R is for Recession and Recovery By Ted Olshansky
Publish Date: November 30, 2007
The freefall was primarily due to two factors:
There is no doubt that the economy is slowing down. Remember we are coming off of several strong quarters. The FMOC reported that for 2008 it saw the economy growing at 1.8% to 2.5% which is down from its earlier 2.5% to 2.8% prediction.
The financial sector seemed to be getting worse news every day. There seems to be a transparency in their earnings since no one can get a handle on the extent of their losses and write downs. With Swiss company Swiss Re taking a one billion dollar write down, we can see that the sub prime fiasco is not only just a problem here in the U.S. When a company such as Swiss Re (Switzerland) takes a one billion dollar write down on its mortgage portfolio, we see that the housing problem also affects other countries. Further trouble for the market and the financial sector occurred when Goldman Sachs downgraded City Group. (Where were they at $56?)
As to why the market rallied, it can be attributed to a few key events. The first was the massive infusion of eight billion dollars into Citi Group by Abu Dhabi. Coincidentally, this is 4.9% of the capitalization of the company, just under the 5% which would have forced them to file information papers with the U.S. government which is required of foreign countries who own 5% or more of a U.S. company.
Another reason for the rally can be attributed to the decline in oil prices. Just a slight retread was welcome for investors and they were also heartened by Bernanke’s statements that the mortgage problem coupled with the housing downturn are potential causes of economic problems. This led investors to believe that further interest rate cuts could be in the offing. While more interest rate cuts may weaken the dollar, Bernanke has no choice now but to let the dollar fall while injecting more money into the system to keep it liquid and ease the housing and sub-prime problems.
As for now we are going to remain bullish for the following reasons. Interest rates are low with the ten year bond yielding under 4%. Commodity prices are high. Stock valuations (P/E Ratios) are very reasonable. Real estate is in the dog house. For now equities seem to be the only choice for investors. This can be seen clearly in last weeks action of the high dividend tobacco companies Altira and Reynolds. Investors bid up their prices with the idea that the 4% and 5% yield plus possible appreciation were worth the risk.
Bullish Bearish Number: 75
Q: I have heard option traders talk about “Deltas”. What exactly are Deltas?
A: The “Delta” of an option is the dollar amount it will increase or decrease on the first point up or down.
Example: XYZ stock trading at $50. A two month call trading at $2.00 may have a 40 delta. That means on a one day move to 51 the option would be worth $2.40 and on a move to 49 the option would be worth $1.60.