Wow, the last week of January already?
This year is already flying by and we're heading into a February with just 19 trading days so just 39 trading days until March options contracts expire – how's that for perspective? Let's keep that in mind with the VIX still near 50 as these fat premiums may not last forever so we may want to move away from February sales early, especially in cases where we get a near double for selling 39 days vs. the 19 days that remain in the current expiration period.
We have to consider – what would it take for the markets to get MORE volatilie? Last week was devoid of data but this week will be exciting with Existing Home Sales and Leading Economic Indicators at 10 this morning, Case/Shiller and Consumer Confidence tomorrow, Crude Inventories and the Fed on Wednesday, Durable Goods and New Home Sales on Thursday and Friday we finish the week with Chicago PMI, Michigan Sentiment, Employment Cost Index and the Advance Q4 GDP – which will make everything else irrelevant so strap in for a wild ride!
We also have earnings from about 1/3 of the S&P 500, highlighted this week by CAT, HAL, MCD and AXP today; DAL, BTU, X, VLO, VZ & YHOO tomorrow; T, BA, COP, GD, LM, PM, ALL, BXP & SBUX Wednesday; MO, BUD, CL, EK, F, OSK, RDS.A, TXT, UA, AMZN, SPWRA and YRCW Thursday and XOM, CVX, HON and PG on Friday. XOM and CVX together on Friday (15% of the Dow weighting) have me really, really, REALLY worried that we'll get a -5% GDP along with poor earnings from them and people are going to act like the world is ending so it's going to be a tricky play this week but lots of fun playing the ultras.
After not hitting our levels last week we shifted to Neutral at 2:21 on Friday and picked up DIA puts for protection and we are sincerely hoping that this down 7% (so far) January market is not the much-discussed "January effect" as, statistically, January is THE BEST month of the year for the markets. It would be quite a feat to just get the markets back even in the next 5 days, let alone come up with a finish that would be encouraging for the rest of the year. Many companies that have reported so far have been hit by the violent swings in currency and commodity prices with many airlines taking hits on fuel hedges while COP, for example, is taking a $33Bn reserve write-down and CVX has warned that it's Q4 earnings will be "significantly lower." KFT is taking $140M in hedging losses this Q and GIS marked down $269M of commodity hedges they took at the height of the Ag bubble.
I was discussing how currencies hit the big international players this weekend with some investors and we used the example of TM, who may have priced a car for sale at $26,000, which was 3M Yen in October but, by the time the car is sold in January $26,000 is just 2.3M Yen, over 20% less then TM planned to collect. If they spent 2.5M yen building and shipping the car and expected to make a 20% profit on the final sale – they are going to have a problem and this certainly isn't the market environment to mark the car up another 20% on this end. This is the reason the Nikkei is off 14% this month as the Japanese market is very export-focused. The dollar has been strong but still losing ground to the Yen, which is seen as the safest global currency at the moment.
Of course no currency is "safe" as gold (I believe I may have mentioned gold before) is flying past $900 as investors look for REAL safety as opposed to the very imaginary safety of fiat currency, no matter what country is issuing the paper. I won't get into it here as we are already big into gold but Adam Hamilton wrote a great article on Inflation and the Money Supply this weekend that is a must read – especially for those of you who think keeping it on the sidelines is going to protect you! The government is trying to keep a lid on gold prices and the US mint suspended and then resumed only limited sales of gold coins and has halted new production. Dennis Gartman agrees with my general strategy of hedging with GLD and agrees we should not go too crazy, as it would be nice if we're wrong and sad if we hit my $1,500 target (at $2,000 we go short).
Speaking of out of control inflation, an inflated money supply and insane levels of government spending – It looks like FRE and FNM need another $50Bn or so this quarter (ah yes, it has already been 3 months since we last bailed them out). Foreclosures are kicking up and, much to my chagrin, the government still hasn't done anything to stop the actual bleeding at the homeowner level so: "Their losses are going to be much higher than anyone anticipated,” said Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia. “The more and more that people are digging into these virtual portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime." The companies have posted five consecutive quarters of losses totaling $68.4 billion combined. The Federal Housing Finance Administration seized their operations in September amid concern from regulators that the government-sponsored enterprises may fail in the worst housing slump since the Great Depression but virtually nothing has been done to actually address the problem by the outgoing (thank goodness!) administration.
Speaking of companies that are being rocked by housing, CAT just reported a 20% miss and guided down 20% for 2009 and is taking a 20% hit pre-market and will be laying off 20% of their workforce. We took the $34 puts for $1.83 on Friday but it looks like we should have taken Komatsu's warning more seriously as our net $32.17 entry target may not be low enough for a CAT entry. Fortunately they have now put March contracts up and we should get a near even roll to the March $30 puts and, despite to poor outlook, I do like this 5% dividend payer (6%+ at this level) for a sub-$30 entry. As an exporter, CAT was hit by the strong dollar as well, getting less of them back in exchange for foreign currencies. It's very possible that a hedged entry into CAT would be nice this morning but we'll have to wait and see where it shakes out in this morning's trading before committing to ownership so stay tuned in member chat as we'll watch this one closely – it could be a great chance to get into a stock that should directly benefit from infrastructure building at a time of maximum panic – very much on-target with the way we're lookng to play this earnings cycle…
Again XOM buyers seem to be in la-la land as XOM is still strong pre-market but CAT was also hit hard by cutbacks in machine sales to commodity producers. We'll see on Friday but we are short XOM at $80 long-term. Another intersting macro to watch is a glut of shipping vessels hitting the water in 2009 as the 3-year building cycle of jumbo vessels that began in 2006 begins to increase capacity at perhaps the worst possible time. The new ships are 30% larger in capacity than Panamax tankers, holding 13,800 house-sized containers and STX Shipbuilding has plans for a 22,000 container ship. The rate for shipping a container from Asia to Europe has fallen from $3,000 last year to $300 plus the $500 fuel service charge – also down from last year. Compare that to what your local movers charge you!
Asia was mostly closed today (lunar new year) and the Nikkei loast about a point on thin trading. Still, that is a 3-month low in Japan and SNE has already warned ahead of earnings this week with not much expected from the auto industry to cheer things up. China denies manipulating their currency, which is interesting since the government sets the official exchange rate which, to the untrained observer, would pretty much be the definition of manipulation. LEH's assets go on sale in Japan this week and that will be an interesting auction as real estate prices in Japan could not (seemingly) get any lower.
Europe, on the other hand, is up about a point as the World economic leaders begin to gather in Davos for the annual World Economic Forum. Financials led the gains as BCS jumps nearly 50% as they move up their reporting date to 2/9 and CEO Varley pre-reported that the bank "will report a profit before tax for the year well ahead of the consensus estimate of £5.3 billion ($7.4 billion)." They also said the bank's capital resources are "well in excess" of regulatory requirements, creating a "large performance cushion" for the bank. So we go from a run on the bank rumor to a run on the bank's shares in just 7 days!
We're waiting to see if Geithner finally gets confirmed today as that should give us a boost and we should also be getting some more stimulation commitments this week, also good fuel to move us up despite some scary earnings reports but I will be very, very, VERY concerned about Friday so we'll be paying careful attention to energy earnins this week to try to get a clue on XOM and CVX on Friday. Also, don't forget to keep an eye on rates today as the US has to find buyers for over $100Bn worth of notes at two auctions.
