It was a week filled with merger-and-acquisition news that, despite some poor earnings reports and semiconductor weakness, managed to drive the Dow to even more record closes.
Private equity struck deals for
Chrysler Group and
Alliance Data Systems
agreed to a buyout, and on Friday,
said it will acquire
For the week, the Dow added 1.6% to record territory of 13,556.53, and the
added 1.1% to 1522.75, but the
, on the semiconductor weakness mentioned above, dipped 0.2% to 2558.45.
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 how to get into a fast-moving market,
on Riverbed as an Internet-video play,
on how much options influence stocks and
on the sudden yield-curve shift.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Rev Shark's Blog: Frustrated by the Go-Go Market? Some Tips
Originally published on 5/14/2007 at 8:08 a.m.
"Sometimes thinking too much can destroy your momentum."
-- Tom Watson
The most difficult thing about this market is that is so easy to find good reasons for why it should stop going up. Even some of the most confident bulls were happy to see the pullback last Thursday and said it felt right that we have some sort of correction given the record-setting run in the DJIA. The problem for investors is that even if a pause or pullback seems highly logical and reasonable, we just aren't seeing it and when we do weaken -- like we did last Thursday -- the buyers waste no time jumping in and driving us right back up again.
The hardest thing to do is to not think too much but to just trust the momentum to continue to run. Although that sounds dangerous and lacking in prudence, it has been the smart thing to do and folks like Jim Cramer have been right to urge sticking with the uptrend and not looking for reasons that it is going to suddenly end.
So what do you do if you have idle cash on hand and you are growing increasingly frustrated watching this market go straight up? Do you just jump in, buy anything and hope you aren't too late to the party?
No, you can't allow yourself to be sucked into the market by the emotion. You have to stay selective with buys and not make them simply to be in the market. On the other hand, you have to recognize that this momentum can easily continue and that you can make some money by playing the game. You just have to have the right mindset and approach.
I suspect there are a lot of folks who are playing the long side right now while they keep their finger not far away from the eject button. That is why when we dip like we did on Thursday it feels like such a complete meltdown. The buyers complete dry up at the first sign of trouble and then dive right back in, like they did on Friday morning, when it looked like the market had found support.
It is going to be particularly interesting to see how the market acts this week with most of the major news flow past and we start moving into a seasonally weak time of the year. Option expiration could serve to hold things up but the news catalyst seem likely to slow.
There is no question about it that this is an extremely tricky market to trade right now. The momentum game is certainly working but it is becoming more and more dangerous by the day. We need to stay particularly vigilant and make sure we don't get caught by a nasty mood shift.
We have a stable open on the way. The Chrysler takeover is helping the mood but Europe is mixed and Asia strong. The Hang Seng Index, which is a cap-weighted index of Chinese stocks traded in Hong Kong, is up 2.50% this morning and other Asian indices are strong as well. Oil and gold are up.
At the time of publication, De Porre had no positions in stocks mentioned, although holdings can change at any time.
Cody Willard's Blog: Running With Riverbed
Originally published on 5/18/2007 at 10:12 a.m.
before as a good play on the Internet video revolution, and it's one of the names I've been scaling into. It's been running away from me, and I don't yet have as big of a position in the name as I want. I'll look to buy more on weakness over time from here, but I figure I'd get the name out to readers in case it doesn't come back in.
Remember the multicolored heptagon wonder that was Inktomi? Well, a few executives from the ISP-software company of the '90s never forgot the lessons that helped them sell the company to
for $235 million at the bottom of the dot-com bust. They have builtRiverbed as a nimble way to maximize that precious bandwidth you pay for by the byte.
Wide Area Network (WAN) refers to the Internet as a whole, as opposed to Local Area Networking (LAN), a little intranet (when was the last time you heard that term?) for your internal corporate needs. The distinction is important; firms and their worker bees have found that sending files by email and other online applications is... wait for it... empowering.
Can you ever imagine a time when companies will use the Internet less? Then the issue of bandwidth usage starts to creep up in the form of increasing bills and upset accounting departments (who no doubt send emails criticizing heavy Internet usage).
Riverbed thinks it can make everyone happy. It has about two dozen patented caching techniques that it has integrated with hardware to deliver a package that minimizes bandwidth usage. If multiple users at a company try to download the same file or the same page, Riverbed's Steelhead system remembers that the file has been sent before and delivers it without duplicating a request to the server. Workers are generally accessing the same pages and applications as their co-workers, and Riverbed has figured out an elegant solution that increases network efficiency. Riverbed enables companies to share files effortlessly across separate offices by maximizing the efficiency of queries and use of applications
I like Riverbed because it is well positioned to become the de facto standard for optimizing enterprise network traffic. Its Steelhead devices are preconfigured to each customer's needs and can be set up out of the box without disturbing the existing network. Its technology is scalable, with solutions costing anywhere from a couple of thousand dollars to a couple of million. And the wonks in accounting will love that Riverbed's products can be depreciated as equipment, as opposed to paying for bandwidth as a good.
still trying to be the
of all your routing needs and
still not out of its options backdating mess, Riverbed is ahead of the curve in WAN optimization and has barely begun to grow thebusiness. Its revenue is expected to double, and the big margins (70%) are attractive to investors who have seen a more than 100% rise in share price since the IPO a year ago. Riverbed has not slowed up on R&D and is now developing a product for laptops that will hold copies of corporate files, essentially a virtual version of its hardware products.
Best of all, Riverbed deals in a kind of bandwidth addiction. Every customer base to which it installs reports such a surge in network speed (up to 100 times), and that creates instant loyalty. Weaning them off their dependency on Riverbed is unlikely.
