to Panama has been. Shareholders had better hope there's some proof in that promised pudding. P/> Google, meanwhile, has become the favorite horse to kick in the mainstream media outlets, which themselves own the very video content and distribution businesses that are fighting Google/YouTube. Let's keep it real: The mainstream media have some serious player-hating envy toward Google, as it's destroying the value of old forms of content distribution like newspapers, magazines and, increasingly, broadcast TV.
That envy has shaken a lot of the weak hands out of Google, at least from a near-term trading perspective. Even as Google continues to take search market share from Yahoo!, MSN and meaningless others (hmm, a natural oligopoly -- remember how the permabears used to explain that search was a commodity?!) and the Internet continues to show huge secular growth, there seems to be little buzz about potential upside for Google in the near term. Low expectations are a good thing.
I've not pulled the trigger yet, but this analysis has me pondering a paired trade of long Google, short Yahoo!.
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: Nasdaq May Make a Move on Philly
Originally published on 4/11/2007 at 9:04 a.m.
This morning's big buzz in the options industry is that the
reportedly in talks to acquire the
Philadelphia Stock Exchange
as a means of expanding into options trading.
This comes after the Nasdaq's failed bid to buy the
London Stock Exchange
, which doesn't trade derivatives anyway, while its rival
to create the first trans-Atlantic market. At one point, the NYSE was reportedly interested in the LSE, but its main focus was on Euronext because of its large options and derivatives business.
Interestingly, the Nasdaq made a lot of noise last September about entering the options business in 2007 once penny pricing came into effect. At the time, I
believed that news wasn't worth much, and that has proved to be the case, as the option penny-pricing pilot program has been in effect for more than two months now.
That's not to say a Nasdaq-PHLX deal would be a bad one. Option volume is growing nearly three times the rate of equity volume, and last year, technological upgrades helped the Philadelphia exchange
post the largest percentage gains in market share, from 10% to 14% in 2006. That put the exchange in an admittedly distant third place in terms of option share among the six current U.S.-based exchanges.
A Nasdaq-PHLX linkup would also continue the trend of exchanges offering both equities and options on a single platform. The two leading option exchanges, the
International Securities Exchange
Chicago Board Options Exchange
, have both launched their own electronic stock exchanges in the past year.
And because the PHLX is owned by five major Wall Street firms, including
, it is also consistent with the trend of liquidity providers having an equity stake in the exchanges on which they conduct their business. Investment banks and trading firms hold large equity stakes in ISE and privately held
Boston Options Exchange
While it's not quite the consolidation I had
called for, it's certainly a step in that direction.
Tony Crescenzi's Blog: The Dollar's Steady Drop
Originally published on 4/12/2007 at 11:36 a.m.
By one gauge, the U.S. dollar is trading close to its lowest point sinceMarch 2005. The decline is nothing out of the ordinary given that thedollar has fallen in four of the past five calendar years. As I havelong noted, only if the dollar's decline is rapid and disorderly should itbe expected to have broad impact on financial markets.
The gauge I referred to above is the dollar index that trades on the Finex.It traded as low as 82.07 this morning, fractionally below its Dec. 5 closing low of 82.09, which was its lowest since March 2005. The index actually traded lower before March 2005, trading as low as 80.60 on Dec. 30, 2004, meaning that the dollar's downtrend can hardly be called rapid and disorderly.
The dollar's drop fits with a theme I have espoused for quite some time,chiefly with respect to the diversification of central bank portfolioassets. Throughout the world, central banks are putting more of theirreserves into nondollar assets.
Today, the dollar represents roughly alittle under 66% of worldwide reserve assets, down from 70% in 2001,according to data from both the Bank for International Settlements and theInternational Monetary Fund.
The best gauge of the U.S. dollar is the
trade-weighted dollar index. It is the best partly because it is the Fed's, and hence theone that is cited most often by Federal Reserve officials. The Fed's indexis only available with a one-day lag, but it looks like it will also break itsDecember low.
In contrast, however, doing so will not put it at a nearlytwo-year low, although a drop of an additional 0.1% would. It would take anadditional decline of close to 1% to push the Fed's index through itsDecember 2004 low, which was the lowest since 1995.
Because of the diversification theme, the dollar seems likely to continue tofall at a slow pace. There will be interruptions, however, particularly ifU.S. growth surprises or European growth disappoints. One can usually beton these things happening, although the prospects for such are not strong inthe immediate term.