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

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 …