So much for Santa Claus.
The widely expected seasonal rally may still lie ahead, but it certainly didn't happen before the Christmas holiday. Even though the Dow did hit an all-time high, all three of the broader market averages finished with losses for the week.
The week was characterized by some conflicting reports on the health of the U.S. economy, with weak GDP and PPI reports countered by solid durable-goods data. Richmond Fed President Lacker offered up more hawkish comments this week in favor of rate hikes. Among stocks,
got punished for its second-half forecast, while
unexpected third-quarter loss dispelled some holiday cheer in the retail sector.
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 what he's worried about,
on how sellers might jump the gun,
on the death of cable,
on supporting factors for 2007, and
on covered calls.
Click here for information on
, where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: The Wall of Worries
Originally published on 12/22/2006 at 11:32 a.m.
I am very worried about the transports. I am very worried about consumer spending. I am very worried about housing. I am very worried about the weak dollar.
I am very worried about FedEx,
Black & Decker
I am very worried about the
I am very worried that
Research In Motion
I am very worried about the high oil price. I am very worried about the low natural gas price.
I am very worried about a possible net slowdown.
I am very worried that
couldn't rally. I am very worried about subprime loans.
I am very worried about the low price of steel. I am very worried about Dr. Copper. I am very worried about the high price of gold.
I am very worried about the Democratic Congress.
I am very worried about the yield curve.
I am very worried about the dollar and the fact that foreign central banks are diversifying because they hate our foreign policy and we have huge deficits.
I am very worried about the complacency.
I am very worried about the
I am very worried about the big increase in consumer spending. I am very worried about
. I am very worried about the Michigan sentiment survey.
I am very worried about
. I am very worried about factory demand.
I am very worried that the
, not loosen.
I am very worried that Goldilocks is a pipe dream. I am very worried about a potential hard landing.
I am very worried about Circuit City. I am very worried about the glut of big-screen TVs. I am very worried about the decline of DVDs and what it will mean to entertainment earnings.
I am very worried about a terrorist act into the holidays.
I am very worried about everything.
Buy stocks. The worries are now priced in.
At the time of publication, Cramer was long Goldman Sachs.
Rev Shark's Blog: Sellers May Look to Jump Gun
Originally published on 12/20/2006 at 12:52 p.m.
I keep hearing that the market isn't going to pull back because so many people are expecting it to. I don't believe that is the situation at all. Although many market-players would like the market to pull back, because it will make for better trading and better opportunities, they have pretty much given up on the idea that it will happen.
They are grudgingly accepting the fact that the bulls are firmly in control and are not backing off. The bears don't like it, but they aren't fighting it, and that is giving us an extreme level of complacency that is very evident in the market action.
The general sentiment that I'm sensing is that the market will be fine into the end of the year, but then at some point in January we will sell off hard as folks with big gains no longer worry as much about tax consequences. The idea is that there are a lot of people who will want to sell and take gains, but they don't want to do it until next year.
If it is true that there is a supply of such folks waiting to sell, then that greatly increases the chances that the selling will actually end up occurring earlier. When an event is widely anticipated by the market, traders will try to get in front of it.
If they expect the market to sell off in a few weeks, then some traders will start selling next week to get a jump on it, and then more will start acting on it this week to get a jump on those that are getting a jump and so on and so on.
If there is a widely held belief that there will be a strong bout of selling in January, what we have to watch for is traders trying to get a jump and triggering some selling pressure before then.
I believe there is a very good chance of that, and hence I believe we have a high probability of a dip before we finish the year.
Cody Willard's Blog: Cable Is Dead; Long Live TV
Originally published on 12/21/2006 at 1:33 p.m.
The telephone companies got a serious boost in their misguided attempt to become traditional cable carriers. The FCC approved a measure that will force municipalities to decide whether phone companies can start offering traditional cable services within 90 days of receiving the submission from the telco.
This is a classic example of "be careful what you wish for." The telcos have already wasted billions of dollars building the cable "head ends" from which they can broadcast cable programming. And now they'll accelerate that spending just as the Internet is about to disrupt the entire concept of cable TV.
The future of TV isn't a competition between cable and telco. The future of TV will be about delivering video content from the Internet, where users can create and share their own programming, where you can instantly watch any show, any clip, anything that you might ever think to type into
Earlier this week, the
had a great article about how the founders of
are now moving into the video business. They're going to build a peer-to-peer (P2P) network that will be capable of delivering HD-quality video to your TV screen. Expect to see other such technologies becoming mainstream in the next five to 10 years.
In that world, there will be no reason to pay the cable company or phone company hundreds of dollars a month for 100,000 hours of programming of which you watch less than one-tenth of one percent. How in the world are the cable companies and telcos going to get a return on their head-end and broadcast investments in that environment?
The answer: They won't.
is at least taking fiber to the home so it can continually increase the broadband capacity into each home. When Verizon is offering Internet services at 1Gbps speeds, which is about 1000 times faster than your current "broadband" connection, it will at least have a competitive advantage over the other telcos and cable companies, which won't be able to scale as fast to the ever-higher speeds. If you have to own a telco, own Verizon for that reason. But really, just stay away from these loser companies that can't even realize that they're building into an industry that is in a secular decline.
Cable is dead. Long live TV.
At the time of publication, the firm in which Willard is a partner was net long Google, although positions can change at any time and without notice.
Tony Crescenzi's Blog: Top Supporting Factors for 2007
Originally published on 12/22/2006 at 1:28 p.m.
There are many factors that will help the U.S. avoid a recession in 2007 and limit both the depth and duration of any bout of economic weakness.
