MorningWord: 11/14/11

by Dan November 14, 2011 8:54 am • Commentary

MorningWord: 11/14/11:  Just when you thought our markets could once again focus on stuff like our own economy and corporate earnings, Italy has to go and try to sell some Treasury’s to fund itself.  The 5 yr auction this morning  with “yields at 6.29 percent, the highest since June 1997 and up from 5.32 percent at the last auction on Oct. 13.”   So even with a new Italian govt in the process of being re-organized, the credit markets are telling investors that they don’t care.  The Euro is down 80bps and most European equity indices are down betwn 1/2% and 1% (the DAX though is down about 1.7% from the opening highs).

This past Thursday and Friday saw a fairly impressive rally, albeit one on low volume, which recaptured much of Wednesday’s losses……Our markets appear to be in a bit of a holding pattern between 1220 and 1270 in the SPX and they clearly want to go higher…….The closer we get to next week’s holiday shortened week the more likely we are to see low volume spikes higher like we did Friday while the bond market is closed…….Make no mistake about it most institutional money mangers share the same self interest to push this thing higher into year end and this is not a battle you want to fight from the short side.  Everyone and their mother prefers equities to go up and when you consider the massive under-performance by most mutual fund and hedge fund managers in a volatile yr like we have seem, the path of least resistance at this point is up in an effort to mark their current positions so their performance looks “less bad”.

So my healthy dose of caution as it relates to most late year rallies has to do with my long standing belief that it is a fairly rigged game.  I continue to short opening gaps higher with tight stops, and I will continue to look to short over extended single names.  So while I think from a seasonal standpoint, the market points higher between now and Xmas, I think the hard trade is to try to short rallies.  As long as their remains an uncertain solution to the Euro debt crisis, I will continue to lean short….at some point I may through in the towel and buy names like AMZN and AAPL for beta moves into holiday selling season.  I’ll be sure to let u know when that happens!


MorningWord: 11/11/11: Europe seems like a slightly safer place over the last 30 or so hours…..Yields on Italian debt are coming down hard from historic levels while the country’s senate approved a key budget vote which should help put a new prime minister in place in the coming days.  Greece also appears to be moving in the right direction as they are close to swearing in their new prime minister so they can move forward and make the appropriate austerity commitments so that they can secure their next round of aid.  European indices are up about 1-2% across the board, the Euro is rallying off of 1 month lows, gold up a tad, crude up a tad and our futures up about 1%…and all seems to be ok with the world, for the moment.

If things in Europe are able to quiet a bit and some of the uncertainty regarding new leadership in southern Europe can help affect some progress towards an EFSF than US investors may start to focus a bit on our own issues, first being the congressional super committee and their deadline to produce a bipartisan plan to reduce the budget by over $1 trillion.  The Deadline for this plan is 11/23/11 and by all accounts this will come down to the wire……this deadline could add some volatility in the next week and half much like the drama we saw this past July which resulted in a ratings cut by S&P.

As for earnings they continue to modestly surprise, DIS last night beat expectations on stability in their media networks and theme parks businesses and the stock is up about 5% in the pre-market.

Once we head into the European close our markets could quite a bit as they cap a week that is practically unchanged from a performance standpoint, on a day where our Bond market is closed in observance of Veterans day. (at this moment lets give a shout out to all that have served our country, you are truly a special breed and we at salute you.)

So as most days in this recent cycle I will take a shot at shorting the open and use a fairly tight mental stop, 1220 to 1270 seems like a decent trading range for the moment and I will continue to play intra-day in that range.



MorningWord: 11/10/11:  Yesterday’s 3.67% sell off in the SPX was in some ways a  healthy reminder that our markets, at least for the moment are a slave to the process to bail out weak European nations and subsequently their banks.  All the incremental positives that we are seeing on this side of the Atlantic as it relates to corporate earnings and economic data that appears to be getting a tad bit better is clearly being overshadowed by European leaders/Finance Ministers inability to enact a plan to attack their sovereign debt issues and thus avoid contagion.

U.S. investors are right to be cautious as it relates to the uncertainty in Europe, because with Merkel and Sarkozy at deepening odds everyday with their weaker European brothers and sisters, new leadership in Italy, Greece and at the IMF and the ECB, compromise on bailouts may be a long time coming……

Supposedly the ECB is in there buying Italian debt today which is why the yield on their 10 year is below 7% this morning….the real question is how sustainable this will be as the crisis deepens?  I think there is a good chance that the rhetoric out of Germany gets increasingly divisive as it relates to an ECB bailout of Italy and that thing are likely to get worse before they get better….

There will likely be some coordinated action by the EU, ECB and the IMF and anyone else they can get the join the party, but that will likely just be window dressing until there is the proper leadership in place in their member nations and some form of spirit to compromise.

