One of the most actively traded stocks today during the big rally was Qualcomm, which is one of the companies that we own. Qualcomm shot up by $1.30, which was a pop of 3.4 percent. That's better than the Nasdaq's gain today of around three percent.
Still, despite the big gains in Qualcomm today, one options trader has a a very different opinion. The stock's been bouncing between $38 and $40 for the past couple of months, which is great for those of us who sell covered calls. This means if we sell a call with a strike price just outside the trading range, we are likely to collect the premium income and not have our position called away. We're also likely to be in a position where we don't lose out on capital gains beyond our strike price, because the stock's range bound.
That means that this trader has just put in a big bet that the share price of Qualcomm will fall, but not below $32. That means that they'll make money on the $37 puts they purchased and collect income from the $32 put they sold. They're hoping that the stock will drop to just above the $32 strike price of the puts they sold.
In order for this to happen, Qualcomm's stock will have to drop by 19 percent. Is this likely to happen? In the mind of the trader who set up this long put spread, the answer is yes. However, with the demand for smartphones continuing to increase and Qualcomm's technology being a key part of these, that could be a bad call.
Naturally, the markets reacted to the bad news. Investors will be happy to close the books on the month of August. For the month, the Dow dropped 4.3 percent. The S&P also fell, declining by 4.7 percent. And the Nasdaq made these declines seem tame by comparison, plunging by a painful 6.2 percent.
But even here, economists warned that the relief could be short lived. One at Capital Economics said that prices will likely fall five to ten percent when the effects of the tax credit are gone. That, he warned, is likely to create a reverse wealth effect and "if households feel less wealthy, they will spend less."
This may mean that the higher than anticipated gains in consumer spending, which increased 0.4 percent in July, will fade. The increase, which was the highest since March, was seen as evidence that the economy will continue to grow, although slowly. After seeing the consumer spending numbers, the chief economist at Pierpoint Securities said "we'll see very slow growth, but it's a far cry from a double dip." Added an economist at Scotia Capital, the increase in spending "is allaying near term double dip concerns. It nonetheless showcases very lackluster growth in
the U.S. economy."
The only good news from the plunge in stocks in the just closed month for us is that our options, which we were worried about being called away, are very likely to remain out of the money. While we don't like the pain of seeing our positions decline in value, the pain is lessened by the premium income we collect.
Deleveraging. We keep hearing about this, and it's something that the pundits are pointing to as the reason why the economy's growing slowly. With both consumers and companies not taking on more debt, we hear, spending's constrained. Thus, the economy can't grow as rapidly as it did when individuals and companies were running up their debt and spending money.
It's a great theory, but it's not borne out by the facts.
A column by Gene Epstein in Barron's shows what's actually happening. When businesses borrow money, they generally invest in plants and equipment with the proceeds. So if businesses were not borrowing, then we'd see a big decline in the amount of money they spent on these investments.
The opposite is actually what's happening. According to Epstein, private sector plant and equipment increased by 7.8 percent in the first quarter. In the second, investment surged by 17 percent, although it's likely that a revision will drop that number down to a still incredibly strong 15 percent.
While it's possible that companies are funding that investment with cash on hand -- the amount of cash on hand at S&P 500 component companies has soared -- it still means that they're investing in long term assets that require additional sales in order to be worthwhile. And if the rest of the economy was growing at the same rate, we'd be talking about how miraculous the recovery we're seeing is and how the Fed is going to have to raise interest rates soon and how a half point increase in the discount rate was likely.
How about the consumer? Have high unemployment rates and a weak housing market caused consumers to stop borrowing? According to Epstein, the answer is no. While it's true that the savings rate has jumped from negative numbers at the height of the bubble to 6.2 percent in the second quarter, that's lower than the 7.2 percent we saw back in the depths of the recession.
Of course, a big part of consumer credit is tapped when people buy homes. And the housing market is still weak. But other things that consumers buy on credit -- durable goods -- aren't showing the same weakness. In fact, consumer spending on durable goods jumped by 8.8 percent in the first quarter of this year and 7.5 percent in the second. Wouldn't it be nice to see that kind of growth in the rest of the economy?
What are consumers spending their money on, in addition to durable goods? One thing is smartphones. These are expected to account for 20 percent of all cell phones by the end of the year, and growth in sales of smartphones climbed by 15 percent in the second quarter of the year on the heels of a 21 percent growth rate in the first.
Recent Comments