The Moon and the Sixpence

NEU Update

2009-09-18T02:31:00.000-07:00

The $81.90 bid got hit and NEU promptly took off on increasing volume. Watch it around a hundred. Is the volume buying it or selling it?

2009-08-26T01:45:00.000-07:00

NewMarket Corp., nice breakout, strong volume, $81.90 bid.

Iconix buy point

2009-08-25T15:35:00.000-07:00

Hey buy point of $18.40 from a pretty flat base. Strong volume on a break out would be a really good sign. As always use a tight stop below entry.

Snow Creek

2007-05-04T01:57:00.000-07:00

Triquint Semi

2007-03-21T03:49:00.000-07:00

Ater seven years, TQNT is finally looking good again. Here's a 10 year chart:
It was quite a ride during that red hot blowout year, and even more so for those that got too attached and didn't know the music stopped. Ouch.

But that trade is history. This one is new. Two-year chart:
Of late things seem to be firming up. Let's keep this just between you and me.

The old P-coast lives

2007-01-19T03:03:00.000-08:00

Nina Mehta on the coming shakeout among options exchanges in the U.S.

She sees two factors which give an advantage to the NYSE and the ISE: deep pockets and a scalable trading platform.

There are two reasons behind the NYSE threat, according to Perfumo. First, NYSE can afford to buy another exchange-and the CBOE is preparing to go public. And second, NYSE has a scalable trading platform, which allows for consolidation. Without a scalable electronic platform, consolidation makes little sense.

"Clearly, New York wants to increase its market share and may have to buy an exchange and merge it with the P-Coast," says Meyer ("Sandy") Frucher, chairman of the Philadelphia Stock Exchange. "If Nasdaq wants to get into the game, they will have to buy somebody as well."

Repetto calls NYSE Arca Options a "new competitor with deep funding." Its recent aggressive fee reductions for market makers are a sign of its ambition.

The old PCX trading floor in San Francisco once on it's last legs, is alive and well under the NYSE banner.

Checking yesterday's IBD, the NYSE Arca (PCX) trading volume was solid with about a twenty percent share among all the exchanges. They were number one in call volume, with 1.8 million contracts traded there out of 6.8 million total. That never happened in the old days.

Hustle and Flow

2007-01-15T03:59:00.000-08:00

A briefing from cnn on the exchange wars:

That deal sparked a wave of consolidation -eat or get eaten. The name of the new game is volume: The more trades flowing through your electronic platform, the more revenue. Now the mega-exchanges are each trying to dominate its niche of global trading. The result will be monopolistic empires that keep adding complementary pieces. "The way I think about it," says S&P analyst Jason Willey, "it's a huge land grab."

The barriers to entry are high so this industry will give you few to choose from if you want to own a piece of it. It's all about the stodgy SRO's going public, being disassembled and rearranged; creative destruction.

Hewlett Packard

2006-12-25T01:41:00.000-08:00

Hpq. A good buy at the fifty-day moving average (blue line). Continuation of the uptrend with support at forty. They must like this Hurd guy.

Microsoft

2006-12-25T01:31:00.000-08:00

Msft. resistance just above thirty. Once it breaks through on volume, thirty will become support. Release of Vista just around the corner in January. You'll be competing with institutions to buy it at the fifty-day moving average (blue line).

American Express

2006-12-25T01:21:00.000-08:00

AXP. Sixty; resistance becomes support.

The Gift of October

2006-10-06T02:40:00.000-07:00

Hey volatility is low as the market continues to rally, and it will stay low as long as stocks rise. But will it go much lower than this? Probably not.

With vol low, options prices--both calls and puts--are cheap. So making directional bets on a stock by buying options, is less expensive than normal.

Betting on the downside by buying puts has the added benefit that when stocks go down, implied volatility goes up, kicking up the prices of the puts higher than you would've expected. So if the rally has given you some profits to protect, consider buying the puts to hedge.

October can be full of nasty surprises.

Let that be the other guy's problem.

This Ain't no Party...

2006-06-08T02:44:00.000-07:00

Fleckenstein gets it right in his May 23 article on MSN:

...For now, folks may actually think that the Fed will fight inflation. So, days like last Wednesday lead to "Fed's gonna be tough" talk. Which is why metals can go down in a session when inflation fears are running on the high side.

Setup for metals' gain, stocks' pain

Nevertheless, as the vise tightens down the road -- i.e., inflation is still not under control, but the economy is clearly slowing down -- you can be sure that the Fed will opt for rationalizing inflation, in the (futile) hope of not presiding over a nasty downturn. That will be the moment in time when the metals (and foreign currencies) really go wild to the upside.
Meanwhile, I believe that the path of least resistance for equities will now be down in the short run. And when we get the next rally, I would expect it to fail, since I firmly believe that the top of this three-year-long bear-market rally has finally been seen.

Sell in May and go away. Especially during a mid-term election year. Rates around the globe are going higher; the equivalent of cutting the purity of a junkie's fix--someone out there is gonna start shaking. I wonder which hedge funds will be going belly-up this year.

We'll see how well Bernanke can dance when he is presented with the " this one is too big to fail" argument for Central Bank "intervention", i.e., print up billions of new money or credit in order to save chequed-pants multi-millionare hedge fund inbreds from taking one on the chin, and oh, by the way send the bill to Johnny blue-collar's children, so they have to drop out of college and learn "a trade" instead of attending Hops & Barley U. on the six year "undecided" plan. What a system.

Currencies markets are starting to get rocked. Bank of Korea surprised the markets and raised rates.

"With the Asian markets all slumping, recent bearish sentiment, which initially began with caution over more (possible) U.S. rate hikes, has gotten worse and worse," said Samsung Securities analyst You Sung-min. "The (BOK) rate hike was just one more on top of layers of negative factors."

South Korean banks were hit hard by the rate hike, fueling worries of a possible cooldown in South Korea's sizzling property market and concern over whether the economy is strong enough to sustain higher borrowing costs.

The losses came after stocks dropped on Wall Street Wednesday, extending investors' losses for a third straight session and pushing the Dow Jones industrial average below 11,000 for the first time since March 9.

Yeah, Central Banks around the world are tightening up, the Fed has been bumping up the Fed Funds rate for a while now claiming it will continue, and you want to be net long this market? How stupid are you?

At least wait till October. Until then, enjoy the volatility.

Gulliver?

2006-06-03T02:27:00.000-07:00

Apparently my prior post here on The Moon and the Sixpence has forced a lot of people to go public about the next step in the expansion of the NYSE, beyond Europe--towards Asia.

As long as they don't mention my HEx, we're cool.

NYSE Euronext, Inc.

2006-06-02T03:08:00.000-07:00

The deal is closer to being done.

If it happens, the NYSE will have a worldwide exchange reach of a 22-hour trading day, with exchanges in San Francisco, New York, Lisbon, Paris, Brussels, and Amsterdam.

The future of the Pacific Exchange in San Francisco just got a little brighter.

Now, if I could just get a little help with my own startup--The Honolulu Exchange. Perhaps the NYSE would eventually want to buy us out and add the HEx to it's collection. Remember how the NYSE got started.

Are you in?

A Bit Uncertain

2006-06-02T02:36:00.000-07:00

Just a picture of the recent spike in Nasdaq volatility. You weren't expecting a slow summer doldrum kind of trading season, were you?

Amex to Join the Living

2006-03-24T02:17:00.000-08:00

The Amex, faced with the question: "sink or swim?", changes it's mind and starts to paddle...

NEW YORK (Reuters) - The member-owned American Stock Exchange said on Thursday it intends to convert into a for-profit corporation and likely move toward an initial public offering -- becoming the latest exchange to revamp its structure as investor demand for the sector heats up.

Exchange Stocks Getting Spanked

2006-03-16T01:45:00.000-08:00

After big runups since their IPO's, these stocks take a needed breather to shake out some of the weak holders and form sound bases. From a Yahoo.Reuters story:

CHICAGO, March 23 (Reuters) - The shares of two high-flying financial exchanges, International Securities Exchange Inc. (ISE.N: Quote, Profile, Research) and CBOT Holdings Inc. (BOT.N: Quote, Profile, Research), plunged on Thursday in profit-taking and worries about competition.

ISE, the largest U.S. equity options mart, led the way as it continued a steep decline from its March 15 high of $52.84.

But CBOT finished as the day's biggest loser on the New York Stock Exchange after analysts at Jefferies & Co. said some profit-taking should not come as a surprise for the parent of the No. 2 U.S. futures mart.

In the above article Frederic Ruffy comments that the NYX Group, which now includes the Pacific Exchange, could become a serious competitor for the ISE.

The ISE makes note of the NYX and it's potential for drawing away some of it's order flow:

"Consolidations and alliances among our current competitors may create larger liquidity pools than we offer. The resulting larger liquidity pools may attract orders away from us, leading to a decline in our trading volumes and liquidity, which would lead to decreased revenues," ISE said.

ISE also said that, with other exchanges now running hybrid open-outcry/electronic trading systems, "certain qualities of our market are becoming more common."

As competitors improve their market quality, "commoditization of electronic trading in the options industry may begin, which could lead to an increase in price competition," the company said.

