MorningWord: 12/13/11

by Dan December 13, 2011 8:54 am • Commentary

MorningWord: 12/13/11:  Yesterday’s Europe fear fueled sell off had many market participants on their heels who had dug in for a year end rally predicated on the “success” of the EU summit.  Weakness was broad based, but obviously concentrated in financial stocks.  Even with the SPX’s late day rally of about 70bps into the close, bank stocks barely rallied off of their lows.  With the SPX appearing to bounce on the open, the see-saw action of the banks of late, but particularly today will be tops on my list of things to watch…..If the banks can get going they will most certainly drag down the broader market.

Not all of Monday’s weakness can be attributed to Europe though, we have to give INTC‘s negative pre-announcment a little credit as the company warned that Q4 revenues would be less than previously forecasted due to the hard disk drive manufacturing and shipping disruption  caused by the Thai floods.  The stock which had been the best performer in the beleaguered SOX took it on the chin and closed down 4%.  Last week saw a handful of semiconductor pre-announcements and we are likely to get more in the coming weeks with reasons ranging from poor demand from Europe to the Thai floods to everything else in between.

BBY is trading down 8.5% in the pre-market following an earnings miss due to poor margins as a result of heavy promotion activity into Black Friday.  I blew this one as I put on a contrarian bullish play into the print based on the thought that their margin issues would have already been factored in at this point and that and positive news could cause a short squeeze.  Well, I was obviously wrong and in some ways outsmarted myself, as I stated the following in my BBY post yesterday:

Let me be clear, I am not a fan of BBY’s business model or their positioning and I am bearish on the name longer term, but I feel that sentiment is poor heading into the print and with only couple weeks of  visibility so far into the Holiday selling season there is a good chance that management tries to put a little lipstick on a pig and offers an outlook slightly better than some expect….with short interest close to 12% of the float maybe this gets the stock going a bit……Longer term I am not a fan of the stock which is why I want to define my risk as I make a short term bullish play….I am risking what I am willing to lose.

SO I guess the moral of this story is “don’t be cute” in this market, and stick to what is working…..

As for today, the action in Europe is not very impressive as the DAX is only up 60bps after yesterdays 3% sell off and stocks like DB which closed near its lows is now trading down about 2%, this is not good action.   SO back to our banks they hold the key, if they can’t get anything going this morning, watch out below…..I will try to short the open and look for a retest of yesterday’s lows in the SPX of about 1227.50.

 

 

MorningWord: 12/12/11:  As I write at 9:15am, European equity markets are down about 2% across the board, while yields on European sovereign debt are soaring from multi-month lows as the Germans continue to back an expanded commitment of the ECB to buy debt and Moody’s warning of downgrading the EU member nations.

Our S&P futures are down in sympathy and just got a little smack when INTC just lowered their guidance for Q4.  This doesn’t come as a huge surprise to me but bulls may want to re-evalaute the companies credibility as they just reported a beat and raise back on Oct 18th.  Last Monday Dec 5th, I reintiated a short on the name and had the following to say:

I think something has to give in INTC and feel that there is a decent chance due to weakness in Europe and a slowing economy in China that INTC may need to back off on their Q1 guidance as Q4 might have been a tad worse than they gave guidance in mid Oct.  INTC has confirmed its Q4 reporting date for Jan 19th which falls in Jan expiration, but I think there is a decent chance they could actually pre-announce negatively if December proves to fall flat for orders, something the disruption in Europe could clearly cause.  Up until a couple years ago INTC used to hold mid quarter updates this week of the quarter, they don’t anymore, but any disappointment out ofTXN”s mid qtr update this Thursday afternoon could cause some weakness across the space. So here’s the trade:

INTC is only down 3.5% in the pre-market, but I am not expecting the sort of rally TXN got Friday after opening down 5% on their disappointing Q4 outlook.  TXN was down about 8% ytd heading into their mid-qtr update, while INTC is trading at multi-yr highs and is massively outperforming the broad market.  This is a name I want to short on any rally.

