The Good News

Despite all the doom and gloom over the global economy, the US continues to show steady improvement. Nov non-farm payrolls were +120k. Not spectacular, but not bad. Again, previous months were revised upward. Oct went from +80k to +100k [= +20k], but Sep was revised up from +158k to +210k [= +52k], and that's after Sep's initial release of +103k.


Look at it another way: The Nov employment report showed an increase of +120k +20k +52k = +192,000 jobs!


Also, the Nov Institute of Supply Management manufacturing index rose to 52.7 from Oct’s 50.8.


And what about the tapped out US consumer? On Thanksgiving Friday (not ‘Black Friday’, as the cynics call it), foot traffic in stores was up 5.1% over 2010 and total sales were up an estimated 6.6% to a record $11.4bn (source: ShopperTrak). Online sales on the same day were up 26% (source: comScore).


Meanwhile, US banks have been aggressively deleveraging. See below.


The Bad News

During the past few weeks Libor, the London inter-bank dollar loan rate, was getting squeezed just as it was during the banking crisis of 2008-2009. Libor is the fear gauge, or VIX, of the banking industry. A Libor squeeze means that the banks won’t loan to each other because they are loosing confidence in each other.

As an indicator of how the EU dollar market has dried up, the Sunday Times (041211)  reported Fitch as saying that since May, US money market funds have cut their exposure to Eurozone banks by 42%. And if they do loan, in many cases they want their money back within seven days.

So enter the Fed last Wednesday. It cut the rate it would loan dollars to the ECB, which in turn cut the rate it would loan to EU commercial banks. Stock markets duly soared.

So why the bad news? Because this is only a temporary solution. There’s no quick fix to the problem of lack of confidence in EU sovereign debt. The EU needs structural reform in the form of fiscal unity, and that means FISCAL DISCIPLINE.

One columnist compared the Fed/ECB intervention to digging trenches before an advancing tank battalion.

So are Europe’s public sector workers going to give up their gold-plated pensions? Will governments be able to pass reform legislation? 

(For example, the UK tax payer spends appx £15bil per year on pensions for public sector workers. Then he needs to save for his own retirement. Can this gross unfairness be unstructured?)

Anyway, the EU – meaning France and Germany - is expected to come to a muddle-through solution this week. Let’s hope that the peripheral EU counties are willing to concede a bit of sovereignty. If not, then Europe as we know it will revert to the bickering factions that it has been for the past 1,000 years.

Gold is still in a precarious state: near-term it could go either way. The fundamentals are bullish, because the central banks will continue to print money in order to get us out of this mess.

The technicals however indicate that we have come a long way in a short time, meaning that we are overbought. The triangle formation in the chart below tells that we are at a short-term crossroads.(See chart below. Imagine an upward trendline from 1500 and a downward trendline from 1900.) If we break out on the upside then gold needs to stage a convincing rally above 1800 for the bull market to continue. A downside break needs to follow through below 1600 to set up a retracement  to 1400-1300. 

Trade Idea: Stocks

Want a wild idea? Buy bank stocks. Hey - no kidding. So what if the banks burned investors by overstating earnings because they didn’t declare off-balance sheet losses. So what if they abused or misunderstood derivatives. Every guy deserves a break, right?

But according to the latest Federal Reserve statistics, as reported by Jeff Cox of CNBC (28Nov11), US banks’ leverage is at a near  record low. Formerly banks had debt ratios of 30, 40 or 50 times their assets, but in October they were down to 7 to 1. All you contrarians, have a look.

Bad Banking, Bad Regulating

But if you’re in Europe, as ever, it’s a different story. Dexia, the Franco-Belgian bank that was recently bailed out with €90bil of EU government guarantees, had been assigned an acceptable Tier 1 capital ratio of 10.4 by the European Banking Authority at the end of 2010. So how did it go bust? It was subsequently revealed that the bank’s leverage ratio was 60 to 1! (The Times, 021211)

Any more skeletons in there?

Lotta News, Lotta Noise + Rogue Director

With the EU struggling to get its act together, and with the markets thin and volatile, these past few weeks have been a great time to stay out of the market.

Sure signs of markets to stay out of are low volumes and complaints by brokers. Currently, there’s plenty of both.

But in case you haven’t noticed, America is on the mend.

