Friday, September 21, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week, the Fed pulled a surprise move when it lowered interest rates and the discount window rate by .5%. The S&P 500 futures rallied 25 points instantly. It was able to add to those gains on Wednesday and prices are holding firm.

I have been opposed to the Fed lowering interest rates because all of the economic data suggest "full employment" and moderate growth. The exception to this is housing, which only accounts for 5% of our GDP. If the economy continues on a moderate growth path, this ease will translate into a new record high for the market.

Don’t be fooled, on a relative basis the market is not near an all-time high. Once the Fed’s actions were revealed, the dollar got hammered. The market is dollar denominated and a foreign investor buying the SPY would pay much less for those shares now than they did at the prior high two months ago. For anyone who has recently traveled abroad, the decrease in our purchasing power is blatantly obvious. A weak dollar is an inflationary event and it is one reason why dollar denominated commodities like oil and gold are increasing in price. For the first time in 31 years, the US and Canadian dollars are trading at parity.





Enough about the dollar, I’m concerned that the Fed sees the big picture and that economic weakness lies ahead. They have been interviewing top CEOs and gathering unique data to gauge what lies ahead. Chairman Bernanke has been a steadfast inflation fighter and he had to be concerned to take such dramatic action. The market would have been satisfied with a .25% ease combined with help at the discount window. He had the option to wait for further evidence that the economy was slowing, but he didn't.

There aren't any earnings announcements worth mention next week so the market will look to the economic releases for direction. Consumer confidence, durable goods, GDP, personal income, core PCE inflation and Chicago PMI are on deck. Those numbers are like looking in the rear view mirror and they may give the appearance that all is well. Consequently, the market is likely to rally and test of the all-time highs this week.

The only way to trade this market is to stay long commodity stocks and equipment manufacturers that generate more than half of their revenues overseas. There are also select technology stocks that I like. I fear that the market could hit another "air pocket" once the first weak economic number hits.

Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

Thursday, September 20, 2007

Home Builders, CDs and Corp. Paper

Home Builders, CDs and Corp. PaperSocialTwist Tell-a-Friend
Fil Zucchi

The following piece was written on August 27:

“We all know the treatment housing stocks have received and at this point few seem to offer decent risk/reward on the downside. The thing to watch carefully now is the debt of these companies and the news-flow around them.

I’ve gone over a bunch of fixed income research concerning this group and while the analysts continue to reassure readers that most companies are still cash flow positive and they will come out stronger when the market turns, one can’t help but get that funny feeling that the real message of those notes lies not in the “all is well” boilerplate, but int eh passing mention that technical violations of debt covenants are not a big deal because the lenders will undoubtedly wave those covenants.

Perhaps they are correct. However, we are often told that bond investors are the “smart” money because they are closer to the financials of the companies than equity investors. After all, bond holders are not in the business of taking principal risk.

Yet Standard Pacific (SPF) and Lennar (LEN) have had to renegotiate loan terms, Beazer Homes (BZH) won’t say where its debt stands until its internal investigation on accounting issues is concluded, Comstock Homes (CHCI) has already gone through one restructuring and its faith hangs on the future sales at a project in Alexandria, VA, and . . . .well, you get the picture. Furthermore, considering how frothy things used to be for homebuilders, one would think that the covenants were probably loose enough already.

Are these covenant workouts a sign that bondholders want to avoid defaults at least as much as the debtors? Isn’t this the same movie we saw in the late 1980’s with respect to commercial loans, before everything hit the fan? Will the daily new lows in the stocks of these companies create their own set of technical defaults?

Most eyes are fixated on mortgage debt, derivatives, and the likes, but few for now dare speak of actual defaults in plain vanilla corporate obligations, especially the kind still rated BB or better (how is that possible?). If that were to happen, that is what you can call the “other shoe”.

Since then, and despite yesterday’s Fed cuts, very little has changed:

The 7-year paper of most issuers has rallied 5-10% but still yields 12-15%.
The CDS’ on these debts have also come in some, but still trade at spreads 3-5x what they were in May, and some spreads suggest a pretty high risk of default. Just a few minutes ago S&P warned that approximately $35b of B rated corporate paper (not just homebuilders) is at risk in 2008, and for our purposes we will ignore that there may be 5x-10x that amount of CDS written against it, for which someone is going to have to pony up some cold hard cash.

No amount of shuffling of debts between GSE’s or other pan-handling bailouts address the key problem: there is way too much debt out there that folks and companies are beginning to struggle to pay. The homebuilders are at the forefront and they should be watched very closely.


Editor Note: Fil Zucchi spent this summer on the long trip back to the Old Country -- Italy. We are glad to find him safe and sound at his HQ on the East Coast.

Wednesday, September 19, 2007

Pink slips at the FDA will equate to red ink for biotech investors

Pink slips at the FDA will equate to red ink for biotech investorsSocialTwist Tell-a-Friend
David Miller

Andy von Eschenbach, FDA Commissioner, says he’ll have to issue 2,000 60-day pink slips at the FDA if Congress and the President don’t get the PDUFA IV bill passed by Friday. We think the chance that they will is good, but the early Presidential election season could very well create some unexpected events. There are more than a few folks who would like to hold this bill up for political gain.

If the pink slips go out, we doubt staffers will start running for the exits right away. The growing trend of the FDA asking for delays will increase immediately, however, as managers start changing existing review and especially meeting schedules.

One could argue some decisions might come early, but we think any such occurrences will be rare. The FDA already considers itself understaffed. Bureaucrats, in our experience, don’t work harder in the face of crises like this. They tend to want to punish those they regulate by delaying even more.

We’ll more than likely see additional delays. The silent delays will be in meetings, time to obtain SPAs, etc. The more public delays will be similar to what ZymoGenetics (ZGEN) recently experienced – 90 days here, a 2-month Class One response turning into a 6-month Class Two response there, etc.






As timelines slip, biotech valuations go down. Significant delays will start damaging biotech investor portfolios.

If the PDUFA IV legislation is tied up for quite some time – say towards Halloween no end in sight – then things will get frightening. The pharma, biotech, and financial communities will pirate the pink-slipped FDA staffers. Once Congress finally gets around to passing the legislation, Dr. von Eschenbach won’t have anyone to hire back. He’s already said the FDA is understaffed.

Even if he replaces people, the loss of institutional knowledge will be significant. Guidance to companies will shift as new people provide new opinions. Delays in regulatory decisions will abound as new review teams have to start from square one in reviewing the data.

Again, I don’t think we’ll get that far as Congress and the President know what’s at stake here. But keep it on your radar just the same.

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