Buzz Bits: Friday October 28, 2005
Class, your homework is to review the buzz. You'll be quizzed on Monday morning.
Fun With Stats... - Greg Collins 3:40 PM
Yesterday the S&P futes opened down, never traded positive and closed down 1%. Today they opened higher and never traded negative. If they close up 1%, then that scenario (2 days like that) has only happened 27 times. The next day was up 70.37%.
Only three times did it happen on a Friday and in those instances, Monday closed up 3 of 3 by an average of more than +1%.
My litte bubala has become a man!! - Adam Warner 3:20 PM
Remember way back last week when the VIX actually went higher than the VXN? Well, take a look now. The VXN sits near 17.50, while the VIX is near Bar Mitzvah territory at 14.
I didn't think it had much significance when they crossed, and I don't see any now. Likewise, there's no "arb" between the two per se, but I would think they converge over the course of time. So if you're looking to sell volatility, maybe it means you sell Nasdaq volatility when it's relatively high, or vice versa.
Sign O The Times? - Sanjay Somaney 3:08 PM
Vodafone has bought a stake in Bharti Enterprises, an Indian conglomerate, in an 820 million pound deal that will give Vodafone a 10% stake in Bharti Telecom, one of India's fastest growing telcos. Vodafone paid Rs 352/share for their 10% stake in Bharti Telcom, up over Rs100/share from the Rs250/share paid by Warburg Pincus in March. SingTel also owns a stake in Bharti Telco further validating my long term thesis, "Many Paths Lead to India".
Soon that will change from "Many" to "All." The Indian telecom industry is one of the fastest growing markets in the world and compared to growth rates in the West which are almost zero, India is being viewed as critical to many American and European telcos plans to goose growth. Just passing it on.
(position in Bharti in Indian P.A.)
Mini-Minyan Mailbag: The Nutty Professor - John Succo 3:00 PM
The nuttiest thing I heard this week was that interest rate hikes were good, because that would allow the Fed to reduce rates when the economy slowed.
Does the sell side ever see the downside of anything?
It is in the interest of Wall Street to keep the commissions rolling.
Only when people buy stocks (when they sell the turnover drops rapidly) do commissions grow.
It's that time of year... - Kevin Depew 2:46 PM
Among new sell signals of note, the iShares Goldman Sachs Semiconductor (IGW) broke a double bottom today with the move below 54 and also violated trend line support from the April lows, Calpine (CPN) has given a new sell signal and violated the trendline from the April lows and Qualcomm (QCOM) has broken a double bottom, though it remains well above long-term trend line support in the low 30s.
Indictment Excitement - John Succo 2:16 PM
The only effect Libby's indictment would have on markets would be psychologically, but that is very important.
Through globalization the U.S. has become the largest net debtor in the history of the world. When Watergate happened, almost all of the U.S. public debt was owned by U.S. citizens.
Today most of it is owned by foreign lenders, mostly other central banks. Consequently, the Fed no longer controls interest rates...they must abide by the sentiment of our lenders.
Since Bernanke was announced the new Fed chairman, the long bond is down nearly three points, being down again today. The long yield is now 4.8%.
This is nothing to crash stocks yet, but I urge you to watch rates for a vote from our foreign lenders as to any change in their preference to continue to lend to the U.S. If they believe that this indictment de-stabilizes the U.S. they will demand a higher risk premium to own our assets.
She's going that-a-way!!! - Fil Zucchi 1:25 PM
- Think the arbs in Spinnaker (SKE) are looking forward to the weekend?
- I've been accused (again) of being a perma-bear who wants to have it both ways when it comes to interest rates: bad for Hoofy if they go down, good for Boo if they go up. But isn't that precisely the only scenario left once a financial system is addicted to binging on credit and needs more and more of it just to stay high? Go cold turkey and you crash, keep going and eventually you O.D.
- We are not in the business of regretting lost opportunites, but having covered Kinetics Concepts (KCI) a couple of weeks ago, and Invitrogen (IVGN) last week, feels like a thumb tack in my shoe. What's worse is that I pulled out of both positions because I did not trust my thinking. Now I'm really screwed because I don't know which thinking I can trust.
- If the SEC investigation into General Motors (GM) accounting, which will look at GM assumptions for its pension funding / liabilities, results in a big old non-cash restatement, will people simply yawn again?
- What's in Uber-Minyan Jeff Saut 's disposition that makes it so easy for him to have embraced Sammy, while most of us are hell-bent on partying only with Hoofy and Boo?
- Do you let sell side analysts' opinions influence your thinking, or do you think around their opinions?
I've got a sector you can rotate! - Jason Goepfert 12:22 PM
Regarding Kevin's post below on sector rotation, I looked at sector relative strength a while back. None of this is a new concept, but it is one of those rare pieces of common knowledge that actually proves true when one runs the numbers.
I used the Fidelity Select sector funds, monitoring quarterly relative strength. When healthcare outperformed the broader market while technology lagged, then six months forward the S&P 500 was positive 54% of the time with an average return of +2.2%.
