By Steven M. Sears
IS CASH A BUBBLE? Are investors too risk-averse?
Options traders are now debating these controversial questions as they prepare for a 2009 that they hope will be more sanguine than 2008, which challenged long-held assumptions about options pricing and the fundamental nature of volatility.
Traders say the "cash is king" mentality is so pervasive in the financial community that it may be primed to join the list of bubbles that have burst over Wall Street, including stocks, oil, agricultural commodities and subprime mortgages.
Of course, a bursting cash-bubble would help, not hurt, investors, as stock prices would advance.
A lot of traders are buying -- or debating doing so -- bullish calls on stocks and sectors. The more battered the security, the better. They see options as a cost-effective way to balance the risk that the market could worsen in 2009, rather than improve, while ensuring they do not miss any rallies.
Investors, especially many mutual-fund managers with investment charters, are taking a more muted approach. They are selling richly priced calls, and using the proceeds to lower the costs of buying stock. The trade permutations are almost endless.
"Cash is the elephant in the room," says a strategist at a top investment bank who spends his days dealing with portfolio managers. "Everyone has lots of it, and I don't know when they are going to start taking risk, but I want to be in right before it happens."
The recent clamor to buy four-week Treasury bills with a zero-percent yield perfectly expresses the market's mania for absolute safety, while the Federal Reserve's decision to lower the federal-funds rate to a range between zero to a quarter of a point suggests Federal Reserve Chairman Ben Bernanke is waging war on cash to force money back into the financial system.
"Bernanke is trying to break the bubble in cash," says Steve Sosnick, risk-manager for Interactive Brokers' Timber Hill market-making unit.
If the cash bubble bursts, the record amounts of cash held by investors and corporations would flow back into the financial markets, benefiting stock prices and other assets, including fixed income, emerging markets, commodities and currencies. Even moribund investment bankers might get some action if corporations resort to mergers and acquisitions to increase depressed earnings, or diversify product suites.
While everyone would love to see the cash bubble burst because it would lift equity prices, the cash-as-bubble makes many traders uneasy, because it underscores the woes of the financial system.
Nascent bulls, and bears, are afraid the global economy's recessionary tailspin could get worse, and that volatility could sharply increase again, in response to unexpected events. What happens if President-elect Obama does not live up to the market's expectations for inspired leadership? Another big Wall Street scandal or another toxic Fortune 100 balance sheet like AIG's would spook the market.
Yes, there is still good reason to be afraid of parting with cash. In a consumer-driven economy like America's, conditions could worsen if consumers do not soon start consuming again. Rising unemployment is also a major risk factor.
It is difficult to find another point in modern time when investor sentiment was more negative than today. Three-month realized volatility of the Standard & Poor's 500 Index was recently 71.86%, surpassing the high of 68% set during the Great Crash of 1929. The Chicago Board Options Exchange, the largest U.S. options exchange, is budgeting for a 15% decline in 2009 trading volume.
BUT TRADERS KNOW that hype -- and "cash as king" is a good candidate -- always ends in a major transfer of wealth on Wall Street.
"One way to play this is to buy 20- delta calls on riskier stocks or even six-month or one-year wide call spreads on those riskier names -- retailers, airlines, homebuilders," says Jack Gonzalez, who deals with many hedge funds as UBS's head of derivative flow sales.
Delta is the rate of change in an option's price in response to changes in the underlying stock. A 20-delta option is typically far out-of-the-money. A 100 delta option is essentially a stock proxy.
While not mathematically correct, many traders think 20-delta calls have a 20% chance of finishing in-the-money. So buying 20-delta calls on risky stocks offers a cost-effective way to wager on rebounds without risking tons of money.
Gonzalez likes buying Lennar (ticker: LEN) January 15 calls that expire in January 2010, and selling the 25 calls with same expiration date. He also likes call spreads in Centex's (CTX) January 17.50/30 call spread at $2.40, Dryships' (DRYS) 17.50/25 for $1.70, Las Vegas Sands' (LVS) 10/20 call spread for $1.70, and OfficeMax's (OMX) January 10/17.5. All options are January 2010 expirations.
"There are many trades out there that have 5:1 payouts because options volatilities are so high," Gonzalez says.
Investors willing to risk a bit more money than a 20 delta call can buy 10% to 20% out-of-the-money calls in favored sectors, or stocks.
A growing number of traders think the financial sector, battered as it is, will rebound in 2009. They are buying out-of-the-money March and June Select Sector Financial SPDR (XLF) calls in anticipation the sector will advance in 2009 after falling some 56% this year.
Many mutual-fund managers, whose investment charters permit the use of derivatives, are increasingly consulting options strategists about "buy-writing. "This strategy entails selling out-of-the-money calls and buying stock. Investors who use this strategy can use historically high options premiums to lower the cost of stock. The risk is that options volatility increases.
Sveinn Palsson, a Credit Suisse derivatives strategist, is advising clients to sell calls against Exxon Mobil (XOM), which he says is the "T-bill of equities."
"A cash bubble is defined as a condition in which investors shun everything but the safest assets," Palsson says. "This flight to quality mindset that pushed T-bill yields below zero has also translated into the equity world as a demand for stocks with proven cash flows."
Palsson notes that Exxon has the free cash flow of $37 billion, the highest in the S&P 500, and the largest cash reserves of all non-financial related stocks with $34 billion. Many investors have recently bought Exxon, and Palsson likes selling the January 85 call against the stock as it appears to be "overbought."
Jon Najarian, co-founder of optionmonster.com, a trading advisory, said cash hordes are so high that they could stress the financial system when reinvested.
"It could be the biggest January effect ever," Najarian says.
