Thursday, January 29, 2015, 11:59pmCT, On Today’s Securities Markets – Omnia Possidere

On the Securities Action of Thursday, January 29, 2015

“Omnia Possidere”

“Just Buy Everything!”

I’m still bullish and believe stock prices will go higher.  Today was a great day for stocks on Wall Street; Stocks roared forward and fixed income rallied.  Stocks traded downwards until approximately 10amCT, when they reversed course and rallied strongly, finishing up for the day.  The DJIA fell to 17,136 before reversing to close at 17,417.  The S&P500 fell to 1,989 before reversing and finishing at 2,021.

Jan. 29, 2015, Major U.S. Stock Indices

The DJIA closed up +225.48 or +1.31% to 17,416.85, the S&P500 was up 19.09 points or +0.95% to 2,021.25, the S&PMidCap400 was up +10.69 points or +0.74% to 1,455.35.  Volatility (as measured by the VIX) imploded, and was down -1.68 points or -8.22% to close at 18.76.

The DJIA is now -3.79% off its trailing 12 month peak, the S&P500 is -3.45% of its 12 month peak, the S&PMidCap400 is -1.55% off its 12 month peak, the Nasdaq Composite is -2.73% off its 12 month peak, and the Russell 2000 is now -2.56% of its 12 month peak, the Wilshire 5000 is now -3.07% off its peak.  XLF, an etf basket of financials, was +0.82% to 23.39, and is now -6.25% off its 12 month peak.  I believe the markets (excluding the Nasdaq 100, and the Nasdaq Composite) are going to plow forward to new all time highs in the next week or two.  The Nasdaq 100 and Nasdaq Composite have quite a bit of more territory to cover before striking new all time highs, set in March of 2000.

Various quotes of interest.

USO (oil) was up +0.72% to close at 16.68, XLE was up 0.33% to 74.90, RSX was down -1.27% to 14.81, CUBA was -2.46%% to 8.72.  Oil seems to have stabilized here over the past few days.  [http://finance.yahoo.com/futures]

In the Fixed income markets, Treasuries sold off, while the high yield sector rallied. TLT traded down -0.66% to 135.87, IEF was down -0.35% to 109.59, TIP was  down -0.11% to 114.80, EMB was up +0.13% to 111.66, PCY was up +0.35% to 28.74, HYG was up +0.35% to 90.48, JNK was up +0.39% to 39.02, and QLTC was unchanged at 49.00.  The 30 year Treasury yield settled at 2.33%, the 10 year Treasury yield settled at 1.77% [data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield].  I continue to believe that 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 believe that when oil stabilizes (or begins to appreciate) that there will be some major opportunities in high yield fixed income funds, such as the ones listed above, EMB, PCY, HYG, JNK, and QLTC.

The US Dollar traded slightly lower versus the Euro on Thursday, the Euro gained approximately +0.30%.  I continue to believe the Ruble and the Euro are still too high, and will further deteriorate, making the dollar stronger.  Check up on current cross rates here:   http://finance.yahoo.com/currency-investing/majors.

I believe the catalysts for today’s stock market rally were the economic data releases.  Labor force figures exceeded expectations.  Initial claims came in better than expected, at 265k, the prior figure was 308k, and consensus estimates were for 301k.  Additionally, Continuing Claims came in at 2,385k, the prior figure was 2,456k, and consensus expectations were for 2,429k.  Pending home sales came in at -3.7%, the prior figure was +0.6%, and consensus expectations were for +0.6%.  Most believe that it was slightly light due to the Holiday of MLK which halted mortgage and banking activity this month.

Today, Bill Gross “the King of Bonds,” released his monthly commentary on the markets.  He believes that higher rates will not be terrible for fixed income or for equities.  You can read his report here:  https://www.janus.com/bill-gross-investment-outlook, this month he talks of the board game Monopoly, and how his mother taught him how to play the board game.  He mentions he likes orange and red properties rather than Boardwalk and Park Place.  More seriously, Gross mentions that the U.S. recovery since the 2008 “greater depression” (as I like to call it) has been very weak and “anemic” as he says; Bill Gross also says he believes The FOMC will raise rates in late 2015.  I’d counter that, the rebound hasn’t been a total flop, and at least stock market performance (as well as the high yield fixed income sector) has been absolutely stunning(!!!) over the past 5 to 6 years, off the rock bottom prices reached around March 9, 2009.  I’d suggest no six year period will see +200% or greater stock index gains again, for quite a while (as we’ve all seen since March of 2009).  Gross then goes on to discuss Dr. Francis Fukuyama’s estimates (read about Fukuyama here: http://en.wikipedia.org/wiki/Francis_Fukuyama) as if we know what he’s talking about.  I believe Gross is pleased at the current risk of slight deflation and disflation, and currency strength, rather than run away inflation, and currency depreciation; perhaps this is what Dr. Fukuyama has projected in the past.  It’s easy to project and estimate a reflationary environment and higher inflation rates, when inflation rates, and interest rates are at historical lows.  There have been many Dollar bears in the past as well, due to the current account deficit; Especially the federal budget deficit in the USA.  It’s kind of like saying there’s going to be a storm when the weather is beautiful, or vice versa.