Today I think you have to be careful as always in pressing a down opening, But like INTC, given the continued negative news flow I think it is safe to short rallies.  Watch the banks, as I mentioned in my post last night, I was not that impressed with their price action Friday after such a nasty sell off on Thursday.  Most names like GS and JPM closed well off of their opening highs….If these stocks can’t hold this morning we could see a repeat of Thursdays action.  Again the banks hold the key for me, but if we start to see the loss of leadership of names like INTC then we could say “hasta la vsta” to a yr end rally.

 

 

MorningWord: 12/9/11: Who would have thunk it, the ECB disappointed and the EU delivered, well not really, and probably not likely today….Debt and Equity markets have gotten a boost this morning following yesterdays 2% sell off on a report that China is setting up a $300 billion investment fund to buy assets in the U.S. and Europe.

Yesterday’s market reaction to the disappointing news from the ECB that they would limit European Sovereign debt purchases to $20bil euros a week was clearly not what the markets wanted to hear and this was obviously reflected in the reversal in debt in equity markets before the US open. Yesterday’s selling felt real as there was barely a single rally all day until there was another bogus rumor about an IMF fund that was quickly debunked and the SPX quickly made a new lower low.

The news out of China and the EU summit this mornings though has caused a slight rally in the European equity markets with the DAX recapturing earlier losses of more than 1% to rally almost 3% to be up a bit more than 1% about an hour ago now only to be up 80bps.  No news will not be good news today and as we get closer to the conclusion of the much anticipated summit this afternoon, I am not sure traders/investors will want to go home for the weekend all that long.

The real tell will be the bank stocks, DB was down yesterday out of the gate and closed near the lows (its adr here in US) down about 8% .  This morning the stock is up about 4.5% in Germany and any failure to hold these gains will not be well received by the broader markets.  Moody’s downgraded 3 French banks (BNP, SocGen and Credit Agricole) this morning and all 3 are trading higher in Paris……clearly the markets are discounting most anything the main rating agencies have to say at this point.

So for today, I am watching European banks into their close at about lunchtime (eastern) and then how our banks which had their worst day in more than a week.  As many of you know I think the banks have gone too far too fast since Thanksgiving and think we wills e a continued retracement of the recent move higher.  I own short dated put spreads and flys in DB, C and MS.

On another disconcerting front, 3 semi companies cut their outlook for Q4 on week demand last night, TXN, ALTR and LSCC all warning that they would miss their guidance recently given in mid Oct.  Many will discount this and suggest that due to the cyclical nature of their business this could be more emblematic of a bottom, I suggest that in an economic environment like we are in now, with so much uncertainty out of Europe and China, which drive a ton of demand for our technology exports, this could be a sign to take some caution as it relates to names like INTC which has rallied almost 30% since its Sept lows.  Into TXN’s mid qtr I bought a Dec Put Fly that should perform very well with the stock down 6% in the pre-market and I also bought January Put Spreads in INTC.

As for today with the markets looking to open a tad higher, I want to short this opening look for the banks to give back early gains, there will be rumors and headlines, but I don”t think there is a ton of risk of a “tape bomb” that could rip shorts today….The EU bought themselves some time, but I am not sure this will be perceived as the all clear sign.

 

MorningWord: 12/8/11: The ECB cut 25bps as expected and while the markets originally held in there, they have since reversed. S&P futures are down about 80bps as the head of the ECB failed to suggest more bond buying. Bond buying has clearly been the reason for European Sovereign yields easing of late.  Expectations were higher, I guess, than most people thought heading into the late week events in Europe and the markets are reflecting that this morning.

