MorningWord: 10/25/11

by Dan October 25, 2011 8:05 am • Commentary

MorningWord: 10/25/11:  Equity markets the world over continue their giddy little run into tomorrow’s second Euro summit on their debt crisis……Make no mistake about it, expectations are high…..kind of feels like AAPL the day before the iPhone 4S launch, and to be frank I reckon we get a bit if a similar reaction to what AAPL got after that product release…..”sell the news”.   The way I see it the summit will go one of 2 ways, all out disappointment, or compromise that does not match the already high expectations…..either way in my opinion after the almost 18% rally since the Oct 4th lows, we are gonna retrace a portion of this move.  I am not calling for a retest of the lows, but we could clearly see weakness in the range of 5% near term.  

We continue to get cross-currents that make dissecting whether or not this was a sort of 1998 kind of market trauma, or the start of a 2008 sort of thing….the excerpt below is from my “MorningWord” On Oct 4th, the day we bottomed and I think it is important to reconsider this discussion now that we are well above these levels and the market appears a bit complacent…..Also remember that I covered most shorts that day and am sitting on some fresh powder…..

The real question, is whether this recent downdraft (-20%)from the multi-year highs is the start of a bear market similar to March 2000-March 2003 and October 2007 to March 2009 or was it more like the July-Oct 1998 market swoon caused by Russia’s financial crisis and the collapse of Long Term Capital.  Chart below shows the peak to trough sell-off of about 22% and the double bottom made on Oct 8th of 1998.

SPX May 1, 1998 to Oct 23, 1998 from Bloomberg


What’s interesting about the pattern above is that this sell-off was caused by a foreign financial crisis but was in the middle of a massive bull marker phase…..the chart below is of the same time period this year……does it look familiar?  Interesting to note that both charts made their last highs on July 20th and 21st and the million dollar question will both make a double bottom around Oct 8th?

SPX May 1, 2011 to Oct 3, 2011 from Bloomberg


Many equity investors are scratching their heads and trying to figure out whether to pull the plug or hang on at current levels, now down about 20% from the highs of the year.  Unfortunately I don’t have the answer to that question, but I will tell you that the closer we get to 1050 in the SPX (the level where we bottomed summer 2010 before the QE2 rally) the more likely we are to get a fierce bear market rally that will rip the faces off shorts……So I continue to ride shorts but on every sell off I take some profits.  My hope is to whittle down those positions to tag ends by the time we make that little near term bottom.

Well the markets are telling us at the moment that this recent downdraft was more like 1998, than 2008, and almost to the exact days of the year july 20/21st to Oct 4/8th…..

The cross-currents range from mixed economic data here and abroad, to some market participants placing a great deal of value on China’s PMI number released yesterday, and suggesting that was the only number that matters. I don’t buy that for one bit and think there is a strong likelihood that we look back at that as a massive head-fake…..Also earnings while they have generally been good there have been some interesting names that have clearly disappointed, MMM just today, TXN last night and IBM and AAPL last week.  Will we look back and say these were the canaries in the coal mine?

Throughout this past 2 weeks some of my best trades have been on the short side, so I would argue for those traders out there, even in what feels like the re-emergence of a bull market that there are plenty of opportunities to play from both sides of the market…..Yesterday I initiated some bearish short term positions in MS and GS (read here) and NFLX into earnings (read here)……the jury is still out on the banks, but NFLX i might have been so right that i am wrong….I got the direction right and the reasons for the sell off, but at the moment the magnitude is far greater that what I expected…..Check back later for how I will manage this trade.

So I remain cautious and defensive, primarily as I feel no matter what happens tomorrow the markets will be disappointed and I think there is a good near term opportunity for a trade on the short side of the broad market, I may look to weekly SDS calls or look out to NOV and buy Puts in the EWG, the Ishares MSCI Germany Index etf.

The DAX which was down almost 35% from its May Highs is now up about 23% from the early Oct lows and just broke through important resistance, I find it hard to believe that European indices will continue on their path to unchanged merely on a plan to fix their debt issues, the real test will be the implementation of austerity measures and co-operation among EU members to see the bail-out through….this will be much harder than it looks and play out over a long period…..


