Daily Market Update – July 15, 2014 (Close)




Daily Market Update – July 15, 2014 (Close)

For the next two days Janet Yellen will be providing some testimony in front of congressional banking and finance committees.

Today no one really cared about what she said, it was about what she didn’t say, but had appeared in printed comments regarding her opinion of stock pricing of some”smaller”  bio-technology and social media stocks as being over valued.

Based on her latest two rounds of public statements it has been pretty clear that anyone with money who was inclined to invest would be better off in stocks as their vehicle as opposed to alternatives, such as bonds. However, today’s comments gave some room for pause, at least in two sectors.

For now, though, at least until the first potential real newsworthy words coming from Yellen’s comments, the story is again on the financials, as more good news is awaited the opening bell and did bring the market higher until the comments from Yellen dragged some of the life out of the decent rise.

With JP Morgan and Goldman Sachs reporting earnings this morning that were in line with the previous day’s report from Citigroup, there’s reason to believe that the economy may be heating up. When the financial sector does well it’s not a far stretch to imagine other sectors doing well, although that’s not always a given.

Over the past 4-6 quarters there have been a couple of earnings seasons that started with the financial sector reporting better than expected earnings but with no follow through from other market sectors.

Sooner or later, though, the rest of the market has to catch up to good fortunes in the banking world.

Goldman Sachs, for example, actually reported revenues that were a $1 billion  more than expected. Additionally, both JP Morgan and Goldman Sachs seem to have indicated that their own fortunes significantly improved during the latter part of the past quarter. For its part, Johnson and Johnson also reported this morning and their revenues came in $600 million higher than expected.

Yesterday’s strong gain was fueled by Citigroup’s results. This morning the impact of the early reports weren’t as obvious, although they did turn the pre-open around from mildly negative to mildly positive.

Yesterday’s triple digit gain came close to setting another record on the DJIA, although the broader market didn’t perform quite as well. It was good enough fo
r most people, however.

Today we were again close to setting another new high, but also again, the broader market trailed the DJIA by a considerable margin.

Yesterday I tried to get some trades in Bed Bath and Beyond, Cypress Semiconductor and even Riverbed Technology. However, while there was a fair amount of volatility with share pricing yesterday, representing give and take between buyers and sellers, despite the fact that the actual indexes were virtually unchanged during the day, there was very little such give and take in the option markets.

What that meant was that even as share prices changed the option prices didn’t follow along, making it a challenge to get trades done, as the “Net Debit” prices couldn’t be realized. In all likelihood that meant that those in the option markets weren’t convinced by yesterday’s trading. Buyers and sellers just couldn’t come to agreement.

That was fairly frustrating.

Generally I don’t mind being the one to give in on pricing because I’m motivated to get the trade done.

However, when volatility is so low and the premiums are, as well, that kind of giving in makes it harder to justify the trade on an ROI basis, especially as the market is sitting at such heights.

When looking at charts of so many potential positions it certainly looks as if there’s more room to drop than there is to climb, even though the potential climb is unlimited. With the small premiums, if using them for downside price protection they don’t offer very much to counter the risk. However, if using the premiums for income, then it’s a little easier to justify the transaction, but still not as easy as even a few months ago.

Today will be yet another day with cash available to spend and a willing, but not reckless spender, looking for an opportunity.

I was hoping that the two sides of the transaction equation could come together better today than they did yesterday, but there really wasn’t too much reason to test the market’s desire to transact on much of anything, today.

The one new position trade in Lorillard oddly disintegrated as the day went on.

Prior to conformation of the buyout of Lorillard by Reynolds American the market seemed to price the transaction at $65.

Today it expressed disappointment that the deal was priced at about $68, based on the details of the deal which included about 0.29 shares of Reynolds stock.

I still don’t understand how Lorillard shares plummeted and then fell even further. None of the issues being discussed later in the day as potential negatives were newly discovered, yet suddenly they have become issues.

I don’t understand, but I wouldn’t mind holding shares, as Reynolds believes that the deal will be completed sometime in the first half of 2015 and they have already committed to the cash portion of the deal, as well as maintaining the dividend at its current rate.

Unless something wild and crazy pops up over the course of the next day, like the world discovering that smoking is bad for you, this is one large drop that I expect to correct itself fairly quickly.

For now we’ll just wait and see what Janet Yellen will say tomorrow that will get tongues wagging.