Here is a quick look at the graphs for some of the exchange related stocks.

NYX, why look abroad?

2006-03-16T00:50:00.000-08:00

Is New York losing it's market share in financial capital to the rest of the world? Daniel gross says yes over at Slate.com.

According to the most recent monthly report from the World Federation of Exchanges, the NYSE and Nasdaq combined had $16.9 trillion out of the world's $41 trillion in stock market capitalization in December 2005, or 41.2 percent of the world's total. That's impressive. But it's down sharply from January 2001, when the NYSE and Nasdaq combined held 48.4 percent of the world's stock market capitalization.

One of the reasons cited is Sarbanes-Oxley. A merger with the LSE could help this once geographically challenged institution get around that. Financial centers throughout the world are in competition with each other to attract capital, not only with the technologies and services that they provide, but also with the regulatory environment that goes along with it.

If the managment at NYX is smart, they will be looking for a way to limit the risk that the same idiots who passed Sarbanes-oxley will be coming back with even more well-intentioned legislation in the future.

An LSE merger would be a good start.

In the minds of politicians no one ever reacts to the regulatory burdens that they impose.

In the real world it's hard to find anyone that doesn't.

Maybe there oughta be a law against that, too.

NYX Rival Bids for LSE

2006-03-11T03:41:00.000-08:00

From Reuters on Yahoo, the LSE rejected the Nasdaq's bid as too low as the NYX gets busy consolidating it's merger.

This was the third bid received by the LSE in 15 months and its rejection of Nasdaq's offer fueled speculation it might not be the last, with the New York Stock Exchange -- the world's largest stock exchange and Nasdaq's arch rival -- rumored as a potential buyer.

Nasdaq's approach comes just two days after the NYSE Group Inc. (NYSE:NYX - News), owner of the Big Board, went public by sealing its purchase of electronic rival Archipelago Holdings.

The competition for dominance of the International exchange market continues at a hectic pace.

But Repetto expects the NYSE to come up with a rival offer and thinks that among U.S. players the Chicago Mercantile Exchange Holdings Inc. (NYSE:CME - News) could be a "longshot" to put in an offer.

These newly public companies now have a pile of cash and their own stock, with which to buy other exchanges and catch their competition napping.

It's like a game of street basketball where the captains are picking their teams before the big showdown. Leaving the best players for the other guy to pick up could be the fatal mistake.

The Pacific Exchange's Future?

2006-03-08T04:00:00.000-08:00

What will become of the options trading floor in San Francisco now that it is owned by the NYSE? Carolyn Said, from the SF Chronicle:

Margaret Nagle, a spokeswoman for Archipelago, said the Pacific's electronic option-trading, which now uses a system called PCX Plus, will change to an entirely new electronic trading platform in the middle of this year, to be based on Archipelago's technology. "The new platform that we're rolling out includes there being a physical (trading) floor," she said.

In response to conjecture that the trading floor might close this year, she said: "I know nothing of any plans of it being phased out in the near future, meaning anytime this year. That would be news to me. My understanding was that the floor, I can't say will remain in place in perpetuity, but there are no plans to phase it out this year."

So far it appears that the NYSE trading floor will remain in operation along side of it's "Hybrid" electronic trading platform, so the management of the NYSE Group, NYX, must see at least some value in physical trading floors.

But then what does this quote from cnn.com mean?:

Thain has expressed confidence in the hybrid program and appears to be poised to take advantage of the exchange's newfound independence from its seat holders. The former Goldman Sachs president hopes to expand the NYSE's offerings to include derivatives trading, including equity options side-by-side with sales of the stocks themselves, as well as corporate bond trading.

Will they be traded side by side in New York, or San Francisco, or both?

If both, wouldn't that be redundant? Perhaps San Francisco will be allocated some underlying products and the New York trading floor, others. Perhaps San Francisco will get to trade all of the Nasdaq stocks along side of their options...

In the future, it's possible that floor traders could not only trade NYSE-listed stocks, but also those listed on the Nasdaq. With NYSE-listed stocks already electronically traded on Nasdaq, as well as Archipelago, the NYSE could not only retain some of its own market share, but also eat into Nasdaq's.

Or perhaps foreign equity products along with their derivatives...

Thain has also said he is still considering expanding the NYSE's operating hours in order to compete with European markets, though that has run into some resistance from traders on the West Coast, who are already in the office at 6:30 a.m. Pacific time for the opening bell.

Foreign exchanges trade some of our equities, perhaps we will be trading more of theirs in a bid to capture more worldwide order flow.

But what would be the impact on the Pacific Exchanges trading floor if the following happened?

Alternatively, the NYSE could go after the Chicago Board of Options Exchange or the International Securities Exchange in order to get a bigger piece of the options and derivatives trade.

If the CBOE was aquired perhaps the two floors could once again divide up the optionable stocks like the days of old and reduce the competion between them for the same order flow, loosening up the sometimes very tight spreads on the more actively traded options.

The one underlying certainty for the options trading floor in San Francisco is this, out from under the thumb of the stifling "public-institution" bureaucracy, it now has at least a chance of finding it's niche, getting an edge, and joining the world of profit driven innovation that has been whirling around it for the past twenty years.

Perceptions of Inflation

2006-03-04T04:47:00.000-08:00

Tom Au with a note on inflation, or rather, inflations.

China's foreign currency reserves too big?

2006-03-04T04:19:00.000-08:00

From a member of an advisory body to the Chinese government:

"China's foreign exchange reserve hit 818.9 billion dollars at the end of last year but what China really needs should be no more than 250 billion dollars," economist Xiao Zhuoji told the Shanghai Securities Times.

"The current (holdings are) way above actual needs," he said.

Chinese reserves should be cut by more than two-thirds from current levels, said Xiao, who is also a member of the Chinese People's Political Consultative Conference (CPPCC), an advisory body to the government.

When the biggest buyer of your bonds becomes the biggest seller, yields are going higher.

If this were to happen, you would have the American central bank driving up the short end of the yield curve, and the Chinese central bank driving up the long end.

Not much left for market forces to do. Maybe the ideologies of governing officials in the two countries aren't so far apart after all, at least where government intervention is concerned.

Silver ETF Coming Soon

2006-03-04T03:41:00.000-08:00

Silver prices moved above $10 a troy ounce for the first in more than 22 years buoyed by strong buying in metal and energy markets.

Traders said investors were also buying into the metal in the hope of a favourable US regulatory ruling on the launch of a proposed silver-backed exchange traded fund. Barclays Global Investors has filed with the Securities and Exchange Commission to list a silver backed ETF, which potentially opens up the silver market to new investors.

Continued at FT.com: Silver pushes to new 22-year high

China... Has a Dark Side?

2006-03-03T01:32:00.000-08:00

Hat tip: Tyler Cowen at Marginal Revolution.

If you are one of those very knowledgable people who are gung ho on China and can't wait to throw your 401k money into the latest China fund, you may want to take a look at this article by Minxin Pei at Foreign Policy, the mouthpiece for the New World Order establishment types.

Then again, if you've already sent your money to China, you may want to finish your lunch first, because after reading The Dark Side of China’s Rise you may not be able to swallow for an hour or so.

Pei steps past the piles of steaming hype, and takes a realistic look at the "engine of future world growth" to reveal the darker side of this neo-Lenninist state, where monopolies, corruption and one-party rule are the norm.

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.

Oh, and I know you don't want to hear about this...

But China’s tentacles are even more securely wrapped around the economy than these figures suggest. First, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country’s fixed industrial assets. Second, the state remains, as befits a quintessentially Leninist regime, securely in control of the “commanding heights” of the economy: It is either a monopolist or a dominant player in the most important sectors, including financial services, banking, telecommunications, energy, steel, automobiles, natural resources, and transportation. It protects its monopoly profits in these sectors by blocking private domestic firms and foreign companies from entering the market (although in a few sectors, such as steel, telecom, and automobiles, there is competition among state firms). Third, the government maintains tight control over most investment projects through the power to issue long-term bank credit and grant land-use rights.

China’s business cycle is therefore driven by Beijing. Private-sector firms have very limited access to finance or new markets. The state even dominates many ostensibly deregulated sectors, such as the brewing industry, the retail sector, and textiles. Of the 66 publicly traded retailers in the country, only one is private. There are only 40 private firms among the 1,520 Chinese companies listed on domestic and foreign exchanges.

While the rest of the world has been buying into the PR campaign of the Big Red Pig from the Far East, The Moon and the Sixpence is one of the few stalwarts who stand firmly on common sense.

No matter how much lipstick you put on her, she's still just a butt-ugly pig.

End of the Currency Carry Trade

2006-03-02T02:55:00.000-08:00

Ft.com's Steve Johnson reports that BNP Paribas' FX Strategy Indicator is turning negative on the carry trades.

Carry trades are simply borrowing money in a country/currency with low rates and lending it in a country/currency with high rates, capturing the difference.

The spread between the two rates is the source of profit, when it shrinks so does the payoff.

The U.S. dollar has been the beneficiary of the carry trade because of the higher yields available on U.S. debt securities. With the decline of the carry trade there will be less demand for the dollar.

