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Showing posts from August, 2012

Morning Update

From Bloomberg:

"Euro-area unemployment rose to a record and inflation quickened more than economists forecast as rising energy costs threaten to deepen the economic slump.

The jobless rate in the economy of the 17 nations using the euro was 11.3 percent in July, the same as in June after that month’s figure was revised higher, the European Union’s statistics office in Luxembourg said today. That’s the highest since the data series started in 1995. Inflation accelerated to 2.6 percent in August from 2.4 percent in the prior month, an initial estimate showed in a separate report. That’s faster than the 2.5 percent median forecast of 31 economists in a Bloomberg survey."

This latest report out of Europe shows that Europe may have entered a period “stagflation.” That is, both increasing unemployment and increasing inflation. This is a particularly difficult situation for governments and central banks to handle because solving one problem generally makes the other worse.

Today i…

Morning Update

Consumer confidence in the Euro area plunged 3.1 to -24.6, the steepest decline in three years. Consumer confidence has only been lower than current levels three times in the past 30 years. Germans were the most confident (or rather least unconfident), while Greeks “are urgently trying to find new reasons to keep pushing the rock uphill day after day” (ZeroHedge).

US jobless claims were up to 374K versus 372 prior and 370K expected. Yesterday’s Beige book showed most districts “growing gradually”, retail sales increasing, and stable prices for finished goods. This is all good news, except for traders betting on the Fed announcing a new round of easing. The market was little changed by the news as it looks to Bernanke’s speech tomorrow.
The S&P 500 has only changed more than 0.25% 4 of the last 16 days, while during the same period the VIX has inched up from a low of 13.28 to 17.06. Implied volatilities premium to realized volatility continues to grow and is exceptionally high by …

Morning Update

Yesterday Mario Draghi published an op-ed in “Die Zeit” in which he discussed what is necessary to ensure the success of the Euro. He says that ”the euro area has not yet fully succeeded as a polity” and “to have a stable euro we do not need to choose between extremes,” the extremes referenced being returning to past, pre-Euro ways, or creating a “United States of Europe.” On finding the proper medium between these extremes, Draghi says:

"How far should this go? We do not need a centralization of all economic policies. Instead, we can answer this question pragmatically: by calmly asking ourselves which are the minimum requirements to complete economic and monetary union. And in doing so, we will find that all the necessary measures are firmly within our reach."

Unfortunately Draghi stops short of actually outlining those “minimum requirements.” All we get from Draghi is what we knew: that the Euro zone needs political reform. No actual solution is presented, only encourageme…

Morning Update

The Australian Dollar / Japanese Yen currency pair traded down overnight after reports showed Australian housing prices significantly weakened and Japanese cut its assessment of its domestic economy. This caused a repatriation of the Yen as traders went into a "risk off" mood and unwound carry trades. However, as of now the pair has rebounded and the US dollar is weaker against all major currencies. European equities remain in negative territory however, and S&P 500 futures are 3 points lower. The latest round of data out of Spain is again dismal: the economy contracted 0.4% Q/Q and contracted 1.3% Y/Y. Additionally private-sector bank deposits in Spain fell from 1.583 trillion Euros to 1.509 trillion, a nearly 5% decline. This shows that people are rapidly losing faith in Spain's financial system despite a 100 billion Euro bank bailout fund and Draghi's promise to bail out the country should they ask. The only good news out of Europe this morning was that the rap…

Morning Update

On the back of declining Chinese industrial profits Premier Wen Jiabo “urged for measures to boost exports, such as faster payment of export tax rebates, greater use of export credit insurance, and reduced inspections and fees to ease the burden on companies. He also said that financial products for hedging foreign exchange risk should be expanded” (Bloomberg).

The IFO survey in Germany has shown that for the fourth time in a row firms have become more pessimistic. This is concerning considering that the Euro is near multiyear lows against the dollar, which is beneficial to Germany’s export driven economy.

