The market posted is worst ever point decline after Congress rejected the $700 billion bailout plan that looked like a sure thing to everyone on Wall Street. That was the problem. As the day wore on it was apparent that the market was nervous and about 1:30 p.m. all hell broke loose after it was clear that the bill would fail.
The Emergency Economic Stabilization Act lost by a vote of 228 (against) to 205 (for). A total of 218 votes were needed to pass. This sent the market into panic mode because the plan was expected to get approval.
By the end of the day, the Dow was down a staggering 777 points and finished at 10,365. The 7% decline was the biggest for the Dow in over 20 years. The Nasdaq fell 9%, or a whopping 200 points, and closed at 1,983. The S&P 500 dropped 9% as well, falling 107 points and ended the session at 1,106.
Talk about getting beat like a rented mule. A sell-off was expected if the bill got shot down but no one on Wall Street expected 10% across the board. They were so sure that the bill would get passed but the market kept giving us great signs that a deal would not get done quickly. Wall Street simply ignored the signs and is now left to deal with the uncertainties. Yes, there will be another meeting on Thursday and yes there is a chance something still gets done.
Look. Something will get done but it will be modified and it will get done when Congress wants to get it done, not Wall Street. I think it was a good move but I still also believe Congress is doing this for the publicity. To be honest though, it is looking like the “good ‘ol buddy” system is in play here because there are too many companies failing at a time when something should have been done by now. It’s like the government is picking and choosing which companies survive and which ones don’t.
Not that it matters, but I would like to see no bailout and let nature run its course. The companies that got into this mess are the ones that should go under for not doing their due diligence. Or, if someone has to pay for it, why not some of the bigger corporations in Amercia? Geez, what did Exxon (XOM, $74.06, down $6.59) make in profits in one quarter? $10 billion. There’s a study out there that shows if the top 20 banks cut their dividend it would pay for the bailout. So yes, there are better ways of doing this.
As far as the market goes, the rest of the week will be crucial if the market hopes to regain any footing.
Rick Rouse
Rick@OptionsMentoring.com
Apple Downgraded, RIMM Continues Lower
Monday, September 29th, 2008
Apple (AAPL, $109.88, down $18.36) is down sharply this morning after a couple of analysts downgraded the stock. RBC Capital lowered Apple’s stock from “outperform” to “sector perform” while Morgan Stanley (MS, $22.41, down $2.34) shifted gears from “overweight” to “equal weight”. Morgan’s price target for the stock was also lowered from $178 to $115. RBC Capital dropped its target from $200 to $140.
It seems both analysts believe that a weaker economy will hamper the consumer which will lead to less demand for Apple’s products. Hmmm. I’m not sure demand for Apple’s products will suffer as much as its stock is today but the downgrades have hurt. Today’s whipping is the biggest drop in Apple’s stock in seven years.
I have written about Apple for quite some time as well as Research In Motion (RIMM, $66.48, down $4.28). Both stocks have been huge winners in the past and normally go through these wild price swings a few times a year. They have been leaders in the past and will be in the future but the current climate is punishing both stocks.
RIMM recently reported lousy numbers and its outlook scared Wall Street. The stock also got a downgrade this morning. Some of you may have put on an option strangle trade for RIMM based on your comments and emails and that trade has done extremely well.
The October 120 calls (RULJD, $0.03, down $0.01) were going for $1.20 the day earnings were announced and the October 80 puts (RFYVP, $14.85, up $3.50) were going for $2.06. The calls will obviously expire worthless but the puts are up seven-fold. The total cost to buy 10 calls and 10 puts would have been around $3,250. Even if the calls expire worthless, you would still have nearly $15,000 if you sold the puts today. Talk about ROI…
I don’t expect Apple to keep falling as low as RIMM but it could. The market is very irrational right now which means these types of options trades are working. If you wanted to look at Apple as a strangle trade you could follow the October 120 calls (QAAJD, $5.85, down $7.65 and the October 100 puts (QAAVT, $5.35, up $4.55). I think there will be enough movement in Apple that the trade could return 10%-20% over the next few weeks.
Rick Rouse
Rick@OptionsMentoring.com
Tags: Apple, Morgan Stanley, RBC Capital, Research In Motion downgrades, strangle option trades
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