Earnings reports, economic data and politics kept investors on their toes this week trying to dodge, duck, dip, dive and dodge the market's bouncing ball. A week that saw the
turning in still more record highs thudded to a close as semiconductors and a weaker-than-expected GDP spooked investors.
But through it all,
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 effect of the upcoming election,
on the bears' surrender,
on the real issues behind the options backdating scandal,
on how to set yourself up for success in an options trade,
on what it took to move houses and
The Street Research Team
on footwear that shouts "don't tread on me."
Click here for information on
, where you can see all the blogs -- and readers' comments -- in real time.
Cramer's Blog: Steer Clear of the 'Bigs' Until the Election
Originally published on 10/26/2006 at 11:08 a.m. EDT
Oh man, it's the election, stupid! You can see it. You can see it in the way
rolls over on nothing. Or the way big pharma's suddenly crumbling. Or the way the HMOs can't -- or won't -- keep their gains. (
wasn't bad at all, by the way.)
To me, the screen is saying we are going to wake up the day after the election and the Democrats are going to be in control of both houses. We are seeing big pharma taking a hit. Big oil will take a hit. And big defense, too. It's all the election, and it is worrisome because, alas, we have nine more trading days for this to sink in.
Believe me, by the ninth day we will have fully discounted this sweep. But right now we are in the beginning of the rollover and the president isn't helping one whit with his obsession with Iraq -- a warranted one, admittedly, but one that is not helping.
Be aware: Anything big -- big pharma, big HMO, big defense, big oil -- is a target. These groups require caution until the Monday before the election.
At the time of publication, Cramer had no positions in the stocks mentioned.
Rev Shark's Blog: Dip-Buyers Awaiting Their Shot
Originally published on 10/27/2006 at 9:22 a.m. EDT
"We shall defend our island, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender."
-- Winston Churchill
In the past few days my sense has been that the unrelenting market rise has finally caused some of the more stubborn bears to surrender. They have all sorts of good reason to dislike and distrust the market but it is killing them with a steady rise and no sign of a pause. What happens is the same thing that happens to the stubborn bulls at the bottom: They can't take the pain any longer and they capitulate.
The conventional wisdom is that when the last of the diehards gives in, a turn is near because the last remaining buying or selling pressure will be eliminated. I have no idea if we are anywhere near that point now but from an anecdotal standpoint it sure is feeling like it. Most of the bears I know have taken to making jokes about how we will never have a dip again.
The biggest difficulty for the bears at this point is that even if the market does pause it is likely to hold up well for a while as the folks who have missed out on the big move try to get in on dips and pullbacks. Not everyone has chased the market strength and they are counting on the chance to buy lower. They will help hold up the market when the pace of the advance slows
earnings last night failed to create any immediate excitement but this market has had a tendency to find reasons to buy no matter what. We'll see if there is still some big money looking for a place to go and is willing to pay up for MSFT.
Overseas markets were weak last night, oil is flat and gold down. GDP is coming up and may give us a hiccup or two.
At the time of publication, DePorre had no positions in the stocks mentioned.
Cody Willard's Blog: Digging Into the Options Debacle
Originally published on 10/26/2006 at 10:54 a.m. EDT
Let's talk about this options backdating debacle.
Most important to this discussion is that managements at companies that backdated options misled us investors about how profitable their companies were. They told us that they were paying their richest executives a certain amount in a certain, legal and straightforward manner.
But that wasn't the case. They were issuing options and then going back and pricing them at the lowest prices they could, but they never told any of us that. They misled us!
This is an outrageous violation of the fiduciary obligation to shareholders. Backdating options to low prices of the past is a way of shifting shareholder value from investors to those who were awarded the options without anyone's knowledge. If they wanted to backdate and told us that was what they were doing, there would be nothing to fret over now.
There would be none of these "noncash charges," which at
now total more than 1,500,000,000 dollars (written that way for emphasis). Such charges wouldn't exist at all if they had simply disclosed what they were doing when they were doing it. No, every time a company takes a noncash charge because of options backdating, it's because they misled their investors in the past and now have to own up to it.
It seems that all of Wall Street, including the mainstream publications and, of course, the sell-side has bought into the line of thinking from
, Broadcom and others, which have admitted the problem, but want to act like it's no big deal.
The general public deserves to understand the reality of this scandal, and we should tell it like it is. That means avoiding the accepted buzzwords that those with vested interests in making this debacle go away have invented to explain it away.
Misleading millions of investors, not to mention the
, to the tune of hundreds of millions or even billions of dollars is a
deal. It's wrong. It's not OK. And I expect the IRS and the
to come down hard on these companies.
Let's stop phrasing it as if it's simply a footnote on the 10-K.
These companies and the managements misled us. Period.
At the time of publication, the firm in which Willard is a partner was net long Apple, although positions can change at any time and without notice.
Steven Smith's Blog: Great Expectations of Options
Originally published on 10/26/2006 at 1:50 p.m. EDT
Aligning your expectations with price behavior is crucial to choosing the right strategy and avoiding disappointment.
Not to re-tread too heavily on the subject, but the recent discussion in both
video form of using an option's price to gauge market expectations for the magnitude of a price move following an earnings report has generated a lot comments and questions. One of the core concepts behind option prices is that their value is based on and represents expectations of a given price move within a given time frame. One of the keys to successfully trading options is to use a strategy that aligns with your market's expectations. The successful prediction of price movement, or lack thereof, in the underlying security without understanding the ensuing price behavior of the options will lead to disappointment.
