MorningWord: 11/21/11

by Dan November 21, 2011 9:08 am • Commentary

MorningWord: 11/21/11: Friday’s sideways action at the low end of the recent trading range capping a 5 day period that saw losses in the SPX a shade below 4% was in hindsight a precursor to continued weakness.  As I said in this space on Friday,  “who the hell would want to be long in this uncertain environment?”, and that still stands walking in this morning with the S&P futures down about 1.25% and the DAX down about 2.25%.  This morning’s weakness has less to do with widening credit spreads (which is still going on with focus now shifting towards France)  in Europe and mostly having to do with our “Congressional Super-Committee” which has failed to reach a budge agreement by Wednesday’s predetermined deadline.  So again, heap on a whole host of uncertainty to an already volatile environment, and what do you get?? an environment where investors will look to reduce risk and book gains for the year in individual names or macro positions.  At this point there is no place to really hide as Gold continues lower this morning, down about 5% in a week, Crude also down and I guess U.S. treasuries likely to remain in vogue even if for counter-intuition reasons.  For more comments on some things are sticking out to me in this environment look at last nights Trading Diary post (here), specifically worried about prior leaders in the Nasdaq like AMZN and AAPL and the price action in the banks threatens to sink this whole thing.

With every fading moment the likelihood of a re-test of the Spring highs becomes dimmer and dimmer, but what does become apparent is that any late year rally in an attempt to mark portfolios should be sold as their does not appear to be any real solutions that can stave off what appears to be growing debt contagion.  In some ways the fate of the PIIGS reminds one of the contagion that hit U.S. banks in 2008; Greece=Bear Stearns, Italy=Merrill Lynch, Spain=Morgan Stanley, France= Lehman Brothers and so on and so forth down the the ironic combo of Germany=Goldman Sachs.  The  route really didn’t stop with government intervention or stimulus, it just stopped with time and a massive oversold condition, which probably wasn’t really until the one year anniversary of Bear’s failure.   While the equities of many U.S. and European banks sit near multi year lows and appear oversold on a long term basis they may not on a short term basis and I would argue until we see new lows in the names there will be those who will need to reduce exposure to the space as many large hedge fund managers appeared to do in the latest round of 13f filings.  If people on TV suggest these stocks should be bought hand over fist on valuation for a long term play, that’s probably a fine suggestion if you don’t mind having what could be substantial % losses in the near term.

The point of this site is turn those sorts of traditional investing myths on their heads…..if you agree with that notion of the bank stocks cheaper than ever before then buy them on the next panic when everyone wants to sell them, not when they are still 10-20% off of the Oct lows and people still defending them.   I will continue to ride my short positions in JEF, BAC and MS and look for opportunities to press them on rallies.  I will look to cover though on a puke, until now over the last 2 weeks the weakness in most of the names (except JEF) has been very orderly.  I may even look to get long before year end as you could see some bargain hunting in the new year.

As for walking in this morning with world equity markets under pressure, I will look to take small profits on some market shorts but also feel convicted in laying out shorts on the first rally.  The likelihood of ECB intervention and some palatable resolution to our budget issues in a holiday shortened weak is not great at the moment.  The path of least resistance is probably lower heading into Wednesday’s close, as European markets will be open Thursday (ours are closed Thurs and half of Friday, while our bond markets are closed both) and I am not sure traders will be feeling the holiday spirit taking the associated risks of remaining long while feasting on Turkey and Football for the back half of the week.

As for the SPX, the chart has a lot of room to the downside as it goes through support this morning at 1200.  Chart below shows the lack of support to about 1150.

1 Yr SPX chart from Bloomberg


Without any meaningful ECB intervention or some 11th hour agreement in our congress the markets likely to remain under pressure for the balance of this week.  I will look to short rallies,while not pressing shorts on down openings like today.

BONUS: check out video of The Airborn Toxic Event perform “sometime around midnight” Friday night at Terminal 5.  If you like these guys u gotta try to see them live, they put on a great show.  Yes my hand is a bit steadier writing on the site as opposed to recording video at a concert.  Enjoy.



MorningWord: 11/18/11: Thursday’s afternoon action in the S&P felt a little panicky for the first time all week. There weren’t too many places to hide as financials, tech and energy all under-performed the broader market, while gold and crude got slammed.  The SPX which is still the best performing broad index in the world ytd is now down about 3.3%  vs the DAX which is down about 15%, FTSE down 8.5%, Shanghai down 14% and the Bovespa down about 17.5%.   U.S. equities are clearly a flight to quality and possibly for very good reason when you consider that our economic data continues to come in slightly above dampened expectations as evidenced by yesterday’s jobless claims and housing starts.  There continues to be cross-currents on the earnings front with recent disappointments from NTAP, SHLD and ANF, but generally they have been better than most would have expected.  One thing is clear that while companies are beating earnings on tighter cost controls, share buy backs but lack real revenue growth and any real visibility.  One thing is for sure, and to state the obvious, that the situation in Europe, if continues to drag on will ultimately drag down the worlds economic recovery.

