Another winning week in the markets has wound up as the Dow has, surprise surprise, broken another record. Helping matters was the big-deal
IPO; hindering were economic data, including weak housing starts; and options expiration threw everything out of whack. Through it all, investors tempered their reactions to the new balance of power in Washington.
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 the right stock to play in a hot IPO,
on what really matters to a hedge fund,
on not guessing at the turns,
on possible options strategies to use with Sears,
on the six factors stabilizing housing, and
The Street Research Team
on which is better for shareholders, buybacks or dividends.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: The Big Board's Big Value
Originally published on 11/17/2006 at 12:22 p.m. EST
If you like the
at $12 billion, don't you have to love the
at $14 billion? Can we really believe that the Nymex is correctly valued and the NYSE is correctly valued as well? Something has to give, when you consider the history and the opportunity.
My take is that right now, right here, if you were to go buy the NYSE you will do better than if you go buy the Nymex. Plain and simple, the opportunity is just greater and the margin expansion more formidable.
It is true that the Nymex has a ton of new products it is going to roll out, and the numbers are way low.
But the NYSE at roughly the same valuation? That's nuts.
Can you imagine if the NYSE were to start trading tomorrow instead of a few months ago?
It would easily be at $140. Easily.
At the time of publication, Cramer had no positions in stocks mentioned.
Rev Shark's Blog: Consistency the Watchword for Hedge Funds
Originally published on 11/14/2006 at 12:56 p.m. EST
The market continues to consolidate. The action is slow and lackluster, but it is a pretty painless way to digest recent gains. The dip-buyers are standing aside for the most part, but you can sense they are out there and simply biding their time.
Back in early January, my partner, Quint Tatro, and I started a hedge fund. It has been a challenging and educational experience and our approach continues to evolve.
One thing I learned quite quickly, and something I've written about often, is that individual investors have much greater flexibility in the way they can approach the market. The flexibility of smaller size is a benefit that is easy to take for granted when you are an individual investor.
Aside from the rather obvious trading differences, there are a number of other things that are different when you are running a hedge fund vs. managing your own money. One thing I found particularly surprising is the strong preference among hedge-fund investors for consistent returns.
In the hedge fund world, it is far better to produce steady, even returns with low volatility rather than higher, choppier returns with high volatility. Volatility is not tolerated very well by hedge-fund investors, and because of the inclination of some of the funds of funds to move on if your performance slips even for a month, managers have to focus on consistency in order to retain investors.
If you are managing for consistency vs. high returns, you obviously trade differently. You don't swing for the fences, because if you are wrong, you are out of business. Not only is it poor trading, but it just isn't worth going out of business over the chance of hitting one good high-risk trade.
A somewhat-related matter in running a hedge fund is the intensive focus on relative returns. In the hedge fund world, everyone is measured against a benchmark, and generally you are better off to not risk underperforming it by a substantial amount. If you are close, you are OK, but if you are under it by a lot, then you are in trouble. As a result, there is a tendency to have less appetite for risk.
Although many may believe that hedge funds are managed by gunslingers taking on huge risk in order to obtain big returns, there are substantial pressures on most managers to do just the opposite. If you want to be a successful manager, you have to think over the longer term, and that means grinding out performance steadily. The cowboys don't last long in the hedge-fund business.
Cody Willard's Blog: Don't Guess at the Turns
Originally published on 11/15/2006 at 8:47 a.m. EST
Market trends have a way of going further and lasting longer than most people ever expect. This market has been in a steady rally mode since late July, and its steadiness and sustainability have indeed surprised all but the biggest of bulls.
Since mid-July, the
has rallied almost 20%, getting not only back into positive territory on the year, but also into double-digit gains for the year. The index has now more than doubled from its October 2002 lows, when the Great Tech Depression ended and the Boom of the New Millennium started.
If you listen to the bears right now, you'll hear how that the Boom of the New Millennium is already over. Certainly, the housing boom has topped out, at least temporarily. That, of course, has the potential to end the Great Consumer Boom that the U.S. has enjoyed for the past 2 1/2 decades.
