Traders,
Sorry for not being around on Friday – seemed like another volatile day – up – then WAY down – then up. I was in Chicago on business and one of our partners (member of the CBOT) took me down to the trading floor to see the action (or lack thereof – since it has gone electronic). While it doesn’t look as empty as the PCX – since I left – it no doubt has been reduced in size. The irony was that I was standing on the edge of the Wheat pit – which had about 10 people in it, but right next to it (in a physically smaller pit) was the Wheat options – which had about 50 people in it. The irony is that the listed options on futures are busier on the “floor” then their underling.
Sorry for not being around on Friday – seemed like another volatile day – up – then WAY down – then up. I was in Chicago on business and one of our partners (member of the CBOT) took me down to the trading floor to see the action (or lack thereof – since it has gone electronic). While it doesn’t look as empty as the PCX – since I left – it no doubt has been reduced in size. The irony was that I was standing on the edge of the Wheat pit – which had about 10 people in it, but right next to it (in a physically smaller pit) was the Wheat options – which had about 50 people in it. The irony is that the listed options on futures are busier on the “floor” then their underling.
Additionally – I have the pleasure of meeting with Rick Santelli. We joked about his recent publicity – I could tell he wasn’t too keen about the jokes or the publicity of it – IF they are NOT getting the message. He’s right – while the Jon Stewart show is pretty funny – it is SERIOUSLY missing the point. I can understand Rick’s frustration – the sheeple are NOT listening, neither are the companies, but most importantly the government.
I was fortunate to hit a warm spell on my short visit to Chicago – a great city, but the cold can cut right through you when it wants. I don’t know how many times I made the trek up and down La Salle street for meetings on Friday – but it’s nice that financial area is centrally located. I know I’ll take a beat down from my NY buddies, but Chicago seems more of a financial trading center than NY. NY seems more banking, while Chicago is more definitely a traders town (between the CBOE and CBOT). Sorry NY….
Well – glad to be back in warm Sarasota.
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Schering-Plough taken over
You would think that in this economic slowdown that big takeover deals would be put on the back burner. Well that certainly has not been the case. Merck is buying out Schering-Plough for $41 billion in a cash and stock deal (SGP to get $23.61 a share). The deal will make Merck the world’s second largest drug maker, right after Pfizer (who only two months ago bought out Wyeth for $62 billion).
In an economic slowdown – the market sells off and when that happens – sometimes the baby is tossed out with the bathwater. It is obvious that these drug makers are looking at gobbling up some of their competition as stock prices are looking attractive compared to book. It is interesting that Merck stood on the slide-lines and waited – they watched Schering struggle, cut jobs, and close factories to make up for losses from a couple of drug failures. Then – when it looked like SGP found a floor and got is costs down, they came in a scooped it up. Bottom picking their struggling competition for fairly low prices.
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Schering-Plough taken over
You would think that in this economic slowdown that big takeover deals would be put on the back burner. Well that certainly has not been the case. Merck is buying out Schering-Plough for $41 billion in a cash and stock deal (SGP to get $23.61 a share). The deal will make Merck the world’s second largest drug maker, right after Pfizer (who only two months ago bought out Wyeth for $62 billion).In an economic slowdown – the market sells off and when that happens – sometimes the baby is tossed out with the bathwater. It is obvious that these drug makers are looking at gobbling up some of their competition as stock prices are looking attractive compared to book. It is interesting that Merck stood on the slide-lines and waited – they watched Schering struggle, cut jobs, and close factories to make up for losses from a couple of drug failures. Then – when it looked like SGP found a floor and got is costs down, they came in a scooped it up. Bottom picking their struggling competition for fairly low prices.
It is a race for market share.
SGP is up in the pre-market. We may some the pharmaceutical sector see a little upside volatility today as more speculate as to the next acquisition.
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Oil ramping?
