The volatility smile is one of those interesting phenomenon that no one in finance can fully explain. The Black Scholes formula for pricing a plain vanilla European option gives the value of the premium given inputs for spot price of the underlying security, strike price of the option, the market risk-free interest rate, the time until expiry of the option, and the implied volatility of the option. It is possible to take the market price for an option and the other four inputs and work backwards to determine what the market is implying in terms of future volatility in a security. Performing this same work-out for many different puts and calls of different strike prices for the same underlying produces a curve called the 'volatility smile'. According to Black-Scholes theory, the volatility smile should be entirely flat, meaning that implied volatility does not change for different derivatives on the same

The trade has been talked about by many of the most reputable fund managers. People, including myself in a December 2009 article, have anticipated the top for several years now. Yet those who have been short US Treasuries have been treated to constantly declining yields. For the first time in a long time, increased slack in the Treasury market manifested itself yesterday with yields leaping upward.

A 2.5 standard deviation move in 10yr yields broke the yield above the 200 DMA and was a rare example of Treasuries being more sensitive to the 'risk-on' trade than equities in the past few years. We think this seemingly minor shift in correlation strengths is an indicator of building selling pressure in Treasuries. Treasury yields have lagged as equities have rallied over the past few months, yet the general stabilization in financial markets and the macroeconomy should gradually begin to

A company that can execute well in two distinct lines of business is hard to find. Even if such a company can be found, it's rare that both business segments are positioned in industries with strong long-term economic outlooks. With LSB Industries (LXU), a company still run by its founder, Jack Golsen, and his experienced lieutenants, you get a proven and efficient operator positioned to benefit from the bull market in agriculture and commodities, as well as the rebounding housing market.

LSB Industries operates two distinct businesses in the Chemicals industry and the Climate Control equipment industry. The Chemicals business produces various chemicals for agriculture, mining, and industrial use. The Climate Control business dominates several HVAC niches including Water Source Heat Pumps, Hydronic Fan Coils, and the relatively new Geothermal Heat Pump market.

Despite producing excellent growth and margin numbers over the past year, LXU continues to remain an under-covered

The International Swaps & Derivatives Association decided on March 1st that no Credit Default Swaps would be paid out in relation to Greece's Private Sector Involvement (PSI) exchange, as currently proposed. This announcement adds little clarity to the post-March 8th environment, when a deadline for voluntary participation in a nearly 75% NPV write-down for Greek bondholders will have expired. Will Greek CDS eventually be triggered? That question hinges on the use of a new mechanism for forcing hold-out investors to participate in the PSI.

Passed last week by the Greek Parliament, so-called Collective Action Clauses (CACs) would be used in the event that less than 95% of private sector holders of Greek debt agree voluntarily to the write-down. The use of CACs would almost certainly trigger CDS pay-outs associated with Greek bonds. Here we'll examine the chances of an actual CDS pay-out and the long-run consequences if such a CDS

HollyFrontier Corporation (HFC) has offered investors a wild ride since the closing of the merger in early 2011, moving up 81% from deal close to its peak in late summer, then back down 42% to a low of $21.74 in November. Since November, the HFC rollercoaster has risen about 56% since to close at $33.89 last week. With earnings reported on Tuesday, what is the current consensus long-term outlook for the refining industry, and HFC in particular?

What are some potential catalysts that might drive the stock? We will add some color to the current market view on HFC and explain why the risk-reward at this level should be compelling to investors.

First, a good overview of the merger of equals of Frontier and Holly Energy is provided by David White in an early February SA article. White does an excellent job of highlighting some of the operational advantages

Almost Family (AFAM) is a company that, because of regulatory uncertainty surrounding government-funded healthcare, presents an attractive growth story at a compelling value. AFAM's move off of its multi-year support in the upper teens should signal to investors that the stock may be ready to run. A price performance comparison shows that AFAM tends to be the outperformer in both up and down markets amongst its peers in the home healthcare sector.

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We've developed a model that accounts for the knowns and unknowns surrounding Medicare reimbursement schedules and we attempt to value AFAM in a manner similar to a utility stock with government determined fixed reimbursement rates.

Almost Family is the premiere player in the Home Healthcare segment, directly providing services to sick and elderly individuals in their homes through their Visiting Nurse (VN) and Personal Care (PC) segments in regional clusters in the Southeast, Midwest, and

The dramatic swings in fortune over the past few years in the global petroleum refining business have placed many of the stocks of domestic refiners in the investment dog house. The period between 2004 and early 2008 saw oil demand marching higher with many commentators focusing the blame for gas price increases on the bottleneck in refinery supply. The world’s leading oil suppliers, the Saudis, as well as many in the Bush administration and US business community suggested that a large-scale build-out of American refinery capacity was essential for the maintenance of American petroleum product supplies. Then came 2008, when the crash of the oil market and the accompanying demand for petroleum products turned most refining margins negative. Between 2008 and 2009, the stocks of many domestic refiners such as Tesoro (TSO), Valero (VLO), and Western Refining (WNR) collapsed over 70% and have remained at depressed levels since.