The Following Bloomberg Headlines From ECB head Draghi are all you really need to know why the DAX has basically reversed 3% in the last 45 mins:

*DRAGHI SAYS ECB HAS NOT DISCUSSED CAPPING BOND YIELDS

*DRAGHI SAYS IMF BILATERAL LOAN PLAN MAY NOT FIT WITH TREATY

*DRAGHI SAYS TREATY SAYS NO MONETARY FINANCING

*DRAGHI SAYS ULTIMATE DECISIONS ON CRISIS IN LEADERS’ HANDS

 

Deutsche bank (DB) is down about 4.5%on the day and should continue to see weakness into tomorrow’s meat of the EU Summit.  The Dec 37.50/35/32.50 Put Spread that I bought yesterday should perform well with this move and I will look to roll something out to Jan Expiration.

I think you have to be careful pressing this open from the short side, But I will most certainly look to short the first rally and I will specifically focus on US banks like MS that don’t appear to be down much on the open.

 

 

 

MorningWord: 12/7/11: As I write at 8:30am this morning, European Equity markets and our futures have reversed earlier gains (DAX was up 1.8% and S&P futures at one point close to 1%) and now down 1.2% and .33% respectively, on a media report that “Germany rejected combining the current and permanent euro- area rescue funds”.   It is my view that expectations heading into Friday’s EU Summit aren’t particularly high as most who have been following this saga since the spring feel that they have been watching a slow motion train wreck, the debt and equity markets though, given their significant moves of late may have another thing to say about non-action.

Yesterday our markets treaded water until late in the day when the FT reported that European leaders were discussing doubling the size of the EFSF at Friday’s Summit.  The SPX quickly ran up to it’s 200 day moving average around 1265 on what felt like fumes and then spent the last 40mins of trading giving it all back, again on what felt like fumes.

I guess the point here, is the volume is light and it will be very hard to get a sense for the conviction of large market participants until we see a bit more commitment as it relates to volume.  The reason for low volume I would assume has to do with the low level of conviction on this week’s Euro events and thus leaves many to just sit and wait, especially after such a big run up since the Monday after the Thanksgiving Holiday (the SPX is up almost 9% in 7 trading days).  But the glass is clearly half full at the moment as the SPX is holding right below the 200 day mva which in a lot of ways is fairly bullish especially when you consider the potential for a seasonal year end rally, IF WE GET INCREMENTALLY POSITIVE NEWS OUT OF EUROPE THIS WEEK.  But either way they may run them into Dec 31.

With all the excitement in Euro equities since last Monday (the DAX is up ~9%), and the easing of sovereign bond yields (the Italian 10 yr now yields less than 6%), the Euro has gone nowhere in that time period, it is up less than 1% and hovers within 1.5% of the Oct lows. It appears that expected rate cut from the ECB tomo morning and lack of progress at the EU summit is being best expressed in investors disinterest in the Currency.  I remain long Jan Put Spreads in FXE.

So what will I be looking for:

I continue to see few opportunities as it relates to single stocks, but will look at some earnings that are on my radar for next week; BBY, ORCL, FDX and RIMM.  BBY will likely give us a decent read on consumer trends in electronics, while ORCL could give us a read on corporate demand for IT, while FDX may just be general sentiment indicator about general activity and how a global transport is faring in these uncertain times in a fairly make or break qtr.   RIMM on the other hand will only give us a read on the continued ineptitude of their horrible management, which I expect to run hot!

SO in a low volume uncertain environment after a massive short term run, I sit on my hands a bit and wait like everyone else…the last thing I want to do at this stage of the game (meaning year end) is force some trades that make a well trade year turn into a late year disaster.  This is the perfect time of year to play a little defense, protect some winners and play a bit smaller than normal on new positions.

 

 

 

 

MorningWord: 12/6/11: The SPX continues to be a flight to quality among equity investors, demonstrating its relative strength yesterday by closing up 1% in the face of S&P putting 15 European Nations on Downgrade watch late in the trading day (it was leaked late in the day, but official statement didn’t come out till after the close).  European markets are down across the board this morning, with the DAX down the most at about 1.15%. The markets continue to be driven by the action in Europe (or possibly inaction) as we head closer to Friday’s much anticipated Euro Summit.  While expectations are not exactly high, no new news would most definitely be disappointing to debt and equity markets that clearly have priced in some progress in Europe’s Sovereign Debt Crisis.  The DAX is up a little more than 12% in a week, while the Italian 10yr yield has dropped from record highs above 7% to below 6% in just a few days.  Again there appears to be some good news priced in to markets hear even with expectations low.

