Thursday
Mar202008

Bespoke's Commodity Snapshot

With commodities down sharply once again today, and the news media already asking everyone and their mother's if this is the end of the boom, below we highlight our trading range charts of major commodities.  The green shading represents two standard deviations above and below the commodity's 50-day moving average.  When the price moves above the green shading, it is considered overbought (oversold when below).  We provide trend and support lines where necessary.

Just as $100 per barrel was a key resistance point for oil on the way up, it is now acting as key support.  Oil is currently trading below $100 at $99.25, and if it closes below the $100 support level today, the bears will remain in charge for the time being.  Natural gas hasn't quite tested its support level yet.

Oilnat

Bespoke readers surely remember our post a couple of weeks ago highlighting the CEO of Barrick Gold saying he would not hedge gold when it was near $1000, and that it "has a lot of room to run."  He reiterated those statements once again on March 13th.  While he may be right and gold could still rally significantly, if a few days ago was the top, it would sure be ironic.  As shown below, gold has broken one of its shorter-term uptrend lines in recent days, but it still needs to get down to the $900 level to test its longer-term uptrend line.

Goldsilv

Platinum rose a lot more than gold did in recent months, and its decline has been steeper as well.  Because it went parabolic, it has a ways to go to get to the bottom of its uptrend.  Copper, on the other hand, never really got going on the upside, and it recently broke support.

Platcopp

While other commodities rallied in recent months, orange juice fell.  In recent days, it even took out its lows from last summer.  Coffee has really taken a hit since it peaked in early March.  As shown below, it broke its uptrend as well.

Ojcof

Corn

    

Wednesday
Mar192008

Commodities Take a Beating

While investors have spent the last few days focusing on the events in the financial services sector, commodities have been under heavy pressure.  Much of the focus today was centered on the declines in gold and oil which fell $59 (5.9%) and $4.94 (4.5%), respectively.  Taken as a whole though, the entire sector has experienced a sell-off of record proportions. 

As measured by the CRB Index, the two largest one day declines in the commodity sector (since 1956) both occurred this week.  Below we highlight the ten largest one-day declines in the index as well as the performance of the index going forward.  Fortunately, for commodity bulls, the average return going forward has generally been positive.  At the same time, however, investors who are bearish on the sector are likely to compare the sharp swings to the Nasdaq back in early 2000 (or the equity markets now).

Crb_ten_largest_declines

Even after experiencing its two largest one day sell-offs on record, the CRB index still remains well above its recently surpassed highs from 2006, and year to date the index is up over 8%.

  Crb_index

 

Wednesday
Mar192008

Shorts Take Aim At Merrill

Merrill Lynch (MER) is under heavy pressure today following rumors that the company is set to take additional write-downs and seeking new capital injections.  While additional write-downs are certainly possible, it is hard to imagine that the company would need to raise additional capital after its CEO John Thain said that they have raised all the capital they need.  In a Reuters story published earlier this week, Thain said, "We have carried out an enormous cleaning of our credit portfolio. We have more capital than we need, so we can say to the market that we don't need more injections. We can confirm that we have tackled the problem." 

After last week's Bear Stearns debacle where the CEO said they had ample liquidity three days before the company imploded, we can't imagine why any CEO of a financial services company would say such a thing.  As the last few days have shown us, anything is possible in this market.

Put volume in MER has shown a big up-tick today to 290K contracts, but it still remains below the peak levels we saw earlier in the year.

Mer_stock_and_put_volume

Wednesday
Mar192008

March Madness: Finish Those Brackets and Get Back To Work!

With the NCAA tournament starting tomorrow, we thought we'd have some fun with a quick comparison between it and stock market trading volume.  NCAA Basketball's March Madness is often regarded as one of the biggest productivity destroyers in offices across the nation.  Employees push work aside and head over to sportsline.com to check the latest scores and how they stack up in their bracket pools.  While overall productivity may decline during the first two days of the tournament, activity in the financial markets tends to pick up.  As shown in the table below, volume is typically higher than average during the first two days of the tournament.

