Thursday, October 30, 2008

Procter & Gamble Nov 95.00 Call & Put Volume Spikes (Options Update)

I was watching the Dow Jones Newswire today, and I came across the CBOE most active put/call list. Procter & Gamble (symbol: PG) was number 1 on the list. At the end of the close today, PG had 133,100 95 NOV Calls traded, and 133,000 95 NOV puts traded. Both had 60,400 already open. So the volume was more than double the open interest, something is up here! It looks like option traders already moved into the 80 strike of both the calls and puts, both having 245,000 contracts open. So there will be hundreds of thousands of puts and calls open at the 95 and 80 strike which expires on Nov 21, 2008. The price of the 95 Call today was unchanged at 0.05, however the put closed up 0.45. Someone is looking to profit from a big move in either direction, or utilizing a MM to simultaneously buy and sell the options to fund a big directional bet... Not sure what move is being put on here, so please comment.

P&G Nov Option Chain (10/30) (Source: Yahoo Finance)

Procter & Gamble's earnings just came out on 10/29, Sales rose 9 percent to $22.03 billion however they dropped the low end of their earnings guidance due to commodity and foreign exchange volatility (Reuters). As of today's close, for the 9/30 quarter, the P/E ratio stood at 16.82, and forward P/E at 14.98. The 5 year range is 16.6 - 24.50, so it looks decently valued, given a looming recession. However if there's a big disappointment next quarter, the stock could fall to readjust the p/e. Here is the CNBC update with a JP Morgan analyst. Couldn't embed, directs to

I also provided some quotes by Clayt Daley, their CFO, during P&Gs most recent earnings call (9/30/08) where he clearly explains how commodity and foreign exchange volatility affects their top and bottom line. P&G has been increasing prices to help offset higher energy and raw material prices, and they expect to see the most recent commodity sell off benefit them in future quarters, due to a lag. I can only quote up to 400 words, the full transcript can be found at seeking alpha.

"There are three important things to understand here. First, commodity and energy markets are becoming increasingly volatile. (Oil: $119 on 8/5, $98 on 9/18, $123 on 9/27, and $65 today).

Second there is a lag between feed stock market moves and the price P&G pays for its materials and the ultimate impact of these materials on our income statement. Oil based materials flowing through our cost of goods are still increasing, tracing back to the oil run up in June and July. We actually will see most of the impact of the steep oil price run up in the June/July period in our December quarter results.

Third, P&G costs are not directly tied to oil and the spot prices of many materials are still increasing. For example, phosphate averaged less than $600 per metric ton during fiscal 2007. Last year it averaged $1,100 per metric ton and currently is close to $2,000 per metric ton…..

Now on to foreign exchange, historically we have told you that foreign exchange impacts our top line more than our bottom line and that the bottom line impacts are largely translational in nature and these are partially offset by natural hedges within the portfolio such as commodities. Now while this is still true, we have seen unprecedented volatility in the foreign exchange markets recently. Even more than in the commodity and energy markets.

I want to explain what is happening in emerging markets in more detail so you understand how we will be managing this and directionally what the impact is likely to be. To do this, let me use a hypothetical example. Let’s assume a business in a developing market has half of their purchased raw and packing materials denominated in U.S. dollars. All other costs including SG&A are denominated in local currency. Now let’s assume a 30% currency devaluation takes place relative to the U.S. dollar. Input costs that are denominated in dollars go up 30% in local currency. This is the transaction impact of the currency devaluation. Every one in the market experiences this transaction impact regardless of their functional currency.

It is effectively an increase in commodity costs which like other commodity cost increases we will plan to recover through pricing as appropriate or through formula cost savings or other cost reduction programs. When the earnings in this country are translated back into U.S. dollars they will then be worth 30% less. This is the translation impact of the currency devaluation. Translation impacts are much harder to recover through pricing.”

Even though Procter & Gamble is labeled as a safe haven during recessions, they still have exposure to consumer spending volatility due to their high end product lines, like Gillette Razors, Duracell. People may go for straight generic brands if money gets tight. And not just here, but emerging markets as well.