These kinds of gifts to the market are often the result of central bankers attempts to evade reality by "liquifying" their economies and keeping rates artificially low in order to induce more economic activity and allow their politicians to stay in office for just a little while longer.

For example, rates in Japan were held down to zero while they attempted for years to end the deflationary spiral that was the consequence of their own prior action.

So while they created credit and pumped out new money 24/7, smart banks and hedge funds were borrowing that money for nothing and lending it to the U.S. treasury--and pushing up the dollar in the process. Note that the Japanese central bank was pumping it out hoping it would be spent domestically to the benefit of the Japanese economy and instead that money ends up financing the U.S. budget deficit thank you very much. No wonder their reflation attempts were not having the desired effects.

And that doesn't even count the direct purchase of U.S. dollars or government debt by their central bank held as foreign currency reserves.

The end of the carry trade? Don't worry about it, if history is any guide there will be ten more central bank freebies out there to take it's place.

NYSE Blog?

2006-02-28T05:26:00.000-08:00

Yup,

The NYSE has just started a blog. I don't think they've quite gotten the hang of it yet but we here at The Moon and the Sixpence would like to extend our warmest welcome, and offer our full veteran blogging support to this young upstart.

Three cheers for establishment propaganda! er, I mean the NYSE blog marketing campaign.

NYSE, The End of the Innocence

2006-02-28T04:40:00.000-08:00

After two hundred and thirteen years, the NYSE will finally join the rest of America as a capitalist--for profit--institution. On March 7th it merges with Archipelago.

Here's the Article from Bloomberg.

Through the merger it also joins forces with the Pacific Exchange, the equity options trading floor in San Francisco, an institution in desperate need of some new lifeblood. First step? Fire all of the old managers and then steam clean their offices before bringing the new leaders in.

Buying the PCX is like buying a fixer-upper, it's gonna take a litle cash and a whole lotta sweat equity to make the thing pay off.

Then again who knows if the management team of the NYSE itself is capable of running a for-profit corporation, answerable to shareholders and competing with other very aggressive exchanges? The first year will be crucial.

You boys better hit the ground running, or you may be the subject of the next takeover and house cleaning.

Capitalism is coool.

Fleckenstein on Bernanke

2006-02-26T04:30:00.000-08:00

New Fed chief Bernanke is talking tough, but Bill Fleckenstein isn't having any of it:

While in the Fed-words-in-lieu-of-action department, I heard from a knowledgeable friend who expressed surprise "that Ben expects investors to hold firm to the concept that 12%-plus growth in short-term credit and 8%-plus growth of M3 is evidence that the Fed has reined in its past accommodations." The Fed has, of course, not reined in its past accommodations, and, in my opinion, has no intention of doing so.

For the moment, though, some folks seem to think the Fed is actually tight and inclined to be tighter -- a notion that I find almost laughable.

Beyond Equities

2006-02-25T04:50:00.000-08:00

Think the interest in trading and investing in commodities is temporary? The big trading houses don't.

Here's Kevin Morrison at FT.com

“If you ask me again in three years time, I would say that the size of the market will have doubled again,” said Mr de Vitry.

An Austrian View of Fooled by Randomness

2006-02-24T02:45:00.000-08:00

James Sheehan finds common ground between Nassim Talebs Fooled by Randomness and Austrian economics.

Though Taleb was influenced by Hayek's The Road to Serfdom, he seems otherwise unaware of the Austrian critique of mainstream economics and the use of mathematics in economic theory.

This reminded me of a similar situation back in the eighties reading Michael Rothschild's, Bionomics. It too was a very enlightening book whose main theme paralleled the Hayekian ideas of spontaneous orders and the use of knowledge in society.

But it's author made not one reference to any Austrian thinker, apparently unaware that he was not exactly discovering virgin territory. Even a college dropout at minimum wage job playing Nattie Bumpo in the high sierras knew better.

Anyway, what's Taleb's main point, you ask?

It's this: you know less than you think you do, so don't sell those way out of the money calls or puts.

Taleb is a buyer and he's patient--and time, is on his side.

Nasdaq's Low Volatility Index

2006-02-23T04:55:00.000-08:00

With earnings season over it's laying down for a nap. Would someone pull down the shades and turn off the lights, please?

Government Fiction # 14708: The Savings Rate

2006-02-20T04:02:00.000-08:00

The news is replete with government supplied "data" on the economy. Frank Shostak at Mises.org isn't fooled by it. Are you?

Now, since it is not possible to quantitatively establish the status of the total of real goods and services, obviously various data like real income, real personal consumption expenditure, or real GDP that government statisticians generate shouldn't be taken too seriously. The data that are generated by means of mathematical methods is just a fiction.

Yet this fiction passes as the facts of reality, which allows economists to make comments with a straight face regarding the likely future direction of the real economy. The debate is often confined to the decimal point of the rate of growth. Thus it is debated whether the economy will grow by 3.1% or by 3.5%.

The fictitious data are served as a benchmark against which various economic theories are validated. Also, once it is accepted that it is "possible" to quantify the state of the real economy then one can also establish another fiction — the price level. This in turn provides the rationale for the importance of keeping the price level stable. And this in turn provides the justification that the central bank ought to navigate the economy towards the path of stable price level and stable real economic growth.

Red Help Lowers Rates

2006-02-20T03:26:00.000-08:00

An article on Bloomberg.com by William Pesek Jr. gives us a good idea about why our long term treasury yields are so low, and it has little to do with domestic "inflationary expectations" or "investors expecting a slowdown in the economy" or any of that other gibberish the experts blabber on about.

Foreign central banks buy a huge amount of these things; the Chinese are one of the biggest holders.

About $250 billion of China's reserves are in U.S. Treasuries. China's purchases ``put Pimco's Bill Gross to shame and contribute to low yields'' in the world's biggest economy, said Nouriel Roubini...

The press tends to hyperventilate over Gross's frequent comments about U.S. debt yields. The reason: He manages Newport Beach, California-based Pacific Investment Management Co.'s $90.6 billion Total Return Fund. Investors might be wise to pay more attention to where the really big money is: in Beijing.

Why do they hold foreign currency reserves, of which Treasury Bonds are a big part? According to Pesek:

Asia's currency-reserve arms race reflects two things. First, a desire to keep currencies from rising so that exports aren't hurt. Second, a determination to avoid a replay of 1997, when the region lacked ample reserves to fight speculators attacking currencies.

You should thank the commies for that low rate mortgage of yours. Their central bank is working hard for you.

It's Getting Warmer

2006-02-18T03:52:00.000-08:00

Bloomberg news gives us the latest on the inflation front:

Costs of intermediate goods, those used in earlier stages of production, rose 1.2 percent last month and are up 9.3 percent in the 12 months ended in January. Prices of raw materials, or so- called crude goods, fell 0.5 percent and were up 23.6 percent in the last 12 months.

Crude goods prices are up 23.6% in twelve months! These are the goods that are furthest away from the consumer in the structure of production, the higher order goods. They are used primarily to make the capital goods which, themselves are needed to make and move lower order goods, consumption goods, to there final destinations.

Among other characteristics they are very sensitive to the business cycle. You might even say that they are the clearest evidence of it.

When the boom begins they rise to the sky and everyone is feeling groovy. When the inevitable bust appears, they get crushed the worst and no one will touch them. But you don't buy crude goods so why should you care, right?

Faced with rising raw-material costs, manufacturers are raising prices. Caterpillar Inc., the world's largest maker of earthmoving equipment, said last month that fourth-quarter profit surged 54 percent, helped in part by higher prices. The company raised its earnings forecast for this year and announced a price increase of as much as 5 percent, effective Jan. 1.

...and on down the chain of production they are passed, higher prices. But they would not be sustainable without the artificial expansion of money and credit by the central banks, the Fed in the United States. A price increase here would be offset by a price decrease there; no general rise in prices would be seen.

With all the talk about the Fed focusing in on the fixing of the Fed Funds rate very few people these days keep track of the changes in the money supply. Doug Noland from the Credit Bubble Bulletin gives us the latest Fed data:

Broad money supply (M3) rose $9.3 billion to a record $10.280 Trillion (week of Feb. 6). During the past 38 weeks, M3 has inflated $654 billion, or 9.3% annualized. Over 52 weeks, M3 has expanded 8.2%, with M3-less Money Funds up 8.3%. For the week, Currency added $0.4 billion. Demand & Checkable Deposits fell $26.4 billion. Savings Deposits jumped $24.2 billion, and Small Denominated Deposits increased $2.6 billion. Retail Money Fund deposits slipped $0.6 billion, while Institutional Money Fund deposits rose $11.0 billion. Large Denominated Deposits declined $11.0 billion. Over the past 52 weeks, Large Deposits were up $264 billion, or 23.3% annualized. For the week, Repurchase Agreements jumped $12.6 billion. Eurodollar deposits declined $3.5 billion.

Bank Credit gained $2.8 billion last week (5-wk gain of $103bn) to a record $7.591 Trillion. Over the past 52 weeks, Bank Credit has inflated $676 billion, or 9.8%. For the week, Securities Credit declined $6.1 billion. Loans & Leases were up 12.0% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 15.3%. For the week, C&I loans declined $3.6 billion, while Real Estate loans expanded $8.9 billion. Real Estate loans have expanded at a 10.9% pace over the past 20 weeks and 14.5% during the past 52 weeks. For the week, Consumer loans were about unchanged, and Securities loans increased $7.6 billion. Other loans declined $4.3 billion.

