Morning Review - 101810

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.
com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com
Stocks were mixed Friday after choppy trading on foreclosure and recovery worries (S&P 500 +0.2%, Dow -
Morning Markets Briefing
0.3%, Nasdaq +1.4%). Headline inflation eased to +0.1% in September from a 0.3% gain in August, while the
core CPI (excluding food & energy) was flat for a 2nd straight month. Retail sales advanced for a 3rd month, October 18th, 2010
Market Commentary:
adding 0.6% in September after August’s upwardly revised 0.7% climb. Excluding autos, retail sales increased
0.4%. Meanwhile, the Empire State manufacturing index jumped to 15.73 in October from 4.14 the prior month A snapshot of the markets through the lens of
due to substantial gains in new orders and employment. In an unexpectedly weak reading, the University of ConvergEx.
Michigan consumer sentiment index sank to its lowest level since July, hitting 67.9 in its mid-October gauge, as
consumers’ assessment of current conditions fell sharply.
The Social Network of Options Pricing and Stock Market Risk
Summary: Our monthly review of risk pricing in the options market shows that we can put “complacency” into the same high correlation bucket that shadows asset classes as diverse as
fixed income, small and mid cap stocks, and equity market industry categories. Only the financial sector and precious metals saw higher levels of implied risk in the past month. The
bank/brokerage/insurance complex is clearly struggling to price in the outcome of the growing foreclosure crisis. Notable here is that overall market action remains positive in the face
of those concerns, a stark contrast to 2008 when financials led global equity markets to the brink. Precious metals risk pricing is on the rise, but likely because this asset class should be
one of the few to benefit from increasing inflation expectations. That’s more an endorsement of gold and silver than a sign of concern.
Social networking – Facebook, Foursquare, Twitter and countless other businesses – would likely not be around today if it weren’t for the Cold War of the 1950s and 1960s. That is
because the Internet as we know it is a direct offshoot of something called ARPANET, a government program from that time which sought to tie then-scarce computing power around the
country to manage radar systems meant to detect inbound Soviet nuclear missiles. It was developed by a Defense Department agency called DARPA (Defense Advanced Research Projects
Agency), created in the wake of the Russian’s successful Sputnik launch. Its mission is to “think outside the box” on issues of national defense and over the years it has not only planted
the seeds for the modern Internet but also had a hand in everything from the F-117 Stealth Fighter to the choice of the M-16 assault rifle as the battlefield weapon of choice for the U.S.
military.
DARPA is now actively involved in examining the uses of social networking for 21st century defense initiatives, as its recent “Red Balloons” challenge highlights:
 The agency put 10 red weather balloons in various locations around the country and invited the public to identify all their locations. The person or team that could do this in the
shortest time would win $40,000. All the balloons were visible from public, often heavily traveled, spaces.
 A team from MIT cracked the problem in just under nine hours, using nothing more than a website and popular online social networks. They offered a share of the prize money
to people who found a balloon and gave smaller shares to those who could refer others who could log an accurate entry.
Market Commentary – Pages 1-3, Equities/Conferences & Earnings – Page 4, Fixed Income – Page 5, Options – Page 6, Exchange-Traded Funds/Indexes – Page 7, Social Media &
Internet Blogs Top Stories – Page 8
1
©2010 BNY ConvergEx Execution Solutions LLC. May not be redistributed without express permission. All rights reserved 1
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
 Part of their success was to engage individuals who had no positive sightings. People with no balloons in their area still had valuable information, in that the MIT team also had
to deal with competitors who pinged them with erroneous information to sabotage their efforts.
There are obvious connections between the “Red Balloon” challenge and what investors do every day to collect actionable information. Important data points exist everywhere, often in
plain sight. Getting to them requires a network of sources, be they real people in the case of fundamental stock analysis or quantitative information for the myriad of automated
strategies used in every asset class. Red herrings abound as well, and knowing what data is wrong is just as valuable as honing in on the right ones.
With the spirit of this networking approach to market analysis in mind, I’ll turn the focus today to what the options market can tell us about recent stock market action. Listed options sit
in what most equity investors think of as a parallel universe to their own. The same, and yet somehow different. Sure, options players talk about company fundamentals and whether a
stock is going up or down. But then there is their need to explicitly price risk – exactly how much is a given stock going to go up or down in the next days, weeks, or months?
The answer to this analysis is something called implied volatility (IV for short). A larger IV means that the options market is expecting the underlying stock move around more than an
equity with a lower IV. Since options markets play the role of insurance provider to equity investors, IVs also tend to rise when investors fear near term declines in stock prices. If you
follow the CBOE VIX index as an indicator of investor sentiment, you are essentially tracking the IV of the options for the S&P 500 index. Higher numbers, such as what we saw during the
financial crisis when the VIX was over 40, indicate market wide fear about a drop in stocks. Lower numbers – something in the 20-or-less neighborhood – indicate perceived stability at
best and complacency at worst. The VIX currently sits at this end of the continuum, at 19.
The following two charts show the percentage change in IVs for a host of industry sectors and asset types as well as how their performance has fared over the last month. Some
observations from this analysis:
 Fear about financials, but not much else. Far and away the most striking dichotomy in the stock market today is the way equity investors dismiss any broader implications of the
ongoing foreclosure mess. The IVs for the financial sector of the S&P 500 are up 7.7% since last month and, aside from a tiny blip in the Telecomm sector, no other sector saw its
IV rise in the same period. The last time the financials saw big-time trouble – the 2008 crisis – the market fell in sympathy from fears that a banking crisis would spread
throughout the economy. Which, of course, it did. Not so now, as is obvious from a +11,000 Dow and +1175 S&P 500.
 Love (and maybe a little fear) for precious metals. The last month has clearly belonged to gold and silver, which both bested financial assets of all types in terms of performance.
Their IVs also rose over the period, which is likely the result of two factors. One is that both metals are at or near generational highs and investors want to take out some
insurance in case of a pullback. The other is that options players are using gold and silver ETF options (we use the GLD and SLV options data here) to hedge against rising
inflation. Not many financial assets actually rise when inflation takes hold, so incremental capital may well be willing to pay more in terms of IV for gold and silver.
 Market complacency isn’t just for stocks. The IVs for high grade and high yield corporate bonds saw the steepest declines in percentage terms last month.
The storyline behind the last month is clear: investors have chosen not to “Fight the Fed” as it gears up for further monetary stimulus. That supports stock prices, weakens the dollar,
gives rise to the popularity of precious metals as a hedge against inflation, and lowers bond yields. To borrow from the social networking lead to this note, investors have clearly
“Friended” the Fed. If there is a concern about equity prices it is that the stock market and the Fed need to stay “BFFs” (Best Friends Forever, in the parlance of the under-30 set) for a
long time to come.
2
3
U.S. EQUITIES
The KBW Bank Index sank 2.4% as financial stocks continued to be hit by a wave of concern over the potential fallout from the foreclosure crisis. S&P Equity Research
downgraded BAC (-4.9%) to “Hold” from “Strong Buy,” saying the bank was not as prepared for the crisis as JPM (-4.1%), for example. In earnings news, GE fell 5.0%
after topping profit estimates but posting quarterly revenue that fell short of expectations, while MAT (-6.5%) also beat on the bottom line but missed top line estimates
due to lower gross margins. On the plus side, GOOG soared 11.2% after it handily beat Street earnings estimates after the bell on Thursday.
Important Earnings Today (with Estimates) From…