A California court ruled on August 24th that Samsung infringed on 6 of 7 of Apple’s patents and must pay Apple $1 billion in damages. This has sent shares of Samsung down 7.5% and Apple up 2.5% premarket. On Sept. 20th a US district judge Lucy Koh will hear Apple’s request for a complete US sales ban on Samsung devices such as the Galaxy S and S II smart phones and the Galaxy Tab 1…

Morning Update

ECB officials said last night that ECB President Mario Draghi will likely wait to hear Germany’s Constitutional Court’s ruling on the EFSM before publicly unveiling his plans. Many were hoping Draghi would unveil his plan after the ECB’s September 6th meeting, but this is becoming increasingly unlikely.

Today Reuters is reporting that Germany is the latest European nation to begin studying the possible impact of a Greek exit from the Euro. This comes ahead of Chancellor Merkel’s meeting with Greece’s Prime Minister today. Merkel has repeatedly said that she would like Greece to remain in the common currency, though clearly someone in Germany believes a Greek exit is possible outcome worth preparing for.

This morning US new durable goods orders numbers we released for July, coming in at a gain of 4.2% M/M. Though this was strong than expected, it was primarily driven by strong aircraft sales. Non-defense orders excluding aircraft were down a sharp 3.4% M/M versus a 0.2% decline expecte…

Morning Update

The August Eurozone PMI is pointing towards recession at 46.6, down from 46.5 in July, its seventh straight contraction. Contraction was reported in the manufacturing and services sectors, with declines in manufacturing the steepest. Declining activity was also widespread across the EU, with contraction in Germany increasing. “Taken together, the July and August readings would historically be consistent with GDP falling by around 0.5-0.6% Q/Q, so it would take a substantial bounce in September to change this outlook” (MarkItEconomics).

The latest PMI reading out of China is equally grim as it hit a 9 month low (47.8 vs 49.3 in July) and indicates an increasing rate of contraction. All of the reading's sub-indices point to increasing contraction, showing that all facets of the economy are slowing. New export orders were particularly bad, coming in at 44.7, the lowest since March 2009 and the post-Lehman trade collapse in trade. This data is in-line with export data from Japan yest…

Morning Update

Yesterday Greek Prime Minister Antonis Samaras spoke to Germany’s Bild newspaper saying: "Let me be very explicit: we demand no additional money. We stand by our commitments and by fulfilling all our requirements. We have to crank up growth because that decreases the financial gaps. All we want is a bit of 'air to breathe' to get the economy running and to increase state income. More time does not automatically mean more money" (Reuters). Currently Greece is aiming to have its budget deficit below 3% by the end of 2014, and Samaras is likely to lobby for a 2-year extension to the end of 2016. At the end of 2011 the budget deficit was 9.3%.

S&P 500 futures traded modestly lower overnight on news that Japanese exports and imports were much lower than expected. Japanese exports to Europe were down 25.1% Y/Y, demonstrating how a slowing European economy is affecting global trade. The news caused the Yen to strengthen as traders shed positions in riskier currencies. …

Morning Update

The latest news out of Athens is the same as it has been for months – Athens will again come up short on funding and require additional capital. Der Spiegel, a German newspaper, is reporting that Greek Prime Minister Samaras is possibly preparing to request an additional 2 years to make €11.5 billion in cost cutting measures when he meets with German Chancellor Angela Merkel on Friday and French President Fancois Hollande on Saturday.

However, the German ECB representative Jorge Asmussen said yesterday that “he backs the ECB buying periphery debt as a means to prevent the disintegration of the Euro” (ZeroHedge). Likewise Christan Democratic Union lawmakers in Germany said that they support making “small concessions” for Greece as long as they lie within the existing program. These comments appear to mark a change of heart for Germany and could mean more bailouts for Greece in the future.

