Investing: December 2009 Archives

Today is the third Friday of the month of December and that means options will expire.  That's likely to drive volatility in the markets.  On options expiration date, traders try to close out their positions with a profit, so they tend to make big purchases and that tends to drive stock prices up or down.

Our options positions, where we sold covered calls, are very likely to expire worthless today. That means we get to book the income and we don't have to sell our position, and then on Monday, we'll roll those options over and sell covered calls on our positions again.

Oil is likely to drive the markets as well, with news that Iran briefly moved its troops into Iraq and "seized an oil well."  The oil well was abandoned and Iranian troops withdrew after a few hours, but the news drove the price of oil up.  Concerns over oil may also cause some volatility in the markets today.

Naturally, the price of oil going up drove down the price of energy dependent stocks.  Airlines are likely to drop since the price of fuel is so critical to their profit margins, which have been negative lately.

There may also be some effect by the approach of Christmas next week.  Many traders will take some of the week of and that may cause them to close out their positions before they leave for the holiday.

In short, there are lots of factors that may drive volatility this trading day.  Enjoy the ride!

With the bad news about debt from Dubai, Greece, and Spain, world equity markets dropped.  The DAX and FTSE were off by one percent.  Asian markets dropped as well.  For the day, the MSCI world index declined for the fifth day in a row.

However, the one bright spot for equities markets was the United States.  American equities initially followed their counterparts lower, but by the end of the day upgrades on companies like 3M and Sprint resulted in a gain for the major indices.

The Dow, S&P 500, and Nasdaq all rose for the day.  The Dow climbed by 0.5 percent to 10,337.  The S&P 500 was up by 0.4 percent to 1,096.  And the Nasdaq rose by 0.5 percent to 2,184.

Analysts said that the reason for U.S. equity markets defying the trend and gaining on a day that saw declines for many of their counterparts was an increase in confidence by investors as well as a willingness to take on additional risk.

However, in light of the downgrade of Greece's and Dubai's debt and a warning from Moody's that the economy of the United States is unlikely to grow at a fast enough pace to reduce significantly the ballooning American deficit, investors need to be cautious.  Some said that this warning from Moody's amounted to "a warning shot across the bow of the US triple A rating."  Any cut in the rating would increase borrowing costs and drive up interest rates.  That would create problems for the economy which is working its way out of the worst downturn since the Great Depression.

Analysts also said that many large institutions are not looking to shoot for big gains by the end of the year.  Instead, they're looking to lock in their gains and close out the year with a positive return.

Investors will also get some critical data on the economy in the next few days.  First will be the weekly data on initial unemployment claims.  With the government reporting that job losses improved to their best level since the recession began, investors will look to see if the weekly claims data confirms the payrolls information.  They'll also be looking at retail sales figures that will be released by the government on Friday to see if the consumer is returning.

That data will definitely be market moving, so investors should be ready to react to it.

Today's downgrade of debt from Greece and Dubai as well as a revision of Spain's debt outlook to negative show that while the financial system may have stabilized, problems remain.

Fitch reduced its rating on Greece's debt from A- to BBB+.  Greece's debt is still considered investment grade, however, there was also a negative outlook assigned to it.  That was a blow to the Greek government, which is struggling to contain a ballooning deficit.  These actions came on the heels of another warning from Standard & Poors.

Moody's also contributed to the concerns about credit, with a downgrade of six Dubai companies with ties to the government.  These companies, which had invested in huge projects during the recent economic boom, were assumed by many to have the backing of the emirate's government.  With Dubai officials making clear that no such backing exists, investors have grown concerned that these companies may not be able to make good on their promises.

The bad news continued, as S&P revised its outlook on Spain's debt to negative from stable.  Spain's debt had been downgraded from AAA in January, but S&P put a stable rating on the debt, indicating that it believed Spain's debt wouldn't face additional pressure.  The likelihood of continued pressure stems from an extended period of economic weakness and greater deterioration in the Spanish government's finances.

"We now believe that Spain will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers...with trend GDP growth below 1 per cent annually," S&P said.

Naturally, on this news, stocks dropped.  Greek stocks dropped six percent in response to the news.  Dubai's stock market plunged by 6.1 percent, with losses lead by banks with exposure to Dubai's debt.  And European stock markets closed lower, with the FTSE off by 1.6 percent and the DAX down by 1.7 percent.

