Friday, August 31, 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 is finally the day the market has been looking forward to for weeks: Ben Bernake’s Jackson Hole speech. At 10 Am EST Bernanke will take the podium to deliver a speech titled “Monetary Policy Since the Crisis.” Ahead of the market open the dollar is weak across the board, with the Euro up nearly 1% against it. Metals are also strong, with Gold +0.50% and silver +1.4%. Traders appear to be positing themselves to profit from further hints of QE3 from Bernanke, which increases downside risk in the market should the speech disappoint.

Thursday, August 30, 2012

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 historical standards.

Wednesday, August 29, 2012

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 encouragement that a solution can be reached. Draghi wraps up the piece by reiterating what he sees the ECB’s role in the situation to be:

"From the ECB’s perspective, a strong economic union is an essential complement to the single monetary policy. Building this will require a structured process with correct sequencing. Yet citizens can be certain that three elements will remain constant. The ECB will do what is necessary to ensure price stability. It will remain independent. And it will always act within the limits of its mandate.

Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole."

European markets did not react to the piece, with the DAX, STOXX 50 and FTSE 100 nearly unchanged. The purpose of the op-ed appears to be for Draghi to share his thinking with the German people and get everyone on the same page. This could mean that Draghi is building up to a new policy and wants to ensure the Germans understand his rationale behind it.

Trading yesterday in the US was again tight and choppy with the major indices closing virtually unchanged. The VIX was up 0.85% to 16.49. Many are taking this to mean that the market is complacent. However, the VIX futures term structure tells a different story; September VIX futures closed at 19.00, a 15% premium to the spot VIX, and October futures closed at 21.45, a 13% premium to September and 28% premium to spot. This shows that there is bid under VIX futures as traders are expecting volatility to rise into September and October expirations despite the near record low realized volatility the market is experiencing at the moment.

US Q2 real GDP was revised upward this morning to an annualized +1.7% from +1.5%, in-line with consensus estimates. The GDP price index measure of inflation was unchanged at an annualized 1.6%.

Tuesday, August 28, 2012

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 rapid outflows of capital out of Greek banks slowed in July, likely due to the results of the country's June elections.
This morning in the US the S&P Case Shiller Home Price Index was released and came in stronger than expected at 0.5% versus 0.4 expected and 0.9% last month. Later today consumer confidence numbers will be released, with expectations for a moderate decline from 65.9 to 65.8. NYSE volume continues to make new yearly lows as the market looks forward to news from the Federal Reserve on Friday. Today Mario Draghi, expected to speak in Jackson Hole on Saturday, announced he will no longer be attending the event, citing a heavy workload.

Monday, August 27, 2012

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 10.1 computer.

In US markets this week traders will be looking forward to chairman Bernanke’s speech in Jackson Hole on Friday. We would not be surprised to see the light summer volume to continue along with tight, choppy trading ahead of Bernanke’s speech.

Friday, August 24, 2012

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 expected. Next week’s domestic news will focus on Chairman Bernanke’s Jackson Hole speech, but the news schedule also includes consumer confidence, GDP, and personal income reports.

Thursday, August 23, 2012

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 yesterday, which also showed a rapid decline.

Yesterday the release of FOMC meeting minutes said the Fed believed new stimulus would be needed fairly soon unless growth picks up substantially. This caused gold to break through its 200-day moving average and close at the highs of the day and the EUR/USD to continue its recent march higher. However, this morning in CNBC St. Louis Fed president Jim Bullard said that the minutes are “a bit stale.” Since the Fed’s last meeting economic data has actually been better than expected, meaning the Fed will likely think twice before implementing new easing when it meets next.

Wednesday, August 22, 2012

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. The AUD/JPY (Australian Dollar / Japanese Yen), a good barometer of risk appetite, was down significantly overnight. This, along with a bullish breakout in Gold yesterday, strong gains in US treasury bonds, and intraday reversals in market leaders Google and Apple suggest traders may be paring back the amount of risk assets in their portfolios.

The main source of headlines in the US trading session today is likely to be the release of FOMC meeting minutes. These could offer further hints to what Bernanke might say in Jackson Hole on August 31st and the debate ongoing within the FOMC.

Tuesday, August 21, 2012

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 $8.25 billion of debt. Buffet likely closed out the trades for a loss, suggesting he only believes the market will get worse from here. Buffet still holds CDS exposure to roughly $8 billion in municipal bonds which he cannot terminate prematurely.