US. Okay, so Oct non-farm payrolls, at +80k, were lackluster, but Sep was revised from +103k to +158k, and Aug was revised from +57k to +104k. Meanwhile, Q3 GDP was up a respectable 2.5%. (Revised to +2.0% and still respectable for a mature economy under current global economic conditions. 28Nov11)

One statistic that especially told (28Oct) was the growth in business investment in Q3, which accelerated to +16.3%, from Q2’s already impressive +10.3%. This shows that the guys who know their business are committing their cash.

And lo and behold, this past week several analysts revised upward their growth forecasts for the US Q4: JP Morgan gave 3%, Morgan Stanley gave 3.5%(!), and State Street gave 3.3%.

My hunch is that NFP will reach +200k during Mar-Apr of next year.

Meanwhile, the S&P chart, given below (courtesy of bigcharts.com), doesn’t look bullish, but it shows that we’ve made an upside breakout from the summer trading range, and that we’re supported at the top of the former range. The technical indication is that we may have seen the low of this market.

 

Trade idea. Don’t get me wrong; I’m not ready to go on a buying spree in growth stocks. I continue to recommend buying stocks that pay 5%+ dividend, with stable, or range-bound, technicals and low P/E ratios. The way I figure, you get a respectable dividend stream for the time being, and your downside risk is outweighed by a medium to long term upside potential. One example, which I recommended in my blog of 17 Oct, is the UK’s National Grid, which is paying 6%+. With a bit of research, you can surely find US stocks that have similar profiles.

I say all of this with the caveat that I am not a stock picker by trade, so you should consult your financial advisor before you whack down your cash.

Italy has been trounced in the financial press because its 10-yr debt is now trading at appx 7%. Let’s put things into perspective:

In the mid-nineties the 10-yr Italian yield was consistently above 8%, reaching an historical high of 13.75 percent in March of 1995.

Back then, of course, Italy’s debt traded in Lira. Now, one would need to adjust for the comparative strength of the Euro. I’ve searched the web for a Lira-Euro-BTP converter, but I haven’t been able to find one. Please let me know if you do (lenny@lennyjordan.com). 

Practically speaking, however, the market must be pricing Italy’s bonds at a historically fair value. A 7% Euro return today probably equaled 8-10% Lira return during the nineties. I wouldn’t panic over Italy.

Gold trade. While we’re on the subject, an interesting statistic emerged this week. When assessing Italy’s solvency, one analyst mentioned that the country holds appx 2,500 tons of gold, worth appx €100 bil ($135 bil).

With gold at $1700/oz, once again Gordon Brown’s decision to sell at $250-$300/oz during the late 90’s looks like one of the worst trading decisions ever. What he sold for £2 bil ($3.2 bil), as Chancellor of the Exchequer would now be worth appx £14 bil ($22 bil). 

Mind you, this was not a bad trade because it lost money. Instead it was a bad trade because he sold the low. Gold, as we all know, has a volatile history. During the nineties its price had been depressed, but it wasn’t going lower. Selling gold then was like selling your house during a recession.

Gold recently met resistance at $1800, and I still have a mind to short it. See my blog of 28Sep11, and stay tuned….

MF Global. Here’s an amusing and personal anecdote. During ’08 I interviewed with MF Global for the role of Head of European Risk. I had a great talk with the global head, whose background, as is mine, is from the Chicago exchanges. We talked about colleagues that we knew in common, and we discussed trends in options theory and product development.

All was looking well for my candidacy, but two weeks later an MFG customer out of Memphis made a rogue trade in wheat which cost the firm $141 mil. End of hiring budget.

The firm survived, however, (even without our favorite options trader/risk manager) until it became headed by John Corzine, who two weeks ago caused the firm to go bust after taking an $11 bil loosing stake in the European bond repo market. And meanwhile, $600 mil of client money went missing.

Rogue trader? Okay, so Nick Leeson brought down Barings, but that’s because the firm was undercapitalized, and management turned a blind eye to his trading.

But the most recent cases, MFG, Lehman’s, Enron, AIG, and RBS, and weren’t brought down by a rogue trader.

Instead, these firms were brought down by a ROGUE DIRECTOR. 

Borrowed Time

It's better than bad that the EU has finally agreed to proposals to save the Euro. At least they came up with guidelines that, if realized, will provide their economies with a window of opportunity for restoring growth.

