Train thoughts

Today's thoughts center around the arrival of a pullback. On Friday, Nov. 5th I opined to a colleague that the S&P would continue its wandering ways, and that although we had clearly broken out I thought we would need a shakeout below 1140, probably to 1125 (or the 200 day), before it became urgent to buy stocks.

Today with the Fannie Mae's (FNM) failure to file and the broader news interest in the vote recounts we may see just such a shakeout. It is hard to see the election outcome being overturned and I don't believe we will learn it was rigged but if you were a buyer on clarity, it will get harder and harder to justify ownership as the tape heads lower. FNM is a similar story. The bad news has been out for a while in my opinion and the only thing keeping that stock up is that it has been dead money on the short side. If it starts to work lower and breaks below 62 it could trade with a 20 handle in a hurry.

If you want to read up on the vote recount I recommend this as a summary, and this to get an idea for how old the news is.

It is still way before the open and the downdraft may not materialize but I am thinking we get a brief scare today, sideways trading into expiry on Friday, and then we shall see if the pullback will be deep as I expect. Plenty of time to square up long positions or if you like to spin positions every couple of days you can even get short.

Grindin' em out

My personal anxiety level is red lining here. I sold too much too early. The tape has done an excellent job of morphing from buy electoral clarity, to buy a Bush win, to front run the social security privatization. My response has been to examine my positions and to force myself to get even flatter. The tape will offer a better risk reward later.

I will chime in here with my two cents on Social Security privatization. I am not sure the net flows will be so large for the markets. The plan will be offered as an option and currently nothing prevents savers from buying equities privately. Technically they could even own equities on leverage via the futures against their expected future social security income. I don't think anyone does this but it is an option for anyone that preferred equity risk to U.S. Gov't risk. The larger impact to me seems on the budget side as this program will make it more difficult for the Gov't to lump social security in general revenues. That is probably good long-term but could be extremely painful in the short run.

I would close with an interesting data point that came to light yesterday from Hewitt Associates. "On November 3, the Hewitt 401(k) Index logged the largest daily movement of money into equity funds since January of this year, with 0.13% of 401(k) balances transferring on a net basis. " This statement surprised me in a couple of ways. I am amazed that the average 401k investor was patiently waiting for the election to be done before moving funds and I am amazed they took rapid and decisive action the day after the election. Couldn't they have just shifted the allocation of future contributions to reflect their bullishness rather than the quick one day shift? Would have made more sense if the jobs number had come out the Friday before the election so they could be sure the economy was not falling apart. Not quite sure what to make of it since it is past but I thought it was an interesting statistic. No doubt that caused a large portion of our move higher and does a lot to explain how the tape remains so extended.

Elvis has left the building

It now appears that Senator Kerry is in a much weaker position than Al Gore was 4 short years ago. The vote difference is wider and (so far) there do not seem to be as many complaints about the process. The futures weakened from my early AM post but are now clawing back those gains and will probably soar as they are above the Oct highs. For my part I will continue selling longs into it but will wait until after at least 11 AM to do so.

Better trading opportunities are outside of equities for me. I did not feel that the election uncertainty or a possible Kerry victory was pressuring the market so it is difficult for me to have faith in the rally. The trading environment should remain the same with plenty of big swings around any trend that emerges.

Oye!

From Bloggerman

"Secaucus - John Zogby’s polling was generally considered the most accurate during the crazed 2000 election, and if he maintains that measure of reliability, you can go to sleep now. Zogby's final tracking poll, state by state, released at 5:30 EST, suggests the prospect of a Kerry win by a margin of 311 Electoral Votes to 213, with only Colorado and Nevada too close to call (and representing just fourteen votes between them).

Oh and by the way, he has Mr. Bush winning the popular vote, narrowly- an irony of biblical proportions that one Democratic pollster rated a one-in-three chance just last week.
It should be noted Zogby is doing a lot of extrapolating. In the two from Column A (Florida, Ohio, Pennsylvania), two from Column B (Iowa, Minnesota, Wisconsin) states, he gives them all to Kerry. But Florida, Ohio, and Pennsylvania are listed as "trending Kerry" based on exit polling. The smaller three states show Kerry up by 5-6%."

