On Monday we launched four blogs on RealMoney; this weekend, we'd like to share the "Best of the Blogs" with TheStreet.com readers. These posts best captured the intent of these blogs, which is to provide intelligent discussion on the issues each writer sees as most pressing that day.
This week, take a look at
comment on the next tech rally,
on the disparity between sentiment and the action on his small-cap-focused quote screen,
on the risks in deep in-the-money calls; and
on the implications of Friday's GDP report.
here for information on
where you can see all the blogs -- and reader's comments -- in real time.
Cramer's Blog: Headed Into Tech's Next Rally
Originally published 1/24/2006 10:26 AM EST
Johnson & Johnson
says things are challenging.
says things are challenging.
did not say things are challenging.
did not say things are challenging.
said things are anything
we have a metric: the "challenging" metric!
I have to tell you that all of this handwringing about tech is gravely mistaken, with the possible exception of
, which is a play on losing share to
coupled with a slowdown in PCs
To me, the majority of the problems with tech were all about problems with making product and executing, and that if there had been more test and measurement --
? -- and more product, the numbers would have been better.
That's not the case with J&J or DuPont. They had all the product that was necessary but costs were too great with the latter and the former has an environment that has made drug companies public enemy No. 1,
The bears want very much to portray the problems with tech as a slowdown, perhaps linking it with the $700-a-month heating bills some of us are getting. Sure enough, I would agree with that if
were at $39 instead of $49, and if there weren't such unbelievable demand, still, for video games, iPods and all of the other cell-phone-cum-mini-PCs out there.
I believe we are headed into the next rally in tech. I believe that this rally will take us back to where we were before the nasty selloff, ex some of the PC players.
And it is worth playing, for certain.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Rudolph Technologies 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.
At the time of publication, Cramer was long Motorola, Intel, Yahoo! and UnitedHealth Group.
Rev Shark's Diary: Away From the Gloom and Doom
1/25/2006 12:03 PM EST
I'm surprised by the negativity I keep hearing while I'm watching all this strong action on my screens. We have 340 new 12-month highs and I am seeing notes about how we are doomed and that we should be expecting a collapse at any moment.
Certainly we aren't going to go up forever, but this is very good action in a whole lot of stocks, and if you are focused on the stodgy, boring, big-caps you are missing out. The fact that I keep getting these dire notes from folks who are talking about crashes and similarities to the bubble top in 2000 makes me feel quite confident that they are going to get a lot more frustrated before those scenarios take hold.
Forget the stuff that is on
and the big-caps that they love to talk about. There is good money to be made elsewhere right now. This is the watch list I made last night. Some of these are chart plays; some are earnings anticipation plays and some are special situations. But these are the ones I'm watching and/or buying today: ERS GOL EEFT ENG MFLX UTHR BBV ITG NOVL NDAQ PWAV TRO TRBM SORC QSFT CLZR MAPS LPTH CRYP ALY MMUS ACW SCMR AIS CNXT ICON MMSI HGRD NNDS UNCA GRB DSC GHL and CMED.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider ERS, ENG, BBV, TRBM, CLZR, MAPS, LPTH, CRYP, ALY, MMUS, ACW, AIS, MMSI, HGRD, UNCA and GRB to be small-cap stocks. 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.
At the time of publication, Rev Shark was long ERS, EEFT, ENG, MFLX, UTHR, PWAV, TRBM, MAPS, NDAQ, ALY, MMUS and CMED, although positions can change at any time.
Steve Smith's Blog:Going Deep
1/26/2006 12:58 PM EST
There has been a fair amount of discussion on this site regarding the merits of buying deep in-the-money options. Before addressing some of the issues I'd like to make it clear that there is nothing wrong with using ITM options. In fact, when anticipating a directional move I often look, and suggest in the Options Alerts, buying an option that has a dollar or two of intrinsic value. So it's worth pointing out that an option that is one strike or a few dollars ITM is not what I would call deep. That said, here are some things to consider when buying an option that is $5 or deeper ITM.
The risk may be limited to the cost but it's still substantial and can easily result in a loss of 100% or the total amount invested. Remember the risk is not just the extrinsic value or premium above the stock price but the full cost of the option. Buying a deep ITM option is similar to just buying the stock.
Buying ITM options as a replacement for owning stock does allow for one to diversify the portfolio by spreading your risk capital around. Instead of buying 1,000 shares of a $50 stock and committing $25,000 (assuming 50% margin) one could buy 10 ITM calls on a handful of companies.
But this leverage works both ways. If one owns a $45 call in a $50 stock, one can expect the option to move about $2 on a $2.50 price change. This is assuming an 0.80 delta. Let's assume the call was trading around $6, this would be a 33% increase or
in the options price. A big down day could result in a losing 50% of your capital.
The idea that one is "controlling" X-thousands of shares for a fraction of the cost is debunked by Adam Warner on his
Web site. Adam writes "one should analyze an option position in terms of its share equivalent, not the dollar outlay in buying the options." This speaks to the basic rule that the number of options you buy should match the amount of shares you would be willing to own. An extreme example would be if you are looking to be long 1,000 shares of the $50 stock you do not buy $25,000 worth of options.
Options that are deep ITM, say with a price of $8 or more, tend to be less liquid and therefore one can expect fairly wide markets and slippage when executing an order that can take a big bite out of the returns.