In the US Warren Buffet slashed his exposure to municipal bonds by terminating CDS agreements on $8…

Morning Update

Asian markets are lower this morning after concerns grew that China would not ease monetary policy despite slowing economic growth. The People’s Bank of China’s primary fear is increasing food and housing inflation, which would be exacerbated by any easing measures.
In Europe an unsourced rumor that the ECB is contemplating setting sovereign debt yield targets was quickly dismissed by the central bank, stating it is an “absolutely misleading report on decisions not yet taken” and that “yield targets have not been discussed by the council” (ZeroHedge). The Euro and DAX initially gained on the rumor but have since retraced those moves.
Spain has said it will decide whether or not to ask for a formal bailout from the EFSF after the ECB provides more details of what such a bailout would entail. The Spanish government would like the ECB to commit to an open-ended debt purchase. Details of a potential bailout could be provided at the ECB’s Sept. 6 policy meeting.
There is no major economic…

Buying Volatility

This morning is another slow news day with little data out of the Europe and the US, so we will take the opportunity to discuss our specialty: trading volatility.
Yesterday my CNBC collegue Bob Pisani discussed reasons to get long volatility at these levels. You can watch his video here:
As Bob mentions, the VIX is near multi-year lows, the NYSE is experiencing historically low volume, large-cap stocks at multi-year highs, and there is significant political risk in the US and abroad. We agree with Bob that this is a great time to buy volatility. The problem is that the spot VIX is a statistical calculation and not tradable itself. So, how can an investor own volatility?

All of the above strategies can be profitable, but require precise market timing and have risks of time decay and negative roll yield. The Stutland Volatility Group has developed a proprietary method of actively trading a basket of securities in order to provi…

Morning Update

Light volumes and little economic news produced another tight trading range in European equities. Shares gained marginally on comments from China’s Premier said that easing inflation leaves more room for monetary stimulus. European CPI was reported in line with expectations at -0.5% M/M and + 2.4% Y/Y. Spain is reported to be requesting an emergency disbursement from the EU for a bank bailout.
In the US initial jobless claims were up to 366K versus 365K expected. Last week’s numbers were revised to 364K from 361K. Housing starts in July were down modestly after a strong increase in June, coming in at 746K (-1.1 M/M) and near expectations for 750K. Building permits increased by 6.8% M/M to 760K, beating estimates. This news has US equities set to open at the highs of the week and the top of the market’s recent consolidation.
With trading volumes at yearly lows due to summer vacations and traders waiting eagerly to hear more from Central bankers about stimulus, we would not be surpris…

Morning Update

Volumes in Europe today have been particularly light due to the Assumption of Mary holiday. No major European economic news was released.

In the US the July CPI was reported to be unchanged M/M with the core CPI up 0.1% M/M. This was lower than expectations, with the consensus calling for a 0.2% increase. The report shows declining energy prices and a moderate increase in food prices, along with a 0.8% jump in retail sales. "The 15% decline in gasoline prices from early April through early July helped stabilize retail sales by boosting disposable income. However, gasoline prices have subsequently risen by 10% since early July” said Ryan Wang, an HSBC Securities Inc. economist (

While the S&P 500 remains in a tight, choppy range around the psychologically important 1400 level, TLT, the iShares Barclays 20+ Year Treasury Bond, and the VIX, the CBOE S&P 500 Volatility Index, have been making notable moves.

TLT is well off its 2012 highs made in late July and l…

Morning Update

This morning there is more troubling news out of Europe with Euro-area GDP showing that the region is indeed in a recession. The European economy as a whole shrank 0.2% in Q2 while the Germany economy grew 0.3% and France stagnated. Spanish GDP fell by 0.4% and Portuguese GDP contracted by 1.2%. Furthermore Euro-area industrial production decreased by 0.6% Q/Q and 2.1% Y/Y. Though this was better than expected, there is a clear trend of deteriorating data out of the EU.
The economic data out of the US has been more optimistic this morning. July retail sales increased 0.8% versus a decline of 0.7% in June. This is the strongest number since February and stronger than forecast. The Producer Price Index (PPI) increased 0.3% M/M and 0.5% Y/Y in July, above expectations. This data is helping to push up S&P 500 futures moderately before the open. This is generally bullish for the market though it is important to remember how volatile retail sales numbers can be. It is also worth pointi…

Morning Update

Overnight trading in Europe and Asia has been light with European equities trading flat. The only major news driving trading this morning is a poor preliminary Japanese GDP reading: GDP growth was 0.3% Q/Q versus 0.6% expected and 1.2% last quarter. Also notable is a story out of China that a reserve ratio requirement decrease may have been delayed because current reverse repo activities are seen to be providing enough liquidity.