 AAPL: $4.05  LNCR: $0.47 S&P Futures
 BRO: $0.28  MMR: $-0.25 One Day (High –1180.00; Low – 1163.00):
 C: $0.05  STLD: $0.09
 HAL: $0.55  VMW: $0.21
 HAS: $1.04  ZION: $-0.51
 IBM: $2.75 Source: Bloomberg
Important Conferences/Corporate Meetings Today:

Citi Greater China Investor Conference – Beijing, China
Prior Day SPX (High – 1181.20; Low – 1167.12; Close – 1176.19): Three Day (High – 1181.00; Low – 1162.50):
Source: Thomson ONE
4
FIXED INCOME
The Treasury budget rounded out fiscal year 2010 with a $1.29 trillion debt, which equals 8.9% of GDP, compared with last year’s $1.42 trillion gap that made up 10.0%
of GDP. Longer-term Treasuries declined Friday on speculation the Fed will implement monetary easing, as the 30-year bond yield touched a 1-month high. Meanwhile,
Fed Chairman Ben Bernanke said that high unemployment and subdued inflation “appear” to be a case for further central bank action, though he emphasized the need
to proceed with caution, as monetary easing has “costs and limitations “ that must be weighed to determine “whether and how aggressively” such policies should be
used.
Source: Bloomberg Source: Bloomberg
Today’s Important Economic Indicators/Events (with

