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H.W. Daniel's  Instablog

H.W. Daniel
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I am just one guy who is fascinated with research, investments, and capital markets...
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  • May 25 of 2010, a Bullish Day

    “Sell in May and Go Away” is not the manta here. I prefer “Sell in May, Investors Are Not Going Away.” Sure the markets have been taking a beating throughout May, but there is more to it than just counting the bad days. I talked here about the Dow Jones Industrial Average for the month of May, or May 3 – May 20, giving back on average 140 points from intraday lows on down days. From May 3 – May 25, now with three more trading days added-in, the DJIA has given back on average 173 points from intraday lows on again, down days. May 25 was very ugly in early trading. The DJIA was down well below the 10,000 mark yet still managed to give back a near 270 points from the intraday low to close slightly above 10,000 at 10,043.75. That says something…

     

    Maybe it says market analysts and reporters doubt the retail investor more than they should. We all saw the declines throughout 2008/09 and many unfortunately do regret not “Buying Low,” back in spring of 2009. However, it does not take a genius to come to the realization that now is what could turn out to be a fantastic buying opportunity for U.S. equities.

     

    U.S. consumer confidence leaped to 63.3 in May from an April reading of 57.7. This was the third consecutive month where consumer confidence increased. Also, the recent slide in oil prices, which alas has been viewed as a negative for the markets, really is a relief to consumers who are enticed to fuel our economy even more when they pay less at the pump. Furthermore, numerous companies have been buying back stock which clearly suggests that corporate executives do see undervalued stock prices. To name a few, consider Genzyme (GENZ) buying back $2 billion of its stock, Union Bancshares (NASDAQ:UNB) buying back 2500 shares/quarter through 2011, Ameriprise Financial (NYSE:AMP) repurchasing $1.5 billion in stock through 2010, and Gilead Sciences (NASDAQ:GILD) buying back $5 billion in stock over the next several years. 

     

    On a final note, James Bullard, President of the St. Louis Federal Reserve Bank, in a news release dated May 25, stated how the sovereign debt crisis in Europe should not be considered a catalyst to derail a global economic recovery. I found it interesting to read his remarks on “Too Big to Fail” and although controversial, the fact that governments will not permit major financial institutions to fail in a sense does eliminate what could be considered a motive for a “double dip.” The release was informative. I encourage all to read it here.

     

    The bottom line – I am still bullish on the U.S. equity markets. I firmly believe that now is a great buying opportunity and I am very happy to have helped several family members establish positions in Altria (NYSE:MO), Bristol-Myers (NYSE:BMY), Exelon (NYSE:EXC) and several other names at the intraday lows on both May 24 and 25.

     

    Full disclosure: Long Altria at time of writing.



    Disclosure: Long Altria at time of writing.
    Tags: SNY, UNB, AMP, GILD, MO, BMY, EXC
    May 25 7:22 PM | Link | Comment!
  • To the Retail Investor, Don't Give Up

    Too many people are worried – there is plenty of bad news that has surfaced. Today, May 20, initial claims had risen by a much more than expected amount, suggesting that the domestic labor market is still a bit murky, contrary to data a few weeks ago. The S&P 500 Volatility Index has been breaking out, well above 40, thus confirming that investor ‘fear’ is now among us – too bad I did not straddle VIX options. To carry on, Government pipelines are filled with new regulations and the only thing investors seem to really care about right now is the euro zone crisis.  

     

    Those who bought domestic equities while the U.S. economy was in recession not too long ago clearly overlooked the uncertainty and saw opportunity. 12-16 months ago, individual stocks were just too discounted to simply ignore. The U.S. equities markets today are roughly 10% off their recent highs. Now I assume that with a correction, which has been anticipated, there must be some bad news to fuel it. If there is no bad news, besides modest profit taking, what else could cause a 10% correction?

     

    With all the data out there that can easily influence retail investors to sell their U.S. equity positions, which I do think could be a mistake, I decided to do a simple analysis to provide more paint to the picture. My analysis is as follows:

     

    Consider March and September of 2008, when Bear Stearns was sold to JP Morgan (NYSE:JPM) and Lehman Brothers declared bankruptcy, respectively. For every day that the Dow Jones Industrial Average closed down in those months of March and September 2008, on average, the index had closed 98 and 91 points above the intraday lows, respectively. The Dow Jones so far for May 2010, in the midst of all these new worries, for every down day has given back roughly 140 points on average from the intraday lows.

     

    This analysis implies that investors are not giving up on the market. Yes we see volatility and bad news floating around, but on such down days, we do not see aggressive selling into each day’s close (not considering today). Note that options expiration is tomorrow and that easily could have pushed the markets to new daily lows at the close today. I say that because I postulate many investors bought put options in the wake of Europe's problems, the oil crisis in the Gulf, and new regulations, but those investors were hesitant to outright short companies due to the fact that we were (or still are) in a bull market. Therefore, a bias towards the downside today and potentially tomorrow seems justified.

    I will have to follow up to this analysis when May concludes, nevertheless, I feel that investors are using each down day to buy more shares of U.S. equities – to position themselves for when the upward trend in the market resumes.

    Full disclosure: Long VIX Puts at time of writing.



    Disclosure: Long VIX puts
    May 20 5:39 PM | Link | Comment!
  • VIX Falls, Moody’s and McGraw Plummet

    Those who did not liquidate their positions in equities last week are likely content as I write this article. I wrote about the VIX just a few days ago were I expressed my concern that the volatility index had risen too fast in too short of a time and that the index was likely to revert to its mean of 26.30. Early this morning, the VIX had dropped below that mean. That being the case, put options on the VIX still seem appropriate, especially with the bounce today resulting from news about a $1 trillion rescue plan for the debt crisis overseas – the U.S. Federal Reserve also said it would give a hand via offering oversea loans.

    Last week was something else, we all know that. But with a barrage of data virtually everyday, I believe betting for or against volatility could be a unique play. The following Seeking Alpha article here suggests volatility is not going anywhere. If that is the case, straddling VIX options seems most warranted, but such a strategy could be dangerous if investors are not exactly sure what they are doing. I personally like put options on the VIX because I still do believe the equity markets have room to run. Those who are short the market can hedge themselves with put options on the VIX also. Investors who are long and contemplating how to lower their correlation to the market in the wake of crazy volatility, maybe buying some VIX calls or betting against Moody’s (NYSE:MCO) or McGraw-Hill (MHP) via short or put positions are some ways to do so.

    I wrote about the rating agencies back on April 19 here. Moody’s and McGraw have dropped more than 10% and 7%, respectively in early trading on May 10. The SEC is out for these two companies simply because their methodology is considered, by federal investigators, to be incorrect, misleading, and so on. With all of this scrutiny, I find it difficult to believe that these rating agencies can regain trust from investors let alone continue to operate efficiently. 

    I personally do not like how the rating agencies have also downgraded credit in the past on an ‘after the fact’ basis. I also cannot believe that Moody’s once referred to the 1st Amendment when attempting to defend itself. If every financial firm said “Freedom of Speech” when being investigated about their methodologies and disregarded the fact that millions of investors take their words and analyses very seriously, we would be in big trouble.    

    Full disclosure: Long VIX puts at time of writing.




    Disclosure: Long VIX puts
    Tags: MCO, MHFI
    May 10 11:18 AM | Link | Comment!
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