On the Securities Action of Wednesday, January 28, 2015
“Vende Omnia”
“Just Sell Everything!”
No really, don’t sell everything, I’m actually bullish. Today was another day of selling on Wall Street; Stocks fell and fixed income rallied. With every tragedy (and/or crisis) comes an opportunity; I believe that’s a Chinese proverb.
The DJIA was down -195 points or -1.13% to 17,191, the S&P500 was down -27.39 points or -1.35% to 2,002, the S&PMidCap400 was down -17.86 points or -1.22% to 1,444. Volatility surged and was up +18.70 percent or 3.22 points to 20.44.
The DJIA is now -5.04% off its peak of the past 12 months, the S&P500 is -4.37% of its 12 month peak, the S&PMidCap400 is -2.27% off its 12 month peak, the Nasdaq Composite is -3.68% off its 12 month peak, and the Russell 2000 is now -3.79% of its 12 month peak, the Wilshire 5000 is now -3.95% of its peak. XLF, an etf basket of financials, was -1.82% to 23.20. I don’t think we’re going to get a ten percent correction anytime soon, despite being half way there for the DJIA, and nearly for the S&P500 as well. We had a big selloff last October, and nearly another one during the first couple weeks of 2015.
USO (oil) was down -3.78% or -0.65 to 16.56, XLE was down -3.94% to 74.65, RSX was down -3.60% to 15.00, CUBA was -1.32% to 8.94. [http://finance.yahoo.com/futures]
Fixed income rallied, ZROZ was up +2.98% or 3.97 to 137.00, TLT rallied and was +2.20 or 1.64% to 136.77, IEF was up +.77% to 109.98, TIP was up +0.44 or +0.38% to 114.93, EMB was up +0.11 or +.10% to 111.51, PCY was up +0.05 or +0.17% to 28.64, HYG was down -.21% or -0.19 to 90.16, and JNK was -0.38% or -0.15 to 38.87, and QLTC was down -0.24% or -0.12 to 49.00. The 30 year Treasury yield settled at 2.29%, the 10 year Treasury yield settled at 1.73% [data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield]. I believe if oil can ever find rock bottom, and/or stabilize in a trading range, or start to appreciate, that there will be some major opportunities in the energy sector in equities, and in their high yield fixed income; also I think when oil stabilizes that there will be some major opportunities in high yield fixed income funds, such as the ones listed above, EMB, PCY, HYG, and JNK, and also QLTC.
The US Dollar now trades at (as of midnight central time) 1.1278 to the Euro, the dollar now can purchase 68.2245 Rubles. I believe the Ruble and the Euro are still too high, and will further deteriorate, making the dollar stronger. A strong dollar is actually quite good for the U.S. economy, as it reduces the import costs of goods and services for Americans, and thus imports deflation, it is good for fixed income as it pushes yields downwards, and it also increases our standard of living, by reducing import costs, increasing our quality of living. I’m all for a strong and strengthening U.S. Dollar, especially after nearly 15 years of a depreciating U.S. Dollar. [http://finance.yahoo.com/currency-investing/majors]
The catalysts for today’s selloff were, I believe, (1) the perception of Greece’s inability to pay it’s sovereign interest on its bonds, and on the anti-austerity sentiment of its people, also (2) light sweet crude oil fell to $44.43 (as of midnight central time) per barrel, on (3) sentiment expressed by Goldman Sachs who believes that oil could drop to $30 per barrel. The drop in oil took the entire energy sector (and the rest of equities) downwards with it. RIG was down -2.89% to 16.49, PBR was down -11.95% to 6.56, BP was down -3.31% 38.88, BPT was down -5.72% to 74.35, XOM was down -3.30% to 87.97. I think oil could go lower on this development, and I believe it will remain quite volatile, as will energy related shares.
I’m still bullish on equities, for 2015, and for the near future. I think the stronger dollar and weakening oil prices will bode well for consumer sentiment and for consumer spending, which is the largest component of GDP. I think also a strengthening U.S. dollar, weaker inflation (aka disflation), and a weakening global economic outlook will result in the Federal Reserve raising rates at the earliest this summer, or perhaps closer to September, if not until later around December of this year, if not postponing it further until 2016. Today, the Federal Reserve released a statement regarding its currently policy (of keeping the Fed. Funds rate at 0.25%) and its outlook and assessment of the economy [click here to read it], they’re quite optimistic and bullish on the U.S. economy.
