The holiday-shortened week started with a bang of mergers and acquisitions, hit a lull as traders exited early to start the Thanksgiving revels and wound down to the early close of Black Friday's session. A surprising whack to the greenback was to blame, if not a turkey hangover, for the softer trade. Shoppers surged into the malls as precious metals surged in the markets. And it's all left market participants wondering how long positive seasonality and buyouts can buoy the indices.
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 latest surge in M&A,
on giving thanks,
on why he's uncomfortable being bullish right here,
on options on takeover plays,
on bullish housing data, and
The Street Research Team
on what to do with retail stocks.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: Takeovers Can't Always Drive a Market
Originally published on 11/21/2006 at 8:41 a.m. EST
Takeovers can't necessarily drive a whole market when the takeovers are in the industries that we don't need to go higher: steel, minerals and real estate. These are the anti-sectors, the places we don't want to go higher. We know these sectors are the "pro-inflation sectors," classic hedges for when the economy's red-hot.
You can't have everything you want in a red-hot tape. The bids for two cyclical companies (
) were motivated by the huge cash flow and terribly low valuations because of the playbook, that not-so-fictitious set of rules big money uses to guide its decisions based on the season, the rate curve, etc. The
Equity Office Properties
deal didn't have much of a premium but still didn't get the respect it deserved, given that the commercial real estate business is on fire and has been for a long time.
Yet, the papers are all playing it as the beginning of the selloff because $50 billion in takeovers couldn't move the market's needle.
I urge you not to think like this. We have plenty of sectors that still sell at low multiples after the run, and I believe the flood of money
the market will still buoy us.
More rallies ahead, and nothing really negative on the horizon.
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At the time of publication, Cramer had no positions in any of the stocks mentioned in this column.
Rev Shark's Blog: Giving Thanks -- to the Stock Market
Originally published on 11/22/2006 at 12:41 p.m. EST
During the hustle and bustle of the holiday season, it is easy to overlook what the festivities are all about. Aside from enjoying the time with family and friends, it really is a good time to reflect on the many blessings we have in our lives.
One of the biggest blessings in my life has been the stock market. The market hasn't just provided me with a little extra money; it dramatically changed my life. I've written a little about my personal story every Thanksgiving since I've been at
, and many of you are familiar with it already. So I hope you don't mind the repeat.
Back in the early 1990s, I had business and law degrees from the University of Michigan under my belt and had gained a CPA certificate after working for two international CPA firms. I was struggling to build a law practice in Ann Arbor, Mich. As far as I was concerned, the stock market was nothing more than an occasional news story and the repository for some minor IRAs I glanced at once a month or so. That soon changed.
As I went about trying to develop my law practice, I had to continue dealing with a rather annoying problem. My hearing was less than perfect, which made it tough in courtrooms where acoustics were poor and in conversations with people who mumbled, or in noisy places.
It wasn't that big of a problem, but it suddenly started becoming much worse. In a matter of months, I no longer could talk on the telephone and eventually was reduced to having people write notes if I wanted to understand them.
The inability to effectively communicate simply doesn't work when you are trying to practice law. I was soon forced to close my law practice and lost virtually everything I had, including my marriage.
At that point I was depressed, lost and had no idea what I was going to do with my life. Luckily, I had a small disability insurance policy through the state bar association so I could pay my rent and buy food. But things looked pretty darn bleak.
Because I felt so isolated and had plenty of free time, the just-emerging world of the Internet caught my attention. I signed up for some of the early services such as Prodigy and Compuserve and began exploring what they had to offer. One day, I stumbled across the stock market discussion boards on Prodigy and my life began to change.
What I found particularly interesting were the emotions and psychology involved as people discussed ways to make money in the market. This wasn't about analyzing financial statements and studying financials, like I was taught in business school.
It was about understanding the feelings and emotions that drove investors to sell and buy various stocks. I found the whole thing fascinating, and here were hundreds of people to help provide some clues as to the emotions surrounding various stocks.
Eventually I set up an online brokerage account with the last of my meager savings and I started to trade. My primary focus was to think about the market in a totally different way from what I had been taught in school, and to trade the other traders rather than the stock itself.
