Options Trader: Friday Outlook

Market death or another bottom test?

Freddie Mac (FRE) and Fannie Mae (FNM) are once again being used to spook the markets but thank goodness for Piper Jaffray, the lone voice of reason in this insanity, who went out on a limb this morning to point out "There has not been one significant piece of macroeconomic or company-specific news on either company to drive the decline," in Piper’s view.  They believe "FNM will likely not need new capital unless credit losses rise to over 40 bps, which would be about triple current levels."

The drop began on a bullish competitor’s speculative note on capital and proposed FASB accounting changes (dispelled by the regulator). FNM/FRE’s regulator, OFHEO, put out a press release last night saying "they are adequately capitalized with capital well in excess of OFHEO-directed requirements, have large liquidity portfolios, access to the debt market and over $1.5 trillion of unpledged assets."   Piper also warns that this is irrelevant as market fear is so high fundamentals don’t matter and, as I pointed out in Wednesday’s Wrap-Up, these institutions are under attack by GS, Cramer and the usual pack of hyenas so facts don’t really matter when the big boys line up to get you.

And, of course, oil is back to $145, up $8 in just 2 hours of NYMEX trading on what I am sure are legitimate demand issues.  GE turned in a report that was in-line, without any of the severe financial losses that were being predicted, and Q3 is being guided in-line as is the year.  This is a $275Bn company with $200Bn in annual sales and $22Bn in profits telling you that things look fine across their finanical, service and manufacturing divisions - QUICK, PANIC! 

What’s even crazier than the herd mentality that is driving investors out of anything financial is the fact that the MSM refuses to talk about the elephant in the room, which is $146 oil (8 am).  Of course $145 oil is causing consumer confidence to slip and causing consumer spending to slow and driving up costs for corporate America and deflating the dollar and destroying our balance of trade and damaging the travel industry and killing the Transports and Restaurants….  It’s ALL about OIL, that’s why it’s usually called an oil crisis, but where is the concern?  Where is the call to action?  What is being done about it?  The media glosses over the issue and the people feel there is nothing they can do but accept their lot in life while the country collapses - When did we let this happen to America?

At least Anheuser Busch (BUD) gets to escape this nightmare, InBev (INBVF.PK) raised their offer to $70 a share and I think they should take the money ($50Bn) and run before Americans have to start walking to the liquor store to be able to afford a sixpack.  We covered up into yesterday’s close as we didn’t hit our market goals for the day but I can’t at the moment imagine what’s going to happen that’s going to make us want to go into the weekend bullish when, based on this morning’s now $9 price move from yesterday, Americans are being asked to come up with an extra $540M for gas this weekend (20Mbd x 9 x 3).  That’s an annual pocket-picking of $65Bn thanks to those stimulus checks, close to 1/2 of which went to gas money last month and allowed Americans to cut back on their driving by "just" 4%.

Over in Asia, the new IPhones rolled out today and immediately sold out.  That won’t stop Apple (AAPL) from selling off today along with the rest of the market even though reports from store after store around the world are that entire 1,500-phone allocations are gone as fast as they can be sold.  Its arrival in Japan marks a significant foreign entry in a market dominated by local brands.  According to the WSJ:  Japanese media are talking about "iPhone shock," alluding to Commodore Matthew Perry’s black ships that forced Japan to open to Western influence in the mid-1800s.

Have you ever seen a company that makes a $500 phone that well over 1M people are waiting on line for around the World trade down in pre-markets?  That’s INCREDIBLE!  I like the AAPL $170s as a momentum play, hopefully for about $7.50, looking for a quick $9 as the sales numbers start coming through.   I also like the Aug $180s for $9 that were $12 on Thursday for a weekend play.  $500M is 2% of Apple's total ‘07 sales in just one day, in just one hour really at the rate these things are selling.

Asian markets were mixed, with India dropping another 456 points, the Nikkei down slightly thanks to an after-lunch pump and the Hang Seng was up 362 points even though the Shanghai pulled back to 315.  Financials were down but export companies picked up a bit along with oil and commodity companies.

Europe is following our markets down significantly, dropping 2% off what started out as a good open.  As with the US, the rise in oil sent Airline and Auto stocks sharply lower.  InBev shares ROSE 3.9% as investors there are very excited about snapping up American companies at what looks to them to be bargain prices (see BUD in Euros chart).