I believe tomorrow the economic data releases may sway the market.  I believe S&P Futures vs. Fair Value will be meaningless until the GDP release, which will make an impact.  Gross Domestic Product (GDP) is expected to come in at +3.2%, the prior quarter was +5.0%; and the Chain Deflator-Advance is expected to come in at +1.0%, and the Employment Cost Index is projected to come in at +0.3%, also the Chicago PMI is expected to come in at 57.5, and lastly Michigan Sentiment is expected to come in at 97.5.

I’m still bullish on equities, for 2015, and for the near future.  I continue to believe (as I’ve said earlier) that 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 until perhaps in 2016.

In other news, MSFT finally saw some relief, after selling off strongly for a few days in a row, it was up 1.99% today.  MCD had its CEO resign, and shares rose +5.06%.  PCLN broke 1,000 per share trading downwards in the morning, before rallying to close up +11.49 to 1,014.74.  PCLN hasn’t seen $1,000 per share for years.  PCLN struck a high around March 5, 2014 at 1,370 per share.  QCOM released EPS recently and traded downwards by -10.28% finishing the trading session at 63.69.  BABA also traded down slumping by -8.78% to 89.81.  GOOGL released its EPS after the closing bell, and missed the 7.11 EPS estimates, and was light on revenue.  Tomorrow’s GOOGL performance will be interesting to examine.  Shares initially sold off on the news, later however, shares are actually trading higher, and shares are up +7.77 in afterhours trading to 521.  In “Big Oil” CVX reports EPS before the opening bell Friday.  Friday’s EPS reports will also include LLY before the open, and SPG before the opening bell as well.  In politics, President Obama asked the people and the Congress to approve a major spending increase for the U.S. Military.  I believe this is a mistake, only because as a nation we spend more than 10 times (on our military budget) then the rest of the entire world’s defense budgets summed together; this is not an exaggeration.  I worry about major budget deficits fueled by higher and higher (and rapidly growing) defense budget expenditures.  I’d like to see a U.S. President raise the defense budget by about +0.001% annually (despite any inflation possible that may or would materialize) for at least the next two terms of presidency in the United States.  That would likely be beneficial to the U.S. economy, and may allow for increased growth rates and increased economic development & activity.  I may not even be opposed to a future President that may decrease the Department of Defense Budget. We need a President who can manage to balance the budget, or better yet, one who can run a surplus.

S&P Futures vs. Fair Value are indicating Friday’s implied open will be nearly unchanged (click here for a futures update).

By Andrew G. Bernhardt

Wednesday, January 28, 2015, 11:59pmCT, On Today’s Securities Markets – Vende Omnia

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.

Jan. 28, ’15 Major U.S. Stock Indices

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

2:01amCT, Friday, January 23, 2015, “Mario Draghi, The ECB Gone Wild, and The Invisible Hand!”

On the Trading of Thursday, January 22, 2015

Invisibilia manus!

“The Invisible Hand!”

Today was a great day for equities, as I suspected and as was rumored, Mario Draghi (at noon in Germany), the President of the ECB, decided to make an announcement regarding the European version of QE, a similar program to QE (quantitative easing) was recently completed in the USA.  He announced that he’d have the ECB spend 60 billion euro (rumors of 50 billion were floating around) per month through at least 2016, buying ECB bonds. He said no definite ending date for the stimulus program of buying Euro Central Bank fixed income was to be declared.  This is believed to stimulate the economy.  Consequently, the markets reacted quite nicely in the U.S. (and elsewhere) to the announcement, despite it being widely expected. The euro currency vs. the U.S. Dollar declined nearly 2%, as of roughly 2amCT the euro traded at 1.1350 vs. the Dollar.

The DJIA finished up +259.70 points or +1.48% to 17,813.98.  The S&P500 finished up +31.03 points, or +1.53% to 2,063.15.  The S&PMidCap400 finished up +26.57 points, or +1.85% to 1,462.29.  These major U.S. stock indices are just 1.60%, 1.45%, and 1.08% respectively off their all time highs.  If I had to take a wild guess they’ll soon plow through these previous all time highs, to strike new highs, before taking a few steps backwards, before making another advance to higher levels.

Oil finished up yesterday, and is currently at approximately 47.07 per barrel.  Treasury Securities traded mostly down, longer term maturities down about point five percent, and intermediates down about point three percent, inflation linked intermediates were mostly unchanged, up about zero point zero three percent. The VIX plunged, continuing it’s rapid descent, which I like to describe as a mini implosion (whenever it happens, as volatility is very volatile itself). The VIX declined -13.00% or 2.40 points, to 16.40.

In other news yesterday, Wednesday, the S&P500’s current yield reached a level that exceeds the 10 year treasury note yield, for the first time in quite a while.  This is a very bullish indicator for equities going out approximately a year.

As of approximately 2:00am S&P Futures vs. Fair Value are indicating an implied open of relatively unchanged for the U.S. major stock indices; +2 points for the DJIA, and -0.30 points for the S&P500.

That’s all the news that’s fit to print.

By Andrew G. Bernhardt