When they were highly emotional and feeling good, I ran with the crowd. When they despaired about the lousy market, I was sitting on the sidelines in cash.
I read everything I could about the stock market and studied it constantly. I was slowly developing my approach and seemed to have a knack for picking stocks. My little account was starting to grow, and I worked even harder at teaching myself the nuances of the market.
The late 1990s until 2000 was an ideal time for a fast-moving, momentum-style trader, and that is exactly what I was. My account doubled and tripled, and I soon was making many multiples of what I had made when I practiced law.
Perhaps it was the insecurity I felt from the experience of suddenly losing my hearing, but I was tenacious in protecting my capital while I tried to grow it. That wasn't always the best approach when the market was going nuts to the upside, but it sure served me well when we finally topped out in early 2000 and the plunge began. I not only held on to my gains but profited well by staying patient and playing some of the subsequent bounces.
My story continues from there and I won't bore you with more details, but I think I can say, without any danger of overstatement, that the stock market has been extremely good to me. I never dreamed that losing my hearing would turn out to be the catalyst for something so positive. But if it hadn't happened, I'm sure my life would not be nearly as positive and satisfying as it is today.
All of us face our share of problems and challenges, and it is extremely important to keep in mind that life has a way of working out if you don't give up. The fact that some deaf guy who couldn't get a job at a fast-food restaurant ended up getting rich in the stock market is a pretty good example.
Don't forget to give thanks this Thanksgiving.
Cody Willard's Blog: As Good As It Gets
Originally published on 11/21/2006 at 4:24 p.m. EST
It was another in a long line of steady days in the market, extending the steady rally mode that's existed for months. I'm uncomfortable being bullish when things are this good. How good are they?
- Yesterday, David Merkel
cited a streak of 91 consecutive days (now 92) without a decline of 1% in the
S&P 500. That's a pretty mind-blowing statistic.
The volatility index is at record lows and trying to get into the single-digits for the first time... ever.
Big-cap tech is on fire, with the highest-profile names of
Microsoft (MSFT) - Get Report,
Apple (AAPL) - Get Report and
Google (GOOG) - Get Report all at 52-week highs.
Metals are in bull mode.
Bonds are rocking and rates are low.
Spreads on corporate bonds are low.
It's more surprising when you walk into your office in the morning and
don't see an 11-figure private equity deal taking supply out of the market.
The permabears are even finally starting to get a little red-faced.
If the permabears would finally try to get long for a trade or two, this market might really be in trouble. My guess is that when the market does finally turn, we'll get the classic "flip it" setup, as bulls panic and permabears try to grab some long-side trades -- basically what we saw back in late spring and into the middle of the summer. It's almost enough to make you feel bad for those doomsdayers. Almost, but not quite, right?
At any rate, I think there's some downside risk when things are this good. Buy the ugliness; sell the beauty. (I'm talking about stocks, OK?!)
At the time of publication, the firm in which Willard is a partner was net long Microsoft, Apple and Google, although positions can change at any time and without notice.
Steven Smith's Blog: Options on Takeovers
Originally published on 11/21/2006 at 2:09 p.m. EST
Given all of the recent merger activity, especially in privately led buyouts whose bids have a large or all-cash component, a reader wonders what happens to the options on the company being acquired.
First, any options that have already been listed will continue to be available to trade like all options. But once the terms of the deal are finalized and the parties have agreed that no new options will be listed, the options that are already in existence or listed, including all long-term or LEAPs, will only be available for closing transactions. That means if you own the option, you will be allowed to sell it; if you are short, you can buy to cover.
In all cases, the options, assuming they are in the money, can always be exercised. What you get will depend on the terms of the deal; each case is different and some can be fairly complicated.
A recent example was
when it spun off some units. Shareholders received a combination of stock in both
and some cash to boot.
A great place to check on what adjustments have been made -- that is, what rights the option holder is now entitled to -- is the
Options Clearing Corp.
Web site. You can also call the
Options Industry Council at 1-888-OPTIONS.
Of more immediate concern is that once a merger or buyout is announced, the implied volatility of the options declines dramatically, as a large price-move above or below the purchase is unlikely. That means the value of all out-of-the-money options -- calls with strikes above the purchase price or puts with strikes below the purchase price -- will go to zero. That means there can be instances where owning call options, especially a longer-dated one with a significant amount of time premium, might actually result in a loss unless the buyout is done at a price above the option's breakeven point.
