In a follow-up to a very recently published article of mine, I felt it only necessary to share some positive thoughts regarding the BP situation from Bruce Lanni of Nollenberger Capital Partners. Consider the following analysis:
* Total expenses are estimated at $30 billion (approximately $6 billion via the cleanup and roughly $24 billion from punitive and civil claims), well under several estimates of $50-100 billion!
* BP has only a 65% interest in the situation (what about Anadarko, Transocean, and other potential players?)
* The dividend will potentially not be cut, but only suspended for one quarter, then resume
* Two relief wells are currently being drilled and once finalized, will seal the wrecked well
* …And I quote, “Bankruptcy is not even a remote possibility; the U.S. Government has a better chance of becoming insolvent before BP”
* The capture rate can maybe rise to 75-80% by as early as next week
* BP has not been deceiving us (we must not confuse deception with ambiguity that comes with operations 5,000 feet below sea level)
As I have actively wrote about put options on the VIX here and here, when the oil spill fiasco concludes, consider there will be one less detriment to the U.S. equity markets. Investors will be more willing to buy underlying stock rather than options, where committing capital is less of a burden. The VIX, also known as the investor fear gauge, can then possibly revert to its mean of roughly 21 over time (historical data beginning in January 2004), after closing at 28.79 one week before options expirations.
Reasons that further compliment the argument for a decline in the VIX do not pertain to this article.
Disclosure: Long VIX puts at time of writing.
Friday, June 11, 2010
Market Sentiment and BP
May 2010, what a down month – will June be similar? I prefer the contrary. For the 14 down days in May, the DJIA had officially closed on average 130 points above intraday lows, potentially suggesting that investors have been buying more often than seldom on weakness.
On June 9, an excessive selloff in BP (BP) implied that investors had taken advantage on June 10 as BP had closed above 12%. Consider the following press release where BP stated how they are generating significant cash flow to thoroughly respond to the situation and that the movement on June 9 was again, excessive and not at all warranted.
As a speculative investment, an appropriate allocation to BP can be shrewd. With roughly 42,000 claims and 20,000 payments already made, I do not see claims against BP growing significantly months on out. Although BP does expect claims to rise throughout the month, I assume the majority who would file a claim against BP already have taken action or will within the next 2-3 months. The moral hazard of businesses and individuals that have not been affected by BP’s situation seeking to take advantage of the company coupled with potential civil lawsuits I feel is not enough fuel to drive BP towards a bankruptcy filing.
As of March 31, 2010, BP had $6.8 billion in cash and cash equivalents. BP’s current ratio, a simple calculation of current assets to current liabilities, reads 1.1281. Even when subtracting from cash and cash equivalents the current cost of $1.5 billion from the oil spill and another, let’s say, $5 billion to compensate for continued expenses, holding all other items constant, the current ratio is still 1.0229, meaning BP is still capable of meeting its short-term obligations.
Criticism from environmental organizations and especially the Obama Administration should also be expected but not confused for set-in-stone decrees that could bring BP to its demise. The Obama Administration must, for its own reputation, scare investors out of BP, or at least make them think twice about owning the company. However, a failed BP would be terrifying for Europe and therefore potentially detrimental to US equities. So does the Obama Administration really want to bring BP down? Most likely not.
Soon enough, BP will find the solution and everyone will then again move forward.
Full disclosure: No positions
On June 9, an excessive selloff in BP (BP) implied that investors had taken advantage on June 10 as BP had closed above 12%. Consider the following press release where BP stated how they are generating significant cash flow to thoroughly respond to the situation and that the movement on June 9 was again, excessive and not at all warranted.
As a speculative investment, an appropriate allocation to BP can be shrewd. With roughly 42,000 claims and 20,000 payments already made, I do not see claims against BP growing significantly months on out. Although BP does expect claims to rise throughout the month, I assume the majority who would file a claim against BP already have taken action or will within the next 2-3 months. The moral hazard of businesses and individuals that have not been affected by BP’s situation seeking to take advantage of the company coupled with potential civil lawsuits I feel is not enough fuel to drive BP towards a bankruptcy filing.
As of March 31, 2010, BP had $6.8 billion in cash and cash equivalents. BP’s current ratio, a simple calculation of current assets to current liabilities, reads 1.1281. Even when subtracting from cash and cash equivalents the current cost of $1.5 billion from the oil spill and another, let’s say, $5 billion to compensate for continued expenses, holding all other items constant, the current ratio is still 1.0229, meaning BP is still capable of meeting its short-term obligations.
Criticism from environmental organizations and especially the Obama Administration should also be expected but not confused for set-in-stone decrees that could bring BP to its demise. The Obama Administration must, for its own reputation, scare investors out of BP, or at least make them think twice about owning the company. However, a failed BP would be terrifying for Europe and therefore potentially detrimental to US equities. So does the Obama Administration really want to bring BP down? Most likely not.
Soon enough, BP will find the solution and everyone will then again move forward.
Full disclosure: No positions
Tuesday, May 25, 2010
May 25 of 2010, a Bullish Day
“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.
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.
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.
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