Daily Market Update – August 18, 2015 (Close)
Yesterday was another one of those impressive comebacks from a triple digit decline, just as we saw mid-week last week.
Those kind of reversals would end up being much more impressive if they could be the beginning of something with at least a little bit of staying power.
That definitely wasn’t the case last week and it may not be the case this week, either as the morning was already showing declines and the market ended the day having traded in a narrow range, finishing with losses.
Sometimes it’s just a case of bad timing, as we woke up this morning to news of a 6% drop in the Shanghai market and an early 3% drop in shares of Wal-Mart, after it announced its earnings.
Neither of those are the kind of things that give our market a reason to go higher, although we may be getting a little bit immune to stock news from China. What may now matter is not the news, but whether the government or others begin selling their Treasury Notes as there is an increasing cash drain going on in China and they certainly have lots of cash tied up in the paper that we hold.
For now, though, those US Treasuries may represent just about the only thing with intrinsic value sitting in lots of Chinese portfolios, so a raid on those holdings is likely to be the very last thing anyone will want to do, unless they specifically want to see some pain felt within US markets, as well.
China, however, is probably more of a rational player than some other nations, such as Saudi Arabia, who sees inflicting pain on others as more important that its own cash flow needs.
It would be much nicer, though, if all we really had to think about were the earnings reports still coming through. The downside to having an interconnected world is that it’s interconnected.
Now, everything is important and there are tangible and intangible impacts coming from direct and indirect exposures of all sorts, some of which may be made up as we go along.
This morning’s early earnings reports were mixed and come from two key DJIA components. Home Depot is faring well in the futures trading, while Wal-Mart was getting punished, although it did something that hasn’t been reported very often lately. Wal-Mart actually beat on revenues and fell short on earnings. For the most part, it has been just the other way around for so many companies who have seen EPS data improve even as revenues fell, likely the result of share buybacks.
As the day came to its end, Home Depot went even higher and Wal-Mart went even lower. Home Depot’s move more than offset Wal-Mart’s move in the DJIA, but it was a draw as far as their impacts on the S&P 500 were concerned.
With the market showing some mild losses prior to the opening bell, I was still hoping to have some opportunity to add a new position or two. Yesterday I was focused on an in the money position in Cablevision which goes ex-dividend tomorrow. However, it along with the rest of the market turned around and that in the money trade became a deep in the money trade. Along with that, the benefit of the trade was lost, as in the low volatility environment the deeper in the money you are the less the time value, so the trade becomes much less attractive.
Today, I still wanted to make that trade and it finally went, but it may be another very quiet week, other than for the potential for rollovers or assignments at week’s end.
For that Cablevision trade, I wouldn’t at all be disappointed to wake up tomorrow morning to find that it was assigned early, as it did finish about $0.31 over the breakeven on the strike, but with 3 days of time value remaining.
I certainly wouldn’t mind that or other assignments on the week, but banking on anything these days is itself risky business, so instead of thinking of it as an entitlement, I would be very grateful if it became a reality about 72 hours from now.
Note: I had a couple of people ask today why the rollover of Holly Frontier, which has September 18, 2015 $50 calls written on both outstanding lots. Since Holly Frontier is now about $3.25 above the strike and shares go ex-dividend on August 31st, for $0.33, I expect early assignment if shares stay at this level.
So in a pre-emptive move in an effort to get the equivalent of the dividend if assigned early, I decided to rollover an got a $0.35 premium. If shares are assigned early on August 30th, then you still have that extra premium which is a tiny bit more than the dividend itself. Better yet, you then get the proceeds from the assignment and the opportunity to re-invest or add to cash reserves, without having to wait an additional 3 weeks for asignment.