“Sell in May and Go Away” is not the manta here. I prefer “Sell in May, Investors Are Not Going Away.” Sure the markets have been taking a beating throughout May, but there is more to it than just counting the bad days. I talked here about the Dow Jones Industrial Average for the month of May, or May 3 – May 20, giving back on average 140 points from intraday lows on down days. From May 3 – May 25, now with three more trading days added-in, the DJIA has given back on average 173 points from intraday lows on again, down days. May 25 was very ugly in early trading. The DJIA was down well below the 10,000 mark yet still managed to give back a near 270 points from the intraday low to close slightly above 10,000 at 10,043.75. That says something…
Maybe it says market analysts and reporters doubt the retail investor more than they should. We all saw the declines throughout 2008/09 and many unfortunately do regret not “Buying Low,” back in spring of 2009. However, it does not take a genius to come to the realization that now is what could turn out to be a fantastic buying opportunity for U.S. equities.
U.S. consumer confidence leaped to 63.3 in May from an April reading of 57.7. This was the third consecutive month where consumer confidence increased. Also, the recent slide in oil prices, which alas has been viewed as a negative for the markets, really is a relief to consumers who are enticed to fuel our economy even more when they pay less at the pump. Furthermore, numerous companies have been buying back stock which clearly suggests that corporate executives do see undervalued stock prices. To name a few, consider Genzyme (GENZ) buying back $2 billion of its stock, Union Bancshares (UNB) buying back 2500 shares/quarter through 2011, Ameriprise Financial (AMP) repurchasing $1.5 billion in stock through 2010, and Gilead Sciences (GILD) buying back $5 billion in stock over the next several years.
On a final note, James Bullard, President of the St. Louis Federal Reserve Bank, in a news release dated May 25, stated how the sovereign debt crisis in Europe should not be considered a catalyst to derail a global economic recovery. I found it interesting to read his remarks on “Too Big to Fail” and although controversial, the fact that governments will not permit major financial institutions to fail in a sense does eliminate what could be considered a motive for a “double dip.” The release was informative. I encourage all to read it here.
The bottom line – I am still bullish on the U.S. equity markets. I firmly believe that now is a great buying opportunity and I am very happy to have helped several family members establish positions in Altria (MO), Bristol-Myers (BMY), Exelon (EXC) and several other names at the intraday lows on both May 24 and 25.
Full disclosure: Long Altria at time of writing.
Tuesday, May 25, 2010
Thursday, May 20, 2010
To the Retail Investor, Don't Give Up
Too many people are worried – there is plenty of bad news that has surfaced. Today, May 20, initial claims had risen by a much more than expected amount, suggesting that the domestic labor market is still a bit murky, contrary to data a few weeks ago. The S&P 500 Volatility Index has been breaking out, well above 40, thus confirming that investor ‘fear’ is now among us – too bad I did not straddle VIX options. To carry on, Government pipelines are filled with new regulations and the only thing investors seem to really care about right now is the euro zone crisis.
Those who bought domestic equities while the U.S. economy was in recession not too long ago clearly overlooked the uncertainty and saw opportunity. 12-16 months ago, individual stocks were just too discounted to simply ignore. The U.S. equities markets today are roughly 10% off their recent highs. Now I assume that with a correction, which has been anticipated, there must be some bad news to fuel it. If there is no bad news, besides modest profit taking, what else could cause a 10% correction?
With all the data out there that can easily influence retail investors to sell their U.S. equity positions, which I do think could be a mistake, I decided to do a simple analysis to provide more paint to the picture. My analysis is as follows:
Consider March and September of 2008, when Bear Stearns was sold to JP Morgan (JPM) and Lehman Brothers declared bankruptcy, respectively. For every day that the Dow Jones Industrial Average closed down in those months of March and September 2008, on average, the index had closed 98 and 91 points above the intraday lows, respectively. The Dow Jones so far for May 2010, in the midst of all these new worries, for every down day has given back roughly 140 points on average from the intraday lows.
This analysis implies that investors are not giving up on the market. Yes we see volatility and bad news floating around, but on such down days, we do not see aggressive selling into each day’s close (not considering today). Note that options expiration is tomorrow and that easily could have pushed the markets to new daily lows at the close today. I say that because I postulate many investors bought put options in the wake of Europe's problems, the oil crisis in the Gulf, and new regulations, but those investors were hesitant to outright short companies due to the fact that we were (or still are) in a bull market. Therefore, a bias towards the downside today and potentially tomorrow seems justified.
