Recently in Business and Financial Blogs Category
Adam Warner over at Daily Options Report discusses the differences between the cash VIX and futures VIX.
The best analogy is to the weather. Think of the *cash* VIX as today's weather, and the VIX futures as a contract that guesses the temperature 30 days forward from the day they expire. The same way a warm day in August will not help you call December weather, a blip up or down in the VIX will not likely impact Dec. VIX futures all that much.
Okay, so what are the cash VIX and future VIX values? If you go to the CBOE website and mouse over the VIX symbol in the upper left hand corner, you can see how cash VIX has changed throughout the day. And if you click on the VIX symbol, you will get the latest cash VIX quote (with the quote delay).
A list of futures symbols can be found at the CFE site. Simply click on the month of interest, and you will get the latest quotation.
As Adam mentions in his article, the current cash VIX is less than the futures VIXs. Thus, if the cash VIX were to pop, the futures VIX is unlikely to pop as much, because the futures VIX is already anticipating that over time the cash VIX will rise.
For those interested in learning more about the VIX, here are two articles that might be of interest:
The white paper provides more specificity on how the VIX is calculated.
Adam has repeatedly made the point that you should not look at the absolute value of the VIX, but rather look at it in context. For example, today's VIX is about 21. Is that high or low? The answer to that question depends upon how VIX has been trading recently. If you look at Yahoo!'s VIX chart, you will note that today's VIX is toward the lower end of its range for the past year. Part of the reason why it is lower is that we are in a very slow part of the year, just before Labor Day. As Adam points out, the futures VIX for September is about 23, which looks much closer to the middle of the values in previously referenced Yahoo! chart.
The point of this article was to provide additional information on the VIX. I have given you links to where you can find quotes on the cash and futures VIXs. And you can follow Adam's blog where he often discusses VIX values.
My photograph of the Mount Edith Cavell is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
Update: 27 August 2008
Adam has another very salient post VIX Vx. VIX on this topic.
With the recent market turbulence, I am sure a lot of you are anxious about your stock holdings and what you should do next. Your first step in making any decisions should be to understand what you own.
Barry Ritholtz wrote an article back in October 2005 titled, Apprenticed Investor: "How My Doin?", where he provided a spreadsheet. Rather than link to Barry's spreadsheet from here, I ask that you visit Barry's article. After completing his spreadsheet with each of your holdings allocated to a sector, you will clearly see how diversified you are. Moreover, you will see for each of your stocks its overall percentage of assets. You will also complete some standard valuation measures such as dividend yield, price to earnings ratio, projected growth, PEG ratio, and beta.
Another excellent source of information to be used in conjunction with Barry's spreadsheet is the S&P 500 website with quantitative data. With the S&P data and your spreadsheet, you can see whether or not you are overweighted in different sectors relative to the index.
If you are managing your own money, you are most likely weighted significantly different than the index. You have taken a deliberate strategy to be different. However, you should review your portfolio periodically and ensure that your current weighting reflect your intentions. Over time, your portfolio weightings will change as some sectors lose while others gain.
My portfolio has a large cash position relative to the overall portfolio. I have been purchasing more oil stocks during this current correction. And if prices continue to fall, I will purchase more. My intent is to be overweight commodities in general and oil related stocks in particular. Nonetheless, I still have stocks from other sectors. So I am not completely concentrated in commodities.
A correction is a good time to realign your portfolio. You should review your holdings to ensure that your overall portfolio reflects your current beliefs and desires. For example, if you believe that financials have been through the worst, you might begin to overweight the financials. As you think through your portfolio holdings, you can begin to think through different scenarios. For example, if the market falls another five percent, you plan to do x. If the markets rally hard, you plan to do y. The key point is to thoroughly review your stock holdings to make sure that you are comfortable with your current position.
In this week's Barron's magazine, Dick's Sporting Goods, Inc. (DKS) was a featured company in the column The Striking Price (subscription required).
It's possible to trade against Smith & Wesson (SWHC), Ruger (RGR) or Cabela's (CAB) by selling calls to bet their stocks won't bounce higher, or by buying puts to bet the shares will decline, but a better trade may involve Dick's Sporting Good (DKS). The broad-based retailer hasn't been associated with a spillover effect from the hunting slowdown, although its implied-volatility levels are unusually high.
The 30% difference between one-month historical and implied volatility on Dick's options indicates significant concern ahead of its Nov. 19 earnings announcement. The spread represents an extreme pricing dispersion that has happened only one other time in the past three years, and then quickly adjusted. Implied volatility, meanwhile, is also extremely high in Merrill Lynch's Retail Holdrs Trust (RTH), which many traders view as a sector proxy.
Sveinn Palsson, Credit Suisse's derivatives strategist, graciously modeled a Dick's trade for us that costs nothing to implement and has a potential 15% return in six weeks. The risk is that Dick's stock, already up 36% this year, continues to advance.
Note: I added links to the companies' websites along with links to their Yahoo stock profiles.
Although Stephen M. Sears, the author of the article, does not mention housing specifically, he does reference a consumer spending slowdown. My assumption is that most—certainly substantial portion—of the consumer spending slowdown is related to housing. Higher energy prices too might be having an effect. Housing, however, is likely the larger culprit.