In other news, AAPL reported its EPS after the bell yesterday, handily beating expectations, shares rose +5.65% or 6.17 per share, to close at 115.31. I had speculated on an earlier blog post that it was likely to appreciate by 6.90 to 7.00 per share (after the EPS release, and) the day after its EPS release by Friday; It appears as though that speculation is materializing. Aerospace EPS reports today of GD and BA were stunning, both rallied well on the news, BA traded up +7.16 or +5.40% to close at 139.64. Also the chief executive officer of MCD is resigning, as sales have been down all through his tenure, MCD is up in afterhours trading. Lastly, FXCM is planning on forgiving debts due from clients who lost money trading the Swiss Franc in recent volatile currency markets. This doesn’t make any sense to me, when was the last time a broker reimbursed you for margin loan losses?! CRAZINESS!!! See this article, http://www.wsj.com/articles/fxcm-to-forgive-some-client-losses-1422454182.
Watch the trading activity of QCOM for Thursday, it’s trading down significantly in the afterhours. Also, tomorrow (Thursday), GOOGL reports its EPS, after the close; I’d imagine there will be quite a lot of hype surrounding this EPS release. GOOGL’s option chain tells me, after analyzing it, that it could move ±22.80 (as in increasing 22.80, or decreasing 22.80) per share after the EPS release to be announced just after the closing bell. Said another way, I think GOOGL will move 22.80 on Friday, either up or down. GOOGL shares closed at 512.43, sporting a PE Multiple of 26.97, and a market capitalization of 347.61 billion U.S. Dollars. On Wednesday, GOOGL’s previous trailing 12 month high is 615.06, set on February 26th of 2014. Options investors could pick (from one of many options strategies, perhaps) and a strategy called a long bull call ratio back spread, with net credit characteristics could be lucrative if the shares rose the projected 22 dollars. This strategy is interesting because, for illustrative purposes, you go actually short an ATM call, then taking those proceeds you purchase more than one (if not two or three) further out of the money calls. The sum of the net debit purchase of the long calls is LESS than the proceeds (the credit) from the single short call, making the trade a net credit; This way if the shares rise enough, you lose one dollar on the short leg, but you simultaneously make e.g. three dollars on the long calls. To top it off, if the shares decline, you lose nothing, and “run off” with the net credit. This trading strategy is popular among active and experienced options traders. The above strategy could be combined with a long bear put ratio back spread, also with net credit characteristics, (constructed by shorting an ATM put, and then going long more than one, if not two or three further out of the money puts, where the cost of the long puts is less than the proceeds from the short put, making it a net credit) that way, one of the two trades will likely be highly profitable, while the other merely brings in the net credit. The risk is that the underlying stock or index of a long ratio back spread does not move enough, exposing you to the risk (or hypothetical loss, which would be the product of the number of the short option contracts, times the distance) between the strike prices of the short and long options. Due to that risk, a capital requirement (aka your brokerage would require cash to be held in your account) would be necessary to place the trade. A more simpler strategy of simply buying deep in the money calls, perhaps 100 points deep, or $10,000 per option call contract, if you’re bullish, would be easier. One option call contract would replicate 100 shares of stock, which if bought cash, would cost about $51,243. Remember there’s intrinsic value and extrinsic value of an option, so breakeven is the strike price of the long call plus the premium (the price paid). To mitigate the extrinsic value decay, options traders usually trade level three spreads, adjusting a e.g. level two call purchase, into a level three vertical bull call debit spread, this is because the short leg is worth the value of the extrinsic value of the long leg, so the time decay is no longer an issue. If the extrinsic value of the short leg is worth more than the extrinsic value of the long leg, it’s called a theta positive position; If less, it’s called theta negative position; if equal it’s called a theta neutral position. Each of these positions (theta positive, theta neutral, and theta negative) have advantages and disadvantages. I could go on, and on, and on about it, but I’ll save that for some other time.
I believe, Thursday’s notable economic data releases (click here for Yahoo Finance’s Economic Calendar) will include Jobless Claims at 8:30amET, and Pending Home Sales Index at 10:00amET. Friday’s notable reports will include GDP as well as the Unemployment Cost Index both at 8:30amET, and the Chicago PMI at 9:45amET, and finally Consumer Sentiment at 10:00amET. I believe these reports will serve as a catalyst for higher equity prices. S&P Futures vs. Fair Value are indicating Thursday’s implied open will be unchanged to slightly up (click here for a futures update).
By Andrew G. Bernhardt
Bernhardt Capital Management LLC 