For example, right now,
is rumored to be a takeover target. With shares trading around $73, the January $80 call with a 2008 expiration is valued around $8 per contract, giving it a breakeven point of $88 per share.
Let's assume that sometime in the next month, U.S. Steel agrees to be bought for $85 per share, or a healthy 15% premium to today's price. The value of those $80 LEAP calls would decline to just $5 per contract, resulting in a $3 loss. If shares of U.S. Steel were to climb to $85 on their own merit or on speculation -- that is, without a confirmed deal -- the value of those options would increase to around $14 per contract, a nice $6, or 75%, profit.
The lesson is that if you are buying calls in hopes of a windfall from a takeover, be careful. You might not get exactly what you wish for.
Tony Crescenzi's Blog: Bears Beware: Bullish Housing Data
Originally published on 11/22/2006 at 9:58 a.m. EST
For the first time since June, the Mortgage Bankers Association's weekly index on mortgage applications for home purchases has held above 400.0 (March 1990=100) for three straight weeks. In addition, both the four- and 12-week moving averages, which have been deeply below the one-year average all year, have moved significantly closer to the one-year average, indicating that at the very least, the rate of deterioration in the housing market has slowed considerably. Bears take note.
The slowing in the rate of decline in housing demand makes it likely that its negative contribution to GDP will begin to slow in 2007. In addition, with demand having picked up, the glut of home inventories will recede. It will take time, probably into 2008, but assuming production levels stay low, inventory levels should fall steadily in the months ahead. These data weaken the bear case for an implosion of home prices and the economy.
The steadying in home buying is likely occurring because of the recent decline in home prices. Recall that in the University of Michigan's consumer sentiment survey for early November, the UOM's index on home-purchasing conditions increased to 136 in early November from 129 in October, to its highest level since August 2005.
In addition, the number of respondents who characterized the present as a good time to buy a home increased to 68% from 64% in October. This number likely increased because of perceptions that the recent decline in home prices had made them more attractive; 47% of those who said it was a good time to buy a home cited lower prices, the most since November 1991.
In the latest week, the MBA's mortgage applications index for home purchases fell to 401.40 compared to 412.90 the previous week, which was the highest level since the week ended July 7th. The peak for the index was 529.30 in June 2005 and the peak for the four-week moving average was about 500.0. It has averaged 341.5 over the past 10 years.
Stock Talk Blog: Take Retail Profits Ahead of the Holidays
Originally published on 11/21/2006 at 10:55 a.m. EST
There are 31 days between Thanksgiving and Christmas. But with "Black Friday" and "Cyber Monday" -- the two big spending days immediately following Thanksgiving -- just around the corner, the holiday spending outlook is still mixed. That has me thinking about protecting profits in retail stocks before we get news that could be less than cheery.
Based on the national Gallup poll conducted last week, 34% of adults believe they will spend at least $1,000 on gifts for the holiday season. This is much higher than the four-year average of 28% of adults foreseeing spending at that level, which suggests consumer spending is expected to be robust.
However, based on the Conference Board's poll from Monday, the average amount of money that consumers are expected to spend on gifts for the holiday season is $449 -- down moderately from last year's estimate of $466.
On the nationwide level, holiday spending is expected to hit $457.4 billion, up 5% from a year ago, according to the National Retail Federation. I believe this estimate is conservative now that energy prices are well off their four-month highs. In fact, oil and gasoline both are trading at lower levels than they were last December, which should lead to additional discretionary spending.
But despite my prediction for strong consumer spending, I'd be more inclined to take profits in retail stocks at these levels now that the major indices are sitting at five-year highs. While some could argue that the holiday season is traditionally a good period for equities, we can't ignore the huge gains that we saw in stocks during the traditionally subdued-to-lousy September-October period.
That's not to say I believe investors should dump their retail positions. The market has defied many trends during its path upward and stocks could move even higher. But I look at taking profits as a win-win situation. If this group of stocks goes higher, you still own half the position; if they move lower, you can always buy more.
In keeping with TSC's editorial policy, Frank Curzio 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;
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