BNP Paribas said "first Dubai, now Greece, and loitering in the background are Eastern European countries that are struggling with huge deficits.  The implication globally is that the financial crisis is far from over and particularly sovereign risk has significantly intensified."

Investors would be well advised to heed those words.  The financial system isn't on the brink anymore, but it's still facing problems.

After getting much better than expected news on the labor market, stocks climbed.  However, the initial pop, which saw major indices climb by more than one percent, stocks gave back much of their gains.

The S&P 500 swung between gains and losses 20 times per day according to data compiled by Bloomberg.  At the close, all of the major indices were up.  The Dow climbed by 0.2 percent to 10,389.  The S&P 500 was up by 0.6 percent to 1,106.  And the Nasdaq climbed by one percent to 2,194.

Economists all agreed that the much better than expected payroll numbers was good news.  National Bank Financial, whose estimate came closest to the actual number, said that there could be a return to increasing payrolls after the revisions to the initial data.

Still though, Credit Suisse said that while the trend is positive, the economy may not have yet hit the trough in employment.  While revisions have been in the positive direction lately, "we shouldn't take that as evidence that we're at the bottom."  The National Bureau of Economic Research, which is the official judge of when recessions begin and end, said that it's likely "the trough in employment will be around this month."

So while the trend in jobs was good news for investors, worries about jobs were replaced with worries about what the Fed might do with interest rates.  If the job market returns to growth, then the Fed will likely unwind its unprecendented measures to inject liquidity into the system and then they will raise interest rates.  Rising interest rates tend to drive down stock prices, so investors were concerned.

Even so, the good news is that jobs, which are a lagging indicator, seem close to turning the corner.  If that's the case, then stocks will rise as the economy picks up.

E-commerce sales in the United States rose by 14 percent compared with last year, according to Coremetrics.  Analysts had projected growth of anywhere from five to ten percent, so the actual results were much better than expected.

However, while the growth in online sales is good news, it's important to keep it in perspective.  Online sales only account for six percent of total retail sales, so much of the holiday spending will be done in traditional stores.  The growth in the online sector will have a small impact on overall retail sales for the holiday season, which the National Retail Federation is expecting to decline by one percent.

And just like in traditional stores, retailers online are using discounts to get consumers to shop.  Amazon began running promotions about a week before the Thanksgiving weekend kickoff to the holiday shopping season.  Their promotions included discounts on LCD televisions and some CDs priced at $5.

So while the discounting online will eat into the margins of retailers, there are likely winners.  Who will those winners be?

The companies who take the merchandise ordered online and deliver it to the customers who ordered it.  Discounts and free shipping may hurt margins of retailers, but they boost the profits of UPS and FedEx.

FedEx expects to process 13 million packages on December 14, which is its busiest day.  Last year, they processed 12 million packages, so in one year, they'll see an increase in packages of 8.3 percent.  In order to deal with the additional traffic, FedEx will hire 10,000 temporary employees.  Its bigger rival, UPS, will hire 50,000 additional workers.

According to analysts, two things that consumers look for when shopping online are ease of purchase and free shipping.  So, with one of the best tools online retailers have being waiving shipping costs, expect UPS and FedEx to benefit.  As Marketplace said, the surge in online shopping can be summed up as win one for the shipper.

Dubai World's announcement that it would seek a "standstill" agreement on all of its debt roiled the markets last week.  A new announcement from the company, however, eased those worries.  The big news was that Dubai World would only be seeking relief on slightly less than half of its debt.  Instead of negotiating with banks on all $59 billion of debt that Dubai World owes, they will only be looking to restructure $26 billion of their debt.

Dubai's ruler also sought to reduce worries from investors.  In a press conference, when asked about worries about Dubai defaulting on its debt, he said that those worrying about a default "do not understand anything."

In addition, the president of the United Arab Emirates, of which Dubai is a member, said that the UAE was in "good condition" and strong enough to handle "the current difficult circumstances of the international economy."  He added that most sectors of the economy had started to show growth in the current quarter.

Investors saw the potential default of Dubai World as another hit that the world's banking system couldn't take after reeling from $1.7 trillion in losses and writedowns.  The Royal Bank of Scotland has the most capital at risk with Dubai World, while HSBC has the most capital invested in the UAE, reports from JPMorgan Chase said.

Analysts said that Dubai World's latest announcement removes a lot of worry from the market.  They called the problem a relatively small one.  However, they also said that investors should see the Dubai crisis as a sign that the world's economy is still not out of the woods and that caution needs to be part of any investor's thinking.