MorningWord 2/5/13: All that talk of last week of fresh highs in the Dow Jones Industrial Average was bit silly to me, the Dow, Really?? 1960 called, they want their stock index back. The Dow consists of 30 of the safest well owned equities the world over and let’s be honest, if AAPL was in the index over the last few years there would have been material out-performance resulting in new all time highs last year while the world was still focused on such blase topics like European Austerity, Blue & Red States, and Fiscal Cliffs. Because the Dow is price weighted, AAPL would have made up well over 25% of the index at any point last year, compared to IBM’s current ~11% weighting………traders on the NYSE would have been dusting off those Dow 20k hats they had printed back in early 2000. Quoting the Dow is a fairly meaningless endeavor and I am not really sure why the financial media continues to do so, 99% of U.S. equity traders I know stare at the SPX or corresponding futures for the better part of the day as it is a much clearer indication of breadth even though the top 10% of the index make up 50% of the weighting.
MorningWord 2/4/13: As a trader, I make my fair share of mistakes, usually not the same one over and over again, but often times it takes a few attempts to break a bad habit A week ago Friday, while Bill Ackman and Carl Icahn were duking it out on CNBC (below) over their opposing views/positioning on HLF (among other things), my sense was that the spike in short dated implied volatility offered an opportunity to sell Feb to own options in March expiration that would include HLF’s next quarterly report. I bought a Feb/March 40 Put calendar when the stock was ~$44.50, and my play was that the stock would remain btwn the high 30s and the mid to low 40s btwn then and Feb expiration.
And here is the mistake, using options to get too cute trading a potentially binary event where the timing is uncertain……….this morning, the NY Post is reporting that the FTC is looking into HLF’s sales practices, which is a main tenet of the Ackman’s short thesis. My cynical predisposition and Ackman’s very public accusations against HLF led me to side with his bearish argument, yet the fact that Ackman is short nearly 25% of the float made me nervous to commit capital to an outright short position. Outright put purchases would have been very profitable in hindsight. IN the trade that I put on, I sold the Feb 40 Put at 1.20 to buy the March 40 Puts for 2.70. The Feb 40 Puts closed Friday at 5.50 and they will be worth a heck of a lot more this morning with the stock trading ~$32 in the pre-market.
Hindsight is obviously 20/20 and if I had thought the stock had the potential to drop 30% like a rock in less than 2 weeks, I would have obviously bought puts or put spreads, or sold call spreads, and for the most part the trade that I chose offered a much higher probability of success. I have said it before in this space, trading is hard, and sometimes those of us who use derivatives of the underlying make it harder than it needs to be, but the longer I do this the more interesting the trading opportunities become, aside from just being long or short. Stay tuned for a trade update on how I manage this trade.
.
About Dan
I think the SPX will top out between 1535 and 1560 before the end of the month. Then I look for a 10 % sell off to happen quickly.
I seem to recall a lot of talk last August (Kass in particular) about a triple top in $SPX . That would be about 100 points ago.
I’m bearish, but I think that’s just a character trait. For what its worth, here’s an unscientific summary of some high-profile investors’ macro views from the Barron’s roundtable. I’ve tried to boil them down to bulls or bears:
Oscar Schaefer (OSS Capital Management) – BULL. “Last year investors put $248 billion into bond mutual funds and ETFs, and redeemed $22 billion from equity funds. This year equities will do much better than bonds… I am extremely optimistic about stocks.”
Abby Joseph Cohen (Goldman Sachs) – BULL. “Concensus estimates for earnings growth are on the order of 12% to 13% this year and next…Our top-down number is lower, but still mid- to high-single digits. That is much better than many people, Goldman Sachs included, felt 12 months ago.”
Scott Black (Delphi Management) – MODESTLY BULLISH. “We expect S&P earnings to rise about 5% this year, to $104. That puts the index at 14.2 times 2013 estimated earnings. On that basis, the market is cheap…It is unusual to see a market that is up just 3% or 5% for the year. If earnings come through and the market is cheap, it will go up by more. The one hindrance I see is the debt-ceiling situation.”
Felix Zulauf (Zulauf Asset Management) – BEAR. “The rally is mature. It is late in the cycle. The rally will end sometime between the second and third quarters and the markets will go down. The problems we have discussed here in recent years are unresolved…Europes’ high priests of economic policy have put preservation of the Euro above everything else. By doing that, they have destroyed millions of jobs and consigned million of people to poverty.”
Bill Gross (Pimco) – NEUTRAL, BEARISH LONG-TERM. “We don’t see a bear market for stocks or bonds in 2013. Stocks will do better than bonds, but neither will return what they have in the past. We’re looking at maybe 5% returns from stocks and 3% from bonds, because we’re in a ‘new normal’ economy that isn’t growing at the 3% to 4% rate to which investors historically were accustomed. Low yields are also due to the artificial pricing of financial assets by central banks, which have been buying up bonds to drive down interest rates. How long do central-bank purchases of bonds continue?”
Meryl Witmer (Eagle Capital Management) – NEUTRAL. “The stock market looks like it is trading around intrinsic value…You’ll basically collect your dividend and maybe a percent or two in addition.”
Brian Rogers (T. Rowe Price) – MODESTLY BULLISH. “I have a positive outlook generally, but stock prices advanced much further than earnings last year…It is tough to paint a really bullish outlook for earnings. But earnings growth of 5%, 6%, 7% and maybe 8% in an extreme case, is enough relative to returns on fixed-income and money-market assets.”
Fred Hickey (High Tech Strategist Newsletter) – BEAR. “We are all doomed. I just don’t know if a date has been set. We are living in a dream state. To have every developed country printing money at the same time is unprecedented…The European Central Bank promised to print unlimited amounts of money, and it suddenly looked like Europe’s problems were solved. They aren’t.”
Mario Gabelli (GAMCO Investors) – BULL. Given the negative flow of funds and the market’s relatively low price/earnings multiple, you have to be positive…I have never been more excited about specific stocks.
Seems like a good time to take profits and increase cash positions.