by Houghton and Atkeson 05/14/08
Editor's note: While Sam Collins is on vacation through May 15, OptionsZone.com contributors and professional traders Andrew Houghton and Nick Atkeson are taking over the Daily Market Outlook as guest columnists.
This week brings May options expiration and, on average, option expiration weeks tend to be "up" weeks for the market. This is partly driven by options investors "rolling" contracts forward into later expiration months.
As we have discussed in the past few days (see yesterday's issue, "Will Volume Bring Validity?") -- if trading volume rises to endorse recent market bullishness and several indices' breakouts, then we will obviously feel much more bullish. Morgan Stanley's (MS) electronic trading in Europe experienced 24% more volume than usual last night, and European markets are mostly positive.
Some of the economic statistics due out this week were announced in the past 24 hours and look to have a bullish tone. This morning, the Consumer Price Index came in better-than-expected, at up 0.2% rather than the forecast of up 0.3%. Yesterday, we received a better-than-expected trade balance report, with the trade gap narrowing to $58.2 billion from $61.7 billion. Both exports (-1.7%) and imports (-2.9%) were weaker-than-expected, but imports more so. Underlying details were mixed.
The real trade gap narrowed even more than the nominal, providing a more-positive starting point for Q2 net exports. But a steep drop in ex-aircraft capital goods imports left a weaker starting point for Q2 investment.
Combining these, we continue to see Q2 growth tracking at a negative 1.1%, but we now see Q1 GDP being revised up to +0.9% from +0.6% instead of revised down to +0.4%.
The markets also received a better-than-expected April retail sales report. Although April retail control was right on our estimate (at +0.3%), there was an upward revision to March (from +0.3% to +0.5%), which resulted in a better ramp for Q2.
The equity market still seems especially sensitive to any negative news associated in any way with homebuilding, mortgages (both prime and subprime), structured products created from said mortgages, as well as the insurers of that paper and even the companies that rate the paper that the insurers insure, that the structurers structure … you get the picture.
Speaking of the bond insurers, Moody's (MCO) said yesterday that MBIA (MBI) and Ambac Financial (ABK) had "meaningfully" higher losses on home-equity loans and collateralized debt obligations (CDOs) than anticipated, thus raising concerns about their AAA status. ABK was down 7.62% and MBI was down 5.38% after that announcement.
The interesting thing here is that, on March 5 --when ABK announced recapitalization plans, including $1 billion in common stock and a half-billion dollars in other equity instruments to fight what appeared to be the inevitable loss of is AAA rating -- the stock lost one-fifth of its value and the S&P 500 (SPX) dropped 60.33 points, or over 4.5%, in the next three trading days. Amazing what we can get used to.
As long as we're looking at anomalies -- does it strike anyone else as intriguing that companies like ABK and MBI (with AAA debt ratings) should have stock prices of $4 and $9.32, respectively, as of last night's close?
As the Bear Stearns (BSC) debacle reminded us, equity holders are the last ones into the lifeboats when the ship sinks. As such, it doesn't look like passengers want to pay too much for their tickets when boarding ABK and MBI.
On the subject of capital, the New York Post highlighted Citigroup (C) in an article yesterday citing Oppenheimer's (OPY) Meredith Whitney on Citi's recapitalization plan. She was quoted as saying that the firm "is so deep in a black hole that even renowned physicist Stephen Hawking could not help the ailing company."
Now, those are Meredith's words and not ours. But suffice to say that -- in this case, at least -- subtlety is not one of Meredith's strong suits.
Given the challenges ABK, MBI and C are facing, it would not be advisable to purchase large quantities of shares in these companies at the moment. It will take some time for these firms to work through the issues they are facing.
It is important to keep in mind, however, that some of the best investment opportunities come from companies that, at one time, appeared to be on the edge of the abyss.
It should also not go unnoticed that the market in general handled the news of ABK and MBI's travails much better this time around, which could be a sign of a more-positive outlook by the market on the future prospects of the U.S. economy.
Andrew Houghton and Nick Atkeson work together to identify unusual options trading activity on the "big money" (i.e., institutional) level and regularly contribute their findings to OptionsZone.com.
For a timely look at big-money options trades taking place under the radar and independent of the headlines, visit Andrew and Nick's full archive of Unusual Options Trading Activity by clicking here now!