Total Commercial Paper dropped $14.5 billion last week to $1.675 Trillion. Total CP is up $25.4 billion y-t-d (7wks), while having expanded $241 billion over the past 52 weeks, or 16.8%. Last week, Financial Sector CP borrowings declined $13.5 billion to $1.537 Trillion, with a 52-week gain of $247 billion, or 19.2%. Non-financial CP declined $1.0 billion to $137.7 billion, with a 52-week decline of 4.0%.

Now I ask you, do those annual numbers leave you with the impression that we are living in a restrictive monetary environment?

Take monetary expansion down to zero and let rates go where they will, then we'll call it neutral.

Until then the business cycles will continue.

Big Cap Twenty

2006-02-08T01:17:00.000-08:00

This weeks IBD big cap twenty list is out, you can see the first ten here and the second ten here.

Looking it over, there are a few things that one might notice. First, some of the biggest leaders have fallen off since the earnings season began. As IBD points out, Apple, Google, Ebay and Yahoo are gone. Mainly taken out by huge price corrections, and from here on out long stock holders will probably be using rallies in these stocks to unload more of their holdings because they know the short term party is over.

Second, the list is dominated by oil and commodity related names: SLB, HAL, PCZ, OXY, BHI, TLM,WFT, NEM. Also up are transports and big capital builders: NSC, CAT, BNI, CNI; and the big money houses of: LM, MER, LEH, and GS.

Techs are barely represented with BRCM and ADBE.

What's the point, you ask?

It's looking more and more like the beginnings of the Mises-Hayek Austrian business cycle. Money and credit is created out of thin air by the central bank providing "liquidity" to the economy and lowering the complex of interest rates below what would have existed without their intervention.

These false signals induce capital investments that otherwise would not have occurred, the boom phase, and lead to malinvestments which will eventually have to be corrected by business failures and unemployment, the bust phase. There are no free lunches, as Uncle Miltie has said.

But the desire in them to maintain political power is overwhelming. So the beat goes on...

Intro to Polycentric Law

2006-02-04T01:56:00.000-08:00

I know you've been looking around for brief explanation of Polycentric law. Tom W. Bell offers one up here.

Economists since Adam Smith have argued that competition in production serves consumers' interests, while monopolies tend toward sloth and waste. Gustave de Molinari, editor of the Journal des economistes, was probably the first legal theorist who dared to ask why this should not be as true of the law as it is of apples, cotton, and iron. He argued that under the state's monopoly of law " Justice becomes slow and costly, the police vexatious, individual liberty is no longer respected, [and] the price of security is abusively inflated and inequitably apportioned. . . ." He therefore advocated a non- monopolistic legal system and projected that once " all artificial obstacles to the free action of the natural laws that govern the economic world have disappeared, the situation of the various members of society will become the best possible."

Thanks to Stefan Karlsson for the pointer.

The Trade Deficit Story

2006-02-01T04:26:00.000-08:00

Frank Shostak at mises.org explains why the trade deficit is not a threat to the economy but the central bank is.

Our analysis doesn't imply that the US economy is in healthy shape - far from it. However, what we maintain is that the key factor behind the erosion of US fundamentals is not the widening in the trade account as such, but rather the policies of the Fed. During the reign of Alan Greenspan between August 1987 and December 2005, money AMS has increased by 173%. Greenspan's strong monetary pumping was accompanied by a massive artificial lowering of interest rates. The federal funds rate was lowered from 6.5% in 2000 to 1% in 2003. Obviously then such reckless policies must have severely undermined the process of real wealth formation. However, focusing on the trade account statements only diverts the focus of attention from the true culprit behind the erosion of US economic fundamentals.

The fear of a growing trade deficit is used to bully protectionist legislation through Congress, the threat of which could easily disrupt the economy and send the market into a freefall.

Then again, if you happened to be long puts, that would be a good thing.

VXN: Nasdaq Volatility Index

2006-02-01T04:14:00.000-08:00

On the rise through January. What it means is that prices for both calls and puts on the nasdaq 100 stocks have been on the rise.

A number of worries for the market are out there including earnings season, the FOMC meeting, oil and other commodity prices continuing to go higher, and Iranian sanity problem, to name a few.

CBOE Plans New Exchange Index

2006-02-01T03:51:00.000-08:00

The CBOE follows the lead of The Moon and the Sixpence and announces plans for an index of one of the fastest growing new industries in the country: trading exchanges.

The index "will provide an essential composite look at this new market, and will provide the benchmark that investors and analysts will use as the indicator for this emerging business sector," said CBOE Chairman and CEO William Brodsky in a statement. He expects options and futures to be listed on the index soon.

The Index symbol wil be "EXQ".

Trading and Innovation

2006-01-31T00:52:00.000-08:00

Trading is a boom industry. Here are the graphs of some of the more interesting publicly traded trading related companies in the United States.

Look at the Chicago Mercantile Exchange, CME. After forming an eight week base on top of a long run up, it still has the strength to break out to new highs above $400.

The Chicago Board of Trade, BOT, an IPO from last year is also doing well. The quick money is gone. It may now be in stronger hands and under accumulation. Yahoo Finance shows that The Vanguard group is the only significant holder but a few other big funds have started to take positions at the end of last year.

Both the Arca Exchange, AX, and the Nasdaq, NDAQ, have shown big volume rallies off of their moving average supports with similar chart patterns.

AX of course owns the Pacific Exchange and is merging with the NYSE.

Do you want a link to most of the exchanges around the world? I found a pretty good one here.

This stodgy old industry is becoming more dynamic as new technology forces its way in, and those who refuse to innovate, get bought out or die.

Competition from abroad forces regulatory changes in the United States and elsewhere that never would have occured without it. Those who benefited from the lack of competition in the past would have watched their order flow dwindle down to a trickle.

The Self Regulated Organization, SRO, model is a failure. A P&L is crucial in decision making. It forces institutions to serve real people, and rewards the best for doing so efficiently.

This is an industry that is slowly being released from its bureaucratic bondage, into a world where it has more to gain from tech innovation than any other. These firms will come to realize that they are nothing more than networks.

An exchange used to be defined by its location. But no longer. The concept of an exchange is being released from its earthly location. If the Pacific exchange abandons it's trading floor in San Francisco and goes virtual with all of its market makers participating electronically, is it still the PCX? The customer may not even notice a change.

...and you are holding IBM in your IRA?

Genius.

Time's Up

2006-01-30T03:43:00.000-08:00

According to the Stock Trader's Almanac, the end of January signals the end of the best three months of the year for stocks. The average gain for the Nasdaq since January, 1971 is 3.7%.

For the S&P 500, the probability of an up day today is about 67%, but tomorrow is historically one of the best trading days of the year with the probability of an up day at 81%.

It also happens to be the day of the FOMC meeting.

Bernanke's coming, look busy.

Half-Point Rate Increase from the Bernanke Fed?

2006-01-28T02:11:00.000-08:00

Jim Otis over at Prudentbear.com speculates on one rate manipulation strategy for new Fed Czar Bernanke.

As an exercise for the students, compare and contrast the results from raising a boring quarter point now and another quarter point at the next meeting, versus a bold half point increase now and no increase at the next meeting. The following Fed meetings will show the timing value of a sharp increase in rates now. By then, the media will talk about little more than the dreaded deflation toward which our economy is surely falling, and the Fed will be able to cut rates by a half point at each of the next few meetings to protect us from the dastardly deflation fate which would otherwise crush our economy (despite the contrary evidence offered by energy and metals prices which will be setting new record highs). Those sharp rate cuts over the spring and summer, combined with the ever increasing M3 money supply which will no longer be published, will have our economy running at full speed again by late fall, and will push stock prices to record highs. Coincidentally, that will put voters in a good mood by November.

If you were the new head of the Fed how would you play it?

GM, Kerkorian Outed by Matias

2006-01-24T03:23:00.000-08:00

In my last post I noted that GM showed unusual strength on that big down day on Friday. Evidently much of that strength was due to Kirk Kerkorian's stealthy accumulation of More GM shares on the cheap, raising his stake to 10% of the company.

Kerkorian, rumored to be a dedicated reader of this blog, The Moon and the Sixpence, realized he'd been outed and decided to go public with his activities.

Note the last three bars (elongated) are the Monday, Tuesday and Wednesday just past. Friday, which on most other stock charts is a big red slash, is an almost nonexistent dot on GM's chart.

Why is he buying again?

His latest move may indicate he believes GM is listening to his ideas for improving the company. In a speech to Wall Street analysts this month, Kerkorian's top aide Jerome York called on GM to cut its annual dividend in half and set profitability goals and a timetable for achieving them.

York said Kerkorian was interested in buying more GM shares and was optimistic about its recovery efforts, but he said it was time for GM to get into a "crisis mode."

GM just broke it's intermediate term downtrend. The company will report quarterly and full year results today.