According to the most recent conference call transcript (courtesy of Seeking Alpha), Dick's Sporting Goods had not been adversely affected the housing fallout.
Michael Keara - Merrill Lynch
Certainly in contrast to a lot of other names. I know you guys aim at a much different demographic and most of your core stores are located in what are probably considered not... probably not located in what are considered bad housing market. But have you seen any signs of weakness in demand, say like in Detroit area which is probably considered a tough housing market?
Edward W. Stack - Chairman and Chief Executive Officer
We really haven't. I mean no that... and we have talked about this before. We are going to travel in a narrower band in the economy as a whole.
Michael Keara - Merrill Lynch
Right.
Edward W. Stack - Chairman and Chief Executive Officer
And so these athletes... young athletes and high school athletes are... they are going to be playing baseball, they are going to be playing soccer, football, etc., and where we have been fortunate to be the destination of choice. We worked very hard at that and the housing market really has not impacted our business with these athletes.
I am curious to see if Dick's position remains the same when it announces its earning on November 19. My guess is that housing will not have played a strong role because its stores are largely outside the most affected areas. The other companies are more mature in that they cover more the U.S. than does Dick's. Thus, I am not sure that one can look at the other mentioned companies and automatically transfer the same weakness onto Dick's. That said, we are still learning true severity of the housing weakness.
With regard to the actual options strategy outlined by Sveinn Palsson, I will look to Adam Warner over at Daily Options Report for his analysis. He usually covers the Striking Price column on Mondays.
Disclosure: I am long stock in Dick's Sporting Goods.
Edmonton model Nikki G is featured in the photograph, which is hosted at Flickr. If you click on the picture of Nikki, you will be taken to where you can view a larger version and see even more pictures of her.
The new royalty structure is largely a nonevent (see New Royalty Framework document (PDF, 950kb)). I expect that most oil companies have long term oil price projections of $55 to $65 WTI, with $55 being the more likely target. Companies are conservative by nature.
At $60, the terms are very nearly back to 1% gross revenue royalty and 25% net revenue royalty. So in terms of future development, the net effect should be muted. At higher prices, new entrants are discriminated against relative to existing players.
It is only at significantly higher prices that larger provincial takes kick in.
The markets, despite all the hoopla, have largely shrugged off this event. Suncor Energy Inc. (SU) and Canadian Oil Sands Trust (COS-UN.TO) were off less than 1.5% combined—easily within daily trading noise—yesterday, the first business day after Premier Stelmach's proclamation.
Some might think that these Suncor and Canadian Oil Sands were already down in anticipation of the royalty review. Not so, this link to a Yahoo price chart shows Suncor in U.S. dollars and Exxon Mobil Corporation (XOM) in U.S. dollars. You will note that Suncor has outpaced Exxon during the last three months. It did not tank prior to or after the Panel's published report.
Without crunching the numbers, a worthwhile exercise, I think the terms that existed during the mid 1990s were possibly harsher with the higher provincial and federal taxes that were about 50% higher than today's percentages. It is only under significant and sustained high prices, say $75+, that the new regime might be more punitive. And even that might be moderated going from synthetic crude oil to bitumen royalty regime. This entire last paragraph is intuitive guesswork that should be more thoroughly investigated.
With regard to the royalty percentages exceeding 25%, I would not be surprised to see the federal government cap royalty deduction at 25% of resource income. If that happens, then there will be a slight further hit to the oil companies. I remain skeptical that the federal government will offer to pay about 20% of the oil companies' increased royalties.
Given the final outcome, I am disappointed with the Panel's work. They had the opportunity to create a meaningful and workable royalty regime. Instead, they presented a wonky royalty regime with an oil sands separation tax, which was not tax deductible and extraordinarily difficult to pass politically. That combined with a royalty rate above 25% would have been very punitive on the oil companies.
After I think more about the Premier's new framework, I will likely comment further. I might even run some numbers through my economic models and discuss the comparisons. At present, however, I think the new framework is largely a nonevent.
I also urge you to read two other weblogs that discuss the new framework: WTF Journal by Ian Langdon and Ken Chapman by, you guessed it, Ken Chapman. My view differs from those of both writers. And that is okay. Blogging should be about informing. Our differing views will allow others to see arguments from different perspectives—a good thing.
Calgary model Jennifer Nguyen is featured in the photograph, which is hosted at Flickr. If you click on the picture of Jennifer, you will be taken to where you can view a larger version and see even more pictures of her.For those interested in more discussion, particularly of a political nature, concerning the Alberta Royalty Review, I encourage you to read Ken Chapman over at his blog. I have not followed his blog closely; however, by reading several of his recent posts, I get the strong impression that he is a voracious reader with strong opinions. And, I note that he has some hecklers that participate in his comments, which is always a good thing. A few hecklers and doubters always spice up a blog.
I have largely ignored the political aspects of the Alberta Royalty Review. I have read and heard some media commentary on the Panel's work, but found the media coverage wanting. I do not think the media has a solid understanding of the issues, or how and the fiscal terms were created. Lacking a strong background, the media tends to parrot various sources.