I will have to follow up to this analysis when May concludes, nevertheless, I feel that investors are using each down day to buy more shares of U.S. equities – to position themselves for when the upward trend in the market resumes.
Full disclosure: Long VIX Puts at time of writing.
Those who bought domestic equities while the U.S. economy was in recession not too long ago clearly overlooked the uncertainty and saw opportunity. 12-16 months ago, individual stocks were just too discounted to simply ignore. The U.S. equities markets today are roughly 10% off their recent highs. Now I assume that with a correction, which has been anticipated, there must be some bad news to fuel it. If there is no bad news, besides modest profit taking, what else could cause a 10% correction?
With all the data out there that can easily influence retail investors to sell their U.S. equity positions, which I do think could be a mistake, I decided to do a simple analysis to provide more paint to the picture. My analysis is as follows:
Consider March and September of 2008, when Bear Stearns was sold to JP Morgan (JPM) and Lehman Brothers declared bankruptcy, respectively. For every day that the Dow Jones Industrial Average closed down in those months of March and September 2008, on average, the index had closed 98 and 91 points above the intraday lows, respectively. The Dow Jones so far for May 2010, in the midst of all these new worries, for every down day has given back roughly 140 points on average from the intraday lows.
This analysis implies that investors are not giving up on the market. Yes we see volatility and bad news floating around, but on such down days, we do not see aggressive selling into each day’s close (not considering today). Note that options expiration is tomorrow and that easily could have pushed the markets to new daily lows at the close today. I say that because I postulate many investors bought put options in the wake of Europe's problems, the oil crisis in the Gulf, and new regulations, but those investors were hesitant to outright short companies due to the fact that we were (or still are) in a bull market. Therefore, a bias towards the downside today and potentially tomorrow seems justified.
I will have to follow up to this analysis when May concludes, nevertheless, I feel that investors are using each down day to buy more shares of U.S. equities – to position themselves for when the upward trend in the market resumes.
Full disclosure: Long VIX Puts at time of writing.
Thursday, May 13, 2010
Reading the Market's Future with VIX Options
Betting for or against volatility is really unique in its own way. I bought July 2010 put options on the CBOE Volatility Index with a 19.00 strike. After last week’s correction, I was shocked as to how high the VIX had spiked and wrote about that here. That move was not warranted due to an improving economy domestically, strengthening balance sheets, a better labor market, and so on.
As I write this, the VIX is trading at roughly 25. If looking at the May call options that trade 4% above the May 25 strike point (the May 26 calls), the bid – ask spread is 1.00 – 1.05. Now, if looking at the May put options that trade 4% below the May 25 strike point (the May 24 puts), the bid – ask spread is 1.05 – 1.20. This tells me from just looking at the premiums, betting on the downside to the VIX is more expensive (evident with the 1.20 ask rather than the 1.05 ask). That makes sense as the market has been gaining back some value following its decline from last week. However, the discrepancy is not great enough to make a solid market predication. Therefore, let’s look a bit further out to the July options to give us a more lucid picture.
When looking at the July call options that trade about 22.5% above the current price of the VIX at roughly 24.75 (just minuets after writing the first couple paragraphs), we see the July calls with a 30 strike. The bid – ask spread is 2.75 – 2.80. The July put options that trade about 22.5% below the current VIX price leads us to the puts with a 19 strike. The bid – ask spread here is .45 – .55. In this case, it is much more expensive to be long the VIX a couple months out. This suggests that more fear will return in the marketplace in the midst of the summer.
In conclusion, there are two ways to read this analysis when considering the July options. First, the July put options are very cheap relative to the July calls. If the market continues to ascend higher, investors can be in good shape if acquiring VIX July puts. I remember that I wanted to buy call options on the VIX a couple weeks ago, before the correction, because those options were so cheap, just like the VIX July puts right now. In addition, buying those calls would have hedged my long positions. The second way to read this analysis is that the sentiment of ‘sophisticated’ investors hints that more gloomy times are coming in the months ahead and therefore investors should be concerned about their longs and start contemplating how to restructure their portfolio to fight a potential storm.