Dow Check

2006-01-22T04:09:00.000-08:00

Here are the graphs for most of the Dow stocks.

Of the bunch, McDonalds is the only one that had a strong up day on Friday, when most of the market got whacked.

T, Pfizer and Merck showed mild relative strength. And surprise surprise, GM may be forming a bottom while no one else is paying attention.

Nasdaq Check

2006-01-22T04:01:00.000-08:00

With the QQQQ as a proxy, on a 3-year chart showing strong support at $40. Let it come in, then if the market action starts to look better, get long.

INGR Closing

2006-01-20T00:27:00.000-08:00

We are short the Jan 45-50 put spread which means we are short the 50 puts and long the 45 puts. On expiration both will go to parity at the end of the trading day. Since the stock is around $49.50, parity for the 50 puts is 50 cents, and for the 45 puts zero.

All we really need to do is buy back the short 50s before the close.

Assuming that the market will be neutral, the stock should be drawn to $50 a share intraday and when it is, those 50 puts will have little value--their price will drop. So when the stock makes a run up through fifty, we should buy them back. Going into the morning let's keep a 20 cent bid in mind. But unless the stock runs up big, we will buy them back by the close.

To remind you, the opening trade was selling this put spread for $1.90. Let's see how well we do closing it.

AAPL legging Out

2006-01-12T22:41:00.000-08:00

Apple, we'll be an $.85 bid on our Jan 80 puts to close. If it trades, we'll still be long the Jan 75 puts from the spread we sold on Monday.

Quick Charts; Oil and Exchanges

2006-01-12T03:48:00.000-08:00

Here are a few good oil related stocks and exchange and trading related stocks. We'll need them in the future.

CMED Out

2006-01-11T04:30:00.000-08:00

Just as I thought, the stock tried to punch through the $40 mark, as you can see on this intraday chart, but failed and closed down.

Fortunately we had a $5.80 offer out on the Jan 35 calls which got taken out on the stock's run up, and we then closed out the other part of our vertical, the short Jan 40 calls, to close.

Bought for $1.50, sold for $3.60.

$210 profit per spread on the initial $150 investment.

CMED, Legging out

2006-01-11T03:32:00.000-08:00

We paid $1.50 for the CMED Jan 35-40 call spread--buying the Jan 35 calls and selling the Jan 40 calls--and since the stock has met our expectations we are looking to get out as the stock hits a ceiling at $40.

But CMED presents a problem common to stocks with illiquid options markets; the bid-ask spread is wide and we don't want to give that much money away.

On tuesday the stock closed at $39.41, and the Jan 35 calls, the part of our spread that we are long, was $4.60 bid, at $5.40--$.80 wide. Too wide.

We'll put out an offer to sell this Jan 35 call at $5.80 and see what happens. Why?

If the rest of the market is neutral we can bet that CMED will make another attempt at crossing above $40, even if it does not close above it. When it does make the run, those Jan 35 calls, which are deep in the money, will move up almost as much as the stock itself.

So if the stock moves up the required $.60 to hit the $40 mark, the calls should move up, let's say $.50. The $5.40 offer on the exchanges will rise to $5.90 uncovering our offer at $5.80--and we will become the best one; the next to sell to those momentum call buyers.

Even if the professionals keep lowering their offer to remain the best one, the stock may continue to rise and they will be forced to fade and maybe buy our call themselves in order to get us out of their hair.

Once we sell the 35 call we can pay the offer on the Jan 40 call or work out of it, and we will be out of the spread.

In the real world you can react to the market in real time, but it is always good to go into the trading day with a plan. As old Gomp used to say "ya've gotta have a plan". Of course that always included a sixer of King Cobra...

STJ Missed

2006-01-07T02:45:00.000-08:00

Do you like apples?

Well I turned around and wasn't paying attention to STJ for a few days while it came back in to $50 and support at its 50-day moving average and so I missed my chance to sell the Feb 50-55 put spread for fat cash how do you like them apples?

AAPL Trade

2006-01-07T01:56:00.000-08:00

AAPL Jan 75-80 put spread let's hypothetically sell it at a $3.20 limit. If the stock comes in closer to $75 during the day (mon.) it might get taken. The stock should find support @ $75 after it broke through and closed above resistance there.

As we've noted before, vertical spreads have a limited profit and a limited loss. To sell a Jan 75-80 put spread, you have to sell a Jan 80 put and buy a Jan 75 put. The difference between the two prices is what the spread trades for, if we sell it, someone else buys it.

Then net amount of money goes into our trading account and sits there until we close out the trade by buying the same spread back. Hopefully for a lot less than we sell it for if our offer gets taken.

Stay tuned...

China Shifting Away from the Dollar?

2006-01-06T02:43:00.000-08:00

If so, the dollar gets weak and long term bond yields rise.

Economists estimate that more that 70 per cent of the reserves are invested in US dollar assets, which has helped to sustain the recent large US deficits. If China were to stop acquiring such a large proportion of dollars with its reserves - currently accumulating at about $15bn (EU12.4bn) a month - it could put heavy downward pressure on the greenback.

Goods imported to the U.S. will themselves become more expensive, and will no longer have as much of a dampening effect on domestic prices here, paving the way for a "surprising" uptick in future CPI numbers, including the phony "core" rate of inflation.

However, according to Stephen Green, economist for Standard Chartered in Shanghai, although the language was "vague", Thursday's statement was the first time Safe has publicly indicated a shift away from dollar assets.

"It is a subtle but clear signal that they are interested in moving away from the US dollar into other currencies, and are interested in setting up some kind of strategic commodity fund, maybe just for oil, but maybe for other commodities," he said.

And their appetite for commodities from around the world will continue to grow. Thanks to prudentbear.com for the pointer.

Under the Skin, All Central Banks are Alike

2006-01-05T05:19:00.000-08:00

On the Prudence of China's central bank, again from Bloomberg.com:

"The People's Bank of China plans to restrict growth in M2, the broadest measure of money supply, to 16 percent this year, the central bank said on its Web site, citing an annual working conference held yesterday."

And Citigroup's best chimes in...

``The M2 target is in line with the aim of having a healthy and stable policy,'' said Huang Yiping, Citigroup Inc.'s Hong Kong-based chief Asia economist.

He makes it sound so easy...

``The M2 target is in line with the aim of having a healthy and stable policy,'' said Huang Yiping, Citigroup Inc.'s Hong Kong-based chief Asia economist. ``We aren't expecting any big tightening moves until inflation picks up and becomes a risk.''

China's consumer prices rose 1.3 percent from a year earlier in November, compared with a 1.2 percent gain in October. Inflation has eased from a high of 5.3 percent in July and August 2004 after the government clamped down on bank lending to industries such as steel and real estate.

It will be fun to watch all of this unfold.

No Inflation Here

2006-01-05T04:42:00.000-08:00

"Inflation? What inflation? Didn't we tell you the core CPI was low--nothin' you needed to worry about?"

Yeah, sure.

Another piece by Bloomberg (Commodities rise to Record...) in the growing body of evidence, that in spite of the 13 headline-capturing rate hikes by the Fed, it has actually been a prolonged period of easy money.

The core rate of inflation is only two percent, you say? Man, you are well trained!

From a story over at the Financial Times (FT.com), metals prices continue to surge.

More to follow...

AAPL, Bite It?

2006-01-04T03:54:00.000-08:00

While it's better to wait until a stock is trading near it's 50 day MA and basing for six to eight weeks, watch AAPL if it closes above $75 on strong volume. You may get paid off for taking a bite.

Go East Young Man

2006-01-04T03:43:00.000-08:00

Think the U.S. is the leading growth market for retail equity derivatives? Think again. Think kimchi and...well, read on at FT.com.

Is the Alleged Tight-Money policy Over?

2006-01-04T03:34:00.000-08:00

From Bloomberg:

The number of rate increases needed to control inflation ``probably would not be large,'' yesterday's minutes from the Fed's December policy meeting showed. The ``measured'' phrasing was retained to avoid any suggestion of bigger rate increases, the central bank said.

No wonder they want to get rid of M3, managing 'inflationary expectations' is half the fun of it.

Market in the Rear View: Looking Forward

2005-12-28T00:46:00.000-08:00

Using the qqqq as a proxy for the stock market, here is a two-year weekly chart showing the nasty fall the market took at the beginning of last year; dropping about 1/8th of its value in the first three months of the year and then using the Spring and the Fall to recover.

$40 has been the key level during this period for the q's, providing resistance to the upside, and will also provide support, when the stock starts to break lower.

This last end-of-the-year rally has been low on volume, and looks to be running out of steam. The return to the $40 level for a test will not be far off.

Short rates have risen and may continue to do so as the Fed attempts to fight the very real threat of rising prices, i.e. "domestic dollar devaluation"; a problem which was created, of course, by the Fed itself.

The yield curve has inverted, increasing the odds of a recession next year. An inverted yield curve simply means that it no longer pays banks and other financial institutions to do what they do: borrow short term money to lend it long term. It's selling something for less than you buy it for, over and over again.

When lending is unprofitable, the boss hits you over the head and tells you to knock it off. So all sorts of productive activity doesn't get financed and that means it doesn't happen. Business slows. Bubbles burst. people feel poorer.