There is no doubt that this market will pull back -- and pull back hard -- at some point. Unquestionably, the same holds true for the economy and the consumer.
But these trends last longer than most anyone would ever expect. The Great Consumer Boom has lasted for the past three-quarters of my life. Guessing and betting that the consumer would die at any point since I was 10 years old have been losing propositions. Guessing and betting that this bull phase would top out and that the market would pull back at any point since midsummer have been losing propositions.
I do expect that this market will have to pull back and that the bulls will be scared by the cooling economy. At some point, see? But, again, there's no reason to guess when that point will come, as anybody who has put money on the line with such a guess will tell you.
When the market's major character change arrives and any major turn in the economy and/or consumer happens, we'll need to make adjustments. Until then, it's steady as she goes.
Stay vigilant and aware. But don't guess at the turns.
At the time of publication, the firm in which Willard is a partner had no positions in any stocks mentioned in this column, although positions can change at any time and without notice.
Steven Smith's Blog: Shopping for a Sears Options Strategy
Originally published on 11/16/2006 at 2:00 p.m. EST
Reader Tradezzup asks, "Assuming a bullish stance on
and given today's action, do you care to offer a simple options strategy that would take advantage of this drop and assumes a rebound over the next month or so?"
Shares of Sears are trading down about $9, or 5%, following its
earnings report. I won't pretend to know whether the numbers or the reaction creates a buying opportunity. But as an options trader, the one thing I know for sure is that after the earnings report, the implied volatility of the options is down some 5%. It's likely to drift lower in the next few days, as the stock digests the news and tries to find some support and establish a new trading range.
At the moment, it looks like the stock might need some time to repair itself. Without any immediate catalysts on the horizon, the near-term upside might be limited. That means taking a patient approach.
The most basic, straightforward approach would simply be to buy call options for establishing a bullish position. It would make sense to buy call options that have at least 60 days remaining until expiration and to build the position by scaling in over time, price or both in order to achieve an attractive average purchase price.
A patient approach can also be bought through the purchase of a calendar spread. That is selling a near-term call premium and simultaneously buying a longer-term call option. My choice would be to use a slightly out-of-the-money calendar-spread strategy, such as selling the December $175 calls and buying the March $175 calls for a net debit of $7 for the spread. Some of the advantages of this position include the following:
- The sale of the near-term options will mitigate the negative impact of time decay, as the theta of the short option will accelerate as its expiration approaches. Also, the upcoming Thanksgiving holiday will have the effect of removing trading days or dialing forward the calendar, making December options a short expiration cycle.
If shares of Sears can stay above $170 but below $175 for the next few weeks, the December options will expire worthless, while the value of the March options will only lose a small amount of time premium.
Assuming all else remains the same, if shares of Sears are at $170 on the Dec. 15 expiration, the March $175 calls will still be worth around $11 per contract. A flat stock price can result in a $4 profit over next 30 days.
This type of position will become more bullish over time, so the best-case scenario is for Sears to work higher and be at the $175 strike price on the December expiration.
The general pattern is that IV peaks on the day before an earnings report and then troughs in the next two weeks. As a net debit position, a long calendar spread benefits from an increase in implied volatility, which I expect to start trending higher at the end of December and beginning of January as holiday sales numbers are reported.
This position offers the flexibility of rolling the short December calls into January to further reduce the effective cost basis of the long March call options. The March options should hold their premium and should still be alive ahead of the company's next earnings report.
The scenario that would negatively impact a long calendar spread is a sharp price move in either direction. As a net bullish position done for a net debit, a decline in price will cause a decline in the value of the spread. A dramatic price increase, in which the strikes get pushed into the money, can also result in a loss, as the option prices will basically be made up of intrinsic value causing the value of the spread to flatten or decline.
Tony Crescenzi's Blog: Six Factors Stabilizing Housing
Originally published on 11/17/2006 at 10:10 a.m. EST
Today's housing-starts data make clear that one of the most important ingredients to an eventual stabilization of the housing market is now firmly in place: demand is outstripping supply. Inventory figures were already showing signs of stabilization before these latest figures, making it likely that the trend has become solidified.