On this side of the Pond, banks stocks continue to be the story capping a one week rally that for some has seen gains of up to 30%.  The ability for the banks to hold these gains in the face of their own S&P downgrades (last week) and the potential for their European counterparts in days/weeks to come is very impressive to say the least.  The banks hold the key in my opinion to the markets being able to put in a decent push into year end.  If they can consolidate and hold recent gains then we have a great shot, and if they continue to rally then don’t be short a thing till Dec 31 at 4pm.

As I have been saying for a few days I am seeing fewer and fewer trading opportunities as we head into year end, but I will continue to focus on the few events where I believe there is a chance that the markets have miss-priced….yesterday I took a look at 2 of the largest components of the SOX, INTC and TXN and place a couple near-term defined risk bearish bets on the stocks as we head into TXN’s mid-quarter update Thursday after the close (read here & here).  By no means am I going in big, but I think there is a chance that the visibility that TXN is relying on to make their guidance adjustments is very poor and if extrapolated to INTC (even though they are much less exposed to wireless) could be a strain on the recent enthusiasm.

Another position that I am keenly focused on is my short FXE Put Spread in Jan. The news out of Europe in front of the ECB meeting Thurs and the EU Summit Friday does not appear to be helping the currency vs. most major crosses.  I believe the direction of the Euro on a week that the markets expect some solid plans to solving the debt crisis could be very telling though for how things will shake out.

So I continue to run a balanced book and will keep things relatively light on the short-side until I feel strongly that we have gotten a bit overbought….at this point I don’t feel that way, but when I do I will most certainly look to buy short dated tight put spreads in the Banks (as detailed Friday in my DB post).

 

 

MorningWord: 12/5/11:  To look at Friday’s 4pm close of practically unchanged for the day didn’t tell the full picture, as the SPX was up a little more than 1% after the open, but more impressively the banks held onto some very healthy gains capping a week that might have caused bears on the space to rethink their near-term thesis.  As I detailed Friday afternoon I will look for these stocks to continue to run into Thursday’s ECB meeting and Friday’s EU summit and I will look to fade this move off of the bottom.  This is not a trade you want to be too early on and you do want to define your risk, just as these stocks might have overshot on the downside they reserve the right to do so on the upside too!

Markets continue to be focused on the potential fixes this week Europe’s Sovereign Debt Crisis and the week is getting off to a good start as Italy’s new Prime Minister Monti’s plan to reduce the country’s debt load.   On the heels of this Italy’s FTSE MIB index is up 3%, while the Yield on the Italian 10 yr is at the lowest levels in 4 months at ~6.10%.  Our futures are up about 1.35% in sympathy and we are likely to continue to be locked in on Europe for the balance of the week.  It is interesting to note though that as we have been getting increasingly better economic data over here as evidenced by Friday’s lower than expected unemployment rate, there continues to be fears of China’s growth slowing at a greater pace than some might have expected and having a distinct possibility of throwing a monkey wrench into the case for the “global reflation” following any solutions in Europe.

As for my own trading, at this point I am not sure it makes a ton of sense to fight this Juggernaut on the short side until late in the week or until it appears that all the good news is baked in the cake….and at this point it does not appear to be. As far as the SPX goes I will wait until we get a test of the the 1265 level right around its 200 day moving average to start laying them out.  On the single stock side I am seeing fewer and fewer opportunities around event and won’t force things when I don’t have conviction around and event or related to price action.  That is the exact reason why I want to wait for the banks to run a bit more and get near-term overbought.

 

MorningWord: 12/2/11: Well we got the all important jobs number this morning and while the headlines seem slightly better than people were expecting, particularly the unemployment rate at 8.6%, the lowest since March 2009, the futures seem mildly unimpressed, having sold off a few handles (albeit from up 17 to handles to up 13).  I guess the larger point here is that with the SPX’s 8% rally this week (including this mornings gains in the futures), there is a lot of good news currently priced in at these levels.