What could prevent a recession from happening next year?

The always easiest answer is that the Fed could return to her old ways and start pumping it out again like the drunken prom queen she is. Stop kidding us honey, you know you love it!

Another very real possibility is that some kind of tax reduction legislation gets pushed through sparking another growth cycle with an unexpectedly big market upside.

The establishment fears deflation like a liberal fears virginity; odds are, they'll do whatever it takes...

Greenspan: The Trailer...

2005-12-27T21:56:00.001-08:00

Stefan M.I. Karlsson, like Murray Rothbard before him, isn't pulling any punches when it comes to Alan Greenspan and his legacy.

"...apart from inflation and economic imbalances, the defining characteristic of the Greenspan Fed has been its dishonesty. We have already seen how Greenspan claimed to have mimicked gold standard conditions. Moreover, instead of admitting how he was responsible for the tech stock bubble through the creation of moral hazard and suppression of interest rates, he blamed the bubble on "irrational exuberance." And instead of admitting his role in creating the housing bubble, he denied that there was such a bubble. Later, when he admitted that the housing bubble was real, he spoke out against it as if he had nothing to do with having created it in the first place."

A Low Inflation Kind of Year?

2005-12-21T02:29:00.000-08:00

The Labor Department tells us that we actually experienced Deflation in November--consumer prices dropped by 0.6%.

Bill Fleckenstein is approriately skeptical about the accuracy of the official "inflation" numbers put out by our public servants in Washington, D.C.

Fed Abandons M3: what's up with that?

2005-12-18T03:44:00.000-08:00

John Williams, at prudentbear.com, has some suspicions about the central bank's ending its publication of the broad monetary aggregate M3. What are they trying to hide?

Sean Corrigan over at the Mises.org blog takes an even bigger swing at it, foreseeing dire straits for the dollar and consequently much higher rates for the long bond.

On a separate note, here's a monthly 5 year chart of the anti-dollar, i.e., gold:

Review: St. Jude Medical

2005-12-17T03:55:00.000-08:00

STJ gave us a freebie, so we might as well take it and run.

We sold the Jan 45-50 put spread at $2.75 when the stock was trading at $47.75; now that the stock has gapped up quickly over the $50 mark up to $51.75 The put spread is $.70 bid, at $.85.

We'll buy it back for $.80 and we are out of the trade with a $1.95 profit ($195 per put spread).

We'll wait for the stock to come in again before taking on a new position. Volume is still way positive and the uptrend should continue. Watch for support at the 200 day MA.

Stock: China Medical Tech

2005-12-17T03:05:00.000-08:00

CMED looks like it is resting before a strong move in one direction or the other. In the month of December the stock has quieted down and has found support above its 50 day moving average. But when it does move, will it be to the upside or downside?

The big reversal day in late November showed active sellers overwhelming the momentum buyers and bringing the stock price down to a more moderate rate of increase. But the uptrend is unbroken and a pullback was due. Now that the expectations for easy money have been diluted, the volume patterns show the stock is still being accumulated.

CMED is also listed in IBD's "New Buys of Top Performing Stock Funds" for November, meaning that some smart institutional money is buying it.

Furthermore, at least through the end of the year, we are in a very positive period for the stock market and so we ought not to bet against the upside.

I know what you're thinking: "let's get long the Jan 35-40 call spread for about $1.50 and see what happens".

Okay, good call. You're getting better at this.

Stock Watch: INGR

2005-12-05T03:43:00.000-08:00

This is another strong stock with high Investors Business Daily ratings. It's uptrend continues with its current consolidation. Institutions would rather not buy a stock too far away from its fifty day MA so they often refrain from their planned accumulation when the stocks price gets too far away.

Now the stocks historical volatility has come in from 28 down to 18 but the implied vol in the options market is still up around 26.

Since we think the stock is going up and vol is high, we need to get long by selling premium. The preferred method is selling put spreads, rather than naked puts which leave us open to big losses.

The INGR Jan 45-50 put vertical is fair at 1.90--selling the Jan 50 put @ 2.40 and buyin the Jan 45 put for .50.

Let's sell the spread there and watch.

Example: Selling an STJ Put Spread

2005-11-14T04:01:00.000-08:00

St. Jude Medical is a company with strong fundamentals in a solid group, and it has every reason to be in an uptrend. It formed an eight week base starting in August and broke above the buy point of 47 1/2 mid Oct. and up to 52, where it sold off and has returned to the 200 day moving average holding at 47 1/2. So how should you bet it?

Since the stock is still in an intermediate uptrend we look for a time and place to get long. The safest place is at the support of its long term averages when the stochastics are low and turn up, in this case when the williams% drops below -80, then heads back above it.

One way to make a bet that this stock will go higher from here is to SELL a put spread.

When the stock goes higher, the put spread will get cheaper. You can then buy it back at the lower price; or even better if the stock has moved high enough, let the price of the put spread go to zero at expiration and just pocket the money from the original sale.

The best thing about vertical spreads is that your losses are limited.

If you use strikes that are 5 points wide, like the STJ 45-50 put spread, its value will always be between $0 and $5. If you bought it for $1, the most you could lose would be $1; if you sold it for $1, the most you could lose is $4.

So let's look at the STJ Jan 45-50 put spread. With the stock at about $47.75, this put spread is trading for 2.75, or $275 apiece. Selling it there would put $275 into your acount now and if STJ went over $50 and stayed above it at the Jan expiration of those options, you would simply keep the money.

If STJ went below $45 and stayed there at the Jan expiration, you would lose the $275 plus another $225 of you own cash because the price of the put spread that you sold for 2.75, would go to 5. But you can buy it back at any time before expiration to get out of the trade, either to capture a profit or to keep from losing more.

Now with STJ in an uptrend and the stochastics about to turn up, let's paper trade the put spread, selling one at 2.75.

We'll watch it and update in the near future.

Recent New High in the Q's

2005-11-13T03:06:00.000-08:00

Here is the weekly chart of the Q's. A new high, yes, but where is the volume? over the last dozen weeks the volume was on the downside and now in the new rally the up weeks are tainted with modest trading activity.

Buying activity did pick up underneath the 50 day moving average, giving support there, but so far aggressive buying has been absent. If this is the start of the rally season, shouldn't there be more people in attendance? Hmm.

Okay, I'll keep a wait and see attitude. But the Fed rate hikes do continue, and this is the first year of the Presidency, classically the poorest performing of the four year Presidential cycle as the Fed tends to pull the punchbowl away after their election year manipulations have done their trick.

But rally time is rally time, and the market is showing better and broader leadership this time around.

The rotation has been out of the oil and housing stocks and into certain retail, financial, medical and transport stocks. More to come on the individual winners in the near future; stay tuned.

Real Estate Futures to Trade at the CME

2005-11-11T01:20:00.000-08:00

Set to debut in April at the CME, this futures contract will be "based on the median home price in ten U.S. cities".

The exchanges are continuing to offer new products in an effort to compete with newcomers for order flow. Some have gone public already, and more will surely follow. Let's go to the charts to see how they're doing.

The ISE is an all electronic options exchange here in the U.S. in competition with the five others, four of which are floor-based. It has run up about 30% in the last month, and is at risk of a little correction as those holding paper profits might be quick to take some off the table. But the volume shows big accumulation and the stock is a great bet for the long haul. A good buy around $27 1/2 if it comes in.

The Arca exchange has already started to come in after a quick runup from $40 on strong volume. As long as it continues to act well, it would be a great buy at $45, at the 50 day moving average.

The small group of publicly traded exchanges, which includes BOT, NDAQ and of course the CME, will continue to innovate and grow as public firms. They should be considered for the trading vehicles that they are, and also as good investments.

Big Cap Stocks of the Week

2005-11-10T01:02:00.000-08:00

Here are the charts of the highest rated big caps according to Investors Business Daily, based on their proprietary composite ratings.

Motorola looks great with strong volume on the up days, a convincing break above its 200 day moving average, and a methodical base building process as it approaches the break out point at $24. It would be best if it had one more shake out to form a handle, before the big volume break out to new highs.

St. Jude Medical is also in an orderly uptrend, with the big volume days on the upside. It is one of the leading stocks in the strong medical sector and is showing good action after its break out at $47 1/2. A break above $50 with the continued support of its 50 day average could leave this stock a longer-term winner.

Norfolk Southern is in the very strong transports sector, has broken above a short-term base at $41, and shows the signs of volume accumulation and support in the moving averages.

The big caps tend to be less volatile, have a lot of liquidity, and have very active options markets behind them, leaving many ways to gain from their movements.

Now go forth and prosper.

Broad Market Indexes

2005-11-09T02:51:00.000-08:00

Here are the latest 6 month charts for a quick look at the state of the stock market.

Notice the recent run up in the Dow Transports and the flatline of the utilities during the Bull of the last few weeks. What does that tell you about the markets expectations for interest rates?

Utilities are one of the most rate sensitive sectors of the stock market. They don't do well when interest rates rise because their earnings are strongly affected by the cost of borrowing money; they are heavy debtors. When that cost is low, their earnings are high, when that cost is high their earnings are low.