MorningWord: 10/24/11: Friday’s close was nothing short of impressive, with the SPX closing at 2 month highs and popping the little flag it had been forming above 1200 for the last week.  From a technical perspective the chart looks pretty darn good, it has consolidated above the top end of the range (since early August) and now looks poised to test that all important 1250 level that served as staunch support for most of the year until the drama following the S&P’s downgrade…..

SPX 5 month chart from Bloomberg


The index is now up about 15% from the intra-day Oct lows and barring any big surprises out of the Euro summit this Wednesday, we could be headed toward that 1300 level.  I don’t say this with a whole heck of a lot of excitement, as I have not been and am not set up for it, and frankly don’t really see the logic in our equity markets being practically unchanged on the year given all the potential near-term headwinds…..

Investors hear the saying that “the equity markets are a discounting mechanism” all the time and most of the time it is fairly accurate……at this point our equity markets are telling us that risks of Europe’s debt crisis spreading the world over are not great, and that U.S. corporate earnings are what really matter at the moment….we will get a very good read on this as almost 200 of the S&P 500 index report this week.

As for the Euro Summit Wednesday I am hard pressed to think that these talks descend into chaos and that they are not able to at least introduce a plan that will keep the status quo…..if we continue to rally into Wednesday I think you have to take a shot and fade the markets and try for a “sell the news”


MorningWord: 10/21/11: Even though we are in the heart of earnings season, our equity markets are feeling little impact from the beats and misses on singular occasions, the only thing that appears to matter at the moment is a unified Euro solution to their debt problems…..Yesterday’s market action was generally a whipsaw session resulting from rumors and headlines regarding the Euro summit this weekend.  My personal opinion is that the outcome from weekend is going to be disappointing to the markets and regardless of the headlines that point to an agreement on how to tackle the issue, it does not solve the issues…..Remember back to late 2008, early 2009 after TARP was agreed apon, the stock market went a heck of lot lower in the months to follow the announcement…..I am not suggesting that this will be the case now, partly because corporate earnings seem to be on far better footing than they were 3 years ago.

SO at this point we sit and wait for the headlines over the weekend.  This doesn’t particularly help what could be an already volatile expiration Friday……any rumors today suggesting progress by European leaders behind the scenes prior to the first summit should clearly cause short covering rallies…..I think this is probably as good as time as any to sit on your hands and wait for the outcome……as the markets are likely to trend in the direction of the perceived outcome for some time following any resolution.  The real outlier here is if Euro crisis does not get resolved and obviously continues to strain economic activity that eventually will send the world back into a recession.

Of course I remain defensive and cautious in my trading and will look to get more aggressive once we have more clarity on the Euro debt crisis.


On a sad note, my partner CC and I will be offline most of the day today.  CC’s father in law Dr. Robert Daly passed away this past Sunday and we will be attending his funeral.  Dr. Daly was a great and very accomplished man, and a friend and he will be missed by many family and friends that he touched throughout his years.  The picture below shows Dr. Daly running for Holy Cross in 1956 (middle-white shirt) which was featured on the cover of the February 13th 1956 issue.


MorningWord: 10/20/11:  Wednesday’s price action was a bit confusing to say the least, AAPL had one of its worst sell offs in a while, and while it was definitely a drag on the Nasdaq, there weren’t too many ways to extrapolate their results to other names in their supply chain.  That being said, INTC had a day, up 3.59% following its own results that beat expectations in the face of many semi companies that have been disappointing over the last few weeks with over a dozen pre-announcements…..So while there doesn’t appear to be an obvious trend in Tech shares, the opposite might have been said about bank stocks right up until yesterday afternoon…..While most results were less than sensational in the space, only 2 names; JPM and WFC faced serious sell-offs post results…..Even GS that missed already lowered numbers rallied following their print….

In hindsight it seems like it was a farely obvious trade to short extended tech names like AAPL and IBM into earnings, and buy beaten up bank stocks like MS and  and GS……well I got half right……

Today’s market result is going to have less to do with earnings and more to do with sentiment and news flow relating to this weeks proposed deadline for the Euro rescue effort and this mornings expected Greek austerity vote…..on this topic I can’t help much but I would suggest that in the near term this is likely to disappoint and any short covering rallies arriving from “tape bombs” are probably good opportunities to take some profits on longs and possibly lay out some shorts….If it doesn’t look like we will get a  near term solution, than I will go straight back to shorting the banks…..especially after this huge rally of the last 2 weeks…..

