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Buzz of the Street: Dollar Strong as Stocks Slip

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Some of this week's most insightful and timely vibes.

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All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights and analysis in real-time on Minyanville's Buzz & Banter.

This week, many traders were speculating on a pullback while the dollar rallied. Steve Smith discussed the protective put buying while Lance Lewis remained skeptic of the greenback bounce as we headed into the FOMC. Hedgie John Paulson created a stir loading up on Bank of America (BAC), which happened to be the same bet James Kostohryz made earlier this year. Check out the rest. We thought it would be worth it to review, and for those Minyans not yet Buzz & Banter subscribers, click here for a free trial.

Monday, August 10, 2009

Steve Smith



As the market holds on to recent gains, the theme in the option markets seems to be protective put buying.

  • Caterpillar (CAT) which has plowed up some 50% to $48 in the past month appears to be ready to burst up another 25% to $56 resistance. There was a notable transaction in the September puts as someone established a 1x2 ratio spread. Specifically they bought 7,500 of the $42 puts and sold 15,000 of the $37 puts for a $0.35 net debit. This position can have a maximum profit of $4.65 if shares are at $37 on expiration. The downside breakeven point is $31.50 or a 37% decline from current prices. Most likely this a form of low cost protection for someone long the stock in some fashion.

  • Interactive Broker (IBKR) shares have gained 35% to $20 in the past three weeks and today some is looking to lock in some gains with a collar or risk reversal. The transaction was out in the March expiration in which someone bought the $17.50 puts and sold the $25 calls 2,500 times for a 40 cent net debit. This provides another 25%of upside and contains losses, or effective sale price, to $17.10 or a 17% decline.

  • Hartford (HIG) shares have soared some 90% in the past month and today someone is deciding to buy some downside protection. The September $15 put saw big buyer with a total of 15,000 contracts traded between 55c and 60c which represented the asking price. This buying has driven up implied volatility some 15% to 80% on the day. Still, this is not an entirely bearish bet given that these puts are some 15% out-of the-money and seem more like short-term disaster insurance than expectations of reversal of fortune.

Tuesday August 11, 2009

Lance Lewis

I'm a little stunned by the amount of dollar bullishness that has built up over THREE whole days of upside in the dollar index that haven't even managed to put the index back above its 50 dma or above its most recent peak on the 29th of July. A sentiment shift of that magnitude without equally bullish price action is generally a VERY bearish setup.

Equally stunning is the amount of bearish sentiment on gold and commodities because of this 3-day rally in the dollar, which likewise hasn't generated equally bearish price action. Consider that despite the dollar index's rally back up to over 79 (a level last seen on July 30th), commodity prices remain well above the levels that they were at on July 30th. See the chart below of the dollar index, gold, the CCI equal-weighted commodity index, WTI Crude oil, and silver.


Click to enlarge


In other words, commodities (especially silver) aren't giving up the gains that were won on the dollar's decline below 79 in proportion to the ground that the dollar index has recovered. And that sort of stickiness in the face of what "should be" bearish is actually quite bullish. Now compare that "stickiness" in gold and commodity prices to the action last July/August when the dollar first began to rally and how commodities (ex-gold to some degree) absolutely collapsed at the first hint of dollar strength.

I have no doubt that many dollar bulls/dollar deflationists are hoping for/looking for a repeat of last year's dollar rally and the ensuing collapse in commodity prices, but thus far the action doesn't support that outcome.

On the contrary, the action would seem to support the idea that the recent rally in the dollar is more than likely just another big bounce based on short covering ahead of the FOMC. And the trends that prevailed before the FOMC (i.e. - a weak dollar and rising gold and commodity prices) will likely continue post-FOMC.

Those trends may even accelerate if the Fed follows the BOE's surprise move last week and increases the size of its monetization facilities, which wouldn't surprise me in the least given the Treasury's "default or debase" dilemma. It would be a big surprise to the market though, just as it was back in March when the program was first announced.

Editor's note: Lance Lewis had positions in gold, and gold stocks at the time this buzz was published.

Wednesday, August 12, 2009

Todd Harrison

What is it they say about the first move (following the FOMC) being the false move? That's right up there with Turnaround Tuesday and Contra-hour as nonsensical notions that often prove true. With that in mind, let's scratch and sniff.

Consistent with what we anticipated, the language out of Washington was, in a word, careful, almost akin to my response when my ex-girlfriend used to ask me if she was overweight. (No, not you--I'm talking about my other ex-girlfriend!)

I touched on a topic earlier this week
and Mr. Practical brought it home yesterday. Policy rhetoric must walk the fine line between appeasing investors and placating holders of dollar-denominated assets. I can't help feeling like we've seen this movie before but somehow, if at all possible, the stakes are entirely higher. Dare I say, they're...cumulative.

Here are some top-of-mind vibes as I try to make sense of this wild world:

  • Sometimes, when listening to the mainstream media, I can't help but wonder if they're watching the same things we are. Then I remember that we all watched this build for many years and they didn't see the conditional elements until after the fact.

  • Yes, I know that second link is to an interview in 2003 and there was a huge, massive, monster rally in the four years that followed. Work with me please, for it's a valid point and I haven't the time to pull more relevant evidence.

  • To that end, it rubs my craw that the same folks who never saw the financial mess coming are center stage assuring us that it's passed. People are so thirsty that in the absence of water they drink the sand; they don't drink the sand because they're thirsty, they drink the sand because they don't know the difference. They will.

  • Not rubbing salt--that's not our style and it's a recipe for humility--just communicating as my therapist says that's healthy.

  • Watch the dollar! Boo would argue that the failure to announce further quantitative easing is dollar positive and stimuli negative. He's a bear, we know, so take it with a grain of salt.

  • Is it me or is every close a critical close these days? S&P 2008 and NASDAQ 2000 are the obvious levels of lore in that regard.

  • I'm listening to the song! The most bullish thing on my screen is the 2:1 positive breadth (along with the first move being lower). The most bearish thing on my screen--aside from the specter of being weened off the government teat--are select seeds of doubt in individual issues such as Bank America (BAC), Research in Motion (RIMM) and Morgan Stanley (MS). Advantage bulls, as least for the time being.

  • Lemme jump, Minyans. As always, I hope this finds you with some jingle in your jeans and a smile on your puss.

    R.P.

Editor's note: Toddo had positions in RIMM, NDX, and S&P at the time this buzz was pubished.

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No positions in stocks mentioned.

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