It will be some time before inventory levels are considered low enough to no longer pressure prices downward, but the timetable might now be seen as having sped up.
The inventory adjustment process will last probably into 2008, but it shouldbe shorter than the one that gripped the housing market in the early 1990s. Here are the main reasons for this:
Inventory-to-sales ratios are lower today than they were at their peak in 1991. For example, the inventory-to-sales ratio for new homes is today at6.4 months of supply, compared with 9.4 months in January 1991.
The interest rate environment is better today than it was in the early 1990s. Recall, for example, that the average rate for a 30-year fixed-rate mortgage was over 10% in 1990 and it was as high as 9.25% in 1994 when the bond market was fearful of an acceleration in the inflation rate. Today, years of success in controlling inflation have led to subdued inflation expectations, and the 30-year mortgage rate is at just 6.25%.
More of today's inventory burden is "professionally" managed. This ismainly because the nation's largest home builders control a greater share of the housing market than they did in the early 1990s. The large homebuilders have the capital to hold on to inventory better than smaller builders, who are more likely to liquidate at much lower prices in order to raise capital.
This particular factor is a bit weak at the moment because of the recentstrength of the stock market. The fact is, however, that since 2000 the equity risk premium has increased, making alternative investments look relatively more attractive, including real estate.
Demographics are more powerful, meaning that household formation ishigher today than it was in 1990. The key home-buying years are ages 25-29and over 45 (for second homes). In 1990, the number of people turning 25 actually fell, owing to the fact that fewer people were born in 1965 than in 1964, the last year of the baby boom. This is not the case today, as the number of people turning 25 will be increasing in the year ahead. Similarly, the number of people turning 45 will be increasing much more than in the early 1990s.
Urban sprawl continues to increase, with suburbia high on the list for new households looking for a place to live.
None of this is meant to say that the housing market will be strong in the months ahead. I mean only to show that there are a number of factors that will help to prevent an implosion in housing demand. So long as that is the case, the erosion in home prices won't be substantial relative to the amount that they increased in recent years. Although the negative effects from construction are likely to slow in 2007, the impact of other housing-related categories will increase.
I am sure many of you disagree.
what you think on housing.
Stock Talk Blog: Dividends vs. Buybacks
Originally published on 11/14/2006 at 9:48 a.m. EST
After the bell last night, a couple of small-cap tech companies announced sizable share-repurchase programs.
First, former B2B e-commerce (remember that buzzword?) software producer
said it would buy back $75 million of its stock, or 15% of the company. Second, enterprise software provider
will repurchase $100 million of its stock, or 7% of the company.
Both companies are profitable and cash-rich, which leads me to ask why they don't also consider paying a dividend. The debate of buybacks vs. dividends has come back to the forefront in recent months, and frankly, there is no blanket answer that works for every company out there.
Rather, you need to look at each stock on a case-by-case basis. First, even if management thinks its stock is cheap, I don't like to see buybacks when the stock is already up a lot. Both Vignette and Lawson have posted just low single-digit gains year-to-date, but both stocks are closer to their 52-week highs than lows.
I also don't buy the idea that dividends are no longer cool. Vignette has nowhere near the image it did when the stock was at $1,000 (split-adjusted), but it does have $215 million of cash ($7.15 a share) on the balance sheet.
I will accept the fact that Vignette is on track to post only its second annual profit since going public in 1999. (It's expected to earn 65 cents a share in 2006.) Nevertheless, there's no reason why management couldn't afford to spend just $6 million a year on a 20-cent quarterly dividend. I believe the 1.2% dividend yield, with a somewhat smaller buyback program, would attract longer-term shareholders and have a better effect on the stock.
In the case of Lawson, the company has been profitable every year since its 2001 IPO, and I don't see why the company couldn't initiate its own 2-cent quarterly dividend (1.1% yield). The strategy would cost Lawson just $15 million a year, and like Vignette, it could be comfortably covered with expected fiscal 2007 (ending May) earnings of 22 cents a share, in addition to the $284 million ($1.50 a share) of cash that Lawson has on the balance sheet.
In keeping with TSC's editorial policy, David Peltier doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
David Morrow is editor-in-chief of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;
to send him an email.