I don’t know if we’re going to hold 11,000 or not but I’ll be taking out my Fannie Mae (FNM) callers and doubling down at the open (looks like $4.20) and selling the $5s on a bounce, but this is a very dangerous trade and will be catastrophic if the rumors are right, but I’m just not buying it.  We went through the same thing with BSC and none of it turned out to be true but, unfortunately, lack of confidence in a financial can become a self-fulfilling prophecy so we’re going to have to play this one by ear.

 

Comments

[jonathan]

I agree with Phil. Unless I have it wrong (could be), my understanding is that Fannie and Freddie do not have much in the way of REAL losses. They are a reporting an enormous amount of Mark-to-Market losses...i.e. if they sold their loan portfolio today no-one would want to buy it...but their business is not in selling loans it is in buying. Their whole purpose is to buy and hold mortgages. So it seems to me that the best (only?) way to fairly value them is on the credit risk. I.e. if they don't sell the loans the mark-to-market is an accounting-ism and as long as the loans are being paid back (or not) the value of the company is entirely a result of the cash flow of mortage payments. Yes, that payment flow will be missing some payments from defaulting owners but that is measurable in their default and foreclosure numbers.

I don't own any as of this second but if I very well may by the end of the day. Obviously the speculative part of the portfolio :)

[User 143167]

It looks more and more obvious now that the oil price/bubble won't burst until Phil capitulates. For the better of stock investors, we really hope you capitulate right now. That will be a great relief to everyone.

[FeverBuster]

The "oil crises" can be solved by releasing/allocating oil from the SPR and increasing the prime rate by a small percentage. Heck, I do not think they would even have to physically move the oil from the SPR, just make an announcement about it. After all, nothing physically actually has to happen to effect the supply, just an implication of such would do it.

[PokerDonkey]

LOL @ Al Rob. In Phil's defense, I think he has more good ideas than bad (even if they're all incorrectly based on everything being Bush's fault). Honestly Phil, the daily political rant is old. If you KNOW a market is being manipulated higher, go long. If you KNOW a market is being manipulated lower, go short. I don't care who is getting rich and who is getting screwed.
FeverBuster - terrible idea. Not only do you want the government manipulating the price of oil with the SPR, but also you want them to lie about it? I wouldn't want them messing with the price of oil as much as I wouldn't want them messing with the price of AAPL, X, HAL, BUD, or GOOG.

[User 94161]

Don't base trading on what you have in your portfolio. It may or may not be right, but it's sounds like you want the stock to go up.


On Jul 11 10:35 AM jonathan wrote:

> I agree with Phil. Unless I have it wrong (could be), my understanding
> is that Fannie and Freddie do not have much in the way of REAL losses.
> They are a reporting an enormous amount of Mark-to-Market losses...i.e.
> if they sold their loan portfolio today no-one would want to buy
> it...but their business is not in selling loans it is in buying.
> Their whole purpose is to buy and hold mortgages. So it seems to
> me that the best (only?) way to fairly value them is on the credit
> risk. I.e. if they don't sell the loans the mark-to-market is an
> accounting-ism and as long as the loans are being paid back (or not)
> the value of the company is entirely a result of the cash flow of
> mortage payments. Yes, that payment flow will be missing some payments
> from defaulting owners but that is measurable in their default and
> foreclosure numbers.
>
> I don't own any as of this second but if I very well may by the end
> of the day. Obviously the speculative part of the portfolio :)

[FeverBuster]

PokerDonkey

Iran and Allies of Iran are the ones manipulating. They are making billions of extra$$ off of the US. They continue bait investors/speculators back to the oil market with their psychological warfare and propaganda. Then, they are probably funding Al Qaeda, and insurgence with a lot of that extra money. So, anybody that contributes to the increase in oil, needs to think about where that money is going and ask themselves how ethical it is if that were the case.

All governments lie, but the fact is that there is plenty of oil, and if the government was to come out and say that they were going to allocate 2-3 million barrels a day until the market stabilized, the actual amount would probably be not much if any. It is more psychological than physical in the oil market now.

"I don't care who is getting rich and who is getting screwed."
This attitude is horrible. If you are not careful, you will be the one that will get screwed whether you are a oil bull or not.

You can not compare Goog or AAPL, etc. to oil. None of your examples have an effect if any on inflation like oil does.

[contender]

Yeah its gotta be Iran manipulating - surely the US crooks refuse to let that bad bad nation ruin our country by driving oil prices up -- Im sure the US traders trade against those bad people to keep oil down because they are worried what high prices will do to our country.

