As always, RealMoney's bloggers were all over the market action this week, and we'd like to share the best of their recent commentary with readers of TheStreet.com. 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 end of easy money,
on taking profits in Apple and
on this week's
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, where you can see all the blogs -- and readers' comments -- in real time.
Rev Shark's Blog: The End of Easy Money May Cause Problems
Originally published on 6/28/2007 at 7:42 a.m. EDT
Change begets change. Nothing propagates so fast.
-- Charles Dickens
After yesterday's healthy bounce, there is an inclination to believe that nothing has changed, the market is back on track and the long-running uptrend will continue. Perhaps it will, but it would be foolish of us to not consider whether anything significant has changed. The market suffers occasional bouts of indigestion that result in setbacks, but we need to watch for are fundamental changes that are significant enough to turn the market trend.
There is one potential major problem out there right now that could derail the market. That issue is the end of cheap money. For some time now, interest rates have been low and lending standards lax, which has led to a flood of liquidity. These funds have been used for mergers and acquisitions, and to take public companies private. The deals have worked because the cost of capital has been so cheap and banks have been willing to accept certain levels of risks.
The blow-up of two
hedge funds that invested in collaterized mortgage obligations has suddenly raised concerns that that maybe some of the deals that are being done and the lending practices that support them are no longer viable. A number of folks, such as the heads of the
and Goldman Sachs, have weighed in on this issue and have made it clear that they are concerned.
What we have to watch for are signs that the market is losing an underpinning of technical support because of this issue. No one knows for sure at this point whether this is going to be a major problem, and it is downright foolish for individual investors to try to figure out how these events will eventually unfold. However, we should stay very aware of the problem and watch how the market reacts to news on the topic. If the market shrugs it off and continues to act well, that tells us that the big money that drives things is comfortable. On the other hand, if we start seeing failed bounces and aggressive selling into strength, then that is our tip-off that something major is changing and that we need to move to protect ourselves.
We have a particularly good test setting up right now after the bounce yesterday. Things were looking pretty dicey on Tuesday but the move yesterday resulted in a collective sigh of relief. Part of the move may be due to some optimism about the FOMC interest rate decision this afternoon, but part of it is also due to hope that the bad debt issue may not be so bad.
If sellers start to weigh on the market after we hear from the
this afternoon, then we'll know that we are going to need to watch this debt issue more carefully. It is the end of the quarter, and quite often the second day before the end of the quarter is the day where the most mark-up action occurs. Funds don't want to be too blatant about it, so they don't wait until the last moment to play the window-dressing game.
My game plan is to stick to the long side for now but to do some paring back into strength, especially if we get a positive reaction to the FOMC announcement. Once the Fed news is out I'll reassess, but I anticipate that I will be looking for some downside.
We have a flat open on the way. Overseas markets were mostly up in sympathy with U.S. markets. Gold is up, oil is down
Steven Smith's Blog: Locking In Apple Profits
Originally published on 6/28/2007 at 3:07 p.m. EDT
left rates unchanged, and stock indices are rallying. But there has still been a shift in the market as to what will drive future gains. No longer will private equity act as a put option; it will take earnings growth to boost share prices.
breaking below its $31 IPO price, another sign that the buyout boom/balloon is deflating is the steep decline in speculative options activity. Over the past year, a deal like the one for
, which had been rumored for a few months, would have sent traders scouring for comparable situations and bidding up out-of-the-money calls. Just two months ago, a screen for unusual activity would have produced a list of 10 or more stocks. That doesn't happen anymore. And this is good.
It means it has become safer to sell calls on run-ups in price or even to short stock based on fundamentals without the fear that you'll come in the next day to find a takeover bid for a 40% premium. It also removes the buyout put that has created a floor in the prices of many stocks.
One name that I think is becoming completely overvalued due to a combination of cost cuts and its potential as buyout target is
, whose shares have doubled over the past 52 weeks. Given the margin pressure felt by other electronic retailers like category leader
, shares of RadioShack look very overvalued. A purchase of the October $30 call for $1.25 seems like an attractive, limited-risk way to establish a bearish position.
shares have been flat over the past week, but optimism about its prospects is evident in the options market.
As an article on
points out, call options remain significantly more expensive than puts heading into to the launch of the iPhone. This means for prudent investors looking to lock in profits, the stock has gained some 30% since the announcement of the iPhone's launch two months ago, and buying puts is a good way to lock in profits. Or, as some advisors from Goldman Sachs noted in the article, creating covered calls or buy-write positions may be ways to take advantage of the rich call premium. Of course, with a combination of buying some out-of-the-money puts and selling calls, one could create a very attractive collar.
For example, with Apple trading at $121, one could buy the October $115 put for $6.50 and sell the October $130 call for $7.50, for a net credit of $1 for the position. The effect is to lock in a sale price of $116, or a 3.2% decline from current levels, while maintaining 9.5% of upside profit potential over the next four months.
I know Apple fans are hesitant to cap any gains, but for money managers who are sitting on huge profits, protecting a portion of their positions makes sense -- especially once end-of-year bonus calculations figure into the math.
Tony Crescenzi's Blog: Friendly Fed Comments
Originally published on 6/28/2007 at 3:11 p.m. EDT
delivered a policy statement that fits with the scenario most likely to be seen by upgrading its assessment on the economy and softening its view on inflation. Many will overanalyze the policy statement, which continues to paint a picture of monetary policy that is likely to be little changed in the months ahead.
A Fed that describes the economy and inflation in friendlier terms than before is generally treated bullishly in the markets, particularly the stock market. If the policy statement fails to get the equity market out of its funk today, it would provide further evidence of the depth to which fears about credit conditions have increased.
The Fed's upgraded assessment on the economy is evident in the way it described economic activity for the first half of the year:
"Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector."
The statement is an upgrade from May 9 when growth was said to have "slowed" in the first part of the year. It used the word "nevertheless" as an inflection to show contrast between its description and what was expected, an expectation now fulfilled, judging by today's policy statement. Here is the May 9 description of the economy:
"Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters."
The softening of the Fed's characterization on inflation is very direct:
"Readings on core inflation have improved modestly in recent months."
The Fed qualifies the remark from several angles, but this should be expected given that the Fed's main inflation gauges remain higher than desired. We should expect nothing less of a central bank.
Rate-cut odds are little changed following the FOMC statement, with the market priced for 22% odds of a cut by year's end, down from 24% just before the FOMC announcement.
In the context of recent concerns over credit conditions, today's policy statement is far friendlier for the markets than a statement that continued to characterize inflation in worrisome terms, as was the case with the use of the word "elevated" in previous policy statements.
In the final analysis, most are likely to see the statement in friendly terms, but this relatively predictable statement seems small in the context of worries about credit conditions, which will be detectable in the response to what would normally be seen as a friendly statement, with growth and inflation characterized as it was.