There will be no major US economic data released Monday, but Tuesday’ schedule includes the PPI, retail sales, and business inventories and Wednesday’s includes the CPI and industrial production. We expect these to be market moving events and could provide a catalyst for moving the market from its consolidation around 1400 in the S&P 500.

Technically the market is at a significant level. Last week the Russell 2000 ($RUT) closed above 800, the S&P 500 ($SPX) closed above 1400, and the NASDAQ Composite ($COMP) closed above 3000. At the same time the Ru…

Morning Update

This morning stocks look set to open lower on poor trade numbers out of China. Chinese exports grew only 1%, well of economists estimates of 5% growth and down from 11.9% in June. Import growth also slowed, being reported at 4.7% versus 6.3% last month. Europe is China’s largest trading partner, and slowing export growth demonstrates the effect weak demand in Europe is having on the global economy. The weakness of these numbers makes easing from the People’s Bank of China, whether through an interest rate cut or reduced reserve requirement ratio, more likely going forward.

Today will mark the first day of trading of Manchester United stock ($MANU) on the New York Stock Exchange, pricing at $14.00. The club is selling about 10% of the company in order to raise capital to pay off large debts incurred in the club’s 2005 leveraged buyout. Sam Hamadeh, CEO of PrivCo, which researches privately held companies, said "It's really trading on the level of fan interest as opposed to an…

Morning Update

Chinese CPI was reported at 1.8% annualized versus 2.2% in June and 1.7% expected. Chinese PPI fell 2.9% versus a 2.1% contraction in June and 2.5% expected. Chinese industrial production rose 9.2% in July, less than the previous rate of 9.8% and expectations of a 9.5% rise. Retail sales and fixed investment data was also reported below estimates.
Market data out of the US this morning included the balance of trade and jobless claims. The trade deficit shrank this morning on lower oil prices and a general decline in imports. Jobless claims came in at 361K versus 365K last week.
This week has been a relatively mild trading week for the market with the exception of bonds. The S&P 500’s ($SPX) range this week has been just 16.1 points so far and the index has demonstrated low relative volatility compared to previous weeks. However, bonds ($TLT) have been moving decisively downward, 2% off Monday’s open. We are seeing a steepening of the yield curve right now: short terms rates are …

Unusual Trading in RIMM

This morning Research in Motion ($RIMM) is up over 5% on heavy volume. Stock volume is 7x greater than usual and options volume is heavy as well: 64,000 calls and 94,000 puts have traded. The largest trade of the day occurred two minutes after the open when 10,000 Sept. 8 calls traded at $0.52. ISEE reports that the trade was to open.

This unusual activity in RIM could be due to speculation that Apple will no longer use Samsung as their supplier for iPhone parts, including the A5 chip and touchscreen due to the two companies ongoing legal battle. Should this occur Apple may take their business to Intel while RIM may team up with Samsung. A Global and Mail story this morning reported that Samsung may license RIM's BB10 operating system.

Morning Update

Overnight news out of Europe once again is full of lowered expectations of future growth. The Bank of England, in its quarterly inflation report cut its 2012 GDP forecast to 0%. S&P placed Greece on negative watch, noting that it may need additional funds from the Troika. S&P also lowered their expectations of Greek GDP from a 4-5% contraction to a 10-11% contraction in 2012. There was pressure on Spanish bonds overnight as Spain changed its deficit target to 4.5% from 3.5% of GDP. Spanish 10-year bonds now yield 6.44%.