For more information on the CBOE Volatility Index, click here.
Full disclosure: Long VIX Puts at time of writing.
As I write this, the VIX is trading at roughly 25. If looking at the May call options that trade 4% above the May 25 strike point (the May 26 calls), the bid – ask spread is 1.00 – 1.05. Now, if looking at the May put options that trade 4% below the May 25 strike point (the May 24 puts), the bid – ask spread is 1.05 – 1.20. This tells me from just looking at the premiums, betting on the downside to the VIX is more expensive (evident with the 1.20 ask rather than the 1.05 ask). That makes sense as the market has been gaining back some value following its decline from last week. However, the discrepancy is not great enough to make a solid market predication. Therefore, let’s look a bit further out to the July options to give us a more lucid picture.
When looking at the July call options that trade about 22.5% above the current price of the VIX at roughly 24.75 (just minuets after writing the first couple paragraphs), we see the July calls with a 30 strike. The bid – ask spread is 2.75 – 2.80. The July put options that trade about 22.5% below the current VIX price leads us to the puts with a 19 strike. The bid – ask spread here is .45 – .55. In this case, it is much more expensive to be long the VIX a couple months out. This suggests that more fear will return in the marketplace in the midst of the summer.
In conclusion, there are two ways to read this analysis when considering the July options. First, the July put options are very cheap relative to the July calls. If the market continues to ascend higher, investors can be in good shape if acquiring VIX July puts. I remember that I wanted to buy call options on the VIX a couple weeks ago, before the correction, because those options were so cheap, just like the VIX July puts right now. In addition, buying those calls would have hedged my long positions. The second way to read this analysis is that the sentiment of ‘sophisticated’ investors hints that more gloomy times are coming in the months ahead and therefore investors should be concerned about their longs and start contemplating how to restructure their portfolio to fight a potential storm.
For more information on the CBOE Volatility Index, click here.
Full disclosure: Long VIX Puts at time of writing.
Monday, May 10, 2010
VIX Falls, Moody’s and McGraw Plummet
Those who did not liquidate their positions in equities last week are likely content as I write this article. I wrote about the VIX just a few days ago were I expressed my concern that the volatility index had risen too fast in too short of a time and that the index was likely to revert to its mean of 26.30. Early this morning, the VIX had dropped below that mean. That being the case, put options on the VIX still seem appropriate, especially with the bounce today resulting from news about a $1 trillion rescue plan for the debt crisis overseas – the U.S. Federal Reserve also said it would give a hand via offering oversea loans.
Last week was something else, we all know that. But with a barrage of data virtually everyday, I believe betting for or against volatility could be a unique play. The following Seeking Alpha article here suggests volatility is not going anywhere. If that is the case, straddling VIX options seems most warranted, but such a strategy could be dangerous if investors are not exactly sure what they are doing. I personally like put options on the VIX because I still do believe the equity markets have room to run. Those who are short the market can hedge themselves with put options on the VIX also. Investors who are long and contemplating how to lower their correlation to the market in the wake of crazy volatility, maybe buying some VIX calls or betting against Moody’s (MCO) or McGraw-Hill (MHP) via short or put positions are some ways to do so.
I wrote about the rating agencies back on April 19 here. Moody’s and McGraw have dropped more than 10% and 7%, respectively in early trading on May 10. The SEC is out for these two companies simply because their methodology is considered, by federal investigators, to be incorrect, misleading, and so on. With all of this scrutiny, I find it difficult to believe that these rating agencies can regain trust from investors let alone continue to operate efficiently.
I personally do not like how the rating agencies have also downgraded credit in the past on an ‘after the fact’ basis. I also cannot believe that Moody’s once referred to the 1st Amendment when attempting to defend itself. If every financial firm said “Freedom of Speech” when being investigated about their methodologies and disregarded the fact that millions of investors take their words and analyses very seriously, we would be in big trouble.
Full disclosure: Long VIX puts at time of writing.
