Daily Market Update – May 19, 2014 (Close)



Daily Market Update – May 19, 2014 (Close)

For the optimist there was reason to be so this morning.

The market closed strongly in the final two hours to end the week  That alone was comforting and gave reason to look forward to the start of the next week’s trading.

But beyond that with news over the weekend about AT&T’s proposed buyout of DirectTV and Pfizer’s newly sweetened offer for AstraZeneca. Put the two of those together and you had the appearances of “Merger Monday” re-appearing in our markets.

The good feeling that comes from mergers and buyouts often has a way of spreading through the markets as speculators start wondering which company will be the next target. Eventually that kind of speculation wears thin very quickly, but at least in its early stages most everyone is happy.

But the pre-open futures didn’t seem to be as optimistic and the market was pointing lower as both AstraZeneca and AT&T were much lower and only Pfizer was showing some kind of modest gain, as its offer again was being spurned, or at least the manner in which AstraZeneca was trading would indicate that the door has been closed.

If that’s the case there has to be some other blockbuster merger to move the market. As it is, I don’t  understand the economics of the AT&T buyout of DirectTV. While AT&T definitely needs that business in order to compete with Verizon and a future Comcast/Time Warner Cable union, the revenue from DirectTV can only fall as it will be offered at lower cost bundled packages to existing AT&T customers, as will AT&T service be bundled at a lower price to existing DirectTV customers.

$50 billion? I hope Verizon goes down in sympathy with AT&T because they appear now to have the advantage with regard to share price prospects once the news of Warren Buffett’s investment is digested.

With the S&P 500 less than a 1% away from another new high and after having set two of those just last week, this most recent leg of the upward climb has been very unusual. You hear very little optimism and you hear very few traders gloating about their results. Reportedly, the vast majority of hedge funds are under-performing the market, which is unusual given the syncopated nature of the climb higher. Their under-performance last year is understandable, but this year you would think that the really smart money would have an advantage by using the various tools to hedge an uncertain market.

Most Mondays the challenge is to find new income producing positions for the week. That’s especially true when a new monthly cycle is set to begin, as it was ready to do so this morning.

Instead, with only a few assignments last week and cash reserves being only marginally increa
sed, I’m far more interested in seeing existing positions generate some income rather than spending cash down to lower levels.

Last week after the sharp downturn in prices on Wednesday and Thursday and no meaningful recovery on Friday, it ended up not being a terribly difficult decision to forego any rollover opportunities, as the option market seemed to be anticipating a late rally and the prices to close out option positions were just too expensive. Add to that the low volatility in forward weeks and you had the combination of relatively high prices to close positions and low prices received for selling new positions.

Sometimes I’d rather take my chances and this was one of those rare times.

So far, after the first day of the week it was another slow trading day by Monday standards, yet it was almost as busy as all of last week and at least a few positions did receive cover and will help put some foie gras on the table.

Maybe tomorrow I can trade the flatware for silverware.