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By Ian Wyatt, Daily Profit |
WMT | Nov 07, 2008 |
*****Funds Move the Market
*****Mom Cancels Christmas
*****A Retail Options Trade
*****A little downside is one thing. 900 points in two days is quite another. The Dow Industrials is still holding on to approximately 550 of the points it gained in the recent rally. But I have to admit - these last two days of sharp selling are disappointing.
Disappointing, but not unexpected. You’ll recall after the massive 900-point rally last Tuesday, I expressed skepticism that those gains would stick. Stocks did a pretty good job hanging on to them until Tuesday’s election. But with all the economic uncertainty out there, it would have been miraculous to see stocks turn around so fast.
As I’ve said, a rally that grinds out small gains over days and weeks will do more for investor confidence than huge moves in a matter of days. Volatility makes people queasy. Sure, it’s great for traders, if you’re on the right side of the trade. But most individual investors have long-term investments like retirement accounts. And we can be pretty sure that it’s not individual investors who are causing the wild swings in stock prices.
Ultimately, wild swings higher and lower come from the institutional investors, like mutual funds, pension funds hedge funds and the like. These institutional investors account for something like 70% of the trading volume at the New York Stock Exchange. These are the entities that make multi-million dollar trades. It is they who are moving the market so dramatically.
*****Retail sales number look horrible for the 3rd quarter. Nordstrom’s (NYSE:JWN) saw sales fall nearly 16% in October. Saks (NYSE:SKS) October sales fell 16.6%. J.C. Penney (NYSE:JCP) and Kohl’s (NYSE:KSS) saw sales fall 13% and 9% respectively.
J.C. Penney lowered 3rd quarter earnings numbers. But Kohl’s didn’t instead saying earnings would come in at the lower end of its forecast range.
Right now, I don’t see any point for retailers to try and reassure investors by saying they’ll still hit numbers. Chances are, they won’t. And I doubt anyone’s expecting them to. It would be far better to go ahead and lowball earnings forecasts. Then any earnings surprise would be good news. As it stands, some retailers are just setting themselves up for disappointment.
Overall, retail sales in October were the worst in 35 years. That prompted one industry group to cut holiday sales estimates to 1% growth. This group, the International Council of Shopping Centers had been calling for holiday sales growth of 1.7%.
Again, I have to wonder, why the optimism? Why not go ahead and forecast lower sales? I can’t imagine anyone believes sales will grow this Christmas season.
*****My Mom has already called off Christmas this year. We are to buy for the children only. I bet there are a lot of other families in the U.S. that will do the same thing.
And why not? The level of commercialism for Christmas is already appalling. For adults, the season is made by seeing family and the smiles on kids’ faces as they tear through wrapping paper. And eating. Let’s not forget eating.
*****The one bright spot in retail? Wal-Mart (NYSE:WMT). Sales at the discount behemoth actually rose in October by 2.4%. There’s no doubt Wal-Mart’s cheap products will be very popular over the next month. Plus, Wal-Mart sells toys, which fits perfectly with my "Cancel Christmas" theory.
And that brings me to a trade idea - sell out of the money put options on Wal-Mart and use the proceeds to buy put options on the S&P Retail SPDR (NYSE:XRT). The idea behind such a trade is that Wal-Mart should remain fairly stable, but other retailers will head lower.
Selling puts on Wal-Mart means that if Wal-Mart falls below the strike price of the option, I would have to buy Wal-Mart. Buying puts on XRT means that I would profit from more downside in retail.
I’m going to go ahead and establish the parameters for this trade so we can track it and see how it does.
Wal-Mart bottomed at $50 during the October sell-off. We would most likely be safe selling the January 50 puts. But to be on the safe side, let’s use the January 47.50 put option, symbol WMTMW. That option contract is selling for $275. So we generate $275 for each contract sold.
We can buy the March 19 XRT put option for $255 per contract.
If Wal-Mart falls below $47.50 by January 16, I’ll have to buy 100 shares of the stock for each put option I sold. But if Wal-Mart falls, other retailers will fall too. That means the proceeds from the XRT put options that I bought will help offset the expense of the Wal-Mart stock purchase.
Considering transaction fees, I’ll assume I’m in this trade with a cost basis of zero.
*****The unemployment number came out worse than expected today. It was expected that the unemployment rate would hit 6.3%. Instead, it came in at 6.5%.
Investors seem to be OK with that, as stocks are in the green as I finish today’s letter. Of course, today’s upside could just be a reaction to the massive selling we saw over the last two days.
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