Skip to main content

Morning Update

This morning US s5tock futures are indicating a higher open on the back of better than expected jobless claims and a lower dollar. However, the market’s main interest will continue to be the fiscal cliff, with rumors driving the market’s direction. The broad market has shown some resilience so far in cliff negotiations while the VIX has been strongly bid. This implies traders are not rushing to sell stocks, but rather buy option protection for their positions. Geithner said yesterday that the US would “rise above” the debt ceiling on Dec. 31st though the Treasury could use emergency measures to delay this for another two months. If the tax hikes become effective January 1st though, this 2 moth cushion could last even longer. This could be why there appears to be little sense of urgency in Congress and it looks like the odds of getting a deal done by year end are minimal now.

With many traders still on vacation yesterday volumes were generally low. However one stock that caught many traders attention was Ford, which traded 3.8 times its average daily call volume. This was on the news that the2013 Ford Fusion had achieved the top crash safety rating from the Insurance Institute for Highway Safety. The top trade of the day was the purchase of 40,000 Feb. 13 calls for $0.44 with the stock at 12.55. This is a $1.76 million bet that Ford will be above 13.44, 7% higher, at February expiration.

Ford will report earnings on January 25th, which will be the stock’s major catalyst ahead of February expiration. Traders will be looking at earnings in three different segments: North America, Europe, and Asia. Ford holds 16% of the market in the US and sales have taken off in the last three years. Currently the average age of a car on the road in North America is 11 years, which bodes well for increased Ford sales. North America has been Ford’s bread and butter and traders will be looking for profits to remain strong. In Europe operations have not been profitable recently due to the economic hardships there. Ford has implemented a major cost saving initiative to save $500 million over the next few years, so traders will be expecting losses to decline here. Finally, Asia looks to be the most lucrative market for Ford and has been the primary driver of sales growth for the company. November broke several sales records in China and traders will be looking for the momentum to continue.

Looking at TTM PE Ford also looks relatively cheap compared to other major auto companies. Ford TTM PE ratio is 2.938 while GM, Honda, and Toyota are all over 10. Technically the stock also looks strong, having just broken a major resistance level at 12.65. This has put the stock within sight of making a new 52-week high at 12.85, which, if broken, could take the stock up to its next resistance level at 14.25.

Ford looks like a solid beta play on the global economy. If conditions are improving in the Eurozone, the US avoids the fiscal cliff, and China’s growth accelerates, Ford will do well in 2013. I like buying calls for now because there is so much uncertainty about whether or not we will see global growth next year. By buying calls you keep risk limited through Feb. expiration and can capture some upside if earnings are good and the fiscal cliff is avoided.


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…