Launchpad

The dollar is seeing some good strength today and I like that pattern much better for a post election rally. It had a small bounce off the 85 level Tuesday, pulled back and retested it, and is now sitting on a launchpad if there is a quick resolution.

I would add to that foreigners may be less familiar with Bush and Kerry and may avoid election uncertainty as a matter of course. That might lead to a more tradable reaction in the currency.

Follow the bouncing ball

As the USD bounces this morning, I am thinking a bit about just how crowded that short is. I am not sure I have ever seen a trade in 10 years that is so widely believed in. Even I believe in it. Because it is crowded though I will watch carefully as the DXY (Dollar Index) approaches that 87 level. I will also consider other shorts against Asia (like GBP/JPY) before getting into dollar positions.

Also, the Reserve Bank of Australia, ECB, and Bank of England all have meetings this week. The election is distracting a lot of people but these meetings are significant because both Australia and Britain nearing the end of their rate hikes. At the turning points the markets will focus on nuances to see what to expect next. And of course the FOMC meets next week for what should be its last rate hike for a while.

Mostly I am looking through the election because it is ungamable. The candidates will only make subtle differences to the markets and even a tied election will eventually get resolved. Life will go on pretty much the same as it is today.

Synchronicity

I can almost here frat boys chanting "Frank the tank! Frank the tank" as I watch HAL (Haliburton) trade today. Clearly, my morning thoughts were a bit out of synch with the market.

The oddest thing here is that while the dollar has been willing to give up its gains from Tuesday, stocks have been well bid. Not sure I get it with the overhead resistance, sharp nature of the move, and of course looming election. Why buy vols but hold your stocks? Mine is not to question why I suppose.

I am still looking for a dollar rally and some metal weakness post election. Should stocks be down substantially on Monday I will make some selective purchases.

VIX

The volatility indices, VIX and VXO, are spiking up a bit. This is a familiar pattern where market participants get their heads together and decide that there could be a terrorist attack this weekend. It is true that if there is an attack 16 vol on the SPX will look very cheap. My problem with the behavior is that the election is widely publicized as something that might spur terrorist attacks and options that incorporate the election have not traded at a premium to the recently deceased October options. This makes the piling in today seem irrational and irrational trading is more likely to be a contrarian indicator.

This election also seems to be occupying a disproportionate amount of people's radar. Most pundits agree with my view that the U.S. deficit is the controlling economic factor no matter who gets elected. Because of this I am viewing the trading chatter as representative of traders' emotional commitment to a particular candidate.

Lastly, and I realize I am contradicting myself, I have been toying with the thought that if Bush wins we are more likely to see the deficit used against us. The deficit is funded by foreigners and foreigners do not like Bush. Perhaps foreigners are cutting us slack because they recognize that while our gov't represents us it is not always representative of us. Should Bush win, that perception may change and foreigners may collectively feel the need to take matters into their own hands and curb America's belief that it can act unilaterally. The obvious result of this is the dollar trading lower while interest rates move higher. I have a hard time betting on this because such a policy by foreigners could have been used preemptively (where have I heard that phrase before) to wake up the U.S. electorate with higher rates before the election.

Bounce

We are seeing a good bounce in the financials (Citigroup) mostly because they have been getting abused and to a lessor degree because of the news in Marsh and McLennan (no criminal charges and a new CEO). Not much else to notice. The dollar has stabilized near the DXY 85 level and bonds are a non-event. It could stay this way right through next Tuesday in case your wondering.

You will also notice the rash of news stories about the election that will never end. Maybe but it is probably over next Wednesday and the market will take that as good news.

Position in C calls.

Election arbitrage

I was just looking over the current prices from tradesport.com and figuring out exactly what the traders there thought about various aspects of the election. One interesting thing is that you can currently buy the "Presidential Election Ceritified by Dec 13,2004" contract for $85 and the price has been dropping. It is a hard to imagine any legal or counting challenges this year not ending at least as quickly as in the 2000 election, and that would be contingent on an election close enough for it to be worth challenging. That contract is probably a buy in here and certainly if it sees $75 or lower as the media hypes up the chances of a contested vote.