In the US, the market looks to be on track for a modestly lower opening. Yesterday after the bell PriceLine and Disney reported earnings misses. We believe that the market looks toppy here and could see a short term decline. One reason is that despite the S&P 500 being up the last two days, the VIX has been up as well. Typically we see the two move opposite to each other.

A rising VIX in a rising market means that traders are buying options to protect thei…

Morning Update

Spanish 2-year yields initially traded down yesterday before reversing to end 60 bps higher on the day. This morning 2-year yields are again down 28 bps and 10-year yields are down 4 bps to 6.76% (

The Italian recession continues with Q2 GDP contracting 0.7% after contracting 0.8% in Q1. This is the fourth quarterly contraction in a row and is likely to further worry investors about Italy’s debt, which amounts to 123% of GDP.

Yesterday Boston Federal Reserve president Eric Rosengren called for an open-ended bond buying program. He said “It’s going to need to be fairly large to have an impact. I’d want to tie it to economic outcomes rather than a calendar date.” He also stated “We have an economy growing more slowly than we expected. If we weren’t facing some of the problems with fiscal policy abroad and with Europe, we probably would have a self-sustaining recovery now” (Boston Herald). Rosengren is not a voting FOMC member but his comments are nonetheless likely to …

VIX Up, Market Up?

Today we are getting lots of questions about why the VIX is up 3.0% while the S&P 500 is up 0.5%.The VIX measure implied volatility in the S&P 500 (SPX) options. When there is strong demand for options, implied volatility increases. Typically as the market declines traders rush to the options market to buy puts and hedge their portfolios. This demand pushes implied volatility up and is the reason the VIX is negatively correlated to the S&P 500. Today we are seeing the opposite scenario: encouraged by promises of central bank easing last week traders are rushing out to buy calls as the market rises, particularly in large cap NASDAQ names.

However, this does not tell the whole story. Because of the way options are priced for the weekend on Friday the VIX tends to get a small boost upwards on Monday. On Friday traders tend to sell options in order to benefit from free options decay over the weekend's two non-trading days. This selling pushes down implied volatility on Fr…

Morning Update

Spanish and Italian yields, especially in the short end of the yield curve where the ECB has said it would concentrate its purchases, have continued last week’s slide. Spanish 2-year yields are 36 bps lower at 3.37% and Italy 21 bps lower to 3.07% today. Lower yields in the Euro periphery have typically sent the Euro higher and dollar lower, which provides fuel for US stock market gains.

The Spanish stock market has been halted for over four hours due to a “technical glitch”. The Ibex, Spain’s benchmark index, last traded up 1.6% on the day.

Economic news looks light for the week ahead, especially relative to last week’s central banks meetings. The most significant news will likely be Thursday’s International Trade and jobless claims numbers. So far in 2012 both the trade deficit and jobless claims have been trending down. Most likely traders will be watching Eurozone bond yields and continuing to react to last week’s promised for central bank easing in the US and Europe.

Best Bu…

Is Risk Really On?

This morning the Russell 2000, a small-cap index, is leading the S&P 500 and DJIA up 2.5% in a broad based stock rally. The US Dollar Index is down over 1% and US 10-year bond yields are up 11 basis points to 1.58%. And the VIX is down  nearly 7% to 16.35. By all measures traders today are buying risky assets and selling their defensive positions, except when you look to Switzerland. Despite a global "risk-on" rally, investors continue to pile into Swiss 2-year bonds, pushing their nominal yield to all time lows of -0.454%. This is an extremely defensive trade that would only be put on in the face of extreme uncertainty and fear of downside risk.

So who is right - Swiss bonds or US equities? In this news driven environment, it is impossible to know with certainty so we encourage investors to take advantage of today's low VIX to buy out of the money $SPY puts. These are cheap insurance against the next headline out of Europe and do not limit upside gains in stocks.