However, when technology was outperforming and health care lagging, then six months later the S&P was positive 85% of the time with an avg return of +6.1%.
That confirms on a larger time frame something I've found on smaller time frames...when defensive sectors like gold, oil and drugs greatly outperform (even on a one-day basis) sectors like technology, banks and retail, the market tends to struggle going forward more than if it was the other way around.
So in terms of predictive ability, when broad market indexes like the S&P are positive, I like to look underneath the hood and see groups like banks and retail powering it higher as opposed to defensive sectors.
Again, none of that is new, but I wanted to add my two cents to say that I, too, have tested it and it proves out.
Mini-Minyan Mailbag: Sector Rotation - Keven Depew 11:13 AM
Re. Sectors and stocks that outperform during negative environments tend to be leaders in positive environments.
This seems intuitive, but has the theory been tested? I always wonder about this since it appears that sector rotation could result in the opposite, i.e. money rotates into defensive sectors when the market is weak then out of these sectors when the environment becomes more positive.
I would guess that one has to determine why the sector is showing relative strength in the first place. Is it for defensive purposes or is there something more significant taking place? Do you know of any studies on this?
Yes, this has been tested. But like all things, it is important to change when the relative strength changes, simply a way of accounting for ever-changing cycles. The reason I like relative strength point and figure charts is that they give clear buy/sell signals. There is no guesswork involved.
This is something we tested when I was at Dorsey Wright. We ran (Dorsey Wright continues to run a modeled-ETF program) a relative strength-based portfolio of sector ETFs, simply buying strong relative strength ETFs and holding them until the point and figure chart indicates that the relative strength has changed.
You may be thinking, "Whoa, that's way too simple to beat the market." But remember, Wall Street is about one thing and one thing only: obfuscation. This is especially so on the sell side where everyone from the very top to the very bottom has a vested financial stake in making things as difficult to understand as possible.
Mini-Minyan Mailbag: Rookie Mistake - John Succo 10:07 AM
Please explain to me how I just made a rookie mistake.I bought puts on MSTR before the earnings last night and the stock has tanked! But I bought the Nov 65 puts and they are basically flat with the stock down 7... I obviously bought the wrong price,and should have bought 75s or 70s? Please explain why they are not moving and how my idea was right but strategy wrong.
Last night the stock was around $75 and you paid $2 for the November 65 puts expiring November 18, twenty-one days from now. At $2, you paid an implied volatility of 86% (implying the stock will move 86% over the next year). This price implies that the stock will move .86 x SQRT (21/250) = 25% over the next 21 days.
After earnings, the stock is only down about 10%. So you paid an option price that assumed the stock would move much more than it did. The options now after earnings have a more realistic implied volatility of 47% and so are saying that the stock will only move .47 x SQRT (20/250) = 13% over the next twenty days.
You simply paid way too much for these out of the money options. When the stock did not move as much as the price you paid implied, the option price declined precipitously.
Next time, first estimate the maximum and minimum you think the stock can move because of earnings. Compare this to the implied volatility of the options you are buying and adjust for timing as I have shown you above. This will keep you from paying way too much for the option.
This data WILL move the stock - David Miller 9:49 AM
I get a lot of calls about avian flu. I don't deny news on this can move stocks, but forgive me if I think this is overblown. For the record, all cases have involved bird-to-man transmission because no mutation exists yet that allows human-to-human transmission. Any vaccine will need to be strain-specific, and we do not know what that strain is because it doesn't exist yet.
Welcome home Deuce Four. Thank you.
ECCO heads up: Onyx (ONXX) and Bayer (BAY) are set to release survival data for sorafenib in kidney cancer Tuesday at 2:30am EDT. The NDA for this indication has already been filed and topline data was announced some time ago, but this data will move the stock. Abstracts will be available Sunday, but I would be surprised if the survival data is listed in the abstract.
Say What? - Keven Depew 8:08 AM
A look at opinion and analysis from around the world:
- The former chairman of the Presden't Council of Economic Adviser has "Questions for Ben Bernanke" in the Wall Street Journal.
- A new backlash against conglomerates suggests a lasting shift in consumer and investor preferences, driven in part by the influence of hedge funds, writes Dan Roberts and John Authers in the Financial Times.
- People sure do like Al Greenspan. But the economy? Not so much, according to a recent poll.
- Wal-Mart cozies up to the state by calling for an increase in the minimum wage, a "selfless act," writes Llewellyn H. Rockwell, Jr., if by "selfless act" one means an act which does not affect the self but does wreak havoc for competitors and increase costs for all of us at the hands of the state.
Leg warmers - Fil Zucchi's "Apple and..."
A couple of weeks ago a Minyan asked me where I'd start legging into longs if I believed that the market was going to make a stand at the SPX 1170-76. Since we don't do advice in the 'Ville, I simply offered that if I believed that those levels would hold, I'd be inclined to wait for a retest before stepping up to the plate. Well the retest is here. If you look at a daily of the SPY, Thursday looked very much like a repeat of April 29. On April 30 the market found a quick low and turned north into a nice bull run. Is this time different? I don't know, but there are some differences between then and now...Read the full article.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter