THE DAILY TRADING RISK: MARKET SNAPSHOT

Friday, February 13, 2009

MARKET SNAPSHOT

*Everyday is a new report of some company cutting its dividend.

S&P heads to first quarter ever of negative earnings
Financials the biggest factor in decline, but ConocoPhillips a big hit as well
By Kate Gibson, MarketWatch

As Wall Street tracks Washington's moves to help the beleaguered banking sector and pass more economic stimulus, nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss -- even excluding financials. "This is the worst, after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's. A sixth quarter of negative growth ties the prior record set when Harry Truman was president, and ran from the first quarter of 1951 to the second quarter of 1952. "And next quarter we're expected a new record of seven quarters of negative growth," Silverblatt said.

As of the close of business Thursday, Silverblatt calculates S&P earnings-per-share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that EPS deficit would drop to $2.35.
"The majority of it is financials, but the biggest issue to hit as reported -- the worst charge -- was ConocoPhillips (COP:ConocoPhillips Last: 46.25+0.05+0.11% COP 46.25, +0.05, +0.1%) . That one charge accounted for $3.66," said Silverblatt.

Income from continuing operations at the companies in the S&P 500 that have already reported earnings fell $90.8 billion, with financials contributing $70.4 billion of the decline. Conoco accounted for $31.9 billion of the shortfall, said Silverblatt.
Financials also led losses in Friday trade. Telecommunication issues fronted the gains. The Dow Jones Industrial Average ($INDU:Dow Jones Industrial Average $INDU 7,872.95, -59.81, -0.7%) was down 63.79 points at 7,868.97 in afternoon trading.
The S&P 500 ($SPX:S&P 500 Index $SPX 829.69, -5.50, -0.7%) fell 5.56 points at 829.66, and the Nasdaq Composite (COMP:Nasdaq Composite Index COMP 1,537.27, -4.44, -0.3%) was down 3.88 points at 1,538.83.

With 84.8% of the market value and 390 issues reported, operating earnings, which includes income from products or services and excludes financing and other costs, are down 62% from the fourth quarter of 2007, Silverblatt said.

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Books

Debt of Honor by Tom Clancy
Den of Thieves by James B. Stewart
Fundamentals of Investing in Oil by Chris Termeer
How We Got Here by Andy Kessler
How the Stock Market Works by Dalton NYIF
How to Day Trade Stocks by Harvey Walsh
Liars Poker by Michael Lewis
Manias, Panics and Crashes by Kindleberger and Aliber
Market Wizards by Jack Schwager
One Good Trade by Mike Bellafiore
Options as a Strategic Investment by Lawrence G. MacMillan
Reminiscinces of a Stock Operator
Secrets of a Pivot Boss by Frank Ochoa
Steidlmayer on Markets
Street Smarts by Linda Raschke
Team of Rivals by Doris Kearns Goodwin
Technical Analysis of the Financial Markets by John Murphy
Thank You for Arguing by Jay Heinrichs
The Ascent of Money by Niall Ferguson
The Big Short by Michael Lewis
The Forgotten Man by Amity Shlaes
The Intelligent Investor by Benjamin Graham
The Logical Trader by Mark Fisher
The Playbook by Mike Bellafiore
The Power Game by Hedrick Smith
The Shack by Wm. Paul Young
The Smartest Guys in the Room by Bethany McLean and Peter Elkind
The Taylor Trading Technique by George Taylor
The Traders Bible by Richard Wyckoff
Unconventional Success by David Swensen
When Genius Failed by Roger Lowenstein
Women & Money by Suze Orman

SHORTING STOCK

Lets say you think GE is headed down in price. You would borrow 100 GE shares from A at say, $10, then sell them to B for $10, and when the price goes down to say $5, you would go into the market and buy them at $5 and give back the shares to A, pocketing the difference.

The Mechanics of a Short-Sale
by Andrew Tobin
When you sell stock short, you are selling shares you don’t own, hoping they will go down. Your broker just borrows someone else’s shares for you to sell. Eventually, you have to buy them back and return them (unless you’re really lucky and the stock goes all the way to zero and disappears, in which case there’s nothing to return). If you can buy the shares back for less then you got for them, you make a profit; if you have to pay more, you suffer a loss.

But where do brokers get shares to lend short-sellers? The first thing they do is look to see whether one of their other customers holds the same stock in a margin account. Anyone with a margin account has signed an agreement authorizing the broker to lend his shares. He will not know they’ve been loaned, and he needn’t worry about it either way. He’ll still get his dividend (it will come out of the short-seller’s account); he will still be able to sell at a moment’s notice. (The broker will just replace the shares by borrowing someone else’s shares. Or, if that proves impossible, he’ll "buy in" the short-seller, forcing him to cover his short — typically at a loss — and return the shares. This doesn’t often happen, but it definitely can. It’s one more risk of the hazardous short-selling game.)

Brokers love short sales, because although you take all the risk, they typically get the interest on the proceeds of the stock you’ve sold. That’s right: you shorted 1,000 shares of some stock at $50; well, that means the broker got $50,000 in cash money in return . . . but you won’t find that money in your account. It’s earning interest in his account, whether he be a deep discounter or the most expensive full-service firm on the block.
(Active, pushy customers can sometimes twist arms and, if they do enough short-selling, persuade their brokers to share some of that interest. But few even know to ask and fewer still will be told yes. If you do $20,000 a year in commissions, say, well, that might be a different story.)

If your own broker doesn’t have shares of stock in one of his other client’s margin accounts to lend you, he will call around to find a broker or institution that does have shares to lend. Harvard, with its $10 billion endowment, makes some good money this way.

When a broker or institution lends stock, the "rent" it charges is interest on the value of the shares. In other words, your own broker has to split some of the largess with the lender (making him all the less eager to share any of his share with you).

*to give you an indication of how crooked the market is lately, Fidelity has put out word that they will not lend out shares of IWM.

If you have more questions feel free to email me at tradebum@gmail.com.

THE DAILY TRADING RISK

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Friday, February 13, 2009

MARKET SNAPSHOT

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