Spring has arrived and the dark clouds over the market are giving way to "patchy sunshine". Some of the market bears are going into hibernation, at least for now.Never mind what anyone is saying, just look at their actions.
What has me pontificating today is not so much the rise in stock prices since my post from last month titled Is the stock market spring loaded? Could it move 3,000 points higher now? but my observations in the options futures that I have been trading.
Here are four examples related to sell to open positions I have, sometimes referred to as "naked puts". This means I have to buy the stock at the strike price if it is trading at 1 penny less or if I made a very bad bet, a lot lower.
American Eagle Outfitters (NYSE: AEO): Three weeks ago I received $0.55 for Aug $7.50 strikes and today you can only get $0.20, or 63% less.
Bank of America Corporation (NYSE: BAC): Last week I received $1.45 for May $7.50 strikes and today am being offered only $0.64, or 56% less.
Citigroup, Inc. (NYSE: C): At a September Strike price of just $1.00 it paid me $0.24 and today offers only $0.11, or 54% less.
Ford Motor Company (NYSE: F): For the past year the "F" in Ford stood for fear and two weeks ago I was able to get $0.95 at a June strike of $3.00 when today all we would receive is $0.30, or 68% less.
The world economy has been shattered by the undervaluing of risk. Today, with the market about 22% higher than it was five weeks ago the average risk premium of the example stocks I used has gone down over 60%. This is striking (pun intended) and indicative of a rapid change in investor sentiment looking forward.
Only time will tell if I was a better judge of risk than the over all market makers. All of these options trades I have been doing were a reflection of my belief that the market pendulum had swung to far to the negative. I first made the case in Investor fear puts me 'naked' on Wall Street and followed that with Chasing Value: Has BNI become 'Berkshire' Northern Santa Fe.
Nobody can predict the stock market with a high degree of certainty and I have been wrong more times than I would like to remember, but the principals of fear and greed have over taken us in recent times and this year, so far, has been a great time to take advantage of it.
For now the futures market is telling me that we are in a period of thawing out. If any portion of the $4 trillion sitting in money market accounts makes a move we could see another major jump in stock prices and continued erosion in put options.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of AEO and options. I own options in BAC, C, and F.
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Reader Comments (Page 1 of 1)
4-15-2009 @ 5:35PM
Iridium said...
The biggest problem has been an overeaction by traders to the news that the recession may be slowing down. They take this as a sign that we may be at a bottom and now we are going to make this light speed trip back to prosperity.
The truth of the matter is that the real economy is still slowing down. Without massive government aid or maissve tax credits people would not be buying anything at all. What happens when the aids go away?
Same thing with autos. Th eonly people who are buying cars are the ones who do not want to miss out on the incredible deals and credits. We are talking about a cash for clunkers program that will destroy the used car market just to sell a few more new cars. The question again is what happens when the incentives go away? Let alone what happens if interest rates go back up.
When the decline does level off, which may be happening, it will stay at the bottom for a very long time. There is nothing to pull us back up. The only thing that can pull us out is massive wealth creation in the middle class. I don't know how you are going to do that when there is a $14 trillion tab that needs to be picked up.
You need to look at the real stats. Manufacturing output, producer prices, and jobs. Until those three start to recover you will not see a recovery. The Bulls have nothing but conjecture and fraudulent speculation to stand on. The 25% run never should have happenned. It created a lot of paper wealth in the wrong area.
4-15-2009 @ 5:47PM
Sheldon L said...
Iridium,
Thanks for taking the time to comment. I agree with much of what you said but not your conclusion.
Very basic modern economics history: Stocks are a leading indicator; employment and real estate are lagging indicators.
Also a slowing trend in bad data points is positive.
And still more: the savings rate has increased dramatically in the past six months; interest rates are not going up for a while; housing prices are stabilizing in most regions of the country; and China, India and Brazil continue to show economic growth of historic proportion.
4-15-2009 @ 7:30PM
william lindblad said...
And Ireland, Iceland, the U.K, France, Germany and the U.S., along with many more, are running in the negative column.
A long time ago I made a crack that some market activity is little more than gambling for which I took a little heat. Put, calls, naked's and the rest of the immediate or "quick money" trading is risky, but a necessary part of the market. The commodity end trades mostly on speculation and rumor and it is only for the most stalwart investors. I have always viewed the market as a long term investment tool and so have many others.
If it is turned into another round of steeplechase and pony playing as it has been for the last 3 or 4 years, than there will be hell to pay as the wealth and money are not real, but will become more of the same fabrication of thought that created the current fiasco. I read the 3000 post and commented on it. I believe that the market can go up - possibly even to that level, but it cannot go on a optimism spree either as there are too many pressures that could upset the proverbial apple cart at any time.
China, India and Brazil all have serious internals, i.e., they have unemployment too and it will not improve until the main consumer nations improve. You forgot Australia. It has been in boom for 11 years and only now is going backward. The main reason is that they are an exporting producer - and no one is buying.
I am not a pessimist without reason and I still do not see anything that will change my mind. This current upswing in real estate is mostly speculators trying to recover loss. Sheldon, I see this where I am in rural America and that being the case, I expect that it is widespread.