Oil was in that 35-40 support are for some time – OPEC had cut, but consumption has also fallen off. One item that most people don’t understand is forward hedging by large firms. Many shipping, airlines, energy and other industries buy future contracts to lock in the price – which is used to help determine costs and revenue (their margin). I spoke in 2008 with a energy trader who stated that the large companies the typically hedge based on the cycle nature of energy use move from the 10-20% hedge vs. spot purchase. However, in 2006 their purchases and holdings in the contracts (both near and far term) began to ramp fast. Instead of buying 80% in the spot market, many firms were buying less that 40% as the rest was going into futures. Call it speculation – but it wasn’t the hedge funds that were buying oil and speculating – the BIG purchases was the industry hedging against future price rises.
He further said that most of the hedge fund paper he saw was SHORTING oil futures (trying to call a top) – not buying it. It was a hedge fund that lost $3 billion being short oil from $100 to $140. The reason I bring this up – back in 2008 he pointed out that the over hedging buy the large companies began to dwindle down (as they were loaded up with future deliveries for the next 6 – 12 months). “They don’t need to buy any more – they are so over hedged compared to traditional hedging that they can take delivery for months without having to buy anything.”
However – he pointed out that while oil will come down (because the pre hedge) will find a bottom at some point, and as they use up their futures they have a choice – buy MORE futures or buy in the spot market. His feeling? He thinks after they saw how high prices went and how bad it hurt their margins – the next time around they will pre-buy MORE futures (before it’s too late). Where is the bottom? Who knows – but I think that 35-40 area is a basing area. It would be nice to know the inventories – but remembering our conversation was almost 9 months ago – we may see the bigger players back in oil buying now to lock in future prices.
How high will it go? Well $100 is certainly not out of the question – and of course as it rallies everyone will blame someone again – instead of looking at the simple fact it is really supply and demand – as institutions measure their need to pre-hedge against future prices. Sure there will be individuals and hedge funds that participate, but when airlines, shipping, energy companies come to the table –they are NOT buying 1 or 2 or even 10 contracts.
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Futures Pre-market
The futures are off and slightly below fair value. It is going to be a mixed opening. Arb traders may play some of the financials this morning – but the spreads are mixed and seeing volatility.
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Support / Resistance
Bottoming ?
INDU 6500 / 7000 (Both are in the cards – however I think we may see a rally soon – if not for anything but a little reprieve from the constant selling pressure.)
NDX 1050 – 1100 (We still didn’t get down to the 1000 range yet – the market is looking a little volatile and had a good rally into the close on Friday.)
SPX 650 / 700 (Do we close above 700 – would show strength.)
RUT 350 / 400 ( A move to 400 is need to show the narrow indices strength.)
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Conclusion
Buffet did his 3 hour interview this morning on CNBC, nothing to report – he was vague in many of his responses. He hinted on some items with a very critical eye – I think he wanted to be MORE critical (and did head down that path) – but he is also a huge Obama and Clinton supporter – with close ties (and smartly so – to insure those huge investments at GS and GE with some TARP and government aid). Having the government be your “PUT” is a brilliant idea – regardless of your political interest. It rubs me the wrong way sometimes – but that is business.
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Futures Pre-market
The futures are off and slightly below fair value. It is going to be a mixed opening. Arb traders may play some of the financials this morning – but the spreads are mixed and seeing volatility.
_______________________________________________
Support / Resistance
Bottoming ?
INDU 6500 / 7000 (Both are in the cards – however I think we may see a rally soon – if not for anything but a little reprieve from the constant selling pressure.)
NDX 1050 – 1100 (We still didn’t get down to the 1000 range yet – the market is looking a little volatile and had a good rally into the close on Friday.)
SPX 650 / 700 (Do we close above 700 – would show strength.)
RUT 350 / 400 ( A move to 400 is need to show the narrow indices strength.)
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Conclusion
Buffet did his 3 hour interview this morning on CNBC, nothing to report – he was vague in many of his responses. He hinted on some items with a very critical eye – I think he wanted to be MORE critical (and did head down that path) – but he is also a huge Obama and Clinton supporter – with close ties (and smartly so – to insure those huge investments at GS and GE with some TARP and government aid). Having the government be your “PUT” is a brilliant idea – regardless of your political interest. It rubs me the wrong way sometimes – but that is business.
Looks like we are in this mess for the long-term and it is really about the bumpy ride. Look for both inflation and equity protection – any day could be a wild card and hidden volatility is lurking everywhere.
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