: Crucial toward any economic expansion is low inflation and low inflation expectations. After a rocky start, Fed Chairman Ben Bernanke has earned the respect of the $27 trillion bond market, which will help sustain a favorable interest rate environment and encourage businesses to plan for expansion without concern for inflation.
: Evidence is plentiful that indicates corporations are flush with cash. Cash relative to capital spending hit a new high last quarter, helping assure plentiful internal funding to fuel the economic expansion. High levels of cash relative to capital expenditures bode well for capital spending in 2007, especially in the context of the strength of the global economy.
: The weaker dollar and the most synchronous global growth in more than 30 years have boosted U.S. exports to gain close to 15% versus a year ago in recent months, more than 2.5 times the normal year-over-year gain. This is giving U.S. factories an added $20 billion per month in new business compared to a year ago.
: State and local spending is expected to increase more than 7% this year after a robust 2006. This is slightly above the long-term average. Federal spending is also likely to gain at a fast pace. Government spending is often overlooked when analyzing the economy, despite the fact that it represents more than 20% of the economy.
: Despite a recent increase, inventories remain extremely lean. Inventories were once a leading cause of the booms and busts of the U.S. economy. No longer. Technology and improved inventory management have reduced the impact of inventories on the U.S. economic cycle. With inventories lean, production would need to be cut very little in order to adjust to any softening of demand.
U.S. banking system
: The U.S. banking system is in extremely strong shape at present. Nearly 100% of bank assets are now held at well-capitalized banks and the vast majority of statistics point to strength. A feature of the 1990 recession was weakness in the banking system, underscoring the importance of the banking system to the economy.
: This factor represents both a buffer and a risk for the economy, but at present it is a feature of strength. Household net worth hit a record $54 trillion at the end of September, up $14 trillion over five years and $30 trillion since 1995. If there's a risk here it is to home prices, but with home construction plunging and demand stabilizing, the risk to home prices is falling. Hence, household net worth should hold up.
: Stock values are up, the dollar is down, credit spreads are tight, and yields are down. All of these factors support growth. For example, a 10% drop in the dollar is roughly equal in effect on GDP to a full percentage point decline in the fed funds rate.
: The commercial paper market continues to expand vigorously, suggesting that businesses are very confident in the near-term outlook on revenues. SEC rules state that commercial paper can be sold for transactions purposes only, so the strong pace of issuance ($1.9 trillion outstanding, double the size of the T-bill market and up 20% vs. a year ago) suggests that companies expect to be able to convert the proceeds into revenue.
: The recent election has given consumer confidence a lift, with the electorate now looking forward to greater inclusion in decision-making that will impact the populace.
abrupt slowing in China's economy, oil, premature acceleration in housing starts or a spike in credit spreads that raise risk premiums.
Options Blog: Options on Covered Calls
Originally published on 12/20/2006 at 11:18 a.m.
Roger Nusbaum's recent
column on the siren song of options -- and the dangers -- makes some great points, especially about the way unrealistic expectations can lead to being exposed to unanticipated risk. This is especially true when you're using covered call or buy-write programs, which have become increasingly popular strategies for generating incremental income and boosting returns. Buy-writes are also touted as a way to reduce risk and lower the volatility of a holding or an overall portfolio.
But one of the biggest mistakes, as in most trading approaches, is not sticking with the defined strategy. That is, investors tend to roll up or not sell calls at all on stocks that are rising for fear of capping gains, or they roll down or sell a greater number of calls or even buy puts to protect stocks whose price is declining.
One way to avoid letting emotions wreck what can be a very effective strategy is to use a proven approach, or let a professional run the buy-write portion of your portfolio. The
proliferation of mutual funds and exchange-traded funds that use option-selling techniques makes it possible for individuals to pursue both goals more easily, and makes accessible a variety of approaches on buy-writes that can align with your goals.
The CBOE's BuyWrite Index (BXM)
uses a mechanical approach. It creates a covered call in the
by selling 30-day, at-the-money call options on a one-to-one basis and being long the index. There is now an estimated $900 billion benchmarked to the BXM, and variations on the theme -- with varying degrees of success -- keep multiplying.
The BXM is 12.5% for the year to date (2006), and hit an all-time record on Monday. Those are pretty impressive returns on several fronts, being about two percentage points below the S&P 500 index. That's certainly significant, but is still an impressive performance given that the S&P has done nothing but go straight up while the implied volatility of its options remains historically low, offering little in the way of premium income.
Historically, the BXM has underperformed the S&P 500 when the index increases 7% or greater on an annual basis. The current saving grace has been this market's steady grind higher. Without steep declines that would incur a loss, or sharp climbs where gains would have been capped, the process of simply rolling up options at the end of the month can be implemented nearly exactly the way the strategy gets drawn up on Ibbotsen's
theoretical white paper. But beware, few markets adhere to or behave as described in theory or textbooks for extended periods.
The other advantage of letting a professional or fund manage this options strategy for you is they tend to have lower costs. Granted, relative to most funds, especially basic buy-and-hold or index funds, the fees on funds that employ option writing tend to be very high, often up to 4% annually. But buy-write investing is labor-intensive and requires a high number of transactions and position adjustments, which means a lot of transaction fees and commissions. Consider that when assessing professional or fund buy-write fees.
Some of the successful buy-write funds include:
- Madison/Claymore Covered Call Fund (MCN) - Get Report
- Dobson Covered Call Fund (DBCCX)
- First Trust/Fiduciary Asset Management Covered Call Fund (FFA) - Get Report
The Chicago Board Options Exchange now offers
more than five different buy-write indices, including some based on the
Dow Jones Industrial Average
and others that sell out-of-the-money calls.
In keeping with TSC's editorial policy, Steven Smith doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Madison/Claymore Covered Call Fund to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.