I remain cautious and defensive and spend most of my days trying to short intra-day rallies, always using tight stops and not being stubborn……


MorningWord: 10/19/11:  Yesterday’s market action saw an interesting reversal between 2 dominant forces that have been playing a bit of tug of war in our equity markets since the spring; tech safe haven vs bank stock malaise.  Bank stocks rallied sharply on a less than impressive earnings beat out of BAC and miss of already lowered expectations for GS.  The stocks I guess had just gotten too oversold and a lot of bad news was in the stocks…..MS was up sharply in sympathy yesterday, and will be very interesting to see how the stock reacts to its own Q3 report just out this morning…..

On the flip side there are technology stocks, where many have been in their own secular bull market this year…..stocks like IBM and AAPL were making all time highs as they approached their earnings reports……and my sense is that if you want to flip the bank stock oversold argument on its head for tech shares you probably have a fairly logical conclusion of why these stocks are selling off post earnings……there was just too much good news in the stocks at these levels….

AAPL Thoughts and  Trade Management of AAPL OCT 405/390 Put Spread

As it relates to AAPL many “fanboys” of the stock are going to suggest buying this dip as it is the “buying opportunity” of the year…..well, as many of you know I bought the dip last month at $360 and again at $380 and was happy to be short into the event at $420. Now, I am trying not to break my arm patting myself on the back here, but that’s called trading…..this is a website for traders, I’ll leave the investing advice to all the brokerage houses……But I guess my point is that stocks like AAPL that have cult followings tend to overshoot on the upside, and every so often they get a little overbought……as for buying opportunity I am sure there are many investors who will listen to the monkeys on TV and run in and buy on the open, and that is probably why the stock is only down 5% in the pre-market… have shorts covering because they finally got a little sell-off and you have the herd buying……I think the stock needs a little re-set and would love to see it get a little sloppy…the only way that is going to happen is if a few portfolio managers at large mutual funds come to their senses and decide to unload a portion of their positions at these levels……

As for my Oct 405/390 Put Spread (I am also long the Oct 410 puts) I will look to take my cost (and some profits) of the table on half of the position following the open and try to let the other half ride.  I will do this because the stock has a history of being volatile the day after earnings and then settling into a range somewhere within the implied range.  The last thing I would want to do is take a shot like this in the short side, when everyone wanted to go the other way and watch any gains disappear……

As for the market’s surge yesterday in the afternoon relating to a rumor that Germany and France had backed a 2billion euro bailout package, I can’t really speak to the authenticity of it other than with this weekends summit looming and deadline for a solution I would expect more such rumors and more volatility…..the reversal comes Monday if European leaders can’t agree as I expect will be the case.

SO today I will be watching MS and the bank stock reaction to its earnings…..Not expecting too many fireworks here as it doesn’t appear that their report at first blush should cause a reversal of yesterday’s rally, but maybe a portion of it……AAPL will also be telling as it makes up almost 10% of the Nasdaq…. unfortunately I am expecting to disappoint those short the name, so my strategy above is prob the right one, cover a portion of the short in the morning so you don’t spend the rest of the trading day wishing you did.


MorningWord: 10/18/11:  Sunday night in the “Weekender” piece I laid out 3 factors that will determine the direction of world equity markets for the balance of the year; 1st US corporate earnings/health of our economy, 2nd European debt situation and a potential solution and 3rd the extent to which China’s economy is slowing.  The above may seem obvious to some, but the markets’ daily reaction to incremental data points will likely prove to be very instructive to the sort of positioning investors should take as we head into the end of the year. In the last 24 hours we got a decent, albeit initial, read on all 3 of these inputs and none really point towards the enthusiasm that has buoyed the markets over the prior 2 weeks.