This morning European markets and our futures have rallied out of the red to be slightly higher on the day as rumors of the ECB buying Italian sovereign debt continue to make their way through the markets and  buoy hopes that the central bank will step up their purchases at the behest of z Germans.   This is where I kind of step out, I don’t pretend to have any unique knowledge of what the ECB can or can’t do.  A lot of people on TV or on the web want to through around terms like “treaty of Lisbon” and the like, makes them sound smart, but the word “treaty” brings me back to my poli-sci days in college and this is when I hit the Google.  CC linked to a fairly good rundown from the Washington Post over night if you haven’t seen it yet (read here).  The only thing that an opening rally predicated on ECB buying of Itialian debt means to me as that I get a decent opportunity to short the opening!

As far as my trading I got a bit more active yesterday once the market started moving and it appeared that we were going to break out of the tight range in the SPX of 1230 to 1270.  I still want to lean short, but will continue to look for tactical opportunities on the long side as I did yesterday in AMZN (read here).  But I still believe the trade is to short overvalued high-fliers into events or after as I did yesterday in CRM (here) and GMCR (here) yesterday.  Check back after the opening for trade management on my CRM put fly as the stock is trading right at my long strike and this once could be dicey on expiration.

So I continue to lean to the cautious side, my bearish bank bets in MS, BAC and JEF are helping me with this thesis as they show no signs of life and in some ways look very near to re-testing the previous lows from Oct.  If we get another flush down today before the weekend (who the hell would want to be long in this uncertain environment??) then I will look to cover some market shorts.  But with near term bearish bets on AAPL (here), acting the way it does I am trying real hard to be patient.

After a week that has seen about a 3.5% sell off though you want to be careful and not press the short at the lows.  So today’s opening bounce will likely see one sell off, if things get sloppy like yesterday after trying to hold then we likely close very poorly, but if the marker comes in 50 bps and then makes a new high on the day we could be off to the raises as shorts trip over each other to cover.  Remember all this ECB monetizing of debt and treaty of Lisbon talk means that traders/investors are worried about some form of coordinated action by ECB , IMF and who knows who to attempt to stabilize things in Europe.  So shorts are nervous as are longs and that makes for a volatile uncertain situation that can be hard to dig your heels in, so be nimble I guess is my point.


MorningWord: 11/17/11:  Well, this is starting to get old, the 4th day in the last 4 that we walk in to see our futures down on the back of European weakness, but like we’ve seen alot lately, they have turned more positive on the back of stronger than expected economic data here in the U.S..

Yesterday’s late day sell off spooked market participants a bit as most didn’t know until after the close what the cause for the weakness actually was. Really???? a report from Fitch titled “Eurozone Contagion Threatens Outlook for US Banks”.  Hey Fitch “Iceberg Sinks Titanic.”   I guess the point here is that the markets are fairly nervous and most investors have their fingers on the trigger.  This is not bullish action.  Yesterday’s intra-day swings of 15-20 S&P handles every few hours does not speak to a calm market ready to rally.  For the last 10 trading sessions the SPX has been trading with a range of 1230 and 1270 and now looks poised to once again test the lower end of that range.

The DAX is down almost 4% this week, the Euro is down almost 2.5% during the same period while Italian 10 Yr yields still hover around 7% (well off this mornings highs and now under 7%).  While many are fixated on Italian yields some are starting to focus on the spread between German and French bonds that at one point this morning was greater than 200 bps.

Bank stocks should be the focus here, not the fundamental issues facing their business models, but the price action of the stocks.   Many investors thought the worst might have been over for the group at the end of Oct as most names like MS, GS and C broke above the the Aug and Sept ranges and capped runs of more than 30% off of the lows.  In the last 2 weeks, the stock have retraced about half of those gains and now look poised to once again break-down.  The way these stocks have been moving I wouldn’t be surprised to see a re-test of the previous lows in the coming weeks.

Our futures just went up on the day on the heels of slightly better than expected Jobless claims and Housing Starts.  Our economic data continues to be “less bad” and our corporate earnings continue to surprise to the upside for the most part.  So any near term resolution to the debt contagion in Europe could clearly put in place a year end rally.

As for today I will wait until maybe 1/2 of yesterday’s sell-off is retaken on the upside and try to short the rally, and always with tight stops. I am doing some work on CRM into tonight’s earnings, so check back later as I think there is probably a trade to do, the options market is currently implying about an 11% move vs its 4 qtr average of 8%.