Monday, August 20, 2012

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 news to be released in the US this morning, so trading will likely be driven by the price action in Europe where equities have recently turned negative. On Friday state-level unemployment data was released by the Bureau of Labor Statistics showing that the unemployment rate rose in 44 states in July. The July non-farm payrolls report showed the national jobless rate to be 8.3%, up 0.1% over June. The White House now expects the unemployment rate to dip below 7% only in 2015. (

Friday, August 17, 2012

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 provide an 83% correlation to changes in spot VIX. We believe this to be the superior way to hedge long stock portfolios and own volatility. To learn more about what we can do to reduce downside risk and volatility in your portfolio, contact us today.

Thursday, August 16, 2012

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 surprised if the market continued to trade in a choppy range or slowly grind higher for the rest of August. Next Wednesday FOMC minutes will be released and on August 31st Bernanke will speak from Jackson Hole. These events will give the market better insight into the Fed’s plans and is could be a catalyst for the market to break out of its range. At the moment we recommend using the buy-write strategy (selling a call against a long stock position) to reduce downside risk while maintaining profit potential if the market remains flat or increases modestly.

Wednesday, August 15, 2012

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 looks poised to break down through a key support area around 124.00. Should TLT loose this level we see its next support level in the 118.00 area, a 4.8% drop from here. Long maturity bonds have sold off over the past few weeks as traders begin to price in rate hikes down the road and investors move their money into riskier investments like equities as a result of the current “risk-on” environment.

Yesterday the VIX confused many investors when it jumped 8.3% on a $0.02 increase in SPY. The jump was due to traders taking advantage of a sub-14 VIX to buy out of the money options on the market. The VIX futures have been showing a lot less volatility than the cash index, as well as extremely high levels of contango. With only 5 trading days before expiration the August VIX future is 1.83 points higher than the cash VIX, showing traders believe that the VIX could still move higher. The September VIX future is 2.5 points higher than the cash, again reflecting expectations of increased volatility. At the moment, it makes sense for the cash VIX to be around 14 given that there is no volatility realizing in the S&P 500.

Tuesday, August 14, 2012

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 pointing out that June’s retail sales were revised downward from -0.5% to -0.7%, and July’s numbers could suffer the same downward revisions next month.

Traders will looking at this data through the lens of the Fed as they try to predict whether Bernanke will announce any easing at his speech in Jackson Hole later this month. The strength of this data suggests that there will be no such announcement. Strong retail sales show the economy is not quite out of steam yet and could foreshadow rising inflation. If the Fed has reason to believe inflation may naturally rise they are less likely to provide the market with more quantitative easing.

Monday, August 13, 2012

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 ($COMP) closed above 3000. At the same time the Russell 2000 Volatility Index ($RVX) closed below 20 and the S&P 500 Volatility Index ($VIX) closed below 15. RVX has only closed below 20 once since 2007 on a weekly basis and VIX has only closed below 15 four times since 2007 on a weekly basis. Since this is options expiration week we foresee traders taking advantage of this low implied volatility by rolling their portfolio protection forward. This could provide moderate downward pressure on the indices as sellers of out-of-the-money puts sell S&P futures against their short options as a hedge.

Friday, August 10, 2012

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 any sort of financial interest. A winning team does not make a winning investment" (USA Today). Unlike many IPOs this stock is expected to have slow growth, and has lots of debt and exposure to Europe.

Today we expect the market to remain choppy on light US economic news. We could see some traders taking profits after five days of gains on the weak news out of Europe. Next week could be a bit more volatile with the PPI, CPI, retail sales, industrial production, and housing starts scheduled to be reported.

Thursday, August 9, 2012

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 depressed due to expectations of “exceptionally low” interest rates through 2014 while long-term rates are rising. Operation Twist, in which the Fed sells bonds with maturities of 3 years or less and buys bonds with maturities of 6 years or greater, will run through the end of the year and has the effect of flattening the yield curve. The fact that we are seeing the yield curve steepened despite operation twist means the market is already anticipating its end.

Some are already calling the end of the bull market in bonds, such as Elliot Management’s Paul Singer, who yesterday said “Long-term government debt of the US, UKL, Europe, and Japan probably will be the worst performing asset class over the next ten to twenty years. We make this recommendation to our friends: if you own such debt, sell it now. You’ve had a great ride, don’t press your luck. From here it is basically all risk with very little reward” (Zero Hedge).

