Friday, September 21, 2007

HOTS Weekly Options Commentary

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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.

Saturday, September 15, 2007

HOTS Weekly Options Commentary

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Peter Stolcers

Let me start by welcoming many new subscribers this week. I live for set-ups like the week ahead and the opportunities are lining up. I’m glad to have you onboard!

This is the calm before the storm. Last week the market rallied on expectations that the Fed will lower rates. The debt market has priced in a 70% probability of a .25% rate cut and the 30% probability of a .50% rate cut. The dismal Unemployment Report dramatically increased rate cut forecasts.

The U.S. dollar hit new 30-year lows against the Canadian dollar and against the Euro this week. We have a huge trade imbalance and a weak dollar forces us to pay more for the goods we import. Translation: a weak dollar is inflationary. Oil has just hit an all-time high. Last week, TSN said that profit margins are being hurt by higher food costs. I've even heard that Italians are boycotting pasta because wheat prices have forced it up 25%. There are countless examples of inflation (tuition, health care, local taxes) that don’t show up in the Fed’s numbers. Tuesday, a “hot” PPI number could add to the excitement.

I believe the Fed will reluctantly lower interest rates by .25% next week. They will lace their rhetoric with inflationary comments to curb future rate cut expectations. The market will have an initial negative reaction.





The earnings releases by LEH, GS and BSC will be much more important. To a degree, the Fed’s actions are priced in. However, no one really knows the earnings impact from the sub-prime/credit crunch debacle. Historically, LEH has made a 2% move after releasing its earnings. The option implied volatilities are pricing in an 8% move in either direction. Lehman releases before the open Tuesday while Goldman Sachs and Bear Stearns will be releasing earnings Thursday, after the Fed's decision. FDX also announces this week and transportation activity measures economic strength. GIS and CAG will shed light on food costs.

Earnings and the Fed’s actions/statements will determine the market's direction for the next month. Quadruple witching will throw gasoline on the fire, accelerating the move. All you can do in these situations is to have your stocks lined up. We will trade relative strength and weakness in a balanced manner.

Friday, September 7, 2007

Timer Digest Market Commentary

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Fari Hamzei

Once you study our Timer and Vol Index Charts, two issues are worth noting:

First our Timer Chart shows (mentioned here last Friday) that we are short-term overbought and due for a pause -- which BLS delivered today with the first negative NFP data in 4 years (and a massive revision to July NFP data).


Secondly, our Vol Indices chart sets the volatility retest targets both in shape and intensity (when overlaid with Sigma Channels).



Given that the seasonality data calls for September being a negative month, dollar being at 15-year low and CFC announcing a 20% layoff after the close today, we hope you have been SHORT this market and getting ready to lower your buy stop.


Just remember: the second mouse gets the cheese !!

HOTS Weekly Options Commentary

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Peter Stolcers

I have been bullish on the economy and Friday's unemployment number tainted my bias. I did not expect the dramatic decline this month and I certainly didn’t expect the huge revisions for June and July. For the month of August, analysts were expecting 115,000 new jobs. The actual number showed a decrease of 4000 jobs. That is a whopping 119,000 miss. June and July numbers were reduced by about 81,000 in total.

High consumer debt levels (and I'm not just talking subprime mortgages) will threaten the strength of this economy if workers get laid off.

Last week, the Fed invited major homebuilders to share their perspective on the economy and I’m sure Chairman Bernanke got an earful. A rate cut is almost certain after this dismal employment report. Inflation is in check and now the Fed can ease rates without the appearance of a subprime bail out.

Next week the economic calendar is light with consumer credit, retail sales, industrial production and consumer sentiment on deck. These releases don't pack the same punch and I believe Friday’s Unemployment Report will induce selling pressure until the FOMC. Traders are scrambling to determine if the Fed will cut rates by a ¼ or a ½ point.

If the Fed reacts quickly and lowers the rate by a ¼ point before the FOMC, it might be viewed as a progressive move and that might be enough to satisfy the market. On the other hand, a ¼ point cut during the FOMC will not carry the same urgency. The market could view that as stingy, feeling that the data justifies a ½ point rate cut.




In this week’s chart you can see the long-term uptrend is still intact and the breakout from April has also held. If the SPY 145 level is violated my bias will turn bearish.

We have bullish positions and this week’s trade will hedge some of our risk.

Friday, August 31, 2007

Timer Digest Market Commentary

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Fari Hamzei

S&P-500 Cash Index 1480 is our line in the sand. Low volume market advance below this level is only noise to us. What matters most now is that we are extremely overbought on the short-term basis. Next week, a short-term pause is a given. Once the market reopens after the Labor Day Weekend, we shall look for robust market action combined with healthy volume to chart the proper course for our equity markets.

I have attached our updated Timer Chart here for your audience.



HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

When John Vogel, the founder of Vanguard Funds, says that in his 50 years of investment experience he can't recall this type of volatility, it means something. He is one of the industry’s innovators and you would think that he has seen it all. Huge day-to-day reversals have become the norm. From a trader's perspective it means one thing – uncertainty.

The bulls are very strong in their conviction and they believe that the current decline represents a fantastic buying opportunity. They point to the low unemployment rate, solid earnings growth, global expansion, and relatively low interest rates as signs of strength. Most quantitative models show that stocks are an attractive value.

