Thursday, February 8, 2007

Evening State of Play

For a day, at least, the sagging housing market and the problem with subprime mortgage loan defaults got the attention of financial markets. But there's still a resistance to giving the problem its real due. Ask any shareholder of New Century (NEW) and they'll tell you the world came to an end today. But guys like Tony Crescenzi, chief fixed-income market analyst at Miller Tabak, remain sanguine. He questioned whether there is "excessive hype over sub-primes." Crescenzi, in an interview with MarketWatch cited Federal Deposit Insurance Company statistics from September, 2006 showing that "banks were very well capitalized." True enough, but NEW slumped 36% today and took the rest of the subprimers into the basement. Adding insult to industry, the luxury homebuilder Toll reported an uptick in the housing slowdown in a number of markets. Read Toll woes. Toll dropped about 3%.

Large cap financials also moved lower, though most big names like Bank of America and even Wells Fargo - the largest subprime lender - slipped less than 50-cents. The pressure was still enough to send the Dow lower by 29, or a quarter percent. The Nasdaq slipped only 1 point, but to the credit of the bulls the major indexes managed to end well above the lows of the day.

Not for nothing, but the index used to create swaps based on 20 triple-B bonds made up of subprime mortgages slumped today to its lowest point ever. This is from the Markit ABX indexes which I've talked about before. It now costs more than $700k to protect $10 mln worth of the bonds against default. Not quite GM crisis risk premium, but getting there. GM was but one company - this is gauging an entire industry... scary stuff...

Ultimately this raises the cost of capital for subprime lenders making it a vicious circle that gets them deeper into the hole. No doubt more subprimers will pre-announce but Wall Street's overall reaction was mild apart from taking the subprime stocks out to the back of the barn and shooting them.

10 yr treasury nudged higher today following decent demand at the 30 yr bond auction.

On to other matters...

Tomorrow morning Mastercard (MA) posts earnings. 12c EPS on revenue of 821.5 mln in revenue is expected. I opted to avoid an earnings play following the run in the stock over the past 3 months. Call me old fashioned, but the forward p/e of "NA" bothered me. Make no mistake about it, the folks running MA aren't dummies and this company will likely beat, but the options were also just too expensive.

BMC Software tonight posted earnings above expectations but lowered guidance. The stock scampered lower by 7%.

Crude oil has bounded above $60 tonight. There's evidence by way of the shippers again that OPEC has indeed been curtailaing production with tanker volume down by 200,000 bbl/day in January from December. Colder weather is also forecast to say around for much of the rest of the month according to the Climate Prediction Center. I remain long there after getting stopped out of a short position earlier in the day. We came close to the 10 day moving avg but just didn't make it.

Gold rebounded to $665 and I may be jumping back in. I probably should have jumped back in before the close late this afternoon, but was just too busy with too many other things. EuroFX is back up to $1.3060. The message was loud and clear today... Euro rate increase next month. G7 meets this weekend. I would be surrpised if they say much of anything about the Yen, even though the Europeans are unhappy about the Yen's weakness. There's is still deflation in Japan - can't see how anyone can argue against that and how the Japanese gov't can be prodded into lifting rates.
Frank Barnako at MarketWatch has an interesting piece on what the coming Fox Business Channel will mean for talent looking to get hired. Click Here Fox. After reading that it makes me all the more joyous that I am happily retired from broadcasting!


Jason said...

if the Japanese do not raise rates the carry trade will keep on going, right? and if that is the case will this crazy liquidity driven equity bubble ever pop?

Jim K said...

sure makes you wonder, doesn't it. there had actually been talk earlier in the week that they might raise, but that seems to have faded away.

OptionPundit said...

Thanks for sharing about MA.

I have been paper trading this one since monday and got out before earning. The whole Idea was to test if I can benefit from a double diagonal due to IV rise before earnings announcement. It did, and to my amazement was a very simple yet powerful concept. Later, I decided not to play MA as I couldn't find any good risk/reward combination.

I played AKAM, AFFX, PMTI , NTRI and seems it was my day :)

There is discussion going on in the comment sections here( )that your readers may find insightful for trade management pertaining to options.

Cheers and as always, it's insightful to read your blog Jim