Skip to main content

Morning Update

Overnight risk sentiment in Asia and Europe was buoyed by a strong PMI out of China. Japanese data was weaker than expected, confirming an accelerating recession in the country. Then Yen has been strong though after hitting major support levels against the Australian and US dollars and ahead of Japanese elections this weekend. This morning the US CPI posted its biggest decline in 6 months but industrial production topped even the highest estimates. With congress at home for the weekend Fiscal Cliff headlines, which control the market right now, are likely to be muted today, leaving only the market technical to fuel trading. The S&P 500 futures are currently at their 50 day moving average, which should provide some support.If Fiscal Cliff fears to surface, I would expect to see the Jan. VIX contract, which has been under performing the Dec contact, catch a bid.

Yesterday MetLife issued a warning to investors that next year’s earnings could come in less than analysts are expecting and below its prior guidance. This sent shares down 2.3% but did not deter some bullish option trades. The biggest trade of the day was the purchase of 9473 March 37 calls for $0.58 with the stock at 32.92. This trade will profit if MET is above 37.58, 14% higher, in the next 91 days.

MetLife’s announcement said that they now expect operating earnings of $4.95 - $5.35 in 2013, would take a $800MM charge in the fourth quarter, and do not expect to buy back stock in 2013. Operating earnings are expected to decline due to the company’s struggle with the current low interest rate environment. Next year the company expects to reduce its sales of variable annuities with guarantees of lifetime income as baby boomers, worried that they will outlive their savings, rush to buy them. These products are not as profitable as they used to be because they are capital intensive and low interest rates make hedging difficult. This is a sign that MetLife is shifting its focus into more profitable, higher margin businesses. In order to further reduce capital requirements and decrease regulatory scrutiny, MetLife announced that it was conditionally approved to sell $6.5B of its bank deposits to GE in move to get rid of its bank holding company status. Once MetLife has sold its bank it will not be subject to stress tests and will be able to buy back shares more easily.

Though this announcement was bearish in the short term, it shows that MetLife positioning itself for long term growth. CEO Steven Kandarian stressed that although share buybacks were not likely in 2013, they would be in future years. MetLife currently trades at 60% of its book value and has a dividend yield of over 2%. Once the company gets through Q4 and investors become more comfortable with the idea of slower growth in 2013 for strong growth in 2014 and beyond, the stock could begin to rally towards book value. Since the stock could see near term volatility ahead of Q4 earnings I would not buy the stock now, and opt for the fixed risk profile of a call option. If, at March expiration, MET has rallied and is above 37 the trade will be profitable and you will have the option to buy the stock there and hold it for continued profits.


Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…