Transports are strong when the economy is running strong or soon will be. Their earnings rise as they are booked to ship more goods to and from manufacturers and to their final destinations; the Dow transports are indicating an uptick in the economy which leads to a greater demand for credit, and higher rates as a result.

During the past year, businesses were getting squeezed between higher commodities prices which they pay to produce goods and services, and an inability to pass them on in the form of retail price increases.

Now however, the lid may be coming off the prices that they are able to charge, and they are anticipating larger profits in the near future as a result.

Given all this and the fact that the ten-year Treasury yield has gone from 4.0% to over 4.6% in short order, it looks like long rates will be rising with short rates, and the yield curve will continue to steepen.

But will it last if the Fed keeps raising rates?

At least for a little while, yes.

Bonds and Futures Links

2005-11-03T02:56:00.000-08:00

A couple of more links, then I'll get back to business.

Here is a bond yield summary from BondsOnline.com; and a very concise futures page from Barchart.com.

Thanks to PrudentBear.com for both.

200 Most Active stocks by Options Volume

2005-10-29T01:54:00.000-07:00

Here's a link to the list from ivolatility.com

Economics Texts Online

2005-10-29T01:51:00.000-07:00

Here's a list courtesy of Tyler Cowen at Marginal Revolution.

Investors Business Daily Big Cap Twenty Stocks

2005-10-28T03:14:00.000-07:00

Here are the graphs for Tuesday, October 25. IBD runs a computer generated ranking of leading large cap companies trading in the U.S. and I dropped them into a stockcharts.com page.

Fed's Fisher spooks the Market

2005-10-07T02:37:00.000-07:00

He seems to be blaming a new bout of inflation on hurricane Katrina; so rates (fed funds) will continue to rise. The stock market cries 'Uncle'.

Hello seasonal bout of weakness.

The End of the Dollar Standard?

2005-10-07T02:29:00.000-07:00

Rob Lee at Prudentbear.com gives us four reasons why the U.S. dollar standard system is breaking down.

'As Voltaire said in 1729 "paper money eventually goes down to its intrinsic value – zero."'

Dow Jones Industrial watch, CAT

2005-10-04T03:32:00.000-07:00

CAT, another of the big Dow 30, is coiling like a snake, ready to break out over $60 on strong volume, just like she did at $55. Get ready to sell that put spread but don't jump the gun; this little triangle pattern could still fail. Wait for the closing new high.

Dow Jones Industrial Stock Watch

2005-09-30T00:52:00.000-07:00

AIG you look like you are ready to break out on strong volume over $62 1/2; you know once you do the sellers will disappear for a while. The path of least resistance. The future is Kaleidic and yet we seek order. Your historical and implied vols are pretty close; as your stock rises your vol should stay low or drop further. How does shorting a put vertical sound? Excellent.

Now to find a call spread to sell on another of the Dow stocks. "Market neutral" means live long and prosper.

The Nobel to Israel Kirzner?

2005-09-21T00:11:00.000-07:00

The announcement for the Nobel Prize in economic science is due out in October; Peter Boettke makes the case for Israel Kirzner.

Kirzner, along with Murray Rothbard, carried on the work of Ludwig von Mises and spearheaded the revival of interest in Austrian economics that began in the early 1970's and continues to grow today. While Rothbard was more prolific and wide-ranging, Kirzner focused on economics.

His Competition and Entrepreneurship is a critique of neoclassical price theory; the "perfect competition" model built upon an equilibrium foundation, with its unrealistic assumptions about time and knowledge, and its total neglect of the process by which an equilibrium state would come to be.

Without a market process to drive prices toward that equilibrium state, there is no need for the one whose actions make that happen, the entrepreneur.

This mystery-man is noticeably absent from the neoclassical story, but he is center stage in the Austrian one, and he is not alone. Because others are on the prowl for profit opportunities also; he must compete with them and win in order to gain.

To Kirzner, "competition" means "rivalry". Every businessman knows it, but not many economists do. To them, "competition" means the state of not having to compete.

If you've ever taken a microeconomics class, you've learned about that neoclassical fraud called the "perfect competition" model; you knew from the beginning that there was something wrong with it, and in Competition and Entrepreneurship Israel Kirzner shows you what.

Watching the Money Czar

2005-09-09T14:36:00.000-07:00

Chad Hudson ask's over at The Prudent Bear, will the Fed Pause?

Prices keep rising even as the economy seems to be slowing. Wasn't their a name for that?

The Monetary Central Planning Group of America, the Fed, meets in two weeks to humbly decide behind closed doors, how quickly they will destroy the value of the dollars we save and earn here in the land of the free.

The Fed Funds market has the probability of a quarter point rate increase at about even money.

One order of flattened yield curve, comin' up; would you like a market crash with that?

Ludwig von Mises

2005-09-09T14:16:00.000-07:00

Ralph Raico writes about The Great Economist of the twentieth century. Those who have never heard of him should read it. It starts with a trickle.

Why No longer Term Bets in the Oil Market?

2005-08-27T12:28:00.000-07:00

Tyler Cowen wonders why futures markets, such as the NYMEX, don't sell longer term bets, and offers up a few possible reasons why.

My take is that these markets develop and grow out of the needs of the hedgers, who look to lay off the risk of future price changes, and focus their efforts on profiting from efficient development, marketing, and production, etc., where they can play a strong hand.

For a market in longer term contracts,like 10 years out, it may not be enough that speculators want them. Speculators can come and go as they please, and their activity alone would probably not provide enough consistent liquidity to sustain the operation.

But firms whose existence requires them to be consistent buyers or sellers of a commodity, like refining and exploration companies are with oil, may have business needs which only require them to lay off price risk a few years out and not beyond.

Without the hedgers participation in the longer term contracts, there is little hope of enough liquidity to justify the contracts existence.

But over-the-counter contracts can be created by the larger brokerage houses, who will take the other side of any bet you care to make--for the right price. If enough of the same kind of OTC bet keeps getting requested, then someone there will eventually get the idea to standardize and list it.

Inflation and Asset Prices

2005-08-27T10:04:00.000-07:00

If someone were to ask you what the current rate of inflation is, what would you say? Well, if your answer has anything to do with the CPI (consumer price index) number, you should think again.

Thorstein Polleit writes on the problem with using this index as the benchmark.

Massaging the perceptions of their populations is the oldest game in politics. Are things really as good as they say they are?

The Austrian economists were critical of the use of all indexing, for a number of reasons, and they argued against the use of aggregates that has come to dominate the world of macroeconomics.

The misuse of the (government created) CPI is but one example of how the U.S. government tries to put off the consequences of its own monetary manipulation, at first denying the existence of inflation, and then when no one buys that line anymore, blaming someone else for causing it in the first place.

But being that the nature of all governments is some combination of force and fraud, one could expect no more from them.

The interesting part is how mainstream economists, who have some degree of independence and intelligence, will don their tu-tu's, go before the cameras, and say their lines on cue; denying domestic inflation and blaming price increases on the greedy oil companies or some other villain of the moment.

Misdirection is essential for the scheme to work.

It's how all pickpockets operate.

Planning For Failure

2005-08-26T00:51:00.000-07:00

From cafe Hayek, an MIT professor finds the solution to high oil prices in a scheme to have the best and brightest take over the helm of the American energy market, and force it to conform to their more rational plan for production and consumption.

Dr. Heywood differs from Chinese communists--in that he is not Chinese, and he would most likely balk at the accuracy of the label "communist".

The functions and importance of the system of free prices is a pretty big thing to not know about. And it takes more than a pinch of hubris to be willing to go out in public and unflinchingly display that ignorance. But Dr. Heywood plows ahead, nonetheless.

On second thought, he's perfect for the job.

You Wanna Bet?

2005-08-20T11:26:00.000-07:00

Alex Tabarrok from the Marginal Revolution gets a chuckle over environmental "scientists" who are long on talk, short on integrity in Not Putting Their Money Where Their Mouths Are.

Inflation: Deception at the Core

2005-08-20T10:19:00.000-07:00

Peter Schiff on Getting to the "Core" of Inflation Propaganda at Kitco.com, argues against this sleight of hand used by establishment economists and media "intellectuals".

These economists say that the already misleading inflation numbers put out by the beneficiaries of said unacknowledged inflation, need to be modified even further, to exclude those price increases which they would like not to be taken account of by ordinary Americans, who know that they, themselves, are paying much higher prices this year, but could be fooled into thinking it's just the result of their own bad luck--and not of the abhorent abuses of the hogs at the trough in our nation's capital.

They might be fooled if morons in suits say these stupid things with straight faces, resonant voices, and the steady stare of their dark, beady eyes which mask the condemned souls of these fallen ones--servants of beelzebub.

At least the people might be fooled for a little while longer. And hey, it's just the next election cycle that really counts anyway, right?

Option Market Making by Allen Jan Baird

2005-08-20T01:53:00.000-07:00

This book is written for those who would like to become a market-maker on one of the options exchange.

Baird's focus is on the "...basic risks, strategies, and tactics of options market-making as a profitable business. It's goal is to be both a theoretical and a practical reference for options traders, dealers, and market-makers in financial and commodity options markets..."