Wednesday, August 8, 2012

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 their portfolios from a decline. This indicates that there may not be many buyers at 1400 in the S&P 500 to continue pushing the market up. We recommend using $SPY August and September put spreads to reduce the impact of a market decline on a long stock portfolio. For example, with $SPY at 140.30, you can buy the Aug. 139 put and sell the Aug. 137 put for $0.45. Should the market decline and close below 137 at August expiration the trade makes $1.55 on only $0.45 of risk.

In uncertain markets like this investors should stick to quality stocks and only take trades with the best risk/reward ratios.

Tuesday, August 7, 2012

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 drive the S&P 500 higher.

Looking at the market’s technical’s, the S&P 500 ($SPY) is at the top end of a daily channel, which could provide resistance to a rally. Traders will be watching the 140.00 level. A break through here could mean a rally to the year’s highs, while failure would likely mean a retest of the channel low (136.50). With the VIX below 16.00 this is a good time to consider buying puts to hedge a potential market decline.

NYSE volume has decreased the past four days in a row. We expect low volumes to continue as the market enters the “summer doldrums.” Traders should be wary of this market, which can be very choppy and headline driven. We recommend using conservative options strategies such as covered calls in these environments to reduce downside risk and create cash flow.

Monday, August 6, 2012

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 Friday. When options resume trading on Monday the weekend decay is no longer being priced into trader's pricing models which increases the option's implied volatility. The net affect of this is that options do not fully realize the time decay they should over the weekend because some of this is already priced into them Friday afternoon.

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 Buy founder Richard Schulze has offered to buy shares of the electronics company for $24-$26 per share. A $25 share price would value Best Buy at $8.5 billion, a 30% premium to Best Buy’s Friday close. Schulze plans to put up $1billion of equity and finance the rest through “premier private equity firms with deep experience in retail” (Bloomberg).

Knight Capital, after losing $440 million last week due to a faulty trading algorithm, has announced that it will raise $400 million in capital via convertible bonds. The bonds will have a conversion price of $1.5 and will dilute shares by 60%.Shares are down 30% pre-market on this news.

Friday, August 3, 2012

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.

Joe Tigay on Trading Next Week

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 payrolls for July were reported as a gain of 163,000 versus 100,000 expected and 64,000 last month. The unemployment rate slightly increased to 8.3% from 8.2% last month. This data will be closely monitored by the Federal Reserve when deciding what kind of stimulus, if any, will be provided to the economy. In the near them we expect to see the market rally off of this number, with 1385 the critical resistance point for the S&P 500 September futures. A breakout through here would signal that the market has left its summer trading range and is poised for a run higher.

Thursday, August 2, 2012

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 holding a substantial premium to cash, indicates back month vol firm.

5. The largest open interest strike for august options in the VIX is 18, this coupled with august including laborday in its September calculation, could put downward pressure on the Vix into 18

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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 make it easier to stomach the wild swings of the market.

This morning the CBOE released an earnings beat of $0.44 EPS versus $0.407 expected. This stock yields over 2% and trades at under 19 times earnings with no debt and steady cash flows. We recommend selling an out of the money put at a level you would be conformable owning the stock. This position allows investors to profit if the stock goes down a little, remains unchanged, or goes up. Should the stock move through the strike sold the investor will be “put” the stock, making for a good long term entry point. We would not be surprised to see the CBOE initiate a stock buyback program in the future, which would increase shareholder equity and be a catalyst for a bullish move.

Wednesday, August 1, 2012

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 consensuses. This afternoon the FOMC policy meeting will wrap up with an announcement on interest rates. This announcement will be closely watched for language signaling further quantitative easing should economic indicators continue to deteriorate. Heading into this announcement the EUR/USD exchange rate is up modestly to 1.2310 and gold is down 0.4% to 1608. Should the Fed announce further easing the dollar would likely lose value, boosting stock and commodity prices and especially gold, which is seen as an inflation hedge.

MasterCard released earnings this morning of $5.55 per share on revenue of $1.8 billion and took a $13 million pre-tax charge to cover legal costs. The company’s net income rose 15% Q/Q. MasterCard also took a 20% share in the debit card market, stealing from Visa who reported a 9% decline in debit transactions in Q2.

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