Traderbill's Financial Markets Weblog

 …that would be the stock market for 2007. Today will be the last real trading of the year…and that will end in the opening hour…then comes the triple witching…then they will start filing out to do their Christmas shopping. A few things TB found interesting:

If you read the market summaries you know that TB checks options expiry every day. The VIX (S&P 500) and the VXN (Nasdaq 100) are quoted. I week ago TB was quite concerned than volatility began to drop…consistently and fairly sharply especially on VXN. That was why TB was convinced that today would be the last real trading day…although there might be a chance of something on his birthday (26th) which is the last day of trading for hedge funds as they use trade date plus three settlement for book purposes and that is the last trade day for yearend…if you are doing tax planning you need to know this too. So it will be incredibly foolish…unless you are a money manager for window dressing to trade the market from here on out.

Both volatility indices are a weighted average of the first and second month expirations until 8 trading days before expiry…then is shifts to the 2nd and 3rd months. Now pay attention. There is an options trader on CNBC who along with his brother know more about options than anyone. He pointed out last night that while volatility on the front month is low it is up on January (expiration 1/18) and the second month February (expiration 1/15)…both of these expirations are about as early as they can get in the month. He said that this state of contango where the volatility is higher in each of those months indicates that volatility will rise sharply again in the first half of January. THEN, when it drops, that is when a rally will develop (at least a trading rally), and cited the 16th of August which was that huge selling climax that triggered the 9.1% in rally in the Dow and 10.1% rally in the S&P 500 culminating on 10/11, a week before expiry, and 21.3% rally in the Nasdaq 100 which ended on Halloween! He then pointed to China which with similar volatility patterns rallied 53% over the same period as the Nasdaq (strange coincidence…but there are no coincidences in science are there?), then fell 17.8% thru 11/22 (Thanksgiving), then rallied 13.7% thru 12/6 (in honor of Pearl Harbor Day?), then dropped 10% from 12/6-12/18…he thinks that indicates another big rally is coming…in China, not here…yet. Think of the money you could have made had you had access to that volatility information. He said that he has found volatility, when in contango to be the best indicator of rallies…not promising anything but worth watching.

(Since 12/18 the Hang Seng is up just 3.3% so there is still time. IF you want to play it iShares has two ETF’s (remember in an ETF outside of an IRA, you can short it): the Hang Seng (EWH), and the Xinhua China 25 Index (FXI). Both track very well but FXI is the more volatile one overstating the Hang Seng moves while the EWH is slightly tamer. Note that the two Mainland China indices (Shanghai and Shenzhen are unregulated exchanges and thus have very different (more bullish) trading patterns. TB does not own any China stocks or ETF’s, but is considering using one of the ETF’s.

If you are an economist and want to learn how to toss economic theory overboard in favor of political ends has TB got a job for you (at least in the current administration): Chairman of the Council of Economic Advisors. CNBC assembled the Chairman (Ed Lazear), Commerce Secretary Guittierez, and Director of OMB, Steven McMillan…in a shopping mall in D.C. if you can believe that. CNBC resident economist, Steve Liesman was moderator. Lazear did most of the talking saying that he saw NO chance of a recession (Post poll shows 60% of Americans see a recession but that didn’t stop him). He said admittedly the 4th quarter was slow, and 1st quarter might be a wee bit slower but then it is off to the races. He also said he was encouraged by the jump in retail sales in November…guess no one told him that Thanksgiving came early and there were six more shopping days which will mean fewer this month. Liesman was gentle and the other two panelists had little to say more than putting a slight positive spin on the data. That is amazing given the reports we had yesterday:

*GDP 3rd Quarter Final: 4.9% unchanged from preliminary but the Price Index was revised up 0.1% to 1.0%, and that is not good news for the Fed even though it has been declining since Q2 2006. However nearly a full point of the GDP was due to higher inventory Investment…which must be viewed as involuntary…have you looked at auto sales?

*Leading Economic Indicators: Declined 0.4% in November and the second consecutive decline (Oct -0.5%)…year over year it is down 0.9% and over the past six months it has declined by 2.3%…guess Lazear doesn’t pay attention to this.

*Weekly Jobless Claims jumped 12k to 346k vs. consensus of 335k. While not significantly higher it along with Continuing Claims has been rising since the end of 2005.

Instead, Lazear pointed to the millions of jobs that have been created under this Administration, disregarding the benchmark revision to the Birth/Death census of business which will cause a million jobs to evaporate in February. Good luck to him and his credibility.

Also guess he didn’t pay attention to that huge subprime (CDS squared) problem of MBIA’s…a monoline insurer that got greedy and never should have been investing in this. The CEO of AMBAC who also owns them…birds of a feather…said that it wasn’t a concern as they are long term investors…yes they are in the most negative sense. Remember when Orange County Treasurer Robert Citron said not to worry as they hold to maturity?…he forgot he bought them on margin and the decision wasn’t his to make! These investments (?), derivatives of derivatives of derivatives, make Citron’s ill-advised bets look like childs play! Now the underwriters…also the ones who sold them the derivatives…are panicked because the muni bonds and other debt the monolines insured (we insure what we own?) are now in danger of losing their Aaa ratings! That will be the next and real wave as investors scramble to liquidate. 

Then this morning Brian Wesbury was arguing that the economy is strong and that despite the subprime crisis we haven’t seen any major impact on the broad economy…yet. What he is ignoring is that the initial foreclosures were due to people who never should have been given credit to own a home. Secondly, we are now seeing resets impacting people…that is the reason the foreclosures slowed last month but delinquencies rose (delinquencies turn into foreclosures…and also to credit card delinquencies and more bankruptcy filings…despite the Band-Aid created by Paulson). Lastly, we have another round of resets next quarter…good luck. Ah but you say, the banks will moderate those terms…if they can and still own the loans which is doubtful. This will be the greatest decade to be a trial lawyer in history! Also, if the banks do give better terms then what happens to their profit margins? This is now the era to have an adjustable rate loan…if you can get one…and be sure it is not tied to LIBOR!

Wesbury, like Kudlow, sees the world thru rose-colored glasses!

If you can keep your head while all those are losing yours…you are not only a better man than TB my friend…you don’t understand the situation.