Meet the Greeks
Helping to explain and define option price behavior are what are known as the
Greeks. My look Thursday at implied volatility was essentially related to
vega, which measures how one unit change in implied volatility will impact the change in an options price. There's an old saying that "changes in IV are easy to see, but it's understanding vega that makes the money." OK, I just made that up. The point is that while the two terms are often used interchangeably, it's important to connect how an increase or decrease in IV will impact the position in dollar terms. Vega is the bridge between IV and profit or loss.
But IV and vega are moving targets, and accurately predicting changes can be difficult. Witness my assumption in
that IV would decline from 70% to its 30-day average of 55% following Thursday's earnings announcement. I was off by a wide margin as IV dropped all the way to 40%, which is a four-month low.
While predicting changes to implied volatility can be difficult, most of the other variables of an option's price, such as time to expiration, price underlying, strike price and interest rates, are easily measured and changes fairly simple predict. We know that tomorrow there will be one less day until expiration, so the impact of
theta or time decay comes as no surprise.
One of most important and basic of the Greeks for determining the price behavior of an option is
delta, which measures the impact that one unit change in the price of the underlying security will have on the price of the option. An at-the-money option typically has a 0.50 delta, which means that for every $1 move in the stock, the option's value will change by 50 cents.
Understanding that concept is crucial for having realistic expectations for the type and amount of returns, both profit and loss, that will be realized on a given price move. Take a look at
the facts about delta for an expanded discussion of how find an option's delta and
this article for how it can be applied to choosing the right strategy or for hedging.
Note that none of this will help predict what the underlying stock might do. But understanding how the option price is likely to behave under various scenarios will help you set realistic expectations and avoid the disappointment and despair that come when a great call doesn't yield great results.
Tony Crescenzi's Blog: Stock of Unsold Homes Falling
Originally published on 10/26/2006 at 10:40 a.m. EDT
New-home sales increased for a second month and inventories fell. That'sthe good news. The bad news is that it took a sharp decline in prices tospur activity.
New-home sales rose to a 1.075 million annual pace in September, 35,000 morethan expected. Sales for previous months were revised downward by 56,000,repeating a recent pattern resulting from high levels of cancellations.
Sales have largely moved sideways since plunging last year, with September'ssales pace almost equal to the 2006 average of 1.079 million. Hence, therate of deterioration has slowed from 2005 when sales peaked at a record1.367 million annual pace in July 2005.
Inventories are beginning to fall. The level of unsold homes fell to 557kfrom 568k in August and a record 573k in July. The current level is thelowest since March. The inventory-to-sales ratio is now 6.4 months, animprovement from August when it was 6.8 months and July when it reached an11-year high of 7.2 months. The current level is still much higher than therecord low of 3.5 months reached in 2003 and it remains above the 15-yearaverage of 4.8 months.
Still, cutbacks in land purchases and constructionmake it likely that inventories will continue to fall through 2007. Thiswill eventually help to restore balance on the price front, but it will taketime. A key question is the extent to which inventory is being pulled fromthe market because of market conditions.
The inventory decline was likely helped by a decline in home prices. Themedian price fell a whopping 9.7% in September, leaving prices at $217k, thelowest since September 2004 and well below the peak of $257k set in April.Average prices fell by a much smaller 2.1%, and prices remain close to 50%above five years earlier. The divergence obviously indicates that a largernumber of lower priced homes were sold, perhaps in part because interestrate declines had made the homes more affordable for those previously pricedout of the market.
Stock Talk Blog: Crocs May Take a Bite Out of Short-Sellers
Originally published on 10/26/2006 at 1:34 p.m. EDT
On Feb. 8
, maker of lightweight, colorful and controversial footwear, raised its IPO offering from a range of $13-$15 a share to $21. The company raised $208 million in the offering, making it the richest footwear IPO ever. Shares opened up at $30, and today they are trading near a 52-week high. However, Crocs' short position has been increasing noticeably. It's now 44% of the total float, which obviously means the stock is going lower -- right?
I have analyzed this stock a few times, and I wouldn't short it. Looking at the company's products, I couldn't find a reason anyone would buy these things. To me, all the Crocs are ugly. They can be worn only in warmer climates, and retail for prices ranging from $29 to $59 a pair. I consider that expensive for a summer shoe that looks like a cheap sandal.
But everywhere I look, I see Crocs. There are knockoffs everywhere, but nobody buys them. The Crocs brand is strong, and I have been told by many consumers that Crocs is the most comfortable shoe on the market. In fact, investment firm Baird said that out of 100 retailers that carry Crocs, 60% said it's been their hottest summer brand this past year.
From a valuation standpoint, Crocs is expensive. The stock currently trades at 25 times next year's earnings estimates, which is higher than the industry norm. But according to Capital IQ, Crocs is expected to grow more than 25% annually over the long term, and the shoes have been flying off the shelves internationally.
Because of the bright colors, kids have taken a liking to Crocs. The children's segment now accounts for 20% of Crocs' sales and could grow further, based on Crocs' recent deal with
. That means Crocs soon will offer shoes bearing images of Mickey Mouse and Donald Duck. Also, Crocs will begin selling shoes decorated with college logos in the fall.
At the current price, I think Crocs is fairly valued, and I wouldn't be a buyer. However, underestimating the potential of a growing brand could be costly for some of those short-sellers.
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;
to send him an email.