The truth

Home Inns & Hotels Management (HMIN) is the premier economy hotel chain in China, targeting business travelers and domestic tourists. Despite the macroeconomic concerns surrounding Chinese growth, the poor performance of Chinese stocks over the past 12 months has expanded the risk premia on Chinese equities to a very attractive level. We also believe that a ‘China 2.0’ opportunity exists in companies which will benefit from the growth of the domestic Chinese consumer and middle class, tourism being one of the primary beneficiaries.

The bear case against HMIN hinges on a slowing macroeconomic environment in China and the perception of a plateau in HMIN’s growth. Chinese GDP growth has slowed, largely due to a tightening in monetary policy as a result of the government’s concerns over heightened inflation and a potential real-estate bubble. Nevertheless, Chinese macroeconomic data does not bear out a hard landing scenario. In fact, while GDP growth

The recent release of new EPA standards on mercury emissions from coal-fired power plants were met with a counterintuitive day of strong outperformance in utility stocks. The DoJ approval of the Exelon (EXC)/Constellation (CEG) merger may have driven much of the price action, though a general perception that the new standards will be fairly easy to meet didn’t hurt. When the Bush administration instituted mercury emission standards with low reduction expectations and a completion deadline of 2018, many states took matters into their own hands. This has created differentials in the impact the EPA’s announcement will have on different power producers.

Illinois’s stringent mercury regulations, put in place under Gov. Blagojevich, mandate a 90% reduction in emissions by 2012, meaning that utility operators in Illinois should already be well on their way to meeting the EPA’s new standards. Exelon, which serves several million customers in northern Illinois via Comed,

Argentina is certainly not a stranger to problems with sovereign debt defaults and its precarious cash position in the face of $13 billion worth of debt coming due this year makes the situation potentially volatile in 2010. President Christina Fernández de Kirchner, struggling with falling popularity numbers, recently proposed that Argentina use a significant portion (approximately $6.5 bil of around $48 billion) of its foreign exchange reserves to help service the debt payments due to be made this year. Kirchner's proposal was rejected by the Central Bank President, Martín Redrado, whom Kirchner subsequently fired by decree.

This is all typical of a country whose sovereign debt shouldn't be touched with a ten foot pole. The New York Times is reporting this morning that a federal judge has blocked the firing of Mr. Redrado and the Kirchner government seems prepared to appeal the decision. This conflict between the different branches of

We've been carefully watching the downtrend on the weekly dollar-yen chart over the previous couple of months. Because we believe that the yen is near historic highs against the dollar and that the introduction of Quantitative Easing in Japan will massively increase the supply of yen, we haven't been surprised to see the dollar rally rapidly back towards this all-important trend line since a capitulation bottom about a month ago.

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If broken, this trend line could see a quick and strong move by the dollar towards the 100, perhaps 110, or even 115 level. Interestingly, the dollar-yen has not become overbought during its latest rally and has even shown the strength to close the week above the [admittedly approximated] trend line two days ago.

This downtrend has been in place since the middle of 2007, and thus holds a high level of technical significance for the

Reading through most of the 'X Things That Will Happen in 2010' posts, it is clear that a lot of commentary is cautious going into the New Year. No question that the world still faces massive financial imbalances that could provide significant headwinds for growth over the next decade. Additionally, a blow up in an emerging market such as China could make this decade worse than the one we just exited.

But if one can see through the fog of war that has permeated our collective consciousness over the previous three years, it's possible to envision the next decade being one of immense economic, social, and technological progress. If you have any faith in mean reversion, you might be interested to know that the S&P has returned an average of -0.9% a year since 1999, including dividends (Bloomberg). Does anyone actually believe the commentators who suggest this disproves the long-run

As we enter 2010, the risks and rewards of investing globally must be considered by all investors. Beyond deeper issues than emerging market vs. developed market diversification, an investor must choose what stocks to invest in within each individual market. In order to create a more effective portfolio risk model, correlations and covariances for sectors and investing styles need to be measured.

The stock market contagion we collectively witnessed in 2008 may be receding, but what the U.S. market does will most certainly have dramatic effects from China to Greece. This afternoon on CNBC Jordan Kotick argued that the "U.S. will provide the direction (up, down, sideways), and the emerging markets will provide the leadership." This viewpoint revolves around the understanding of country beta relative to a global stock portfolio. Higher beta countries, the EMs, will be crucial to outperformance if the bull market is real; conversely, they will eat

Our attention has recently been caught by the strong technical action in China Agritech (CAGC), a U.S. public company that is rapidly expanding in China's liquid compound organic fertilizer and agricultural products market. CAGC has seen some nice gains since its introduction to NASDAQ trading on Sept 21, but a brief look at its fundamentals seems to indicate a strong growth company with a relatively cheap valuation and little public exposure. We believe the lack of analyst coverage will serve as a catalyst for CAGC going forward as it gets picked up. The company is a small-cap (~$240 mil), high beta name with almost zero institutional ownership. Risky to be sure, but a look at the balance sheet and income statement indicate a healthy and growing company.