Last week was something else, we all know that. But with a barrage of data virtually everyday, I believe betting for or against volatility could be a unique play. The following Seeking Alpha article here suggests volatility is not going anywhere. If that is the case, straddling VIX options seems most warranted, but such a strategy could be dangerous if investors are not exactly sure what they are doing. I personally like put options on the VIX because I still do believe the equity markets have room to run. Those who are short the market can hedge themselves with put options on the VIX also. Investors who are long and contemplating how to lower their correlation to the market in the wake of crazy volatility, maybe buying some VIX calls or betting against Moody’s (MCO) or McGraw-Hill (MHP) via short or put positions are some ways to do so.
I wrote about the rating agencies back on April 19 here. Moody’s and McGraw have dropped more than 10% and 7%, respectively in early trading on May 10. The SEC is out for these two companies simply because their methodology is considered, by federal investigators, to be incorrect, misleading, and so on. With all of this scrutiny, I find it difficult to believe that these rating agencies can regain trust from investors let alone continue to operate efficiently.
I personally do not like how the rating agencies have also downgraded credit in the past on an ‘after the fact’ basis. I also cannot believe that Moody’s once referred to the 1st Amendment when attempting to defend itself. If every financial firm said “Freedom of Speech” when being investigated about their methodologies and disregarded the fact that millions of investors take their words and analyses very seriously, we would be in big trouble.
Full disclosure: Long VIX puts at time of writing.
Thursday, May 6, 2010
Today, I bought VIX Puts
Wow... What a day today in the market. For awhile, I have contemplated about whether or not I should buy call options on the VIX (Chicago Board Options Exchange Volatility Index) to hedge all of my long and call positions. Unfortunately, I did not make such a trade, however, today I went out and bought put options on the VIX and my reasoning is as follows.
In short, the VIX is a measure of volatility and fear/satisfaction in the market. For those who do not know what volatility is, think of it as being similar to a standard deviation, or statistically speaking, a dispersion of returns. When the VIX is below 20, the sentiment says investors are content, the markets are calmer, and there is not too much spookiness going on. I suggested that AAPL shareholders should buy put options on AAPL during its solid push forward, if not for my argument, because the protection was so cheap! Those who had done so around the time I wrote that article must be very happy with their decision to have done so. When the VIX trades above 30, the markets trade very volatile and investors become instilled with fear and ambiguity.
Now, the VIX over the past year has traded below 30 and stayed in the mid 20s then started to decline to the mid-upper teens when the DOW really started to break out in its movement above 11,000. Interestingly, the DOW went from a 52-week high of 11,258.01 on April 26 to close at 10,520.32 on May 6, a near 6.5% decline in only a few weeks. Intraday on May 6, the DOW crashed below the renowned 10,000 mark, more than a 10% decline from its 52-week high. Clearly, there are hiccups in the market and to the many analysts and commentators out there who had talked about a correction, well... here it is.
Investors should not forget the dozens of companies who have recently reported fantastic quarters accompanied with solid outlooks, the countless investors who are still waiting to jump back in the markets, and the numerous economic indicators that have been improving – the initial claims report on May 6 and construction spending to name a few.
I bought put options on the VIX because over the last few weeks, it soared from roughly 16 to just below 33 at the close on May 6! Now that might be a bit excessive. Intraday, it popped to 40.71, a fresh 52-week high. I do not think that the high VIX reading is warranted due to the fact that the economy has been improving, despite the debt crises overseas. From March 2, 2009 up until today, May 6, 2009, I averaged the VIX to be 26.30. I believe it is appropriate to assume the VIX will revisit its mean. If so, VIX put options could be a unique play. If the market heals its hiccups and ascends higher, VIX put options could be even a better play or at least a good hedge for those who do want to short the market.
Full disclosure: Long VIX puts at time of writing.
In short, the VIX is a measure of volatility and fear/satisfaction in the market. For those who do not know what volatility is, think of it as being similar to a standard deviation, or statistically speaking, a dispersion of returns. When the VIX is below 20, the sentiment says investors are content, the markets are calmer, and there is not too much spookiness going on. I suggested that AAPL shareholders should buy put options on AAPL during its solid push forward, if not for my argument, because the protection was so cheap! Those who had done so around the time I wrote that article must be very happy with their decision to have done so. When the VIX trades above 30, the markets trade very volatile and investors become instilled with fear and ambiguity.
