Caterpillar Woes the Health Reform Bill

Caterpillar says health reform costs their shareholders $100M over 10 years. This is FUD, since the predominant trend has pushed health care costs into wage reductions. Investors will rally the stock when the company says the cost will become their employees cost.

The fear: US based companies may become less efficient compared to other business environments. Higher employee costs could translate into further outsourcing, or worse, complete US corporation entities being reborn overseas to avoid the US business climate. (e.g. Seagate closed shop in the Cayman Islands and moved back to Ireland, potentially due to closing US offshore accounting loopholes.) As more US corporations move overseas, expect US Tax receivables to plummet.

Hourly pay will remain the same, but employees may walk away with a smaller weekly paycheck.
The fear: How does the working, employed class foster economic growth, if more of their paycheck gets stuffed into health insurance coverage?

The uninsurable will be insurable, and be able to move between insurance providers. The potential deaths prevented will create additional tax payers, to offset the program costs. Hospitals won't need charity or Pro Bono work, since everyone will have health insurance. Then again, hospitals charge 2-4x over typical cost for uninsured folks, because often they cannot reclaim the losses, so hospital losses should shrink. However, any "profit" they were gaining on writing off the losses will go away. So the hospitals with the most write-offs will come under the most fundamental scrutiny from investors.

The deal is getting sweeter for being unemployed, while employers are pressured again to cut costs, cut benefits, or push costs onto employees.

The Four Horsemen of Options Trading

Also known as the four greeks bearing gifts, the four horsemen are swift and merciless. Delta tears you to shreds when the price moves against you. Gamma mutilates any chance for recovery as you approach option expiration. Theta slowly bleeds your position to an anemic size. And finally, the lesser mentioned Rho accelerates the decay of your hope that some day the position will improve.

For instance, plot the risk/reward for any strategy you deploy. If it looks "too good to be true", such as a spread with a 100% reward at expiration for 5% risk, the option writers have a very good idea you may never see that reward.

Your Broker Says, Risk Only 1% Per Trade

E*Trade has recently been offering trade strategy advice, where one risks only a 1% loss on their portfolio per trade. This of course is a great way to increase commissions, as your stops fire quickly in the almost daily 10 point /ES swing (roughly 0.8% in the past weeks).

Apple Product Line Observations

A couple factors may be delaying Apple's Core i5/i7 MacBook Pro. Given all of the observations below, if a mid-May 2010 release does not occur, the next window is WWDC in late June 2010. Or prove me wrong, Apple, and release it sooner..

* Mid-Jan 2010: Intel announces Core i Series for sale. Dell lead times about 4 weeks.
* Jan 27, 2010: iPad Announced. Teaser dates set. iPad hype starts.
* Feb 9-13, 2010: MacWorld Expo. Expect no major Apple product announcements during MacWorld Expo anymore. Apple wants to prove that MacWorld Expo is an unnecessary venue where they cannot control the message.
* Mar 5, 2010: iPad release date confirmed for April 3rd.
* Mar 16, 2010: Intel announces Xeon 5600 Series. Potential candidate for MacPro. Last time, Apple had an exclusive MacPro Xeon release about 3 weeks earlier than everyone else. Well, it did not happen this time.
* Mar 31, 2010: International 'Free iPod Touch w/Purchase' campaign ends. (See here.)
* Apr 3, 2010: iPad release party. Sorry, no Mac line will steal the spotlight.
Tentative:
* Apr 15, 2010: Potential XServe and/or WWDC dates announcement (2 months prior to WWDC). Will probably build anticipation for iPad developer sessions. An early April XServe announcement is critical for IT purchasers to plan their quarterly expenditures.
* May 4 or 11, 2010: Potential MacPro announcement date. Apple likes Tuesdays, and this marks two months from the Xeon 5600 announcement.
* May 25, 2010: Potential MacBook Pro announcement date. Apple likes Tuesdays, and this marks four months from the Core i7 announcement.
* Jun 27-Jul 2, 2010: WWDC rumored dates. Potential iPhone announcement.

The new product introduction of the iPad disrupted the typical MacBook release cycle. iPad introduction/sales start April 3rd. Apple wants everyone's focus on the iPad. Distraction due to a new MacBook might hurt iPad demand.

Internally and historically, Apple OS resources will likely be positioned and prioritized for the iPad release.

Speaking of MacBook demand, Apple's first quarter was strong, and MacBook sales were strong. This may be fueling a decision to continue selling the Core 2 Duo MacBooks, until the demand wanes, or Intel cuts off the Core 2 Duo supply.

The Intel Core i3/i5/i7 line was introduced mid-January 2010. Apple has set precedent to release speed bumps or new platforms (Core 2 Duo) four months from Intel's public release dates. Using this observation places a MacBook delivery around mid to late May. This hedges any weak demand for the iPad, because there is a significant amount of pent-up demand for a Core i series MacBook Pro. (e.g. Read the rumor forums.)

Competition-wise, Dell's Studio XPS 16 w/Core i7 and Alienware M17x both have 3.5-4.5 week lead times as of today (4/7/10 & 4/814/10 respectively). This has not improved much since the beginning of February. There is either significant demand for these processors, or the supply/yields are low.

Given the lead time, Apple may be waiting for Core i3/i5/i7 supply to be sufficient to satisfy the instant gratification crowd.

A rumor exists for a "Magic Trackpad". Rumor sites have said this is for an unreleased consumer product (like an iSlate, which I believe was a secondary, reserved name for the iPad), while it makes sense this is likely a reference to the trackpad on an upcoming MacBook model.

Have you noticed that WWDC's dates have not been announced? It is likely WWDC will be in late June, to coincide with the announcement of a new iPhone. Given the initial adopter's of the iPhone 2G will be expiring, this is Apple's prime time to introduce a next generation iPhone.

Watch for a WWDC date announcement shortly (1-2 weeks) after the iPad launch.

Apple does not have a history of overlapping product line announcements (e.g. MacBook Pro, iMac, and MacPro), except when there are significant platform changes (e.g. 680x0 to PPC; and PPC to Intel).

Just a view from my dartboard.

$3T Parked on the Sidelines

Do you believe that $3T is parked on the sidelines watching this bull rally? Or is it a bear rally? The increase in the fear barometer says there is discomfort at the recent highs. (Another post will follow up on this in more detail.)

10 Dow stocks up 100%.
Market up 60% from last March.

Ultimate pump & dump scenario setup?

TED Spread Update & Fear Barometer Watch

Are we still hearing crickets over in the TED spread trench? It is cutting new lows, lower than during the previous 2004-2007 bull rally.

European debt is apparently equal risk to US debt. The debt bubble is world-wide, and the banks are comfortable with it. Worldwide, governments are willing to take on more stimulus (debt) to seed growth.

Meanwhile in the equity markets, the Credit Suisse Fear Barometer (CSFB) is making monthly highs, as QQQQ, IWM, and SPY all reach for new year highs. The spread to 'protect' a portfolio is widening, meaning option writers are willing to take risk in exchange for higher premiums as the market touches and carves out new highs.

The higher premiums are for those afraid to risk, and let the index gains offset their portfolio protection. Similar to 6/2006-10/2006, the market could climb for another few months with spread premiums climbing on higher-highs, if implied volatility drops. A side-ways scenario is also being priced in, where butterfly strategies will likely be less profitable in the near term, since market movement has been both volatile and trending.

Pick your strategies wisely, the daily 10 point SPX swings are being priced in.

If implied volatility drops, and price drops, this is very bearish, since option writers are confirming the downtrend, risk premiums increase accordingly, and bearish spreads will likely shrink.