1. For starters, U.S. corporate earnings have been a mixed bag…not unexpectedly, bank earnings have been disappointing and the stocks have been in retreat mode……last night’s reports from IBM and VMW offered sobering outlook from a space that has been a sort of safe haven throughout this turbulent year…….If we start to see cracks in technology earnings visibility, this could be the start of an unwind in a sector that in some ways has been the anchor for our supposed economic recovery……AAPL reports after the close tonight and while their results and guidance will be a stock specific event, any disappointment that causes the stock to sell off will have a negative affect on the Nasdaq as the stock makes up about 10% of the index.   As important, GS earnings are due out this morning and the stock’s reaction to what will likely be ok results (street estimates have come down dramatically in the last 2 months) could dictate the course of the day.  WFC’s weakness yesterday to disappointing results was frankly a bit surprising given how well known the problems in the sector are and specifically the perceived safety of a name such as this relative to it’s peers.

2. European markets reversed yesterday following the opening enthusiasm about what was perceived to be progress from the G-20 meeting about a deadline for a solution on the debt situation………..only to be squashed by German Finance Minister’s suggestion that there would be no quick answers to the debt crisis.  This comment and the markets’ reaction shows how delicate the rally was…..As I write at 7:45am, European markets are down across the board, with the DAX fairing the best only down 1/2%, while most of the others are down more than 1%.  Any incrementally bad news about the timeline for for EU leaders to agree on ways to attack their debt crisis could cause serious volatility in the market this week.

3. Last but not least China, overnight Q3 GDP was reported and came in slightly less than expected, but industrial production and retail sales were slightly better than expected…..growth in Q3 slowed to 9.1%, from the prior 9.5%, and less than the 9.3% consensus…..this is not a disaster by any means, but some have stated that the industrial and retail data could tie the hands of Chinese central bankers if necessary to start easing soon.  The Hang Seng got smoked after the data came out closing down 4.2% and Shanghai was down about 2.3%.

SO the net of it is the news in the last 24 hours is far less good than many expected as we closed on 2 month highs on Friday at 4pm…..

As many readers know I started putting out shorts late last week as I felt the rally was getting a bit extended and I wanted to look to names that seemed to be particularly overbought, where a lot of the “good” news was possibly in the stock, as in the case of IBM.  If the takeaway from IBM and VMW’s commentary that the upheaval in the world markets over the last few month’s is finally crimping demand than we could be in for a rocky patch as we get to the meat of earnings season.  I remain short biased and defensive, but in all instances I want to define my risk.


MorningWord: 10/17/11:  Friday’s close, at new 2 month highs said a lot about how quickly the sentiment changed in just days….we went from making new 52 week lows on Oct 4th to closing at the dead high of the Aug/Sept range.  Asian and European equity markets were up overnight between 1 and 2% on enthusiasm that the G-20’s deadline for the EU to offer up a solution to their debt problem by next Sunday’s summit in Brussels. Not coming as too much of a surprise, but the German’s squashed all the fun as their finance minister stated a few hours ago that he does not see a quick solution.   Since these comments the DAX is down a little over 2%, along with the rest of Europe and futures.

On Friday I waded back in the water on the short side with a handful of contrarian plays in front of a busy earnings week (read summary here).  My conviction level on the short isn’t as high as it was back in June or Aug/Sept, largely because I think we are fighting some factors that are out of our control…Govt/Central Bank intervention and the Calendar.  Coordinated efforts to solve the European debt crisis are coming to a theater near you, but we also having a little excitement coming from our own Govt in Nov as the congressional super committee is swiftly approaching their deadline to offer spending cuts for our deficit talks.  Aside from non market factors, as we get closer to the end of the year and as the market hovers the unchanged area, the greater the likelihood that we rally into year end for the typical marking period……SO if we are going to retest the lows, or retrace a portion of the recent move it is likely to be in the coming weeks……

Today I want to focus on C and WFC as they both reported Q3 this morning and while both have shown some reasonable signs of relative strength to their peers of late, both sets of results will be combed through and their analyst calls will be high scrutinized…..where they are trading in the pre-market is no indication of where they will close today and the direction for the sector….WFC is currently down 4% and C is up about 1.75%…I suspect C will be down on the day by 11am and the sector will trade with it….

