Four at Four: The Tide Is Turning

Four at Four: The Tide Is Turning

from WSJ.com: MarketBeat by David Gaffen

If this was a test, the stock market flubbed it. But most will concede that one sour day does not derail a rally, even though the lack of follow-through from Monday’s action is still not overly encouraging. Markets held together for a time and were lifted in the middle of the session, bolstered by a surge in technology shares. But only the semiconductors were able to retain their strength, as the rest of the market faltered later in the session. Still, one gets the sense that the tide is turning, at least among the investing cognoscenti (those that have their shirts, that is). Volume today was low, making the decline less of a concern. Options activity is concentrated in sector-specific exchange-traded funds, suggesting that investors foresee broader market moves rather than stock-specific ones. “It’s nice to see some of these groups off the bottom performing well — it leads me to be optimistic,” says Michael McCarty, chief options strategist at Meridian Equity Partners. Meanwhile, uber-bear Bill Fleckenstein announced the closure of his Fleckenstein Capital fund. Separately, at a Reuters investment conference, hedge-fund manager Michael Steinhardt said that “I don’t think that this is the bottom, that we’ve hit the bottom, although it wouldn’t shock me if it were the bottom,” and Jim O’Shaughnessy, chairman and chief investment officer of O’Shaughnessy Asset Management, said at the conference that this should be the point when one would expect to see a market recovery. Similarly, Tony Richards, managing principal at Stairway Partners, said that “maybe we take a pause here, but the risk longer-term is to be out of the market rather than in it.”

Strategists often finger individual investors as poor at market-timing. Corporations, for the most part, are no better, often buying back shares en masse as the stock price peaks, later suspending their share-repurchase programs when the shares fall to 52-week lows (or in many cases of late, multi-year lows), later finding themselves strapped for cash and unable to raise much in the way of capital through share sales. Wal-Mart Stores is one of the few S&P 500 companies posting a gain in 2008, rising 17% on the year while the broader market is down by more than 39%. But the company, in its quarterly filing Tuesday, announced its intention to temporarily suspend its $15 billion buyback program, which it authorized at the end of May 2007. In that time, Wal-Mart has easily outpaced the S&P as the company has repurchased about $10 billion in shares. Not all of those buys were bottom-fishing: approximately $1.3 billion in shares were bought back between August and October, when the average price was between $55 and $60. But the company was most active in buying back shares around the end of 2007, when the average repurchase price was in a range of $43 to $45 a share. The stock closed at $55.45 Tuesday. While those most recent purchases are underwater, at least Wal-Mart can feel good about avoiding a slew of buybacks of an inflated stock, only to find itself short of cash at a time when the stock is bouncing around at multi-year lows.

While Wal-Mart is exiting a once-popular market, El Paso Energy is entering another once-popular market, busting into the high-yield debt issuance arena with the intention of selling bonds at what are exorbitant rates by any and all standards. The oil and natural gas producer and pipeline company sold $500 million of five-year senior unsecured notes with an expected yield of 15.25%, and a 12% coupon, according to investors. This was the first junk-rated deal in about six weeks, since casino operator MGM Mirage sold $750 million of five-year notes to yield 15% on October 30. But the deal came at a discount, as buyers received a higher yield because the bonds sold at 88.9 cents on the dollar. El Paso is one of the better-rated below-investment grade companies out there, with double-B ratings, just a shade below investment-grade. “It is a positive that a higher quality issuer like El Paso is getting a deal done in these very difficult market conditions to help the company with refinancing needs in 2009,” says Josh Rank, portfolio manager at Aviva Investors. “This proves that there is still a market for higher quality issuers, but at a price.”

Some have surmised that the decline in options trading in December suggests that investors are getting an early jump on the end of the year. It’s hard not to blame them, with the way markets have behaved this year. In December, average daily equity options volume through Monday was 10.42 million contracts, compared with 13.26 million for the year. But November’s volume was down as well, with an average of 11.75 million contracts changing hands. One possible explanation relates to the stocks available for the use of options, says Michael Schwartz, chief options strategist at Oppenheimer & Co. He notes that about 38% of the “optionable stocks,” which he estimates at about 3300 names, were trading at less than $10 on Tuesday, down a bit from the 40% to 41% witnessed in the last week. With such a high volume of stocks trading below $10, using an options strategy makes less sense, as the stocks themselves are nearly as cheap as a call or put option. “We have a stock market of perpetual options, and they have no expiration, unless they go bankrupt,” he says. “The stocks have become so cheap that you’d buy them rather than the options.”