Houghton and Atkeson

Dichotomies, Divergences and Discrepancies

by Houghton and Atkeson   05/05/08

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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.

They will bring you a market outlook each day along with several trading ideas following their approach to tracking unusual option trading volume. Check back each day for their commentary, and you can also click here to receive it via e-mail!

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Dichotomies continue to define the current market environment. The Commerce Department reported last week that the Gross Domestic Product (GDP) rose 0.6% last quarter. And then household spending, the biggest sector of the U.S. economy, grew at its slowest pace since 2001, which was the last time we were in a recession.

HOUSING-MARKET HAVOC

RealtyTrac Inc., a California-based data vendor, states that one in every 194 households, or 650,000 properties, were in some stage of foreclosure in the first quarter of 2008. Additionally, The Wall Street Journal reported this weekend that between 25% and 40% of subprime borrowers are more than 60 days behind on their payments for mortgages that were issued between June 2005 and June 2007, when underwriting standards were at their weakest.

These statistics are made more interesting when compared to the 41% rise in the S&P Homebuilder SPDR (XHB) since its low close of 16.10 on Jan. 9. (The XHB is an Exchange-Traded Fund created to replicate the performance of the S&P Homebuilders Select Index.)

The Bureau of Labor Statistics released payroll figures on Friday showing that a much-less-than-expected 20,000 jobs were lost last month. This number becomes somewhat suspect when, upon close examination, the birth/death adjustment was shown to have added 267,000 jobs to the calculation.

The data also show that 8,000 jobs were added in the financial sector, along with 45,000 in construction and 83,000 in leisure and hospitality area.

Given that GDP grew at such a small fraction and that the effects of the subprime-induced credit crunch are still rippling through the economy -- causing pandemic belt-tightening -- it seems unusual that the three areas mentioned above would be ones showing job growth. The city of New York, in fact, just tripled its estimate for job losses to 24,900.

WATCHING RATES WITH 'INTEREST'

There are also some interesting divergences in the rate markets. Before the Federal Open Market Committee cut interest rates on March 18, the Fed Funds rate was at 3% and the three-month London Interbank Offered Rate (LIBOR) was at 2.54%.

On Friday, the Fed Funds rate was at 2% but LIBOR was at 2.77%. Since LIBOR is used at the benchmark for everything from corporate loans to adjustable-rate mortgages, this can only add to the pressure being felt by those already struggling to stay current.

With all of this in mind, we would be remiss if we did not also highlight that the Dow Jones Industrial Average (DJI) closed at its highest point in 2008 on Friday after moving up 4.5% in April. The S&P 500 (SPX) gained 4.8% in the same month and is now less than 10% from its all-time high last October.

COULD MARKETS BE RESUMING THEIR ASCENT?

To put all of this in perspective while looking at things from a slightly higher altitude, Gulfstream (GIA) -- maker of the "G" series of jets -- announced that demand for its newest model, the G650, is strong. The company has received 450 letters of interest, which include a $500,000 deposit from prospective customers.

The only consternation being felt among the jet-set crowd, it seems, is that production on the new models won't start until 2012. And even at a ramped-up production rate, the company will only be able to deliver 45 planes a year. Imagine the frustration of having to wait until 2022 to spend $58.5 million on your new toy.

Although we certainly are not exposed to the frustration of waiting for our new jet, we are very much exposed to the frustration of waiting on this market to sort itself out.

Are we going to new highs or have we just hit the top end of the range again only to go through another painful downward slide? The good news is that the economy's weaknesses should be resolved well before 2022 and we are unlikely to have to show the patience of new G buyer.

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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!