Now, the VIX over the past year has traded below 30 and stayed in the mid 20s then started to decline to the mid-upper teens when the DOW really started to break out in its movement above 11,000. Interestingly, the DOW went from a 52-week high of 11,258.01 on April 26 to close at 10,520.32 on May 6, a near 6.5% decline in only a few weeks. Intraday on May 6, the DOW crashed below the renowned 10,000 mark, more than a 10% decline from its 52-week high. Clearly, there are hiccups in the market and to the many analysts and commentators out there who had talked about a correction, well... here it is.
Investors should not forget the dozens of companies who have recently reported fantastic quarters accompanied with solid outlooks, the countless investors who are still waiting to jump back in the markets, and the numerous economic indicators that have been improving – the initial claims report on May 6 and construction spending to name a few.
I bought put options on the VIX because over the last few weeks, it soared from roughly 16 to just below 33 at the close on May 6! Now that might be a bit excessive. Intraday, it popped to 40.71, a fresh 52-week high. I do not think that the high VIX reading is warranted due to the fact that the economy has been improving, despite the debt crises overseas. From March 2, 2009 up until today, May 6, 2009, I averaged the VIX to be 26.30. I believe it is appropriate to assume the VIX will revisit its mean. If so, VIX put options could be a unique play. If the market heals its hiccups and ascends higher, VIX put options could be even a better play or at least a good hedge for those who do want to short the market.
Full disclosure: Long VIX puts at time of writing.
Wednesday, May 5, 2010
Monthly Recap: April 2010
This post is to simply run through what I had written about during the month of April 2010 and briefly discuss my estimates, the situations, etc...
My first post was Bottom in Construction, Coming Up! After seeing data released earlier this week, I feel confident to call right here and now that February 2010 was the bottom in Total Construction Spending (TCS). After adjustments, TCS was up .21% in March from February. My logic derived from the realization that for some time, Building Permits have been steadily rising. Building Permits are a leading indicator and are also intertwined with Residential Construction Spending (RCS). For the month of March 2010, RCS made up just less than 31% of TCS and going back slightly over 10 years, on average, accounted for roughly 45% of TCS. Knowing that Building Permits and RCS bottomed in April 2009 and June 2009, respectively, with just these two data points, assuming TCS has bottomed in February 2010 or was going to bottom within the next few months was not an irrational prediction.
I thought that I could play the bottom in TCS with U.S. Concrete. I was well aware that the company was distressed and planning to restructure and just a few days ago, U.S. Concreted filed for Chapter 11 bankruptcy protection to undergo the restructuring. I talked about the situation, warrants, and new equity here and here. Although I ended up cashing out a few days ago because I realized the stock began trading lower on lighter volume and for reasons regarding my own financial situation, I still feel that over a long-term time horizon (about a decade), the warrants existing shareholders are entitled to will be extremely valuable because I do still believe the new equity will be appealing to investors, especially now that TCS has bottomed. I believe U.S. Concrete wants to get the restructuring out of their way (evident with them expediting the process) simply so an enormous debt burden is not hanging over them when they start turning a profit.
From an investment perspective, I firmly believe that it is essential to be bullish and bearish on different companies (or sectors) simultaneously basically to mitigate risk and reduce a market correlation. I talked about the rating agencies here and stated why it would be appropriate to buy the January 2011 $22.50 and $17.50 put options for McGraw-Hill and Moody’s – on April 19, 2010, the premiums were $.45/contract and $.84/contract, respectively. As the market closed on May 5, the McGraw-Hill and Moody’s put options rose by approximately 100% and 65%, respectively.
When I wrote my first post about Apple on April 20, the stock closed at $244.59/share. I followed up to that post after the company reported its financial results on April 21, where it then closed at $259.22/share. On May 5, Apple closed at $255.99, 6% below its intraday and all time high of $272.46 set just over a week ago. Many analysts have a $300.00 price target. However, I feel that competition and what it can do to Apple is not really thought of - and that can be bad news. Consider the following chart:
This chart shows that Apple did not hold its gains from its blow-out earnings report about two weeks ago. If Apple breaks $230.00 or so, I feel that Apple shareholders should be at least slightly concerned, should they not? I will not go off on a tangent here – I continue to stand with my outlook on Apple.