CAGC's revenues grew at 16% in 2006, 29% in 2007, 19% in 2008, and as of Q3 appear to have grown at around

One disconcerting characteristic of the Great Rally of 2009 that I can never quite swallow: the volume has been absolutely anemic. Amidst all of the spectacular predictions of 3.5% U.S. GDP growth in 2010 and the new bull market mantra, the market as a whole remains decidedly unconvinced according to the tumbling volume figures as the fall, and subsequently winter, have set in.

In order to understand the volume patterns in the S&P, a look back at the previous recovery of 2003 might be helpful. Two scenarios are possible. First, the lackadaisical volume may be indicative of a false rally, a government induced liquidity flood that will only serve as a further head fake for investors as the markets roll over and test the lows. Or, perhaps what we perceive to be unhealthy volume may simply be reversion to a more normal level of activity that is typical for a

Nobel laureate Joseph Stiglitz, professor at Columbia University, told the media in Singapore that the likelihood of the U.S. economy sliding back into recession is "very, very high" in 2010. Stiglitz attributes this risk to the lack of job creation as our so-called "V-shaped" recovery takes place. Stiglitz argues that the U.S. economy must grow at 3% annually in order to create enough jobs for the expanding workforce. The probability that U.S. can sustain a 3% pace of recovery is low.

Interestingly, Stiglitz suggests that the federal government should prepare another stimulus package aimed at providing job growth. This third stimulus bill would inevitably be wracked by the political pork which made the second $787 billion bill a complete waste of tax payer money and Congressional effort. I agree with Stiglitz that the 'jobless' nature of this recovery will not be a benign thing. There is no way that the

The investing community remains split over how the financial sector will perform over the next couple of years. Having gone through one of the greatest booms, and subsequently one of the greatest busts of all time, investors are struggling to pin down the 5 year outlook on the industry. We believe that financials will underperform the indices over the next couple of years, despite having played a lead role in the violent rally that has taken place since March.

The collapse of the tech bubble gives us a blueprint for analyzing the future of financials. After leading the market upwards in the late 1990s, tech underperformed over the subsequent bull market of 2003-2007.

Additionally, while financials have been a high beta sector over the previous months, we believe that they will lose beta over the next year and their volatility will be increased on pullbacks rather than on rallies. This

What's the first thing that comes to mind when you think of Mexico during the past 12 months. Drug violence? A collapse in tourist traffic? How bout the birthplace of the swine flu? We've all heard the stories about the impressive performance of the Brazilian real, but Mexico is projected by the IMF to grow at 3.0% next year, compared to Brazil's 2.5% projection. Unfortunately for the peso, Mexico's myriad economic problems this year have made it one of the worst performing currencies in the world in 2009. Fortunately for investors, the negative noise out of Mexico is giving us a golden opportunity to buy into a currency with enormous potential over the next few years.

On November 23, Fitch cut the country's credit rating to from BBB+ to BBB, a move that was apparently expected by most of the investment community. Simultaneously, the upgraded the outlook on Mexico's rating

Home healthcare and nursing services provider Amedisys (AMED) saw a 9.38% pop yesterday on more than double the average volume. So, is this a great exit point or should you be accumulating AMED? A look at the 5-yr chart indicates that AMED may be breaking out of an extended consolidation triangle and penetrating a downtrend line reaching back to the summer of 2008.

Just looking at some preliminary numbers, we'd put a target price range between $55-60 and that range could be hit relatively quickly. The volume action in the name is very attractive over the past couple of days as it has spiked.

Its hard not to love the fundamentals behind this story and we consider it one of the most compelling valuation stories in a market that is overvalued. First, the home nursing and healthcare sector is and will remain a growth story for most of the next

The debate over the nature of the economic recovery here in the U.S. was both engaging and informative back in the spring and summer. Contrary to those who continue to debate the topic, enough data has begun to emerge showing that a V-shaped recovery is not taking place. If you remember, the debate at the beginning of the spring was whether the recovery would be an L, a U, or a W. As we saw the massive, Fed-driven rally off the March lows the consensus suddenly became a V-shaped recovery, surprising many of us who believed that something like Fall '08 doesn't happen without altering societal consciousness in substantive ways. We continue to believe that a 'new normal' will emerge, at least here in the U.S. This 'new normal' will include lower consumption levels, slower growth, a higher personal savings rate, higher taxation, and higher market volatility. Nevertheless, the tag