Another interesting prospect is that for $13 you can sell a contract that will be worth $0 if Pres. Bush fails to win 350 electoral votes. The odds of that seem a lot smaller than 13% at this point. That contract has been falling steadily and it seems like it will continue.

Lastly you can buy a contract that Kerry wins the Rustbelt (PA, OH, and MI) for $38 while you can hedge by betting that Bush wins OH for $55. If Bush actually wins OH this combo pays you $7 and can only loose money if Bush loses OH but wins in MI (trading at $26) or PA (trading at 31). Other combinations like Kerry winning New England are trading much closer to parity against their weakest link. This is to say that if you buy Kerry winning New England for $55 and also buy Bush winning NH for $49 you have become a net loser just with the bid offer let alone the 5 other states Bush could win with one of them being Maine which is trading similar to MI.

All of these contracts have relatively wide bid/offer spreads so it probably pays to be patient and to expect to hold throught the election rather than trade in and out.

Election news

This is a good site for monitoring the upcoming election. There is a lot of press right now about Kerry taking the lead in the projected electoral vote. Currently the polls seem to be pointing to Florida deciding the election again.

Bark or bite?

It feels like there is a lot of angst out there today. It is really just more of the same as the market marches sideways. The dip this AM in the banks (caused by insurance fears) really has a lot of bulls reconsidering. I think we continue to edge sideways in equities and that these mini-panics (or euphorias) are opportunities for short-term trades. Still have some bigger trends like the advance and collapse in steel stocks but as a whole too many traders and not enought idea's. Everyone has tight stops and very little patience with the market.

Lots of people talking about election risk but I think the risk is more in the process than in the outcome. Seeing stories daily now about various start dates for absentee ballots. That combined with law suits being fought about computer voting and new laws make me think the media is going to recreate "Indecision 2000" before the voting even starts. Probably more hype than anything until election day actually arrives.

Wrap up

After going over todays action I am struck that the volume was weak everywhere. This happens a lot on Monday's and generally it means you can't trust the move. Not a bad day but still feels like both sides should be nervous.

The charts I posted today are all shorts but they are all in sectors that have been market leaders. Maybe just more volatility (better to trade) on both sides while other sectors are caught in doldrums.

Maybe the whole market is in the headlights as we head toward the election or maybe just testing everyones patience. Their seems to be a lot of that this year.

Have a great night.

mike

A vote for Kerry?

Could this be an election trade? It looks like it is heading for 200.

I am only relating this to the election by the old axiom that Republicans are tougher (and spend more) on defense. The election is still up in the air and both candidates are talking strong on defense but given the run up it has had it seems like a good candidate to have an adverse reaction to a Kerry victory.

Election Crunch

Today's News
Since the debates ended pundits have been spending a great deal of time analyzing Kerry's "outing" of Cheney's daughter. It is a bit amusing that it is taking air time away from the investigation into the administration's "outing" of a CIA spy. While the spy case will not reach the President or V.P., the leak was in response to Bush being called out for talking about Nigerian "yellow cake" in his State of the Union address. I recognize the need for the media to give equal time and their desire to make the election a horse race but at some point it stops making sense to weigh each candidate phrase by phrase and action by action without taking into account the ramifications of those actions. The two political maneuvers are not even in the same league and yet the air time is all going to Kerry's insensitivity.

On to the Bigger Question.
For the markets it is difficult to see either candidate making much of a difference. The deficit is too large and the global forces of my previous post are too strong for the US to do anything but struggle. Kerry's plan to move "catastrophic" insurance costs to the public sector seems promising because if he does manage to curtail healthcare costs that will improve U.S. competitiveness tremendously. Kerry needs to spend his entire tax hike though (and maybe more) which ensures that the risk of capital flight from U.S. markets remains high. Deficit, deficit, deficit.

The flipside, to me, is Bush's overwhelmingly bad track record. It was going to be a bad 4 years no matter what but he has spent too much on projects (Iraq war) which that have no monetary payoff. The short-sighted nature of his decisions means he could probably still make things worse. While the deficit growth has produced a lot of hand wringing by market watchers it has not had an impact yet and interest rates remain low. A Bush re-election alone would not alter the markets perceptions.