As for my trading I continue to lean short and am focused on our banks…..This morning the S&P futures are up 1.35% as of 9:05am in sympathy with European markets, I want to sell this opening and play for a re-test back to yesterdays lows in the SPX of about 1226 (which also happens to be the 100 day moving average)… that point I would expect next support to be about 1215 and then 1200.

Check back after the open for trade management updates on my CSCO long structure (stock up 6.5% in the pre-market) and my GMCR short structure (stock is down 30% in pre-market).


MorningWord: 11/9/11:  I spent most of yesterday afternoon’s 1.5% rally in the SPX scratching my head asking anyone who would listen why a new PM in Italy and Greece, with both nations scrambling to form “unity govts” and and ECB and IMF with new leadership  will be at any way helpful to hurrying the pace of an agreement on the EFSF.  One thing I do know is that markets HATE uncertainty and that’s what we got a hole heck of a lot of.

In a round about way, all this forced change of leadership reminds me of a little lesson that my dad (a retired Lt. Cl in the Army Reserve and a smart life strategist) first laid out to me after Gulf War 1 and then again after Gulf War 2.  Following the Iraqi invasion of a Sovereign Kuwait in 1990, the U.S. led coalition pushed the Iraqi’s out of Kuwait and then did some damage to their military industrial complex, but never went into Baghdad and displaced Saddam.  At the time many called President Bush Sr a coward for not finishing the Job.  My Dad had a slightly different take that at the time I probably didn’t understand….but it went something like “Better the Devil That You Know”.  So for the next 10 years or so when Saddam would “act up” we would just bomb military installations and annoy him with UN weapons inspectors, and generally he was under control and in someways served as an important counter balance to Iran.

So When Bush Jr.’s coalition went into Iraq in 2002 he went straight for Baghdad, not willing to take the same criticism that his Dad received a decade earlier……and we all know how that went….the country’s displaced leader/govt/society resulted in an almost 10 year chaos…..Now some may say this is not an apples to apples comparison and I concede that, and this example is not meant to be political, but I guess my dad’s point after Gulf War 1, and reinforced after Gulf War 2, was not a bad one, and I often think of this lesson and compare it to situations in the markets and consider how it relates to uncertainty of leadership on a macro or on an individual company level (see YHOO and its never-ending rotating door of CEOs).

At this point I am not sure Europe is gonna be in a much better spot than they were 2 weeks or 2 months ago and if anything the change in leadership may only make compromise that much tougher or extend the duration as Merkel and Sarkozy now have unfamiliar bedfellows. Global Markets have already not taken this kindly following yesterday afternoon’s late day euphoria.  As I write at 8am, the DAX is down about 3%, while Italian 5 yr bonds are up 75 bps to over 7%, making new Euro-zone highs.  Our Futures are down 2% in sympathy more than erasing yesterdays gains.

Today will be a crucial day for the markets in my opinion, if the news (primarily Italian bond yields) gets much worse throughout the morning we could see equity markets get a little panicky for the first time in weeks.  SO I remain cautious and defensive and I will reiterate that in times like these, where it appears almost impossible to get your arms around the macro uncertainties, sometimes sitting on your hands and preserving capital can be the most profitable thing you can do.  My trading positions generally are leaning to the short side in such names as AAPL, INTC, JEF, BAC, MS and SDS and have very few longs.  I continue to trade intra-day generally from the short side and on days like yesterday the need for stops (at least mental ones) could not have been more important.


MorningWord: 11/8/11:  Yesterday’s resilience in our equity markets following the European close in the face of the Prime Ministers of Greece and Italy falling by the wayside display a sense of hopefulness that has the potential to be very disappointing for those trying to navigate this macro minefield.  If you have been doing this long enough you know that markets climb a wall of worry and that is exactly what they appear to be doing so far this week…..last week’s consolidation below the previous week’s highs seemed a bit more sensible in light of the uncertainty regarding the fate, size and source of funding of the EFSF and the support for austerity by the Greek and Italian people.  I guess the one major cross current, and one of the primary reasons our markets appear to be a sort of “flight to quality” is the relative strength of U.S. corporate earnings and the fact that our economic data appears to be “less bad” than it was 4 months ago.

If you are buying U.S. equities here you must believe that the last 4-5 months of mediocre economic data was just a soft patch in a recovery, U.S. corporations will continue to grow earnings, China will have a soft landing and ultimately see an uptick in global growth, and that Europe will finally get it’s act together and put a fund in place to back stop their banks, buy their sovereign debt and take the panic out of the credit markets in Europe that is causing sovereign lending rates to reach EU records.  That seems to be a tall order at the moment, but when you consider any incremental progress on even most of the above, it could set up for a re-test of this years previous highs by yearend.  I am not positioned for this at the moment as I see any potential hiccups out of Italy or Greece in the coming days as a massive potential road-block to this thesis and therefore I will wait and see.  As a trader or an investor it is impossible to get any sort of edge to the situation in Europe, and therefore I continue to sit on my hands and play the micro, albeit at a more cautious rate.