Another important point Adam makes, pertains to dividends. Owning deep ITM calls on stock that pays a dividend creates a situation where it will probably make sense for an early exercise, which means that this is not only just like owning the stock but you really will own the stock. So where is your leverage now?
The bottom line is that ITM options are a terrific way to participate in a directional move but do not significantly reduce the risk compared to owning stock. Indeed, part of the attraction of buying deeps is that you are basically removing volatility and time decay, the two of the most important elements in choosing a strategy, from the equation.
Tony Crescenzi's Blog: Causes of GDP Miss and Implications
01/27/2006 11:58 AM EST
The minority camp that expects a deep weakening of the U.S. economy may get a few new members today following the weak GDP report for the fourth quarter.
That said, for a variety of reasons, including some related to the details of today's report, few minds will be changed by today's data. At most, some will become a little more open to the possibility of a deeper slowdown than expected, but in the absence of factors that reinforce the thesis, they will stick with their current views and keep their positions as they are.
A key aspect of the GDP report that might lure some market participants into the bear camp (with respect to the economic outlook) was the weak pace of business spending. In particular, the 3.5% gain posted in spending on equipment and software was far below the double-digit gain seen over the past two years, a pace that was expected to have been repeated in the fourth quarter. Many are banking on a strong pace of business spending to offset expected weakening in consumer spending in 2006 to support their expectations for a relatively healthy pace of economic growth.
Government Spending Plunges
The 1.1% GDP gain was considerably weaker than the consensus for a gain of 2.8%.
There are a few reasons for the miss. For starters, government spending, including spending by federal, state, and local government, was much weaker than expected. It fell at a 2.4% annual pace, shaving a half-point from the headline gain. Expectations were for government spending to add as much as a half-point, meaning that there was a swing factor of a percentage point due to the unexpected decline in government spending, which was led by a 7% decline in federal spending, a decline that won't likely last. Federal spending will almost certainly rebound sharply in the current quarter.
The Treasury department has already announced plans to borrow a record amount of money during the quarter (via its issuance of Treasury securities), which will inevitably lead to more spending, a chunk of it is expected to be allocated toward the rebuilding effort in the hurricane-affected regions.
It's also an election year, and it is difficult to imagine a scenario in which Washington spends less than it has already appropriated for 2006.
Businesses Were Supposed to Pick Up the Slack
A second reason for the miss relates to business spending, which as noted earlier rose much less than expected. The weakness could reflect the business community's rapid response to the events of the fourth quarter, particularly the slowdown in consumer spending that resulted from the effects of the recent hurricanes. It is further evidence of Corporate America's desire to maintain growth in profits. In a way, this is good news for shareholders. On the other hand, if the weak spending is a harbinger of things to come, then it is worrisome. Especially given that business spending is expected to offset a slower pace of consumer spending.
More likely, business spending will snap back in the current and upcoming quarters. Cash levels are extraordinarily high, order backlogs have increased at a rapid pace, factory operating rates are above their long-term average, the global economy is stronger, and the rates of return on investing in capital equipment remain high.
There are already indications of a rebound apparent in recent data, particularly Thursday's durable goods report, which showed a 3.5% gain in orders for non-defense capital goods excluding aircraft. Moreover, with jobless claims at their lowest level in 5 1/2 years, businesses appear to remain confident in the economic outlook, confident enough to continue to increase capital spending.
Additional evidence is apparent in recent corporate borrowing trends. January saw very large issuance of corporate bonds and companies continued to expand their use of both commercial paper and commercial & industrial loans.
Inflation Accelerated, Lowering Real Growth
A third reason why GDP grew less than expected was because the inflation rate was higher than expected. The 1.1% gain, of course, reflects the growth in GDP after adjustment for inflation. The GDP deflator rose at a 3.0% pace, three-tenths of a percentage point higher than expected, thus accounting for three-tenths of the miss.
Importantly for the bond market, the deflator for personal consumption expenditures minus food and energy rose at a 2.2% pace. That's above the Federal Reserve's target range of 1.75% to 2.0%.
The 1.1% gain in GDP would have been much weaker if not for the contribution from inventory investment, which added 1.4 percentage points to GDP. Therefore, final sales, which measures GDP minus the inventory change, actually fell, by 0.3%. The inventory gain is not worrisome, however, given that inventories had contributed negatively to GDP in the two previous quarters and given that the inventory-to-sales ratio is now at a record low and below the secular trendline.
Service Spending Figure Is Good for Job Growth
There are two final reasons why investors might dismiss today's data as aberrant.
First, the report should be put in the context of previous strength. GDP grew by 3.0% or more in 10 straight quarters, the longest such streak since 1984-1985.
Second, personal spending on services grew at a 3.2% pace, about the same as the past two years. Why is this important? Well, of the 134 million jobs in the U.S., 112 million are in the service-producing sector. The rest, of course, are in the durable goods sector, a sector that contributes very little to job growth, especially now given the problems in the automobile sector.
In other words, although consumer spending was weak, the composition of spending growth was favorable for continued job growth and hence the sustainability of the current expansion.
That said, today's data invite new believers into the notion of a deeper economic slowdown than is now currently expected. Nevertheless, in the absence of data that support a continuance of the fourth-quarter's weakness, and in light of some of the causes of the weakness, most views on the economic outlook probably haven't changed much. But the camp that is open to change probably has grown a bit. Not enough to change the course of the markets for now, however.
George Moriarty is managing editor of RealMoney.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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