Consensus):
 Treasury International Capital (9:00am EST)
 Industrial Production (9:15am EST): 0.2%
o Capacity Utilization: 74.8%
 NAHB Housing Market Index (10:00am EST)
 Dennis Lockhart Speaks at 12:30pm EST
5
U.S. EQUITY
OPTIONS
SPX – The underlying index rallied in early trading, posting its high of the day (+0.6%), then quickly selling off to the low of the day (0.6%). As sometimes happens, the final SPX settlement (1183.97) was
actually higher than the composite high on the SPX cash (1181.20) recorded for the day. This is due to the mechanism for calculating the settlement value, in which the opening value of all the individual
openings in each of the 500 SPX stocks are used, although some of these may not open for some time while the “composite” is already posting. Despite the early burst of volatility, the index spent most of
the day oscillating in a tight range around the unchanged level, ending +0.2%. The implied premium in SPX options (as measured by the VIX) jumped on the early activity to a intra-day high of +9%, but
ended the day - 4 %, reflecting the more subdued trading following the morning burst. The activity in SPX options was mixed. There were sizable sellers of options, such as the Dec 975 puts which were sold
at various prices throughout the day about 15,000 times. There were also several buyers of options such as the purchase of over 10,000 November 1125 puts.
ETFT- The market opened in positive territory sold off following concerns in the financial sector then hovered around neutral over the course of the day. Options volume was elevated with Friday marking the
last day of trading prior to October expiration. We highlight a massive trade in GLD as paper bought the Dec 145 / 150 / 154 skewed call fly 77,000 times on the wings and 154,000 times on the innards.
This position is most profitable if GLD reaches $150. An investor in GDX purchased a far out-of-the-money put through buying 40,000 GDX Jan12 25 puts. In the international space EWT (Taiwan) saw
volatility buyer through the Dec 13 / 14 strangle 9,000 times, while in FXI (China) paper bought ~20,000 Nov 48 calls. Lastly, XLK (Tech) had investor buying 20,000 Nov 24 calls, while UUP (DB US Dollar
Index Bullish Fund) saw increased volume with paper buying Jan 24 calls 10,000 times.
CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

Rank 10/11/2010 10/12/2010 10/13/2010 10/14/2010 10/15/2010 30-Day Implied Vol
1 PTV PTV PTV PTV PTV 8.01 BIGGEST MOVERS
2 MFE DTV MFE MFE MFE 5.22 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
3 DTV MFE DTV DTV DTV 21.80 FRX 33.12% 29.65 APOL -61.83% 57.77
4 RSH RSH RSH RSH RSH 40.96 JWN 28.33% 41.81 FTR -30.44% 18.82
5 CLX CLX PNW BMC BMC 53.70
FIS 18.62% 26.03 DV -28.03% 60.04
6 MYL MKC BMC HSP HSP 31.42
7 K K PBI MJN MJN 34.39 APD 18.52% 24.70 PNW -19.08% 25.41
8 MJN PBI CLX CLX CLX 18.30 EMC 17.55% 38.99 SWY -18.75% 24.48
9 FSLR MRK MJN CHRW CHRW 24.95 LO 16.82% 20.49 PCS -16.28% 50.02
10 CHRW M AMGN KMB KMB 15.05 MWW 16.73% 53.31 C -12.73% 35.31
11 PBI APOL HSP M M 41.31 Q 16.50% 26.95 PBI -10.98% 26.58
12 MRK FSLR M FSLR FSLR 50.56
GNW 16.48% 53.45 RSG -9.05% 26.21
13 M SWY KMB FIS FIS 26.03
14 PCS MYL FSLR AMGN AMGN 28.80 NRG 16.45% 27.85 GWW -7.80% 25.72
15 VRSN CHRW CHRW MYL MYL 27.90
16 BMC HSP MYL SJM SJM 22.03
17 HSP BMC SYMC MDP MDP 41.34 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
18 SWY VRSN APOL HRS HRS 34.55 historical volatility ratio. Above we identify the 10 most positive and negative movers.
19 APOL PCS CA ABT ABT 16.99
KG GME HRS VAR VAR 26.66
The table to the left represents the 25 highest 30 day implied to historical volatility
20
21 KMB MJN VRSN VRSN VRSN 31.43

