Noteworthy News – July 12, 2010

In a challenging economic environment with burgeoning government debts, it is more important than ever to dig deeply and challenge the general consensus. One year ago today, I started this blog as a venue to relay my thoughts and challenge my opinions. After 270 posts, I can say that it has grown faster than my expectations and I am very glad that I stuck to this venture here and on SeekingAlpha.com.

I want to thank everyone who has been a loyal reader, and continue to ask for suggestions and comments that can help improve the usefulness of my site. I am always looking for interesting material and greatly appreciate guest posts or topical ideas. I will continue to add functionality and hopefully the second year can be even more productive than the first.

The following is a look back at the most popular posts from the last year:

Option Strategy: Long Gamma, Short Vega
Do Black Swans Negate Option Premiums?
Income from Equities or Bonds?
Hedging Equities with VIX Futures (VXX & VXZ)
Volatility Selling Strategies
Extreme Fear in S&P 500 Option Skew
Efficiently Trading Option Spreads
MOVE Index Versus the VIX
Credit Spreads are the Key
What Influences Volatility?
VXX/VXZ Pairs Trade
Covered Call Options as Investment Strategies
Scalping Gamma
Focusing on Volatility Skew
Liquidity and Volatility
Long-Dated Volatility Opportunities
Collapsing Volatility
Moral Hazard: The AIG Bailout
Mitigating Gamma Losses
Picking up Nickels in front of a Steamroller
Insurance as a Business
The Debt Spiral

Posted in Economics, Markets, Media, Politics.

Tagged with anniversary.

4 comments

By SurlyTrader – July 9, 2010

Record Cash Weighing on Stock Market

As corroboration for my previous post, read Bloomberg’s Record Cash Weighing on U.S. Stock Market Returns: Roben Farzad. Farzad says that investors should be asking for cash rich corporations to return their money as dividends:

“Some aggressive motion could come in handy right now, because a return to activist investing by hedge fund managers is precisely what the market needs. It could help prod cash-rich companies to increase their dividends, thus making equities more attractive to investors in a time of low returns.”

The highly respected James Grant from the Grant Interest Rate Observer seems to be on my side:

“James Grant of Grant’s Interest Rate Observer in New York dedicated his June 11 newsletter to screening for big names like Bentonville, Arkansas-based Wal-Mart Stores Inc. and Kimberly- Clark Corp. in Dallas that throw off cash and yield more than overrated, over-printed Treasuries. Bonds have outperformed stocks in the past six months, even though 10-year government bonds offer about 3 percent.

“As for the government’s well-exhibited capacity to conjure money,” writes Grant, “we can’t think of a better reason not to own government securities. Hence our preference for big, stable, dividend-paying corporations.”

Grant points to Orlando, Florida-based Darden Restaurants Inc., which runs the Olive Garden and Red Lobster chains. He noted its roughly 25 percent return on equity and 2.3 percent dividend yield. Darden holds more cash than it knows what to do with: $249 million as of May, a quadrupling over the same period last year. On June 23, the company raised its dividend, boosting its payout rate to 3.1 percent. Yet the stock is still 21 percent off its year’s high. Investors are not impressed — at least not yet.”

Posted in Markets.

Tagged with asset allocation, dividend yield, stocks, treasury yields.

2 comments

By SurlyTrader – July 8, 2010

Six Days of Nonsense

It has been about 7 months exactly since I wrote Expect the Unexpected. The last six trading days have been a glorious example of unpredictable trading in the equity markets. During those six days, the S&P 500 has fallen 6% and then regained nearly all of its ground.

Down! Up! Down! Up! Up!

Now at the same time that equities seem to be turning the corner, 10 year treasury yields are at 14 month lows:

The Treasury market certainly is not pricing for optimism

Looking specifically at the level of interest rates, I might become quite bearish, but looking at the steepness of the curve gives me a little more hope.

Let us take a further step back and just look around at the news. When every one is looking for the exit doors or calling for a great depression repeat, then it is probably time to be a contrarian. Barry Ritholtz questioned the wisdom of crowds by looking at the google search interest in “double dip recessions”:

Can you see the recession coming?

No, I do not think the economy is great or that our recovery is “V-Shaped”, but I am also not socking away gold bars and guns in my basement. A few facts that I think warrant consideration:

The S&P 500 has a dividend yield of 2.07%, which is 29bps greater than a 5 year treasury and 91 bps less than a 10 year treasury
7-10 year investment grade corporate bonds have a yield to worst of 4.66%
Most compelling of all – the top 250 dividend paying stocks of the S&P 500 (forward) yield the same as a 10 year treasury

You still want to buy a treasury?

Now, unless sales drop off a cliff, I do not understand how cash heavy corporations will dramatically cut dividends. In order for sales to really plummet, unemployment would have to go much higher. The unemployment situation is ugly, but it does not seem to be getting worse. On top of that, refinancing is spiking which should put more dollars into consumer pockets.

I also saw an amusing post that said to get ready for Armageddon because the consensus estimate for earnings is $89 and they expect $69. Hold on a second, at a level of 1060, do we not still get an earnings yield of 6.5% versus a 10 year corporate bond yield of 4.66%?

Lastly, let me jump back to my original article of “Expect the Unexpected”. It turns out that I called an upward breakout of the dollar back in December 2009. Now, I am almost ready to call the dollar downside breakout as the Euro has stabilized and the carry trades are back on. Trade du jour – borrow in the cheap currencies and plow the money back into risky assets.