Yesterday’s price action in JEF was something out of the 2008 playbook and if I was a long holder would make me entirely uncomfortable.  The company for the second time in as many trading days came out and defended their capital base and positioning and made the announcement that they reduced their exposure to European Sovereign debt by about 50%, as NYT Dealbook stated, “Just To Show It Can” and the stock barely rallied off of last weeks panic lows, which tells me one thing, THE MARKET DOESN’T BELIEVE THEM.  Again as I have said numerous times in the last few days in this space I have no strong belief one way or the other whether their statements are accurate, but as a market participant/observer this price action is reminiscent of 3 years ago, and in the the face of the MF Global debacle I have to assume there will be much less worthy (MF Global appeared to be very worthy) sacrificial lambs before this market turmoil is over and why not be a marginally capitalized financial firm like JEF (which Nouriel Roubini has recently warned against some “banks’ dependence on short-term financing to maintain their long-term asset leverage and run their businesses”.  For right or wrong JEF has been placed in the eye of this storm and for whatever reason the company’s actions and words don’t seem to be helping much.   I am merely commenting on the price action, not the fundamentals which I have no strong knowledge about.  I would expect that this company gets a capital infusion as show of confidence from a larger player in the very near future or the stock could be a hat size in the coming weeks.

So for today, our futures are up in sympathy with European equity strength as we wait for the Italian budget vote and to see if their PM can maintain his majority…..again I don’t have much to add on this front and like you will just sit on my hands and wait.


MorningWord: 11/7/11:

“Oh, the streets of Rome are filled with rubble Ancient footprints are everywhere”

“I left Rome and landed in Brussels On a plane ride so bumpy that I almost cried”

Bob Dylan-When I Paint My Masterpeice

Last week’s equity market losses (down about 2..5% and about 3% in Europe) seem generally benign when you consider the monster rally of the 5 previous winning weeks in a row.  Some market observers found Friday’s action disappointing on a day that saw data suggesting that our employment situation here may actually be getting a tad bit better.

But as anyone who has at least stuck their toe in this market over the last few months knows, Europe is driving the ship……and in some ways you could make the argument that the SPX only closing down 63 bps Friday, on a day that saw Greece’s govt essentially collapse and disappointment out of the G20 meeting that our equity markets continue to be a relative safe haven (the DAX closed down a little less than 3% on Friday).

This morning Greece is less of the issue as concerns have now moved towards Italy’s Prime Minister Silvio Berlusconi’s ability to keep his ruling coalition together and get a majority in tomo’s parliamentary vote on a budget will affect Italy’s austerity pledges.  European equity markets are well off off of their lows of the day almost unchanged (Italy’s FTSE MIB index is actually up 2%), but the yield on their 10 year is surging to new highs at about 6.6%.

So another week and a new set of problems with very few agreed upon solutions…..European Finance ministers will again meet in some fancy Euro City (today it will be Brussels) while the world waits for them to (yes I am gonna say it) “paint their masterpiece”.   Italy appears to be a much bigger potential problem opposed to Greece and the markets will need to see the “Bazooka” EFSF fund to attack such a potential problem.

As for our markets there will be a lot of fed speak this week as the chairman and many of the governors will be parsing through last week’s FOMC statement.  For my own trading, I am still doing my best to preserve capital, my trading positions are at the lowest levels of the year as I continue to see few opportunities from a macro standpoint.  On a micro level, I still think there are plenty of stories to look at on a single stock level, but with the markets at what I feel is a huge inflection point, I think the prudent thing to do is sit on my hands a bit and wait for some form of resolution in Europe.

When I consider new longs, I am generally looking at close to or our of the money call spreads….if the market is gonna rip into year end on any resolution (at least a near term one) to Europe debt issues than we could see a move back to the Nov highs…..But if this is not the case and we head back to 1150 or so in the SPX, I want to have made smart decisions about the risk reward relationship of my long bets.

On the short side I continue to trade on an intra-day basis and continue to use tight stops….this is the only way to do it….the stops should not be so tight that any little tape-bomb takes you out of your position, But you also don’t want to get run over on a massive reversal move……when I speak about stops I almost entirely refer to mental stops, a pre-determined point where I will take at least a portion of my position off if that level is breached……this is a must for day-traders but it is also a useful tactic for investors……..have a good idea where you would cut losses similar to the  idea of where you would start to book some gains.  Discipline is the name of the game, especially in an uncertain market like we are in now…..If you can preserve capital, and remain disciplined in volatile markets you will live to see another day, hopefully a day where the trends are clearer and easily identifiable.


While I am a Dylan fan, primarily because he influenced most of my favorite rockers…..but in the instance of “Masterpiece”, like many Dylan covers, I prefer the Grateful Dead’s rendition.