Anyway, the stock rallied after their earnings announcement. It broke out of a downtrend recently, and could see resistance at $64, and $66. So we'll see what kind of market conditions we're in. The long term trend from 2002 doesn't look that hot, it broke to the downside recently. That could give the green light to test new lows, if it's not just a short term blip. Also, I charted out the US Dollar vs. Procter & Gamble during the past 10 years since the CFO was talking about foreign exchange volatility. They look to be inversely related, however from the early 1990s-2001, P&G and the USD moved up synchronously. So probably all depends on location of earnings and exchange rates. So, the main point is, there's a move coming because big money is levering up in the options market. So watch P&G's stock, and go to to see what's going on.

PG 3 Month Chart (Source:

PG 10 Year Chart (Source:

PG vs. $US, 10 Year Chart (Source:

Damn It Feels Good To Be A Banker - A Wall Street Musical

I had to put this up, thought it was very funny. Biggest financial rap battle in history. "Damn It Feels Good To Be A Banker -- A Wall Street Musical". Bankers vs. Consultants.

Wednesday, October 29, 2008

St. Louis Adjusted Monetary Base Spikes to $1.174 Trillion (Chart)

(Source: St. Louis Fed)

That is a HUGE spike in the monetary base, not that we didn't know this was coming. It went from $707 Billion on 10/30/2002 to $1.174 Trillion on 10/22/2008. This is from the St. Louis Bi-Weekly Reserves and Monetary Base release. Here's straight historical data.

Is the Unwinding US Dollar, Yen Carry Trade Overextended? A Look at USD/CAD, AUD/JPY, FXC, UUP, GLD, Charts and Analyst Quotes

Volatility spilled into the forex market recently. Carry trades have been unwinding as investors began to dump risky assets, funded by cheap Japanese Yen and US Dollars. During the past few years, investors have been borrowing cheap currencies to buy higher yielding currencies, profiting from the spread and exchange conversion, while magnifying gains with leverage. They used the Yen and the USD to fund the investments, which were sold to buy the higher yielding currency, which ultimately pushed down the value of the YEN and USD.

Recently investors have been fleeing from emerging market risk; dumping higher yielding currencies and buying back the borrowed USD and Yen. The US Dollar Index and Japanese Yen Index were up 20% since the summer. As these safe haven currencies were bid up, and volatility infested the forex market, the carry trade started to lose value. Also, overleveraged funds were seeing redemptions and margin calls, exacerbating the situation. The inter-bank lending freeze, and the lack of US Dollar liquidity, also contributed to the USD bid. Commodities linked to these higher yielding currencies have seen a steep fall. Canada and Australia are big commodity exporters and their currencies were directly affected.

Has the unwinding carry trade overextended itself in the near term? Could there be a CAD/USD, AUD/JPY relief rally? I charted these currencies out last night, and it looks like it is already taking place (as of 12:06pm Est on 10/29/2008). The Fed is supposed to lower rates today, which is putting pressure on the US Dollar. It is interesting because global central banks have pumped billions of dollars into the banking system, however banks have not been lending out money. Once risk appetite presents itself again, and liquidity gets released into the system, monetary inflation could make commodities more valuable, especially precious metals if demand destruction continues to affect energy prices (as Ashraf Laidi, chief FX strategist at CMC Markets mentioned in the video below). This would benefit countries producing and exporting the commodities, like Canada and Australia against the US Dollar and Yen.

However, in the near term, it's tough to tell how harsh the slowdowns will be around the world, which could cause central banks to cut rates further and intervene, so the forex market is out of anybody's control. The Japanese Government is thinking about intervening in the forex market to halt the rise of the Yen. Plus, every USD and Yen could find it's way back home if we see a deep global recession, which would delay any type of rally. The fact is, a huge amount of paper money will be infesting the Earth very soon and the U.S could be approaching a trillion dollar deficit!

Here are some predictions by analysts, with links sourced, along with charts of USD/CAD, AUD/JPY, FXC (Canadian Dollar ETF), UUP (US Dollar ETF) and Gold.