Right off the bat you know that this is not a book for beginners or small-time retail options traders. Nor is it a book for the speculator of any size for that matter, though they too would profit from reading it.

His focus is on those people who have to take the other side of whatever order may come into the options trading pit, and how they might capture their profit while still minimizing their risks.

He starts out with a brief discussion of fair value, pricing models, and volatility. Then he quickly moves on to the standard risks of individual options such as delta, gamma, vega, etc., giving good explanations of each.

Next, he talks about those subjects which don't often appear in thin books on options trading: synthetics, conversions and reversals, the importance of interest rates and boxes, time and calendar risks, and finally core strategies and market-making tactics.

Baird does a great job of avoiding the temptation to impress his readers with a lot of formulas and mathematics and instead relies on simple examples and diagrams to get his concepts across.

As I said, this is a thin volume, coming in at under two hundred pages, but it gets right to the heart of the matter. It doesn't take the encyclopedic approach that some fall back on, but gives simple and direct instructions on how to hedge individual trades and what kinds of overall positions you should be shooting for as a market maker.

This is an excellent addition to any library on options trading, as a reference for the speculator, or an instructional guide for the future market maker.

Options Market Making gets the Full Moon rating; excellent.

QQQQs in the short term; bad moon rising.

2005-08-19T02:04:00.000-07:00

The Nasdaq, here represented by the qqqq's, looks ready to make a run up to test the yearly high near $41.

But coming at this time of year, in this interest rate environment, and during the first year after a Presidential election, The odds are...that it will fail.

The recent correction during August has been accompanied by the increase in implied volatility that one expects to see when a stock heads south (yellow line). If the Q's do rally from here, implied volatility will again decline offering up a great opportunity to the straddle or put buyer to buy cheap vol going into the traditionaly stormier seas of September.

Front month implied vol on the Q's is currently running about 14 which is not a bad buy in itself, historically, but should it get down to around 10 again within the next few weeks, it would be a screaming buy.

If one wanted to trade this scenario immediately, one could SELL the Put spread Oct 38-39 for about a $.40 credit. Then when the market tests the new highs in the next few weeks buy back the short options (the Oct 39 puts) with the lower implied vol--for about $.30, leaving you long the Oct 38 puts for a net CREDIT of $.10.

Though there aren't any sure things in trading options, getting long vega and gamma that cheaply in this market environment is a solid bet, leaving one open to the small probability of a big payoff.

Citigroup and the Business Cycle

2005-07-18T09:48:00.000-07:00

Citigroup earnings disappoint due, in part, to a flattening yield curve; it's fixed-income markets revenue dropped by 28% from the prior year. The stock is currently down about 2.5% on the day and has been the catalyst for a weak banking sector.

When short-term rates are high relative to long-term rates, bank margins get squeezed. Since they are in the business of borrowing "short" and lending "long", when their cost of funds rises (short rates), while the price they charge others to borrow them remains the same (long rates), their profits dissappear.

The yield curve itself is a product of both the market, and government intervention. The Fed has been hiking up short rates in order to keep inflation at bay, and to keep speculative markets like real estate, from getting out of hand. But longer-term rates like the ten year T-bond yield, are set by the market, and have remained stubbornly low.

If short rates continue to rise and surpass long rates, the yield curve will then be negative, and that does not bode well for the economy or the stock market. Financing begins to dry up as lending money becomes unprofitable, and business activity slows down as a result.

And even a well diversified banking powerhouse like Citigroup will feel the pain of an unacknowledged business cycle.

Single-digit Implied Volatility

2005-07-12T01:09:00.000-07:00

Implied volatility (yellow line) on the OEX is now down below 10. It generally goes lower as the market moves up, and higher when prices move down.

But at this low level the daily drip of decay is more bearable to option-buyers as they wait for the next big move.

The Treasury Bond real interest rate

2005-07-12T00:21:00.000-07:00

An interesting look at the current bond market interest rate conundrum throught the lens of Austrian Economic theory, via Mises.com.

The problem is that the current real interest rate is roughly zero, the exact number being dependent upon how you arrive at the true rate of inflation, and therefore, what you think it is; government supplied numbers are never quite what they seem.

If the current nominal market rates are the result of an artificial stimulation by the central bank, then the coordination between the time-preferences of savers, and the time-preferences of borrowers will be all screwed up, leading to further boom/bust cycles in the economy and a genuine loss of wealth.

QQQQ and the Moody Blue

2005-07-05T02:35:00.000-07:00

The big picture on the Nasdaq composite eqivalent, QQQQ's.

Resistance can be found at the high of $40 from the end of last year, where the 200 month moving average is also coming to rest. Notice the distribution volume during the first half of this year.

Now tell yourself it will all be O.K.

Money Supply heading South of the border

2005-07-02T15:53:00.000-07:00

This graph from an article over at The Daily Reckoning gets to the heart of the matter. The stock market is in for a heap of trouble this fall given this kind of monetary environment. MZM has gone negative and the yield curve is flattening, and may go negative as well.

This adds up to a recession for the economy and a downtrend for the stock market, with the possibility of a good old fashioned whacking before the end of the year. The August-September time period is the most likely candidate for the lows of the year, according to The Stock Trader's Almanac put out by Yale Hirsch, and the year after a Presidential election tends to be the worst.

If this is true what should you do? If you've already made some money this year on a good pick or two, think seriously about banking it, or at least hedging. If you want to make some money on the possible down turn, buy some puts.

Implied vols, which means options prices, are low at this point, i.e., calls and puts are cheap. This varies from stock to stock of course but as an example, let's take a look at the QQQQ options:

As you can see, the implied volatility (yellow line) of the Q options is at a low. Notice how it spiked up in August of last year, which is another way of saying that the calls and puts suddenly became a lot more expensive, or that those who had the foresight to buy them just prior, made a lot of money. Will this August be the same?

Of course no one can predict the future, but those who consistently make money at anything know to place their bets when the odds are in their favor, and reduce their risk when the odds are against them.

Credit Spreads

2005-06-25T14:54:00.000-07:00

SFO has a good article on one of my favorite options strategies. The best thing about it, is the fact that with credit spreads, time is on your side.

But the downside is that right now in the equities options markets, implied vols are low. People have already been selling those at-the-moneys for all they're worth, and you may just be the last in line. Your wages (pay per hour) would be very low at this point, so why bother?

Then again, if the skew was in your favor, you could probably find a good backspread or two and just wait it out. Sometimes even negative surprises can be a good thing.

Charting the Volatility Index

2005-06-25T01:13:00.000-07:00

Successive hundred point drops in the DOW due to higher oil prices, caused a rise in the VIX from it's low of around 11; straddle buyers should be happy.

When she bottoms, she bottoms quickly. People get nervous before earnings season and in this environment of higher short rates and higher commodity prices, they may not want to risk a nasty surprise. So some will sell early and come back to buy after the dust settles.

Maybe the Summer will be interesting after all. The down days came on heavier volume in the DOW and left a lower high behind, hinting at an intermediate term downtrend in the stock market.

But in order to make that official, the DOW would have to drop below the 10,000 mark, making a lower low; not an easy thing to do without a small dose of panic.

And that's something the straddle buyer would love.

Black Robes and Goose Steps

2005-06-23T02:20:00.000-07:00

The long march continues, as the Leftists on the "Supreme" Court lead us further down that glorious road to serfdom.

"Taking" is a tradition here in the land of the free; the very foundation of progress. Without it, how could we plan for our glorious future? Should chaos rule, instead?

Your house is your's--unless we want it. Then it's ours... so it can then become his. Let the will of " the people" be done.

And let this blather about your rights, be done, too. You stand in the way of progress, waving some old parchment that's of no interest to us. You will be crushed, and your parchment will be buried, and we will drown your cries with the sounds of our boots, clapping the ground as we march on past.

Your quaint attachment to this notion of rights, is outdated in this era of public-spiritedness and planning. Our rulers are benevolent, and much smarter than you. And only by their will, can some progress appear. Let their will be done.

On what basis do you challenge them? You are a selfish peasant who seeks to deprive the community of what it needs. When instead you should be rejoicing for the opportunity to serve. No more evidence of your individual corruption is necessary. By your challenge, you display your guilt.

The people march forward in stone-faced columns, with empty hands and hollow eyes. Following the goose-stepping imposters in their shining, black robes.

With nothing in particular on their minds.

volatility crush

2005-06-23T01:49:00.000-07:00

Summer's here for the options markets; volatility is nearly nonexistent as the VIX sinks to 11. This means both calls and puts are being sold by the professionals, who don't expect much activity in the stock market--at least not for the next 30 days.

Are they right? Probably yes, for now. But at some point nearer to the end of Summer, in this post-election year, shopping for puts will be the prudent thing to do. Especially if options prices remain this low. Short term money is getting tighter now, by the Fed's design. They pumped enough into the system prior to the election to keep the incumbents happy, and now it's time to soak it back up. Same old story.

With commodity prices continuing to move up putting the squeeze on margins, the third quarter results could have an excellent chance of coming up short. And surprises are very good for options buyers.

2005-06-21T17:17:00.000-07:00

Uva uvam vivendo varia fit.