While the first two days of the tournament tend to have higher than average volume, on the Wednesday before the tournament starts, volume tends to come in below average.  Perhaps people are busy filling in their brackets.

Volumemarchmad_2

Wednesday
Mar192008

Monthly Number of iPOs Since 1990

With Visa (V) breaking the record for the largest US IPO ever today, we put together a chart of the monthly number of IPOs since 1990 for those interested.  As shown below, the current decade has paled in comparison to the 1990s when it was common for 50 or 60 companies to go public in a month.  The tech bubble hangover of the early 2000s was very weak for IPOs, but things picked up again once the bull market that started in late 2002 was finally given credence.  Things didn't really begin to slow again until the last few months.  After 43 IPOs in November 2007 (a month that saw big declines in equity markets), December saw 22, January saw 15 and February saw 8, which was the slowest month since May 2003.  We've only gotten 4 this month so far, including the Visa IPO.

Ipo1990_2

Ipo2000

Wednesday
Mar192008

Why Is Bear Stearns Trading Nearly 3 Times The JPM Buyout Price?

With Bear Stearns (BSC) currently trading more than three times the agreed upon buyout price from JP Morgan (JPM), there have been multiple reasons cited as to why the stock is trading so high. The first and most prominent theory concerns the potential for a white knight to come in and make a higher bid.  In fact, this morning's New York Post suggests that Joe Lewis and Jimmy Cayne, who own 15% of the company, have been working the phones to try and get other bidders in play.

Other ideas as to why the stock is trading so high were brought up in Wednesday's WSJ.  According to the article, some investors are betting that JPM will sweeten its bid in order to insure that the deal gets done. Others believe that BSC bondholders are buying the stock.  The reason they would be buying the stock is that they are eager to see the deal get done rather than go through bankruptcy procededings.

One theory that we have yet to hear discussed might be that many holders of the stock simply can't sell it.  The first of these holders consists of the hardest hit - the employees, who own over 30% of the company.  While we do not have access to the exact numbers, generally speaking, most of the employee compensation at Wall Street firms is usually in the form of restricted stock.  So even though they own the stock, most employees can't sell it until it fully vests.   

The other group of large holders are State Street, Barclays, and Vanguard, which are essentially index funds.  Collectively, this group owns another 10% of the company.  So until BSC is dropped from the indices that it's in, index funds cannot sell.

If we add these two groups together, we get a large percentage of the float which essentially can't be sold.  As of the end of February, short interest in BSC was 20% of the float.  Given that things really got dicey in March, this number likely only increased since then.  Combine these ingredients together and you get a situation where shorts need to buy and longs can't sell. For Bear Stearns employees, hopefully a higher bid is reached, otherwise watching the current premium slowly evaporate as the deal's closing date approaches will only pour more salt on the wound.

Wednesday
Mar192008

Bespoke in Stocks and Commodities Magazine

Sc_2Bespoke co-founders Paul Hickey and Justin Walters were recently interviewed and featured in Stocks and Commodities magazine, a popular publication for traders and investors alike.  Big thanks to Jayanthi Gopalakrishnan and S&C magazine for choosing Bespoke for their feature interview this month.  You have to be a Stocks and Commodities subscriber to view the interview in its entirety, but the introduction can be found here.

Wednesday
Mar192008

MasterCard (MA) vs Visa (V)

IPO history was made today with Visa's (V) record $17.9 billion offering.  At $60 per share (where the stock opened in the secondary market), Visa's market cap is $58 billion.  Below we highlight a chart of Visa's market cap versus MasterCard's (MA) market cap.  As shown, Visa's is currently more than double that of MasterCard!  In the first quarter of 2008, Visa had revenues of $1.49 billion.  MasterCard hasn't released Q1 '08 revenue numbers yet, but current estimates are for $1.06 billion. 