But proposals being only proposals, the ultimate question is one of implementation. Eg., so banks write off 50% of their Greek debt while recapitalising to 9% of their assets. Suppose you're a bank with both problems on you hands. Where are you going to find the money to solve them?

And the EFSF bail-out fund is now authorised to increase to  €1 Tril?

Pathetic. French President Sarkozy needs to go begging to the Chinese to fund the EFSF. With their economy facing a slowdown, the Chinese will soon have plenty of internal needs for capital. And if they agree to contribute, what do you suppose the Chinese terms will be? Free from military and strategic conditions?

Let's put it another way: Would you loan the EU your money?

Still, the conference's proposals, if enacted, will provide a temporary solution in order to give the European economies time to return to growth. The big question is, how are they going to do it?

Take Greece, for example. The country is now condemned to extreme austerity measures and an unfavorable foreign exchange rate. Not components for economic revival.

Italy's proposals were only paper commitments by Berlusconi, which included raising the retirement age to 67. But can he get his proposals through the legislature and the courts? Right.

The German taxpayer is tapped out. France's AAA credit rating is under threat of being downgraded. And what of the EFSF itself? Since this past summer, it's borrowing costs have risen sharply. Have a look at the chart below, whch shows the EFSF (and France's) 10-yr rate over the Bund:

One way or another, Europe's borrowing costs are headed up, making it more difficult for these economies to grow.

So what's the solution? Fiscal union, of course. The long-standing criticism of the Euro has been that monetary union without fiscal union is unworkable. The one glimmer of  hope that came out of this conference was that the eurozone countries are planning to form an inner core that will work towards greater economic coordination.

In sum, the Euro basically dislodged two pillars of a nation's economic management: 1) the need to control supply and demand through setting of interest rates, and 2) the need to balance imports vs exports by setting its foreign exchange rate. Greece is the perfect example of how unrealistic the Euro experiment has been. This experiment was driven by politicians who ignored economic common sense.

Next week I'll be in Paris, and I'll try to get the opinion of those at the center of this crisis.

And by the way, yesterday's stock market rally was probably due to pent-up demand - based on generally good earnings - being unleashed by the proposed solutions to the EU crisis.  I'm sceptical.

Don't Sell Stocks on Monday

The above is the title of a book that was popular in the eighties, when I first arrived at the Chicago Board Options Exchange. After last week's rally, which had traders squirming and cursing, stocks have had a typical Monday sell-off. I discuss what to do with my OEX trade idea below.

Meanwhile, there's been a lot of talk lately about dividend-paying stocks. I thought I would give a trader's view on this subject. One UK stock that stands out is National Grid: It's dividend currently pays 6.4%, according to the Sunday Telegraph. Here's the chart:




After the rally from the August low,  I'm not particularly keen to buy this stock, but it looks to be supported at 620. And with a robust dividend, I could be tempted to average in. The August low, by the way, was caused by concerns over supply disruptions in the States during Hurricane Irene. But now NG is behaving like a typical, boring, utility stock. 


And just out today, National Grid has reopened its inflation-linked bond, looking to raise an extra £10 million after the strong response to its initial issue last month. The bond, which offers a return of 1.25 per cent on top of the Retail Price Index (RPI), originally attracted over 10,000 investors and raised £260 million. So if bonds are for you, then get your skates on and phone your financial adviser.


TRADE IDEAS


My OEX trade from 14 Sep has performed nicely. Remember I suggested 'buying' this spread for a credit of 11.60 (Confused? Please see the chapter in my book on the Condor). Last week this spread could fairly easily have been closed at 6 ticks, giving a profit of 5 ticks, or $500 times how many times you did it. With today's sell-off, and the OEX at appx 544.88, the condor can be closed for an extra tick, for a profit of $600. If you haven't closed this trade, then I suggest that you do so immediately. The Oct contracts expire on Friday, and the market will be quite volatile this week given earnings reports and the ongoing EU problem. Today's sell-off is a gift, and as I always say, TAKE A GIFT.


Meanwhile, gold is languishing at appx 1670. I'm still looking to short it at 1750-1800. Patience is a trader's best friend. 

Humpty Dumpty?

The Fed 'twists' $400 bil of short-term debt into bonds, while Obama proposes $480 bil of stimulus, the BoE hints at another round of QE, the ECB is ready to reverse its rate hikes, and the IMF is to increase its bailout fund to €2 tril. Can all the King's horses and all the King's men put the Euro and American economies back together again?