Gimme a break.

We know the enemy -- the enemy is us.

[Ames Tiedeman]

When the bombs drop on Iran oil will go to 250.00

[phdinsuntanning]

There are those who believe high oil prices are the result of market forces--limited supply meets endless demand, which makes barrels of crude more expensive. In an October 2004 National Review article, “The Oil Bubble: Set to Burst?” it was argued that oil prices, at that time $62 a barrel, would soon collapse. In ten months, oil was $73 a barrel.1 All through oil’s five-year price surge, rising to $105 per barrel as of March 2008, there have been many voices asserting that the precipitous rise is all the result of speculation--unsupport... by the rudiments of supply and demand.2 Speculation will have an effect on oil prices if it leads to hoarding or an increase in private inventories of crude. Some espouse that inventories have remained at “normal” levels, which implies that the rise in oil prices is not the result of runaway speculation, but the consequence of decreasing supply and the rapid growth of developing economies like China and India.3 We would like to point out that the notion of high futures prices reducing physical supplies through “hoarding” has nothing to do with a “normal” level of inventories, but whether there exists a positive relationship between futures prices and oil stocks/inventories. For specifications including longer-term contracts that are inherently more speculative, the real price of oil appears to be determined predominantly by the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market: both oil stocks/inventories and futures prices are found to be positively cointegrated/correlate... with each other.

[Tmalan]

"Im sure the US traders trade against those bad people to keep oil down because they are worried what high prices will do to our country."

Can you explain this a little better? I do not understand how they can trade against Iran directly in an Oil futures market. From what I understand, producers (which I believe would be OPEC here) do not lose any money on futures. They break even when the future expires when in contango or selling on spot market when in backwardation. Either way it is a net sum in the difference in price.

They would however, make profit from the delivery price vs the cost of producing, storing, and/or shipping the oil when that difference is positive for them. Am I mistaken?

[Tmalan]

There has been considerable demand destruction already in the US. There will continue to be more in the US and other countries. None of this seems to weigh enough against a virtual threat from the Middle East.

The Axis of oil have the ability to control supply. As demand continues to drop, they can enviably produce less to keep inventory tight. How would anyone know the difference in taking less out of an oil field in order to control what is taken out vs the oil field going towards the end of the fields capacity? Who oversees this? Are they allowed to go into countries like Iran and do oil field checks?

There is too much uncertainty in the market and it is being driven by fear not facts. Yes, I do agree that demand has increased and will continue to increase provided the price comes back down to earth. However, the supply side is the uncertain variable with what seems like unlimited opinions on the subject.

This is why opening up the SPR and increasing the dollar with a rate increase will diffuse the fear and bring back stability to the market. I also agree that this should preclude opening up more offshore/Alaskan drilling for future supply streams.

The combination of these elements would remove the fear, remove incentives for propaganda, and remove the index long calendar investor who no longer would see the potential for profit.

Normal speculators then could come back into the picture and perform their normal futures trading to hedge on normal trade price fluctuations.

[Dan Walker]

Phil, you ought to be happy as a dead pig in the sunshine. They managed to get everyone short Friday before expiration, vix got within a hair of 30, it is all on their bullsh*t, there is no Dow support below the low for a 1000 points and Ben announced that Fannie/Freddie could borrow all they wanted at the discount window reallll-ly late Friday afternoon. What more do you want?

[Shaggieman]

Window-Reuters
DOW JONES NEWSWIRES

Federal Reserve Chairman Ben Bernanke told Freddie Mac Chief Executive Richard
Syron that Freddie and Fannie Mae are eligible to use the Fed’s discount
window, Reuters reported, citing a source with knowledge of the conversation.
Bernanke told Syron in their phone conversation that he intended to allow the
two government-sponsored mortgage giants to use the option, the source said.
Web site: www.reuters.com

Dow Jones Newswires
07-11-08 1500ET

Dan - If this is what you're taking about I couldn't find any conformation and then later news seemed to recant this. Bottom line is no need to use the window I guess?

[Brewer]

Uh, Apple went up on Friday, you missed that one...

[CoverIsBetter]

I also wanted into AAPL, and sold the 170 Calls to get the 165 Calls cheaper (and as a hedging play). Of course, now I am getting slaughtered like a Pig (albeit a small pig). Is there any hope left for AAPL before the August expiration? The media is not helping talking about cracked devices.

Thanks