Morning Update

Yesterday markets tumbled as Mario Draghi, president of the ECB, left rates unchanged and did not announce the immediate beginning of a bond buying program. The market was looking for immediate action after Draghi, in a speech in London, said he would do “whatever is necessary” to save the Euro. Instead of action, Draghi outlined what the ECB’s future policies could be – the bank can buy shorter dated debt from struggling countries like Spain and Italy, but will only do so upon those countries request. Draghi also said “It’s pointless to bet against the Euro. It’s pointless to short the Euro.” The market however, disagrees, with the Euro down against the dollar. Curiously, the S&P 500 was down nearly 1% yet the VIX closed down 7%, suggesting traders did not feel the need to hedge their portfolios by buying puts. This could mean that the market will be headed up from yesterday’s lows.

This morning S&P 500 futures are up over 1% on a better than expected jobs report. Non-farm p…

Why on earth is the Vix Down today?

This is quite an unusual day, we had a highly anticipated news event which the market was expecting a move. We got the move and now with the confidence of Drabhi and the ECB standing at the ready to step in to rescue Spain and Italy traders are now comfortable selling puts in equities.
I would have to say that this move is highly unusual, but looking at a few factors it kind of makes sense.

1. Even with the news the SPX is only down 1.1% today. A VIX of 16 prices in an expectation of about a 1% move on any given day over the next 30 days, so we are within that range.

2. The VIX was rising into the announcement, so I think some of this move was priced in. Believe me, when we got the rally of the lows this morning the VIX and the VIX futures got smoked, so there were many market players looking to dump some long vol exposure.

3. The SPX is still well above technical support levels and really has just found its way back to the recent mean of 1350.

4. Plus Sept futures holdi…

Join Me Live at The Forex & Options Expo

Join Me Live at The Forex & Options Expo

You're invited to attend The Forex & Options Expo, September 13-15, 2012 at the Paris Las Vegas Hotel & Casino. Take control of your buying and selling strategies and learn to profit from current challenging market conditions. A commitment to learning successful strategies and having the tools to complete those strategies make the difference in today's market. Attend The Forex & Options Expo FREE to receive market insight from top forex and options experts and be sure to join me for the following presentation:

Beyond the Buy-Write: Option Strategies of the Pros
Saturday, September 15 • 8:15 am - 9:00 am
Join this panel of CNBC contributors, Michael Khouw, Scott Nations, and Brian Stutland, as they dissect current options trading techniques. Get an empirical look at the performance of common options strategies including buy-writes, put writes, and collars. These top industry experts will give you a look under the cover …

Morning Update

US Continuing jobless claims rose less than expected to 370,000 versus the consensus estimate of 365,000 and last week’s reading of 357,000. This initially sent S&P 500 futures up this morning, though these gains were quickly reversed when the ECB revealed that interest rates would remain unchanged and that no bond buying program would be immediately implemented. However, Draghi did say that the ECB could buy short dated bonds in the future. This decision will continue to drive European cash into the US markets, making it bullish for US Treasuries and ETFs like TLT and the US dollar.

We suggest continuing to hold high quality US equities and hedging that with a long SPY put position. This put will minimize losses from holding stocks but is also a way to gain long exposure to volatility. When the market sells off volatility rapidly increases, making volatility an ideal stock hedge. Out of the money puts give your portfolio the ability to profit from increases in volatility and mak…

Morning Update

China’s June PMI reading came in at 50.1, showing narrow expansion in the manufacturing sector. The HSBC manufacturing PMI was reported at 49.3, up 1.1 M/M. This report is widely watched and suggests that the Chinese economy might be at or near a bottom. In Europe Spanish and Italian PMIs came in better than expected, while French, German, and British PMIs missed expectations, confirming that even Europe’s core is slowing.

The Bundsbank last night published an internal interview with President Jens Weidmann in which he was quoted as saying that the ECB must not overstep its mandate, governments overestimate the banks, that the Bundsbank has more influence in the ECB than other central banks, and that a political union is hard to imagine in the future (Benzinga). This momentarily moved European markets upon its release but became muted when traders realized that the interview was a month old.

In the US the ADP jobs report was published this morning coming in at 163,000 versus 120,000 …