And that would be a lovely way to start 2009.
E-mail: steven.sears@barrons.com
2008年12月20日土曜日
2008年12月8日月曜日
The World Goes Japanese
By Leslie P. Norton
BRING BACK THE PKO! THAT WAS snarky shorthand for "Price Keeping Operation," measures Tokyo traditionally invoked to direct banks to buy stocks or deploy money from Japan's massive postal-savings system to prop up the Nikkei. Today, the whole world is using some version of the PKO. With the Nikkei down 48% this year -- reflecting the yen's strength and the market's jitters -- why should Japan sit this one out?
It may not. Japanese equities, as well as battered real estate, may be bought by a new government-owned fund, according to its advocate, Sen. Kotaro Tamura of the ruling Liberal Democratic Party. The PKO would be funded by loans from Japanese banks. It's inspired by the French sovereign-wealth fund proposed this year by President Nicolas Sarkozy. That fund was established last month to invest in strategically important companies and in smaller companies that were having trouble borrowing.
"This would be close to the French idea," says Tamura, although it wouldn't focus on takeover defenses. Tamura says it could be as large as $250 billion -- about a tenth of the Nikkei's market cap. The French fund is just $25 billion. Japan has almost $1 trillion in foreign-currency reserves and a $1.5 trillion public-pension fund. "We would not be seeking economic returns, but 10 years ago, the government made a huge investment in banks and real estate and made huge money," says Tamura. "In the long term, we can make a huge return."
The fund is the latest iteration of Tamura's idea of a sovereign-wealth fund that would use parts of the government-pension fund and its foreign-exchange reserves to buy non-Japanese assets and diversify returns.
Barron's recently visited the flashy young Tamura (for more on his style, check his blog kotarotamura.net). His idea for a sovereign wealth fund has been taken very seriously this year. Japan's finance and banking minister is concerned about the markets, and a package of measures to support regional banks is part of the latest emergency economic stimulus package.
Much depends on how any fund is structured, and whether it's sufficiently diversified and professionally managed. "The devil is in the details," says Kathy Matsui, Goldman Sachs' Japan strategist.
"Tamura is a creative thinker who wishes to advance Japan as an international financial center and lower the burden on future generations by investing national assets more constructively," says John Vail, the chief global strategist at Nikko Asset Management. Vail doubts that a fund to buy stocks would immediately fly with banks or bureaucrats. He says that "more aggressive management of forex reserves should happen by spring, [although] a true SWF is unlikely for several more quarters."
Says Tamura: "If we can better manage government assets, we don't need to increase the consumption tax -- we could even decrease it. If we want to stimulate consumption, we have to have a better stock and real-estate market. Our companies and economy are much healthier than the U.S. and Europe's. Any stimulus should be focused on the asset markets." That could be the trigger for domestic investors to buy the Nikkei. And any stimulus plan will bolster the yen.
E-mail: leslie.norton@barrons.com
BRING BACK THE PKO! THAT WAS snarky shorthand for "Price Keeping Operation," measures Tokyo traditionally invoked to direct banks to buy stocks or deploy money from Japan's massive postal-savings system to prop up the Nikkei. Today, the whole world is using some version of the PKO. With the Nikkei down 48% this year -- reflecting the yen's strength and the market's jitters -- why should Japan sit this one out?
It may not. Japanese equities, as well as battered real estate, may be bought by a new government-owned fund, according to its advocate, Sen. Kotaro Tamura of the ruling Liberal Democratic Party. The PKO would be funded by loans from Japanese banks. It's inspired by the French sovereign-wealth fund proposed this year by President Nicolas Sarkozy. That fund was established last month to invest in strategically important companies and in smaller companies that were having trouble borrowing.
"This would be close to the French idea," says Tamura, although it wouldn't focus on takeover defenses. Tamura says it could be as large as $250 billion -- about a tenth of the Nikkei's market cap. The French fund is just $25 billion. Japan has almost $1 trillion in foreign-currency reserves and a $1.5 trillion public-pension fund. "We would not be seeking economic returns, but 10 years ago, the government made a huge investment in banks and real estate and made huge money," says Tamura. "In the long term, we can make a huge return."
The fund is the latest iteration of Tamura's idea of a sovereign-wealth fund that would use parts of the government-pension fund and its foreign-exchange reserves to buy non-Japanese assets and diversify returns.
Barron's recently visited the flashy young Tamura (for more on his style, check his blog kotarotamura.net). His idea for a sovereign wealth fund has been taken very seriously this year. Japan's finance and banking minister is concerned about the markets, and a package of measures to support regional banks is part of the latest emergency economic stimulus package.
Much depends on how any fund is structured, and whether it's sufficiently diversified and professionally managed. "The devil is in the details," says Kathy Matsui, Goldman Sachs' Japan strategist.
"Tamura is a creative thinker who wishes to advance Japan as an international financial center and lower the burden on future generations by investing national assets more constructively," says John Vail, the chief global strategist at Nikko Asset Management. Vail doubts that a fund to buy stocks would immediately fly with banks or bureaucrats. He says that "more aggressive management of forex reserves should happen by spring, [although] a true SWF is unlikely for several more quarters."
Says Tamura: "If we can better manage government assets, we don't need to increase the consumption tax -- we could even decrease it. If we want to stimulate consumption, we have to have a better stock and real-estate market. Our companies and economy are much healthier than the U.S. and Europe's. Any stimulus should be focused on the asset markets." That could be the trigger for domestic investors to buy the Nikkei. And any stimulus plan will bolster the yen.
E-mail: leslie.norton@barrons.com
登録:
投稿 (Atom)