22 GME SJM SJM CA CA 30.15 ratios within the S&P 500 companies. The green represents names new to the list while
23 SJM AMGN PCS ORLY ORLY 29.29 the red represents names that have fallen out.
24 HRS AVP MDP PPL PPL 19.59
25 CA CA K PNW PNW 25.41
MKC HRS AVP K K
AMGN KMB SWY MDP MDP
FTR KG MRK PCS PCS
MKC APOL APOL
PBI PBI
6
Exchange-Traded Funds/Indexes
Prior Day Peform ance ofLargest ETFs by Assets S&P 500 Sector ETFs
Nam e (Net Assets*) Ticker Category Daily Return Sector Ticker 1-Day Perf YTD Perf Sector Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 0.25% Energy XLE 0.25% 3.84% Telecom m IYZ -0.14% 9.39%
SPDR Gold Shares GLD N/A -0.79% Health XLV 0.42% 0.26% Technology XLK 1.73% 5.10%
iShares M SCIEm erging M arkets Index EEM Diversified Em erging M kts -0.12% Industrials XLI -0.62% 15.98% Consum erDiscretionary XLY 0.73% 16.59%
iShares M SCIEAFE Index EFA Foreign Large Blend -0.33% Utilities XLU 0.35% 2.87% Financials XLF -1.75% -0.42%
iShares S&P 500 Index IVV Large Blend 0.12% Consum erStaples XLP 0.25% 8.08% M aterials XLB 0.26% 4.82%
Prior Day Top Volum e ETFs Currency ETFs
Nam e Ticker Category Shares Traded Currency Ticker 1-Day Perf YTD Perf Currency Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 213,820,006 Australian Dollar FXA -0.49% 10.01% M exican Peso FXM 0.16% 4.87%
FinancialSelectSPDR XLF Specialty -Financial 111,664,579 British Pound Sterling FXB -0.12% -1.28% Sw edish Krona FXS -0.98% 7.79%
Pow erShares QQQ QQQQ Large Grow th 86,504,330 Canadian Dollar FXC -0.60% 3.61% Sw iss Franc FXF -0.60% 7.72%
iShares M SCIEm erging M arkets Index EEM Diversified Em erging M kts 69,270,329 Euro FXE -0.70% -2.57% USD Index Bearish UDN -0.54% 0.11%
iShares Russell2000 Index IW M Sm allBlend 67,752,574 Japanese Yen FXY 0.06% 14.00% USD Index Bullish UUP 0.59% -3.21%
Prior Day Top Perform ers VIX ETNs Fixed Incom e ETFs
Nam e Ticker Category Daily Return Nam e Ticker 1-Day Perf YTD Perf Bonds Ticker 1-Day Perf YTD Perf
ELEM ENTS CS GlobalW arm ing ETN GW O N/A 10.18% 6.9 iPath S&P 500 VIX VXX -1.97% -57.70% Aggregate AGG -0.20% 4.68%
ProShares UltraPro QQQ TQQQ Large Grow th 6.38% Short-Term Futures ETN Investm entGrade LQD -0.63% 6.92%
Direxion Daily Technology Bull3X Shares TYH Specialty -Technology 6.00% High Yield HYG 0.26% 2.28%
ProShares Ultra QQQ QLD Large Grow th 4.22% iPath S&P 500 VIX VXZ -1.01% 3.77% 1-3 YearTreasuries SHY 0.04% 1.74%
Direxion Daily FinancialBear3X Shares FAZ BearM arket 4.20% M id-Term Futures ETN 7-10 YearTreasuries IEF -0.43% 11.50%
20+ YearTreasuries TLT -1.21% 11.56%
Others
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD -0.79% 24.57% Crude Oil USO -1.47% -9.70%
Silver SLV -1.20% 43.54% EAFE Index EFA -0.33% 4.07%
NaturalGas UNG -2.74% -43.65% Em erging M arkets EEM -0.12% 12.58%
Major Index Changes:
SPDRs SPY 0.25% 5.62%
None
ETFs in the Headlines and Blogs:

 Increased Demand Could Boost Coal ETFs - http://www.dailymarkets.com/stock/2010/10/14/increased-demand-could-boost-coal-etfs/
 ETF Trading Activity Up 15.5% From 2009 - http://blogs.barrons.com/focusonfunds/2010/10/15/etf-trading-activity-up-155-from-2009/
7
Top Online Social Networking Stories
Latest Popular Digg.com Business News

 Where Are All the Homebuyer Tax Credits? - http://blog.turbotax.intuit.com/deductions-and-credits/where-are-all-the-homebuyer-tax-credits/10072010-3728
 Why Brazil Is Right to Auction Off the Amazon Rainforest - http://www.fastcompany.com/1694802/brazil-auctioning-off-pieces-of-the-amazon-to-timber-companies
 CVS Pharmacy to pay $75 million civil fine for problem in sale of meth ingredient - http://www.chicagotribune.com/business/sns-ap-us-cvs-meth-fine,0,5776576.story
 America’s Most Stolen Products - http://www.walletpop.com/blog/2010/10/14/americas-most-stolen-products/
Calculated Risk
 Retail Sales increase in September - http://www.calculatedriskblog.com/2010/10/retail-sales-increase-in-september.html
 Bernanke: “Appears to be a case for further action” - http://www.calculatedriskblog.com/2010/10/bernanke-appears-to-be-case-for-further.html
The New York Times