MorningWord: 11/16/11:  Walking in this morning, the third day in three where our futures are down in sympathy with Europe…….Equity markets the world over have been moving around the last 16 hours……Shanghai Comp had its worst day in weeks down about 2.5% , the DAX is now 2.8% off of the morning highs and down over 1% at the lows of the session and our futures are down about 1%.  The Euro continues to slide breaking a key technical level at 1.35,  Crude oil broke $100 on the  upside for the first time since early August, while all eyes remain fixed on the PIGS debt, specifically on Italian 10 yr which continues to hover around the psychologically important 7% level.

As for our markets, earnings continue to be mixed with DELL beating on eps but missing on revenues and giving a cautious outlook, while TYC beat slightly.  The real story in our markets was the Nasdaq out-performance yesterday largely fueled by the reversal in AAPL.  Once AAPL broke its 1 week malaise, it carried with it many other names that have been showing relative strength.  INTC for instance closed at a new 52 week high, while GOOG continues to push towards the highs made back in the summer.  Tech is obviously a bit of a save haven here, and until we see a rotation back in to financial stocks it is likely to remain a sector that money managers keep over-weighted. So here’s what I will be doing today:

As for this this morning, I think once again you want to be careful pressing shorts on the open and as always wait for a rally.   Markets are starting to move around a bit and the VIX above 30 may be telling us to hold on to our hats cause we could be in for some increased volatility in the weeks to come.  Maybe 30 is the new 20 in the VIX (20 being the long term average and the level below which some vol traders look to get long premium).

As always look to take some profits on shorts on down openings and then wait for rallies to put them back.  I still struggle with identifying longs and as I said the other day at some point in the next week or 2 I will throw in the towel and look for beta names to play into a potential year end rally.   In the meantime I will look to make defined risk bets around events such as ADSK last night.  The company beat and slightly raised last night and the stock is only up 2.5% (under-performing the implied move of about 7%) in the pre-market.  This one has the potential to reverse intra-day if it can’t get a head of steam.  I will keep a close eye on this position and look to salvage some premium from this put spread if the stock starts to come in as there is not much time before expiration.   Please check back later for any updates on my trade management.


MorningWord: 11/15/11: European equity markets are getting knocked around a bit this am, although most of the major indices are about 1% off of their lows of the session.  The news flow and the set-up this morn seems a bit similar to yesterday’s, as all eyes on are on the weak Euro and rising bond yields among the PIGS.  It appears that the “honeymoon” of just a couple days is over following the Burlesconi resignation, and now the Italian 10 yr is hovering right back around the psychologically important 7% level.

One of the more interesting comments I read this morning was from a Bloomberg article speaking of the challenges new Italian Prime Minister Monti now faces:

Monti, a former European Union competition commissioner, struggled to get political parties to agree to participate in his so-called technical Cabinet during talks in Rome yesterday. A government lacking political representation will find it harder to muster support from the parties in parliament to pass unpopular laws. Monti said he’ll conclude his talks today.

I guess what many market participants who bought the Greek and Italian leadership changes late last week failed to properly price is what does this new level of uncertainty bring to debt and equity markets that are desperately seeking some stability?

Yesterday’s sell off in the SPX was anything but scary as the market traded on fumes in one of the lowest volume days in a long while.   The weakness never felt like it had a chance to get sloppy like last Wednesday and in some ways was almost healthy given Thursday and Fridays melt up.

The news flow over here this morning continues to be ok with Retail Sales and New York Manufacturing coming in better than expected as inflationary data was milder than expected.  The S&P futures which were down a little more than 1% about an hour ago in sympathy with European have now halved those losses and will be looking for some leadership on the opening….Leadership has been hard to come by of late as the banks can’t seem to get out of their own way and some large Tech like AAPL seem to be for sale.   Lots of retail earnings out this week;  HD beat and raised this morning with the stock trading up 2% in the pre-market but this is on the heals of a solid report out of competitor LOW yesterday and should not have come as a surprise.  On the flip side WMT is trading down 2% in the pre-market, as the company missed earnings on weaker than expected gross margins.  Both stocks have outperformed the broader market this yr about about 9% and both are up at least 22% from the August lows.  I am not sure this will be the sector that will continue to lead the market as a tight consumer may be the merging theme as we get closer to the holiday selling season.

As for today, I think you want to be careful not to press the down opening on the short side, but if you must, as I probably will, wait for a rally to lay them out.  European leaders seem to be back towards their clueless-ness and as we get closer to our super-committee deadline for budget cuts Nov 23rd, we could see a market that doesn’t know which way is up.

So I remain cautious and defensive, I just don’t see the risk reward on the long-side of the market, but clearly recognize the need for many market participants to want this thing to close higher than current levels at year end.  I think any extreme weakness in the coming week or so before Thanksgiving will be met with buyers in an effort to keep the markets within a few % points of unchanged on the year.  That way as we head into a holiday shortened month of December they have a good shot of ripping them back towards the previous highs.


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 there 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.