The bears also have a long list of items to substantiate their bias. They point to increasing debt levels across the board (federal, state, municipal, personal) and they believe the credit squeeze is just beginning. From 2000 – 2005, almost 50% of the employment growth came from the housing sector. This number includes lenders, realtors, construction workers... everyone. They believe that the sub prime woes will continue to spread into other areas and the unemployment rate will rise. They also believe that hedge funds are highly leveraged and that the current credit crisis could force another round of liquidations. In a worst case scenario, they believe that some of the “fluff” will be taken out of the emerging market run up. Once profit taking sets in, that could have a cascading affect as investors run for cover.

Personally, I'm going to stay out of this fight. When a winner emerges I will know who to back. In the meantime, the implied volatilities are very high and option selling strategies make sense. This is a time to rely on stocks with relative strength/weakness and to keep your distance from the action.

Tuesday, August 28, 2007

Timer Digest Market Commentary

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Fari Hamzei

We have four charts for your review this evening: SPX, RUT, XLF & XLE.

Let us start by stating that market action today, unlike two weeks ago, was not marked by forced liquidation, but rather it was an act of deliberate selling by many players. SP-500 Index (SPX) in the last 30 minutes of trading touched its last week's lows while Russell 2000 Index (RUT) took out its last week's lows in the first hour of trading this morning.



The next major support levels for S&P-500 Index (SPX) are located at 1421 (MS1) and 1387 (MS2). The fact that our coveted CI Indicator crossed its signal line below the ZERO LINE is very ominous. Today SPX also crossed below 200 day and 20 day Moving Averages. Down Volume to Up Volume on NYSE was almost 26 to 1. This tells us that last week the big players bid the market up to get out of their troubled positions and now they are getting ready for a big push down. A top ranked technical analyst on the Street and a contributor to my book, Master Traders, on Monday August 20th, wrote us that his SPX target for the bounce from the August 16 low is 1480. Four trading sessions later, the bounce stopped 60 cents below his target last Friday !!




Another technical analyst for whom I hold tremendous respect for (yes, he works for a bulge bracket investment bank) told us two weeks ago that his SPX downside target is 1300. If you look that how Russell 2000 (RUT) has behaved in August (never crossed its 200 day Moving Average during eight sessions during each of which it had a chance to do so). Because RUT normally leads the SPX, the RUT price action today means, the 1370 retest on SPX is a given, and the 1300 target for SPX is more plausible now than ever. Worth noting is that the next major support for RUT is 745 (MS1) which on the way up last year was a key resistance level.

The next chart really drives it home. Financials are in trouble after MER downgraded them today and when 20% of SPX is in trouble, we all are in trouble. CFC problems are far from over and if our calculations are right, we have not seen the worst of XLF. The next support is its MS1 located at 31.56 which it bounced from on August 16.





Of course the Market won't sell off in a big way till the mightiest fall and that honor goes to Mega Oil. Here we present you with its ETF (XLE) which closed today at 66.88, pretty close to its MS1 at 66.5. Keep an eye on that 10% of SPX, with key support at 64 (MS2) and its 200 day MA at 63. Once these levels are broken, the free fall should begin in earnest.

Have a great Labor Day Weekend.........




Editors' Note: MS1 stands for Monthly Support 1

Sunday, August 26, 2007

HOTS Weekly Options Commentary

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Peter Stolcers

Thursday's price action was very telling. The market had posted five consecutive late day rallies and it received a dose of great news after Wednesday's close. Bank of America was making a large investment in Countrywide Financial. In after-hours trading, the S&P 500 futures gapped 10 points higher on the notion that mortgage lenders present investment opportunities.

As the market prepared to open Thursday morning, those gains started to deteriorate. Soon after the normal trading hours started, the futures fell back to unchanged. At that juncture it was difficult to determine if the market had reached a resistance level, or if traders simply felt that the news did not justify the reaction. The momentum from the early reversal paved the way for bears to maintain selling pressure and they were able to push prices lower. By late afternoon, the market was able to stage another rally and finish unchanged for the day. The SPY 146 level was preserved.

This price action shows that buyers are willing to step up and buy stocks. It also demonstrates that we are not going to have a melt up rally. A great deal of nervousness still exists and any rally will be hard-fought.





Friday, strong durable goods orders created a bid to the market. That positive economic news was complimented by new home sales that came in better than expected.

The market avoided a sell off Thursday and it mounted a constructive grind higher on Friday. This week there are many economic numbers that will be released. Barring any new sub-prime defaults, I believe the economic numbers will show stability and they will pave the way for a continued rally. As we move above SPY 146, greater pressure will be placed on the shorts to cover. Next week, the market should also gain strength from end-of-month buying.

Here are some of the stocks that will announce earnings: SNDA, BGP, SAFM, BIG, BWS, JOYG, WSM, PSS, COST, CIEN, HRB, SHLD, TIF, DELL, FRO. As we saw this week, most of the bad news has been factored into the retailers. HPQ announced last week and I don't feel DELL’s numbers will pack any punch. Earnings will not have much of a market impact this week.

The shorts are no longer able to sell into every financial stock rally. There is a bid in those stocks and stability there will fuel the market since they comprise 20% of the S&P 500. It's still too early to give the all clear signal. This sell off was different from the one we had in February. Back then, there were phantom lending issues. This time around, the market had a more severe reaction as it counted the casualties.

As a side note, I feel the Fed has handled this crisis masterfully. They provided assistance when needed without compromising their stance or bailing out corporations that made poor lending decisions.

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