Lastly, YRC Worldwide came out with their financial results on May 4. Unfortunately, investors did not like the quarter and the stock sold off, and did so with strong volume. However, the company reported a loss per share of $.33 when not considering a $.20 charge for union employee equity awards which was expected. With the charge, the loss was really $.53/share. The expectations were at worst a $1.32 loss, on average, a $.48 loss, and at best, a $.07 loss. I was hoping for a number greater than the negative $.07.
Regardless, a loss of $.53/share is significantly better than the worst case scenario of a $1.32 loss which tells me that the company has been operating much better than few had thought. Also, President and CEO, Bill Zollars continues to state how the company from its operating momentum is still expecting positive EBITDA in the second quarter. Zollars also claimed during the report that YRC is poised for growth. I still believe in this story for the long-run.
Full disclosure: Long YRCW calls at time of writing.
My first post was Bottom in Construction, Coming Up! After seeing data released earlier this week, I feel confident to call right here and now that February 2010 was the bottom in Total Construction Spending (TCS). After adjustments, TCS was up .21% in March from February. My logic derived from the realization that for some time, Building Permits have been steadily rising. Building Permits are a leading indicator and are also intertwined with Residential Construction Spending (RCS). For the month of March 2010, RCS made up just less than 31% of TCS and going back slightly over 10 years, on average, accounted for roughly 45% of TCS. Knowing that Building Permits and RCS bottomed in April 2009 and June 2009, respectively, with just these two data points, assuming TCS has bottomed in February 2010 or was going to bottom within the next few months was not an irrational prediction.
I thought that I could play the bottom in TCS with U.S. Concrete. I was well aware that the company was distressed and planning to restructure and just a few days ago, U.S. Concreted filed for Chapter 11 bankruptcy protection to undergo the restructuring. I talked about the situation, warrants, and new equity here and here. Although I ended up cashing out a few days ago because I realized the stock began trading lower on lighter volume and for reasons regarding my own financial situation, I still feel that over a long-term time horizon (about a decade), the warrants existing shareholders are entitled to will be extremely valuable because I do still believe the new equity will be appealing to investors, especially now that TCS has bottomed. I believe U.S. Concrete wants to get the restructuring out of their way (evident with them expediting the process) simply so an enormous debt burden is not hanging over them when they start turning a profit.
From an investment perspective, I firmly believe that it is essential to be bullish and bearish on different companies (or sectors) simultaneously basically to mitigate risk and reduce a market correlation. I talked about the rating agencies here and stated why it would be appropriate to buy the January 2011 $22.50 and $17.50 put options for McGraw-Hill and Moody’s – on April 19, 2010, the premiums were $.45/contract and $.84/contract, respectively. As the market closed on May 5, the McGraw-Hill and Moody’s put options rose by approximately 100% and 65%, respectively.
When I wrote my first post about Apple on April 20, the stock closed at $244.59/share. I followed up to that post after the company reported its financial results on April 21, where it then closed at $259.22/share. On May 5, Apple closed at $255.99, 6% below its intraday and all time high of $272.46 set just over a week ago. Many analysts have a $300.00 price target. However, I feel that competition and what it can do to Apple is not really thought of - and that can be bad news. Consider the following chart:
This chart shows that Apple did not hold its gains from its blow-out earnings report about two weeks ago. If Apple breaks $230.00 or so, I feel that Apple shareholders should be at least slightly concerned, should they not? I will not go off on a tangent here – I continue to stand with my outlook on Apple.
Lastly, YRC Worldwide came out with their financial results on May 4. Unfortunately, investors did not like the quarter and the stock sold off, and did so with strong volume. However, the company reported a loss per share of $.33 when not considering a $.20 charge for union employee equity awards which was expected. With the charge, the loss was really $.53/share. The expectations were at worst a $1.32 loss, on average, a $.48 loss, and at best, a $.07 loss. I was hoping for a number greater than the negative $.07.
Regardless, a loss of $.53/share is significantly better than the worst case scenario of a $1.32 loss which tells me that the company has been operating much better than few had thought. Also, President and CEO, Bill Zollars continues to state how the company from its operating momentum is still expecting positive EBITDA in the second quarter. Zollars also claimed during the report that YRC is poised for growth. I still believe in this story for the long-run.
Full disclosure: Long YRCW calls at time of writing.
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