Gold finally had a decisive sell-off. Have a look at the spot chart below :



TRADE IDEA There may be an opportunity here to trade gold from the short side. If you think that we've seen the highs for the near to medium term, and if you think that gold will consolidate or retrace to $1,000, as some analysts suggest, then you may wish to sell rallies at resistance levels. This chart tells me that gold may struggle to surpass the 1750-1800 area, so this level may be the place to get in.

You could of course, short the future. You could by the put, but the gold vix is at 35, so vol is too high to buy puts outright. A more prudent trade would be to buy the 1x1 put spread, also know as the put bear spread.  Here, you may buy, let's say  a 1600 put while selling a 1500 put.

I'll have more to say on this if gold rallies. In the meantime, we need to have what every trader needs to have most of all: patience.

So in the meantime, if you have any questions or comments, or if you simply have an idea on how to save the Western economies, then by all means send me an email at lenny@lennyjordan.com

Choke a Horse!

With Moody's downgrade of two French banks, the UK Vickers' report, and a rogue trader costing UBS the equivalent of 3,500 jobs, there's been enough news lately to choke a horse!

But the top story has to be the unwillingness of US lenders to supply dollars to the Eurozone. Therefore the CB's of the US, UK, Switzerland, Japan, and of course, Europe, needed to step in with a promise to open the liquidity floodgates. Stock markets rallied. SOLD!

This news wasn't good enough to push the OEX through the upper end of its range, so the condor referred to last week still looks like a good trade to be in.

The VIX is still at a hefty 30+ and well supported, as it should be. If it breaks the level in the chart below, then we'll know that the market is ready to take a breather. Don't hold your breath.



So all eyes now turn towards this week's FOMC meeting. To print, or not to print, that's the question. And how will the markets react to either outcome? Any comments?

One statistic to keep an eye on is the 10-yr borrowing cost for Italy. Currently it's at 5.59%. The ECB is buying Italy's bonds like there's no tomorrow. If the rate gets to 6%, then the Greek problem will look like a mere dress rehearsal.

14Sep11

An investor has asked if could apply the S&P strategy below to the OEX (S&P 100). Sure, because the technicals of these indexes are so closely linked. If you look at the 2-yr OEX chart below you will see support at 500 and resistance at 550 (+/-). So you might sell the October 550-570 call spread and at the same time sell the October 490-470 put spread. I chose October because I like the time decay characteristics.

This spread is know as the condor, and it's described in my book. Yesterday, with the OEX at 526.25, this spread was trading at 6.50 (calls) + 5.10 (puts) for a credit of 11.60. The fees you get from your broker will, of course, reduce the credit you receive from this spread.

You need to be aware that if at expiration, the market closes above 570 or below 470, then you loose 20 - 11.60 = 8.4. The risk/return of .72/1 is not spectacular, but the risk of the OEX breaking so deeply through its support/resistance levels is not that great, either. Anyway, you're not going to run this spread through expiration. Instead, you're looking to buy it back at 6 or 4, taking a few ticks out of it.You would also put in a stop loss order to pay 13 or 14 to buy it back.

So now you need to be the trader. The technicals are on your side, but what can go wrong with the fundamentals? What if Greece defaults? What if Merkel gets a a vote of no confidence? What if France's banks get downgraded? What if the FOMC decide on another round of QE? What if they say that they've done enough? Has the market discounted the bad news?

At this point, you need to talk to your financial adviser. Let me know how you get on.

blogdate 12Sep11

Hi,

It's getting scary. Last week, Germany's ECB member Jurgen Stark quit, while the Bund reached a record low of 1.77%(!). Obama's jobs plan got a lukewarm reception, and it was basically discounted as electioneering - and not cheap, either. The Swiss stopped their currency appreciation at 1.2 to the Euro. Bernanke added no direction. Trichet blew his top.

Stocks sold off, but could have done worse. Have a look at this 2-yr chart of the S&P 500, courtesy of BigCharts:

We seem to have entered a mini range with support at 1100, resistance at 1250. We'll probably stay in this range until the FOMC meeting, 20-21 Sep. A TRADE IDEA is to look for this range to hold through the meeting. If the meeting results in nothing to break the range, there will be a premium-selling opportunity such as  selling options at technical levels while buying covering options. For example, you might sell the 1050 put and the 1300 call while buying the 1000 put and 1350 call. Please consult your financial advisor before you do this trade.