Mavisa

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Wednesday
Mar192008

Mortgage Rates Finally Starting to Decline

One of the major problems that the Fed has had in recent months is the fact that fixed mortgage rates haven't been declining.  The rate cuts were supposed to lower borrowing costs for individuals to help stop the decline in home prices and spur economic activity.  Rates declined for the majority of 2007, but as credit markets got more and more tied up at the start of this year, fixed mortgage rates actually spiked in the face of massive Fed Funds Rate cuts. 

In recent days, however, 30-year fixed mortgage rates have begun to decline.  On March 6th, the average 30-year fixed rate stood at 6.12%.  This rate stood at 5.66% as of yesterday, and they are declining even more today.  If mortgage rates can keep going lower, it will go a long way in helping out the struggling real estate market.

30yrfixed1

30yrvsxhb

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Wednesday
Mar192008

Bottom Calling Abounds

Yesterday's gains seem to have been met with plenty of bottom calling.  Granted, this is anecdotal evidence from what we've heard on CNBC and other media outlets on Wall Street, but it's important to remember that we're not out of the woods yet.  Below we highlight a chart of the S&P 500 and an index that measures the default risk that investors are placing on high-grade corporate debt.  As shown, the S&P 500 (red line) remains in a severe downtrend, and it has a lot of work to do to get out of it.  While the credit default risk index had a huge decline yesterday, it barely put a dent in the strong uptrend that it's currently in.  When the market gains 400+ points in one day, it's easy to selectively remember the good and forget the bad.  While we hope a bottom has indeed been made, it's still important to tread these waters carefully.

Defaultrisk

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Tuesday
Mar182008

SPY Down Gaps

The S&P 500 tracking SPY ETF is now up more than $7 from the open on Monday.  Financial markets didn't look good yesterday morning, but during times like these, it's important to gain perspective by looking at similar events from the past.  We put out the report below (click thumbnail to view) to our Bespoke Premium subscribers prior to the open yesterday morning.  The report highlighted that when the market gaps down significantly at the open, it has gone up from the open to the close 19 out of 22 times for an average gain of 2.36%.  For those that read this site and are looking for reports similar to the one below, visit Bespoke Premium and become a member today.

Tuesday
Mar182008

Short Covering Rally?

Was today real buying or short covering?  As shown below, today's best performing stocks in the S&P 500 were also the ones with the highest short interest as a percentage of float.  On the other hand, stocks with the lowest short interest underperformed.

Short_interest_by_decile_2

Tuesday
Mar182008

Big Up Days in the Dow

The Dow was up more than 400 points today for the second time in a week.  There have now been six +400 point days, and one-third of them have come in the last seven days.  As we did last week, below we highlight the largest positive 1-day point changes in the Dow 30's history.  While a better historical comparison is to look at daily changes on a percentage basis, big point moves do affect market sentiment.  As shown below, the prior five +400 point days have been met with declines in the index on the following day.

Dowpointmoves1

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Tuesday
Mar182008

High Yield Spreads Defying Gravity

Yesterday, we heard several commentators suggest that JP Morgan's no-obligation purchase of Bear Stearns (was the $2 to cover shipping and handling?) had helped to calm tensions in the credit markets.  However, based on the movements of high yield bond spreads (using Merrill Lynch data), conditions remain tense.  As shown below, the spread between the interest rate on high yield bonds and comparable US Treasuries has risen to 862 bps, which is the highest level since 2002.  To put this in perspective, at their lows in June 2007, spreads were at 241 bps.

High_yield_spreads_031808

   

Tuesday
Mar182008

Fed Funds Rate Poll Results

Below we highlight the results from our Fed poll conducted earlier.  As shown, what people want the Fed to do is all over the place, while 83% think they will cut by 75 or 100 bps.  The highest percentage of people actually want the Fed to cut by just 50 bps.  Based on these results, the majority of people aren't going to be happy if the Fed does cut by 75 or 100 bps.  But given that hedge funds and large institutions can cause large swings following these announcements, individuals will have little control over the direction of the market in the short term.

Want_2

Think_2