The skepticism around Riverbed is similar to the skepticism around F5 when I was buying it at $23, three years ago. (Check out my write-up in
The Telecom Connection from June 16, 2004.). F5 now trades at roughly $75.
I don't know how to game the near-term action in Riverbed, but I do expect to own it as secular growth in the browser-based Internet-video cycle accelerates over the next few years.
At the time of publication, the firm in which Willard is a partner was net long Riverbed and Cisco, although positions can change at any time and without notice.
Steven Smith's Blog: Option Theory
Originally published on 5/15/2007 at 5:20 p.m.
I received an email this afternoon from a reader asking for an explanation of Jim Cramer's
CC post regarding puts on
The reader, who first paraphrased Cramer's post "that bears are pressuring NYSE, the stock, with May 80 puts, 3000 of them, thus forcing brokerages to ALSO short the stock to hedge," asked me, "Do options control everything behind a stock?"
Options can have some influence over stock movement, but it is tail-wagging-the-dog type stuff and usually very short-lived. Also, sometimes Cramer doesn't sniff behind the numbers to see what the real impact of the option activity would be before ascribing a meaning that fits his existing thesis.
Let's look at the numbers in NYX. As of 3:30 p.m. ET, there have now been about 4,400 of the May 80 puts traded. Prior open interest in the strike is over 12,000 contracts, so it would immediately be a bad assumption that this is all new buying, given there are now just three days until these options expire. I'd assume some of the volume is liquidation.
But let's go with the idea that all of the volume represents new buying of these puts, and they need to be hedged by the market makers who are taking the other side, that is, selling to facilitate the trade. Those put options currently have a delta of 0.55, meaning they would create about 240,000 shares of selling pressure. A fair amount, but still representing less than 4.5% of the stock's 5.1 million shares traded thus far today.
Also, for consistency's sake, one should assume that the call volume, which has seen 3,000 of May 80 calls trade thus far, is also all opening transactions -- even though prior open interest was 6,138 contracts -- that needed to hedged. So, that pretty much negates the selling pressure created by the put buying. I just don't see how the option activity can be cited as the force driving the stock price lower today.
No, I think the stock has been under pressure since the Euronext deal closed because the shareholders' lock-up period to sell expired. And there are some rumors starting to circulate that the NYSE might make a run at taking over
, which recently agreed to merge with the Deutsch Bourse.
Tony Crescenzi's Blog: Six Reasons for the Sudden Yield-Curve Shift
Originally published on 5/16/2007 at 4:53 p.m.
In February, the yield spread between three-month Treasury bills and 10-year Treasury notes -- at -60 basis points -- signaled almost 50% odds of recession. That has almost disappeared, with the spread now at just -4 basis points. The narrowing has been particularly sharp in recent days, moving from -25 basis points last Tuesday.
Technical factors seem to be playing a large role, although most of the move has been because of a sudden drop in T-bill rates, which have fallen significantly below the fed funds rate. The last time this occurred was on the eve of the
last rate-cut cycle.
Six reasons are behind the sudden shift in the yield curve.
1. Faded pessimism over the economic outlook.
When the yield curve reached its maximum inversion on Feb. 28, pessimism about the economic outlook was at its peak. Recession fears have faded since then, particularly because worries about spillover from the subprime mortgage market have simmered down.
2. Big increases in international foreign exchange reserves.
International reserves have been growing sharply for several years, and growth has recently accelerated. Although central banks are diversifying out of dollars, they remain large buyers. In China's case, its increase in international reserves has been massive, increasing $1 trillion over five years and $134 billion in the first three months of 2007 alone.
In Brazil, reserves have soared over the past year, to $122 billion at the end of April compared to $55 billion a year earlier. More than half of that increase has occurred over the past four months. Brazil's holdings of Treasuries have jumped by $40 billion over the past year, with sharp increases occurring in both February and March.
3. Big increases in cross-border deposits.
Vast amounts of monies are moving across borders, evidence of massive levels of global liquidity. Data from the Bank for International Settlements show that cross-border deposits totaled $25 trillion at the end of the third quarter of 2006 (most recent date available), up 18% vs. the previous year. Much of the increase has been concentrated in dollars, leaving more money available for investment in Treasuries.
4. More carry-trades, including a jump in borrowing of the Swiss franc.
Data from the Bank for International Settlements indicate a surge in lending by Swiss banks to the Cayman Islands. According to the data, lending of Swiss francs to offshore entities increased by $51 billion in last year's second quarter and $66 billion in last year's third quarter, much higher than the previous record of $6 billion.
5. Pre-flight-to-quality trading.
As equities have been advancing with unusual frequency, some investors might be deciding to park cash in zero-maturity assets. Asian investors, flush with dollars, might be particularly leery about China's domestic stock market, where speculation among its nation's populace has been dramatic.
6. Parking of deal-making money.
Before deals are closed, capital for them might be finding their way into zero-maturity assets.
Missing from the fundamental perspective is any evidence of rising rate-cut odds in either the Eurodollar or fed funds futures market. This is intriguing, given that the T-bill yield has fallen 51 basis points below the 5.25% fed funds rate, the most since the Fed's last rate-cut cycle, which ended in June 2003.
Just two months before that cycle started, when the Fed delivered its first of many rate cuts, the spread was just 6 basis points. It widened to 125 basis points days before the rate cut. Therefore, the current move in bills suggests increased bets on the chances of a near-term rate cut.
I'm putting the odds of a rate cut at the August Fed meeting at about 30%, which is higher than the market's given odds of 15%. The chance of a cut has grown because first-quarter gross domestic product was so weak and because consumer spending started the current quarter on a very poor note. The weekly chain-store data weigh heavily in my view on whether an important shift will occur at the Fed.