Buzz on the Street: Bulls Keep Hanging On
A look back at the happenings on Wall Street this week, as seen through Minyanville's Buzz & Banter.
Note: Some links may require Buzz subscriptions.
Monday March 26, 2012
Lions Gate Options Shrink Like a Frightened Turtle
I noted last week (here and here) that implied volatility readings in Lions Gate (LGF) options seemed likely to shrink today after the opening of The Hunger Games.
Well, the weekend box-office take was huge ($155 million!!!), and the stock is now trading up about 3% on the day. However, that IV shrinkage seems to have hit as most Lions Gate calls -- which were in huge, huge demand last week -- are down today.
For example, as you can see in the attached partial screen grab, the April $18 and $19 calls that were very much in vogue have been cut in half. And of course, the loss is actually worse if you can only get out at the bid instead of in-between.
Steve Smith recently wrote a great article on options pricing which explains how a trader can buy calls on a stock, correctly predict a news event, see the stock rise -- and still lose money. Check that piece out here.
That's exactly what we're seeing today in Lions Gate.
I remain long Lions Gate common stock and short puts, as I'm forecasting ongoing shrinkage in these options as Hunger Games-related uncertainty continues to dissipate.
(click to enlarge)
Afternoon T: Big Ben to the Rescue
The ECB helped on Friday, Merkel helped this morning, and then Big Ben came to the rescue and gave the markets more than enough QE and accommodation talk to drive stocks relentlessly higher. I'm not sure that the S&P has moved down 2 points from any level all day. Basically, everything but infinite central bank liquidity is off the table (at least for today). Chinese hard landing concerns are a distant memory. Weak economic data today is actually good, because we will get the New QE even sooner.
The argument is that although there is little evidence that the money does anything for the economy, it clearly does a lot for stocks – so we are at multi-year highs. Seems hard to believe that economic data doesn't matter, especially at multi-year highs, but so far the market is buying into it. The only things that don't seem to be exuberant today is natural gas and IG18. The CDS index is better today, but still sitting at 90.25, which is almost 5 wider than where we got last week on the tights. Treasuries seem a bit confused whether they are supposed to rally on more QE, or sell-off on a rotation out of fixed income into stocks.
A truly weird day. Nothing much seems to have changed, yet here we are, far more comfortable that the central banks will prop up the market. Volumes remain incredibly low. I don't get a sense that retail is going to add to their equity allocation based on more easing, this is a very "professional" move. I can't bring myself to get excited about the market here, but was obviously wrong this morning, when I thought the data might actually mean something.
Another Monday in March Madness
It's just another Monday in the thick of March Madness. Chief Wiggum took to the mic this a.m. to reiterate the Fed's dual mandate of printing money and pushing risk-on assets higher. The commonality trap that will occur state-side soon is already having a positive effect in Germany, in that investors are being fooled into believing a rebound in equity prices as a sign of a sustainable economic rebound.
Bernanke was correct in his analysis that markets and unemployment remain far from normal. I would argue that the easing and twists implemented are too far from normal, and until we remove said manipulation from our markets, we likely don't know what normal looks like. Rest-assured our wait will end once the election passes, as Obama hinted that today "off camera".
Who knew Obama and Bernanke would become such good friends? I got your back buddy, likewise! Turning to the markets; you just can't keep a good man down. This impressive action is displaying just how many managers are lagging in terms of first-quarter performance.
I still see 1420-1440 being a near-term resistance, area and it will be tested. The small caps are making another go at a Monday move towards a breakout. Recall, we were here last week and looking for continuation that failed. Tuesday, as always, will be telling. Oil holds firm and at this level that isn't good thing. I believe we are hitting its seasonality stride now through Memorial day.
Tuesday March 27, 2012
Dudley Says Fed Owns "Small Amount of Sovereign Debt"
Following up on Professor Cooper's thoughts, NY Fed President Dudley said earlier that the Fed holds a "very small amount of European sovereign debt". There are a lot of unknowns to what or how they own this, but we don't know if this was purchased, because the sound bytes are unclear. As far as we know, it is against the Fed's charter to buy European sovereign debt. The other question is how much is a "very small amount". Are we comparing it to the US national debt?
One idea that was suggested to me was that the Fed owned this small amount because it was pledged by a central bank as collateral for a swap. This couldn't be the case with the ECB or any of the national banks because this is simply just changing numbers on a spreadsheet, there is no collateral.
It is very possible, and this seems like the most likely scenario to me, that during the very uncertain times of November that the Fed took some of the sovereign debt off a troubled primary dealer's balance sheet or two. BNP or SocGen were widely rumored not to be able to fund their day-to-day operations in dollars before the Fed opened swap lines. Maybe they took some of their holdings of sovereign debt off their sheets to reduce market uncertainty? That would be a great way to indirectly lend to sovereigns and protect US banking interests. It's obvious that they did this pre-LTRO, because after there was no point.
Truth be told we don't know why they did it, but that seems like my guess.
Heavy Metal. Heavy, Yellow, Metal.
Gold's Island pattern under 1640 (basis Apr futures) was obvious before Thursday's close. Now its 1691 target has been met. Keep in mind the title of yesterday's update: "Don't Forget What Follows After an Island's Target Is Met, Even for Gold."
Island Reversals produce corrections. Their patterns are retested.
This does not consider whether or not that retest holds, producing either a better bottom or a new downleg. I suspect lower targets will be in-play, but we'll be open to indications either way.
Meanwhile, closing above 1691 would signal the bounce was extending to retest 1712. Any higher than that would suggest the Island was no longer corrective, and that a bigger rally was already underway. Until then, the premise is that it launched a correction, and that the correction might now be ending.
The pink piggies (BKX -60 bips) stand out in Red Dye today as they take a breather from their 45% rally since the end of November. Of course, they remain almost 60% lower than they were in 2007, so where you stand is a function of where you sit.
Hoofy will offer that this action is digestive and until proved otherwise, that mindset will self-fulfill.
Before I scooted to Palo Alto, we discussed the 'reverse dandruff' that worked to S&P 1410 (it's actually S&P 1420; I fat-fingered my calculator at the time).
Of course, the 'reverse dandruff' we spied in December worked to S&P 1360 and kept going and going and going, so please remember that technicals are a better risk context than catalyst.
Conventional wisdom has a way of paving a path of maximum frustration, as we've discussed in the past.
The good news--for all of us--is that Mercury Retrograde starts to fade late next week. See ya and wouldn't wanna be ya.
The great part about trading--and yes, there are dynamics that qualify--is that every day is a new day with fresh opportunities. If you've had a chilly feel of late (hand raised), clear the mechanism; profits reside in the ride ahead.
As always, I hope this finds you well.
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