"The USD CAD posted a new multiyear high on Tuesday but closed lower for the day. Traders sold the USD CAD on the strength of the commodity markets. News that credit markets were loosening led to speculation that demand would increase for commodities such as wheat and lumber. The weaker Dollar also led to a strong crude oil market. Traders are hoping that this rally lasts long enough to have a positive impact on the Canadian economy which is so reliant on stronger commodity prices. The charts indicate the potential of a huge drop to 1.1636 to 1.1335. A break of this sort.....

The AUD USD rallied on Tuesday as the Reserve Bank of Australia intervened for the third day. Sources at the bank claim that the interventions were not to stop the break to five year lows, but instead to provide liquidity so that the markets could function properly. Along with the interventions came renewed appetite for risk by traders seeking higher yielding assets. The threat of interest rate cuts by the Bank of Japan and the Fed are making the Australian Dollar an attractive investment...." -By James A. Hyerczyk (Source: Click link for more analysis.

"The risk at the moment is that we continue to see more Canadian dollar weakness," Shaun Osborne, the chief currency strategist at TD Securities said.", "There's no indication at the moment that this move is done. We're kind of running out of superlatives to describe this because it seems to go from bad to worse every day." (Source: Financial Post)

"The loonie, as Canada's dollar is known because of the aquatic bird on the one-dollar coin, ``appears cheap'' at current levels, said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. He predicts the currency will strengthen toward C$1.17. Wright predicts a rebound to C$1.20 by year-end." (Source: Bloomberg)

"The equity markets are moving currencies around with a fair bit of severity this morning," said Jack Spitz, managing director of foreign exchange at National Bank in Toronto. "That's favorable for the Canadian dollar, but it's been offset to some degree by month-end flows and the need for some to re-balance hedges, which will attract some buyers of U.S. dollar-Canada between now and the end of the month." Spitz and others contend that sentiment toward the Canadian dollar remains very fragile and could abruptly reverse on any souring of stock or commodity markets. (Source: Dow Jones News via

"While uncertain about what the short term will bring, Laidi is fairly confident gold -- and other commodities -- are good long-term bets because of the dollar's weak underlying fundamentals; namely, a ballooning federal deficit and increasingly loose Fed." -Ashraf Laidi, chief FX strategist at CMC Markets on Tech Ticker.

"ROBERT RENNIE: I think as long as this period of intense volatility continues to rattle through global financial markets, there certainly has to be a risk that the Australian dollar continues to fall and potentially overshoot significantly in the downside. Look I think if we remain very much locked up and in this period of intense volatility there is a risk that the Australian dollar may break beneath 60 cents, there is a possibility that we continue down into the mid 50s. Beyond that point though I think you would have to argue that we really have moved into overshoot territory." -Robert Rennie is the Chief Currency Strategist at Westpac Bank on ABC Local Radio.

"Australian Dollar Losses May Continue As Very Little Support Remains" ( 10/25/2008

"Yen carry trades unwinding in Austrailia, Brazil, U.S$, New Zealand" (

AUD/JPY (source:

USD/CAD (source:

GLD (Gold ETF)(source:

UUP (Bullish US Dollar ETF)(source:

FXC (Canadian Dollar ETF)(source:

Tuesday, October 28, 2008

Peter Schiff, Rick Santelli Talk U.S. Dollar, Gold, and Future Dollar Recycling (10/23 - CNBC)

Peter Schiff of Euro Pacific Capital and Rick Santelli of CNBC via the Chicago Board of Trade talk about the U.S. Dollar, Gold, and the future of Dollar recycling that is currently funding our deficits. This CNBC clip was on 10/23/2008. Here are a few quotes by Rick Santelli.

"Peter's on to something that I really agree with, that the end game here is that all of these countries recycling our dollars back to support our current account deficit, our trade deficit, even our budget deficit, that once the realignment of the Euro and Pound is done that they aren't going to do that so I agree with him, there's got to be a major higher interest rate environment around the globe when they stop supporting each other's debt habits"

"I deal with a lot of French and Norwegian bankers, I just met with some yesterday, and what I hear is, is that the only thing Europeans liked better than French pastries were U.S. derivatives!"