 From a Main House, a National Foreclosure Freeze - http://www.nytimes.com/2010/10/15/business/15maine.html?_r=1
 The Mortgage Morass - http://www.nytimes.com/2010/10/15/opinion/15krugman.html
The Big Picture

 The PermaBear to English Translation Guide - http://www.ritholtz.com/blog/2010/10/the-permabear-to-english-translation-guide/
 Mortgage Market Breakdown by Equity/Delinquency - http://www.ritholtz.com/blog/2010/10/mortgage-market-breakdown-by-equitydelinquency/
Economist’s View
 “United in Our Delusion” about Taxes - http://economistsview.typepad.com/economistsview/2010/10/united-in-our-delusion-about-taxes.html
Bespoke Investment Group

 Google Trading Up in Earnings - http://www.bespokeinvest.com/thinkbig/2010/10/14/google-goog-trading-up-on-earnings.html
 Long End of the Yield Curve Keeps Getting Steeper - http://www.bespokeinvest.com/thinkbig/2010/10/14/long-end-of-the-yield-curve-keeps-getting-steeper.html
 Sovereign Debt Default Risk - http://www.bespokeinvest.com/thinkbig/2010/10/14/sovereign-debt-default-risk.html
Zero Hedge
 Meet Danielle and Jim Plus 9: The Squatters Who “Reclaimed” Their Foreclosed Home Over the Weekend - http://www.zerohedge.com/article/meet-danielle-and-jim-
plus-9-squatters-who-reclaimed-their-foreclosed-home-over-weekend
8
GENERAL DISCLOSURES
This presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It is provided for general informational
purposes only and should not be relied on for any other purpose. It is not, and is not intended to be, research, a recommendation or investment advice, as it does not constitute
substantive research or analysis, nor an offer to sell or the solicitation of offers to buy any BNY ConvergEx Execution Solutions LLC (“ConvergEx”) product or service in any jurisdiction. It
does not take into account the particular investment objectives, restrictions, tax and financial situations or other needs of any specific client or potential client. In addition, the information is
not intended to provide sufficient basis on which to make an investment decision. Please consult with your financial and other advisors before buying or selling any securities or other
assets. This presentation is for qualified investors and NOT for retail investors.
Please be advised that options carry a high level of risk and are not suitable for all investors. To receive a copy of the Options Disclosure Document please contact the ConvergEx
Compliance Department at (800) 367-8998.
The opinions and information herein are current only as of the date appearing on the cover. ConvergEx has no obligation to provide any updates or changes to such opinions or
information. The economic and market assumptions and forecasts are subject to high levels of uncertainty that may affect actual performance. Such assumptions and forecasts may prove
untrue or inaccurate and should be viewed as merely representative of a broad range of possibilities. They are subject to significant revision and may change materially as market,
economic, political and other conditions change.
Past performance is not indicative of future results, which may vary significantly. The value of investments and the income derived from investments can go down as well as up. Future
returns are not guaranteed, and a loss of principal may occur. The information and statements provided herein do not provide any assurance or guarantee as to returns that may be
realized from investments in any securities or other assets. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a
limited view of a particular market.
The opinions expressed in this presentation are those of various authors, and do not necessarily represent the opinions of ConvergEx or its affiliates. This material has been prepared by
ConvergEx and is not a product, nor does it express the views, of other departments or divisions of BNY ConvergEx Group, LLC and its affiliates.

Morning Review - 101810

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Morning Review - 101810

Загружено:

Авторское право:

Доступные форматы

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.

The Social Network of Options Pricing and Stock Market Risk

Important Earnings Today (with Estimates) From…

Important Conferences/Corporate Meetings Today:

Source: Thomson ONE

Source: Bloomberg Source: Bloomberg

Today’s Important Economic Indicators/Events (with

CURRENT IMPLIED VOLATILITY / CURRENT HISTORICAL VOLATILITY

21 KMB MJN VRSN VRSN VRSN 31.43

ETFs in the Headlines and Blogs:

Top Online Social Networking Stories

Latest Popular Digg.com Business News

The New York Times

The Big Picture

Bespoke Investment Group

Вам также может понравиться