Meanwhile, market analyst and derivatives guru Satyagit Das, in Friday's Evening Standard, expressed renewed doubts about the European bailout plan, banks exposure to Europe's debts, while citing evidence that the money markets are beginning to again tighten (or freeze) up, while the broader economic environment deteriorates.He said, "If the markets seize up again, this time it will be different. There may not be enough money to bail out everyone and every country that needs rescuing."

Stay tuned.

050911 weekly

Hello Again.

CONSUMER SPENDING, anecdotal evidence: I just received word that my gas bill is to rise by 11%, while my electrical bill is going to rise by 18%! Meanwhile, the price of a pint of beer here in London is firmly at £4 ($6.50!). (Unless you go to one of the Samuel Smith's pubs, where a fresh and tasty bitter still costs only £2+).So what does this say about consumer spending?

CHINA HEADED FOR A CRASH?: A new book, entitled 'The American Phoenix' (Profile Books) by Charles Dumas and Diana Choyleva (Made known to me by Anthony Hilton of the Evening Standard.) posits that the Chinese growth rate is likely to halve because their export-led growth model is unsustainable.

This analysis dovetails into what  Soc-Gen economist Albert Edwards said, as reported in the Guardian on 03Jan11 (yeah, that far back). Here's a few quotes: "... housing and credit bubble goes out of control..."  "The Chinese situation is the one that could come out of nowhere because people are not considering it as a serious possibility."  "...it's a bit like investing in Nasdaq  stocks in 2000..."

We've heard this story before, from Japan in the 90's. We all know how it ended. This time, however, the leverage is far greater.

NFP: Told us what we already knew: the economy is in the doldrums at best. All eyes now look toward the Fed meeting on 20-21 Sep. so what can they do? print more money? Buy puts on equities indexes as we rally. I'll have more to say about his during the week.

STAY TUNED

290811 Weekly

Lenny Jordan's Market Blog

Monday, 29 August 2011

Okay, here’s the first installment of my weekly market blog. Let's have your comments!

THE MARKETS

Last week the markets stayed waiting for Friday’s comments by Fed Chairman Bernanke from Jackson Hole. Traders reported generally lackluster conditions. Typical comments included: ‘…waiting for the Fed to lead us by the hand,’ and ‘… like being holed up in Jackson Hole.’

Although trading activity was light, however, the markets are preparing themselves for renewed activity next week, as indicated by the firmness in options implied volatility.

Bernanke’s comments were professor-like, but at least they calmed the markets. We need to watch the flows on Monday to get a true sense, but my hunch is that vol’s about to take a short-term dive.

COMMODITIES

After the push through $1900, and after the 5% sell-off, gold vol stayed firm. The precious metal may have been overbought on a technical basis, but with the possibility of more QE looming, significant upside potential still remains. All this put a bid to the CBOE Gold ETF Volatility Index (the gold VIX), which went to 33, its highest level for more than two years, and still remains trend upward.

                         

The Brent-WTI spread (110.15-85.16 = 24.99!) continues to firm as well. There’s lots to say about this spread, and below is a chart telling when it all began. Stay tuned for a more in-depth analysis, and…

                 

If you want a market on this spread, then give us a call.

STOCK INDICES

Meanwhile, the S&P 500 VIX is firm at the 35-40 level, as the market looks for the relief rally to continue but also fears a breach of major downside levels: S&P 1,000; DJIA 10,000; FTSE 5,000. For a trade idea, see below.             

TREASURIES

The Implied vol vs yield spread continues to defy logic. There’s no justification for the Bund implied to be at 4% when the yield’s @2%. Historically, this spread should be at about levels. Still, in a fear-driven market, this makes perfect sense. Which makes for trade opportunities, see below.

TRADE IDEA

One trade idea – and a safe one - is to place butterflies and condors at technical support/resistance levels. This is a market maker’s trade (because I was one): you anticipate vol coming off for the next several days, with near-term technicals to hold. You are selling options premium but you have the protection of covering options. And with vol as high as it is, these spreads are cheap. For more discussion, please phone or email.

‘Til next week,

 lenny@lennyjordan.com, in London at +44(0)7905589249