Skip to main content

Morning Update

On Friday the Brazilian statistics agency, IBGE, reported that their economy expanded just 0.6% in the third quarter, which was well below expectations. This sent Brazilian stocks tumbling, Petroleo Brasileiro among them. PBR has had a rough 2012: the stock is down 27.7% year to date and currently trading near its 52-week low. However, now the stock is getting cheap enough to entice Brazilian bulls to take a shot on the stock. On Friday one trader bought 8500 April 20 calls for $0.72 with the stock at 18.05. This is a bullish bet that will profit if PBR is above 20.72, or 15% higher, at expiration.

Brazilian growth is highly dependent on growth in China, is one of their largest trade partners. Brazilian stocks have been sold for the past few weeks as data out of China showed a slowing economy and analysts downgraded Brazilian GDP expectations for 2012 and 2013. However, this morning data out of China was upbeat; the HSBC’s Purchasing Manager’s Index rose to 50.5 from 49.5 in October. This reading beat expectations and indicates that the manufacturing sector in China is expanding. Brazil's PMI was also released this morning and showed a rise from 50.2 to 52.2. This indicates that Brazil’s manufacturing sector expanded at the fastest pace in two years and suggests that the government’s stimulus is finally helping the economy.

PBR is a government controlled integrated oil company and has a monopoly on the industry in Brazil. Therefore, this company stands to benefit immensely should the Brazilian economy return to the high growth rates seen in past years. PBR has underperformed the Brazilian Index EWZ by 16% this year, which suggests that there is a lot of negativity already priced into this stock. While one good PMI reading does not necessarily mean that there is a rosy outlook for PBR in 2013, it could entice some investors to step into the stock and pick a bottom. The stock has strong technical support around 17 and currently trades at 14 time forward earnings and pays a 1.3% dividend.

This trader is likely looking for the stock to bounce off of oversold levels should the data out of Brazil change to a more upbeat tone in 2013. Buying out of the money calls is the best way to play this, though PRB has long term structural challenges to face and could be forced to sell assets in 2013 even if the economy rebounds. Therefore this trade is highly speculative in my mind and should only make up a small portion of a portfolio that needs exposure to emerging markets or as a high beta play on rebounding global growth.

Comments

Popular posts from this blog

FED Rate Hikes Could Cause Unintended Volatility Shock

Last week the Federal Open Market Committee surprised no one when they raised rates 0.25 basis points to increase rates to between 1% and 1.25%.  What did surprise the market, was the revelation that the FED is committed to normalize rates, even if inflation does not meet their target.  This was reiterated this week in a speech by William Dudley, President of the Federal Reserve Bank of New York, who stated he feels the FED needs to raise rates, despite low inflation, to be ready to act if the economy does slow down.
The market has been quick to respond, and nothing was hit harder by a reduction in inflation expectations than commodities.  Gold, since the announcement, is lower by 2.39%, and oil is down -3.18%.  Crude futures have broken their upward trend line and appear poised to test the previous low of $39.56.
While, oil has been under pressure all year, the S&P 500 does not seem to care, as it continues to make all-time highs.  Oil is down 23% year to date, while the S&P…

Gold and Treasuries Say “RISK OFF”, But VIX Says "RISK ON"

Today we are seeing a modest rebound in the market after yesterday’s small selloff.  Volatility remains extremely low, with the VIX hovering around 10.  It’s important for traders to recognize how low the VIX has been lately.  Since 2010, the VIX has only closed below 10 five times, and each of those five times has come in the last month.                   However, the market is not without risks right now.  Gold has rallied 6.5% since May 9th.  Treasuries have rallied, pushing rates to below 2.15.  So, the market is currently in a risk off mode while equities are in a period of historically low risk.  The VVIX (the VIX of the VIX), for its part, is not sounding the all clear signal, 87 is in the medium range for VIX volatility.  Tomorrow we have a potential market moving event with James Comey’s testimony to Congress.  The last time Comey’s name was in the news, we saw the VIX move from 10.5 to over 15 in one trading day (a 50% increase) on a day where the market was down over 2%.  …

Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this …