Also I want to keep a close eye on some high flying tech names like AAPL and IBM, both who report this week and both closing at all time highs on Friday….I don’t expect them to continue to make new highs every day into their earnings report……

SO while I am playing for a pull back, I am not all


MorningWord: 10/14/11: Yesterday’s price action was fairly constructive for those who feel that the lows may be in for the year……the fact that our markets opened down ~1% on what was perceived as less than stellar quality of earnings from JPM, and then closed practically unchanged on the day demonstrates the underlying bid in the market.  Bank stocks were weak across the board as many investors felt that if any of the banks were to report decent numbers and offer upbeat commentary it would have been from JPM, and the balance of the reports will be worse over the coming weeks.  UBS probably had the most sobering take on JPM, excerpts here:

A well run bank but not completely immune

· Economic headwinds become very apparent with 3Q results

The difficult environment is weighing on JPM’s near-term outlook. With capital markets not expected to materially improve, capital management likely to more constrained than previously thought, and organic growth prospects diminished, there was very little in 3Q11 results to get excited about.

· Given macro stress, we believe consumer credit may deteriorate modestly

We are increasingly concerned that some of the early trends in consumer lending data could be beginning to flash warning signs. Specifically, while we understand that JPM stopped releasing reserves in the interest of conservatism given the current environment, we are apprehensive that increasing delinquencies could be just around the corner.

· Reducing estimates on less reserve releases and weaker capital markets

We are reducing our 4Q11 estimates to $1.03 from $1.17; 2012E to $4.70 from $5.40; and 2013E to $5.65 from $6.25, respectively, driven by lower expected reserve releases, weaker capital markets activity, and higher operating expenses.

· Valuation: Lowering price target on weaker near-term ROTE outlook

We are lowering our price target to $44, which assumes JPM will trade at 1.2x our 3Q12 TBV estimate in 12 months (vs. 10-year avg. of 2.1x). While we view JPM as the best positioned firm in our coverage, we believe the difficult environment is likely to weigh on money center bank results over the next several months.

JPM as I write is only up .15 in the pre-market from yesterdays close, that with the S&P futures up over 1% as of 9;15am.  If the bank stocks continue yesterday’s slide in the face of what is a mounting tech rally on the heals of GOOG‘s strong results then I really don’t know what to tell you.  Could we really have tech rally back towards the July highs and the Banks stocks make new lows???  I think not…..So I am going to continue to ride bank shorts in a tactical way….look to get in front of some strong tech earnings stories like AAPL and GOOG in the past week, while not exactly holding the risk through the event.  I want to try to take a shot at shorting the market before the G-20 meeting this weekend but as always will use tight stops……I am not gonna get carried away.



MorningWord: 10/13/11:  JPM reported Q3 earnings this morning and beat already lowered expectations.  The stock’s 20% rally in the last week into the print will not exactly help the stock today. The earnings call starts at 10am eastern and I would expect the stock to remain in a tight trading range until the q&a of the call.  

Citi’s early read on the results:

Results showed core miss — JPM posted 3Q EPS of $1.02 vs. our $0.96 estimate

and consensus of $0.91. The $0.06 beat vs. our estimate was driven by: 1) $0.26 from

better than expected one timers (mostly $1.9 billion DVA gain), 2) $0.05 from slightly

lower tax rate (27% in 3Q), offset by 3) $0.14 miss on core PTPP ($8.9 billion vs. our

$9.7 billion estimate) on weaker results across the board with each business line

missing by $20-180 million, and 4) $0.13 higher credit costs due to less than expected

reserve release in credit card. Stock likely to be a bit soft today, but we continue

to viewthis as the best positioned of the capital markets/universal names…reiterate Buy.

-Credit losses below our est.Retail deposits increased 2% LQA and commercial deposit

growth looked very strong.

-$4.4 bil of Buybacks, virtually completing 2011 allocation of $8 bil — JPM bought

back $4.4 bil of stock, vs $3.5 bil in 2Q11, using nearly all of the remaining 2011

allocation for buybacks in the quarter.

-Cautious Guidance on Investment Bank for 4Q — JPM guidance for 4Q is cautious

for the I-Bank, stating it is not unreasonable to expect market conditions to be

similar to3Q. None of this should be viewed as a surprise and is in line with our


-2012 Guidance cautious on markets, reduces NII guidance $400 mil due to

spreads – 2012 Guidance sets a cautious tone for the I-Bank and AM, spread

compression expected to reduce NII in Consumer & Business banking by $400 mil.

