Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/30/2012

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Markets: Closed Today Open Tomorrow

by Thomas Hughes

Click here to email Thomas Hughes
Trading Closed For Second Day

TRADING TO RESUME TOMORROW UNDER NORMAL CONDITIONS

I'm sure you are all aware of the current events in New York City and the eastern seaboard. Due to the storm and its threat to life and infrastructure the US financial markets were closed today. Plans are being put into place for some form of trading tomorrow but I believe they are waiting to make a safety call. As we know, the end of October marks the end of the fiscal year for many hedge funds and other institutional trading houses. The different heads of the markets want trading to resume so that we can bring an official close to the month.

I expect volume to be heavy and volatility to rise. There are a few reasons to expect this. Pent up demand is present; normal trading has been suspended for two days, four counting the weekend. No one has yet been able to trade Amazon or Apple since their simultaneously disappointing earnings releases. Apple traders have another catalyst to consider as well, the departure of two top executives. There is also the end of the month to consider, the actual reason they want the markets open at all. There may also be some trading based on the storm itself as speculators guess which industries will be hurt or hindered by Sandy.

There was futures trading this morning until 9:15AM. As could be expected, the indexes were down for the second day in a row. The declines were marginal and on very light volume. Traders are still waiting to hear more detailed reports of the extent of damage from the storm. Implied open for this morning was around -20 for the Dow and -0.6 for the S&P 500. The current talk bantered around on the news is now about the chances for the storm to boost GDP. Some say yes and some say no. For me I think it is some of both. There are certainly areas for cash to flow and inventory to be used up and jobs to be filled but there are also a lot of negatives.

My Thoughts On Sandy Boosting GDP

Insurance companies will be hit first, that is after you consider all the people, businesses and municipalities that have been injured by and suffered from the storm. Insurance will have to pay out and speculations are for that to total into double digit billions for many insurers. Some of the claims will eventually be covered by re-insurers but most of it will come from the insurers themselves. It is their business to provide claims money and the industry is positioned to bear the brunt but it will affect balance sheets and cash flow into the coming quarters. Eventually the cost will be returned to population in the form of deductibles and higher rates.

Electric utilities will also pay a heavy price. They will have to rebuild a large portion of the north eastern power grid. There are currently 8-10 million people without power in a range from North Carolina to New Hampshire and Illinois to the Atlantic Ocean. They are expecting it to take days to over a week for the farthest out to receive power again. This isn't a problem of one or two minor problems interrupting power to millions, this is hundreds, thousands or more little problems adding up to millions without power. The power lines will have to be checked from the power plants to the end of each line. Those farther out will take longer to fix; Along the way power companies will have to rebuild the grid, including sub-stations, transformers and transfers.

Last night Jim Cantore pointed out the electric light show from the sub-stations and transformers exploding in New York and New Jersey. The sea water, which is highly corrosive, was shorting out power all over the region. That's a lot of copper. Rebuilding this will surely move some cash through the system and eat up some inventory. Power companies will put their employees to work, pay out overtime, use up stock piles of supplies and then need to re-order more to get ready for the next time.

Now take into account all the damage to property, and not just personal property. Homes, furniture, businesses and entire communities have been destroyed. This all needs to be cleaned up and rebuilt. Contractors, construction workers and supply warehouses will all be put to work too, adding more cash flow to the system. New data released today shows that home prices rose again last month and now that inventory in the north east has suffered damage prices for the best homes their may rise again.

All this activity will use up a lot of resources. These will all need to be replaced which will send a ripple of activity through the economy. Adding to this is a possible ripple from increased consumer spending. The more people put to work rebuilding the more wages get paid and the more money for consumers to spend. They are saying that crews are being called in from states as far away as Texas and California. If it all works out like the way I envision it the fourth quarter bounce I keep expounding upon may get a boost from Hurricane Sandy.

Story Stocks

Apple made headlines last night as two of its top executives left the company. Two top executives were removed by CEO Tim Cook. The move is based on long time frictions and recent handling of the Apple Maps fiasco. Apple has been facing a lot of criticism lately and this move could be Cook's way of asserting himself as head of Apple. Their recent launches of the iPhone5, iPad Mini and other innovations did not quite get the reactions you expect from the latest Apple release. We'll have to keep a close eye on how Mr. Cook develops Apple and how sales and sales mix trends going into the future.

BP PLC soundly beat the streets expectations for earnings. The company posted dollar based earnings of $1.48 per share versus the expected $1.29. However, revenue decreased on a quarterly and year-to-date basis of double digits each. Despite the drop, which was primarily due to lower average selling price per barrel, the executives increased the dividend by 12.5%. Shares of BP have trended up since hitting a bottom last summer but are now trapped in a trading range below resistance. Improving profits and an increased dividend may attract new investors. Watch for a break above $44.