Again, for those looking for more of a political interpretation and analysis of how the Royalty debate is progressing in Alberta, I urge to read Ken Chapman's blog.
Ian Langdon has an informative blog WTF Journal where he writes about issues facing Alberta. Naturally, many of his recent posts concern the Alberta Royalty Review. His blog is a great resource and highly recommended for finding current commentary.
Two quick random thoughts:
- I read the Alberta Royalty Review Report today. I found the document interesting and agreed with much of the report; however, I do disagree with some key parts. I will comment further next week when time permits. All that said, I do believe that the Alberta Government will raise royalties on oil and gas. The report leaves the Alberta government no choice.
- I found Fast Money's Interview With Carl Icahn interesting because Icahn believes that market is on a precipice that could go either way. I have been cautious and not wanting to chase the markets after the rate cut.
Calgary model Amanda Grace is featured in the photograph, which is hosted at Flickr. If you click on the picture of Amanda, you will be taken to where you can view a larger version and see even more pictures of her.
Eric Bolling commented on his departure over at Barry Ritholtz's The Big Picture: Bolling on Bolling.
As I stated in a prior post, I thought Bolling was the strongest panelist of the group and had the most respect for him. I still think that way. His post on Ritholtz's blog, however, does leave me a little cold. He fails to comment on his lawsuit with CNBC and instead focuses the attention on his family. But the truth is, if I were in his shoes, I would have done the same thing—avoid the negative and focus on the positive stuff. Bolling is undoubtedly bright and shrewd and is already planning his next moves. If you look carefully, you will note that he is the retired Admiral...for now—possibly implying that he might be planning to come out of retirement, perhaps on Fox?
Whatever his reasons, they really do not concern me. I hope he made a correct decision, and I hope he is able to find time to share with us his views on how he sees the investment landscape.
Model Linda T is featured in the photograph, which is hosted at Flickr. If you click on the picture of Linda, you will be taken to where you can view a larger version and see even more pictures of her.
One of my favorite investment television shows CNBC's Fast Money has lost a valuable contributor Eric Bolling. Bolling's departure has been reported in media, including weblogs such as The Big Picture. I saw on CNBC today that Karen Finerman has replaced Bolling. While I think Finerman is a strong contributor—all the panelists are strong contributors—I respected Bolling the most of all the panelists. I found he gave a larger picture overview without the ancillary shouting and screaming. Because Bolling is a bull on commodities, I am sure that influenced my appreciation of him as well.
While I will still watch the show, it will not be the same with two of my favorite panelists now gone—Tim Strazzini and Eric Bolling. Dylan Ratigan does a terrific job as host of the show, though I wish he would interject a bit less. That said, I do give Ratigan a lot of credit for keeping the pace of the show moving along and explaining to the audience some of the more advanced topics. If you have not watched the show, try watching it for a week.
Update
Read my article where, on 11 September 2007, Dylan Ratigan comments on Karen Finerman's success.
Model Linda T is featured in the photograph, which is hosted at Flickr. If you click on the picture of Linda, you will be taken to where you can view a larger version and see even more pictures of her.Adam Warner over at Daily Options Report provides an excellent lesson in using options. Earlier he had constructed two theoretical positions: one, a short strangle on SPY and trades SPY aggressively, shorting into weakness and purchasing into strength; and two, the opposite where trader seemingly overpays for a strangle with the high volatility and flips SPY aggressively to overcome decay and to pay for his initial position. Now, four days later, guess which trader is ahead? Go over to Adam's site to read his complete article.
I always enjoy reading Adam Warner's Daily Options Report because it is an informative and well written, not to mention witty, weblog that teaches its readers about options. Yesterday, Adam wrote an article Getting Naked......, which, despite its provocative title, is a review of Barron's Striking Price column (subscription required), a column dedicated to options. In his review, Adam provides some anecdotal commentary as well as provides corrections. For example, he correctly tears apart the notion that selling naked calls and selling naked puts against a stock are similar but slightly nuanced.
I periodically highlight Adam's blog because it is one of the very best weblogs for learning more about finance and the markets. Not only that, I get a kick from Adam's writing style.
In my prior post, I indicated once again that I remain bullish on commodities. Fellow blogger Wcw has a post titled Gasoline and GDP where he quoted the Energy Information Administration:
EIA supply data for the four weeks ending September 22, released earlier today, showed that gasoline product supplied (a proxy for demand) was up 3.8 percent compared to the same four-week period last year. However, it is important to remember that last year’s demand data were significantly affected by Hurricane Katrina, making demand this year seem greater in comparison than it would otherwise. Thus, any oil demand comparisons to last year over the next few weeks may seem somewhat larger than typical or expected, due to the effect last year’s hurricanes had in dampening demand temporarily.
While true that gasoline product supplied statistics are somewhat wonky because of Hurricane Katrina, if we step back and look at U.S. Weekly Total Crude Oil and Petroleum Products Imports (see graph), then we note that crude oil and petroleum products imports continue to climb. In fact, the latest import data for 22 September 2006 show that last week was the fifth largest import. This is, in part, why I continue to remain bullish on commodities.