JPM’s reaction today to the quarter will very likely set the tone for the early stage of earnings……After the market’s 12% rally in the last week a healthy consolidation in names like this that have doubled the performance of the market in this time period would not be alarming……But if the bank stocks get a little sloppy and appear to lose their recent bid then we could see a retest of their previous lows…..

GOOG reports tonight and the implied move is about 6% vs the 4 qtr average move of about 8.5%……Monday I spoke about buying Oct 550/600 call spreads when the stock was $534 into the print (read here).  The stock is up about 15% in the last week or so and defining your risk into the earnings event could make sense for those looking to make a directional play….Also for those who own the stock and have no intention of selling could consider collaring the name in a tactical fashion around earnings……with the stock around $550 you could sell the Oct 585 call at about 7.50 and Buy the Oct 515 Put for about 7.50…….This way you pay nothing for the collar and your long is protected below $515 until Oct expiration next Friday and on the upside your long stock would be called away at $585 on Oct expiration.  You would only do this if you didn’t want to sell the stock for tax reasons but were worried that the stock could face an out sized move the downside…..

So for now I am sitting on my hands and waiting to see how JPM reacts to the earnings call, which I think will be very instructive to the direction of the market….Yesterday in the last hour of the day I bought a JPM oct weekly 33/32/31 Put Fly for .15.  with the stock down 2% pre-open I will look to take a portion of this off if and when I am in a position to take the original cost off the table and let the other half ride….


MorningWord: 10/12/11:  Yesterday saw the sort of healthy consolidation that one would expect if a rally like we just witnessed over the past week has any chance of going higher near term.  If the last week has shown us anything, it’s that markets can defy gravity, but an 11% 5 day move needs to gather a bit more steam before it can meaningfully test the  next resistance level.  After opening lower the SPX rallied to unchanged and spent the rest of the day trading within 3 points of either side of that level.  That’s fairly impressive action and tells me that there are still plenty of shorts in the market and even on days when the market participants should be nervous, they are nervously optimistic.  

1 day SPX chart from Bloomberg


Bank stocks continue to act in a curious manner as sentiment in a lot of ways has shifted from worst case scenarios to the possibility that the worst is over.  As I think about the carnage that this sector has been subject to this year, I can’t put my finger on just one reason why the sector has massively under-performed the broad market.  At any given moment over the last 6 months there were different headlines that took them down, it started with financial regulation and what that would do their ability to grow revenues from depressed levels, to mortgage  portfolios and potential liability stemming from past deals, to their exposure European sovereign debt to the final and more difficult reason, to downright hysteria…….The memory of the 2008/09 banking crisis has much to blame with the stocks’ action this summer, at times watching the stocks go down 7% a day for no real reason other than sentiment had an eerily similar feel to the last crisis, but for much less quantifiable reasons.  I have rode shorts in this sector all summer and frankly can’t tell you that i have done so for any of the reasons listed above other than the last one……I just made the decision in April/May/June to apply the 08/09 playbook to the sector for sheer sentiment reasons and it was the right one….SO the gazillion dollar question; is it over?  I have no clue and the stocks’ reaction over the next couple weeks as they report Q3 earnings will likely hold the key.  I said yesterday that the higher they go off of last weeks lows the more vulnerable they are in my opinion.  But I will reiterate you do not want to be pressing a sector like this near the lows…..There is no doubt in my mind that while fortunes were being lost by the likes of Paulson in this sector, those with fresh capital and longer term time horizons will most likely be rewarded by taking the other-side of his misfortune.

So I guess my point is, if we can figure out this little bank stock thing in the next month or so there is likely to be a definable short term trend….if the stocks take mediocre results and earnings and don’t make new lows I think I will want to take a shot on the long side and abandon the 2008/09 playbook.

JPM reports tomorrow morning, check back later for a preview.

As for today our futures are climbing the little Slovakian mountain of worry here, up 1%, and Europe is up across the board about 1.8%……SPX is is approaching 1200 and a close above that level would obviously be bullish near term…..Chart below shows the ranges the market has traded in since early this year and clearly shows the no mans land that 1200 to 1250 is…..

1 yr SPX from Bloomberg


SO a handful of closes above the 1200 range could signal a test of what is now massive resistance at 1250.  If the market blows throw 1200 and continues to run as we head into earnings I will look to fade this move as I have suggested.