Ford was also able to beat the streets estimates of profits. The world's second largest car maker increased North American margins to 12% which offset large losses in the European division. The huge margin drove Ford to post record profits of $0.40 cents per share. Ford is planning a restructuring of the European arm that is expected to lower costs, increase productivity and profitability. As with other corporations this quarter Ford's beat on the profit line comes with a decline in revenue.

Several hundred companies have reported earnings over the past two days and several hundred more will report tomorrow and Friday. Far too many to include in one recap; None jumped out at me as I was scanning the lists. The reports may ad volatility to the markets but I think it will be on an individual basis as stock pickers search for new entries. Far more important, in may eyes anyway, are the releases of ADP Employment figures tomorrow and US Non-Farm Payrolls on Friday. In between this is jobless claims on Thursday. I think the data will show a pick up in jobs and a decline in jobless claims. However, I also expect a jump in claims initially following the storm before the rebuilding gets under way.

What To Expect Tomorrow

I think tomorrow is going to be a fast paced, high volume trading day. There are a lot of reasons to trade and a lot of traders who have had to wait since last Friday to get in or get out of positions. I don't want to rehash the close of last weeks trading, we have had plenty of time to read the recaps and do our own analysis. What I will do is say this: the markets have had time to reflect on the state of affairs. Perhaps the emotions have had time to cool down as well and allowed for a different perspective.

The economy, on a national and global basis, has been improving. Economic data shows stability, which is a good starting point for growth. Earnings, while light on revenue, have revealed a strength in business not seen for some time. Balance sheets, cash flow and operating margins are better than they have been since before the world financial crisis began. The economy is in a near term bounce and now there is the chance for increase cash flow triggered by the storm. With interest rates and monetary easing at historic levels the field is set for people, businesses and communities to rebuild, create jobs and maybe even grow.

The European and Asian markets were both up today and that will help support our own markets. Signs of stability, though still paired with signs of weakness, are bolstering support for equities. European shares closed up today by around 1% across the board. The Spanish recession continued but support for the Spanish government also made an appearance. GDP in Spain fell by -0.3%, the fifth monthly decline in the country. Year-to-date the country has shrunk by -1.6%, in line with their own full year projections. An ECB official said that Spain was not in imminent danger and was capitalized through the end of the year at least. Greece on the other hand may need more money as soon as mid-November. The wash of news, coupled with European earnings reports, is generally a positive and will help our own market sentiment going into trading tomorrow.

Keep all those in harm's way in your hearts and minds.

Stay vigilant, trade conservatively and remember the trend.

Thomas Hughes


New Plays

A Full Day of Trading Tomorrow

by James Brown

Click here to email James Brown

Editor's Note:

The storm is over but Wall Street could have a tough commute to work tomorrow. The New York subway system is still closed and unlikely to open for a few more days.

The major U.S. stock exchanges, the NYSE and the NASDAQ, were closed yesterday and today due to Hurricane Sandy. Both are scheduled to reopen for normal trading tomorrow although trading volumes are unlikely to be normal due to the closure and the end of the month.

European markets had a good day on Tuesday with the major exchanges all advancing. The French CAC40 rose +1.1%. The German DAX rallied +1.1%. The British FTSE closed up +0.9%. Asian markets were not quite so bullish. The Chinese indices ended the day close to unchanged while the Japanese NIKKEI lost -0.9%.


In Play Updates and Reviews

Wednesday Could Be Volatile

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets were closed for a second day on Tuesday thanks to Hurricane Sandy. The storm has passed and people are assessing the damage. Currently 30 people have been killed by the storm but officials are worried that number will climb. Almost nine million people are without power. Estimates are suggesting the damage caused by the storm could hit $20 billion.

Both the NYSE and the NASDAQ exchanges are scheduled to open for normal trading tomorrow (Wednesday). After a weekend and a two-day closure, the pent up demand to open or close positions before the month ends on Wednesday (October 31st) could generate a lot of market volatility.

There is speculation about what stocks might move in the aftermath of Hurricane Sandy. It's possible that Home Depot (HD) and Lowes (LOW) could see their stocks rise as people flood into their stores looking for equipment and materials to begin repairs. Insurance companies, specifically those with big property and casualty insurance businesses, could see their stocks decline as investors worry about how much exposure the companies might have toward insuring hurricane damage. It's worth noting that any post-disaster decline insurance stocks tends to be short lived since companies use the storm as an excuse to raise rates.

The newsletter should be back on schedule tomorrow with the markets poised to re-open.

-James