Yesterdays sideways action was fairly healthy after Wednesday orgy, and in a lot of ways we seem to be heading towards a glass half full scenario into year end.  As I have been saying for at-least a week, I refuse to get caught short in a silly year end mark and have been reducing/closing shorts, while also taking profits in longs when I have them.  The book is getting smaller and smaller as we will have fewer single stock catalysts in the coming weeks and will largely be left in the hands of the Macro situation and the “calendar affect”.

Looking ahead to next week’s meeting of European Leaders I would expect more positive rhetoric in an effort to at least talk things up into year end…..I actually disagree with this strategy a bit and  if I had a seat at the table I would love to see world equity markets close the year back at the lows and then get after the backstopping/stimulus/market manipulation at the start of the year and try to follow a similar timeline to 2009 looking for a bottom in late Q1.  But that’s just me.

As for my trading I am getting pretty light, and have few single stock positions left on the sheets, and I am likely to re-evaluate my Short FXE in the coming days if it appears very likely that next week will be a Euro-leader love-fest.  I am keeping a close eye on the banks, if they can continue to hold this weeks gains then we will  see them hold the recent lows (that about a week ago they looked destined to breach at any moment) at least till year end.

The sentiment has certainly shifted and this could have more to do with the calendar, but in the meantime (till Dec 31st at 4pm) I am not sure this is a battle that I want to fight on the short side, and in some ways let them close up on the year so it sets up for a great short into Jan.

 

 

MorningWord: 12/1/11: Not much to add as far as yesterday’s 4.33% rally in the SPX other than it seemed like we were due.  While many market participants had been waiting for some sort of coordinated intervention by central bankers, I am not sure many expected yesterday’s specific action or in my case I really don’t understand why lowering the rate on dollar swap lines is such a big deal.  So the cost for European banks to borrow dollars from central banks is now 1/2 point lower…..OK.  I guess the big thing is that investors saw a coordinated show of force and now finally expect more.  But what I don’t really understand how this attacks the root of the sovereign debt problem (if any of you can explain this to me I would love to hear it).  I don’t mean to sound cynical, I obviously recognize that yesterday’s strength had less to do with the actual program and more to do with sentiment.  There is a crisis of confidence in our banks and our leaders (both economic and political)  and this sort of response helps to make the leaders look a little bit more “proactive”.

But the Cynic in me definitely thinks back to all of the “proactive” policy responses to our 2008 financial crisis and how every rally predicated on increasing liquidity measures to the then strained financial system between the Bear Sterns failure in March 2008 to early 2009 were a flat out sale.  Are we reliving this pattern? Have we had our Bear Sterns Failure that will be the tipping point of this crisis? What are the odds that “half measures” like lowering rate of dollar swaps can solve the sovereign debt problems?  Answers to those questions and a couple bucks will get you a seat on the downtown bus, but to where??

As for my own trading, I am short high valuation stupid cult stock names (HANS, GMCR & LULU) through Put Spreads, I am long some (reduced position risk dramatically early last week by rolling up the short put strikes) MS and BAC Jan Put Spreads and long some DEC GS and MS Call Spreads that I will look to sell on any continued strength for almost a double in a week.  So I am maintaining a balanced single stock trading book and continue to look to short gap openings to the upside with index etfs.   That was a bit of a losing battle yesterday with the SPX closing about 1.25% higher than the open and on the dead highs.  I am eying 1265 the 200 day moving avg to really lay them out, and who knows at this rate we could see that later today.

Check back after the open for updates on how I will manage my LULU Dec 47.50/42.50 Put Spread with the stock trading down 14% at my short put strike in the pre-market.

 

MorningWord: 11/30/11:  Well this mornings opening gap of approx 3% in the SPX is the exact reason why I have not wanted to be net short since early last week.  The pressure was just too great for central bankers not to act in what appeared to be an impending equity and credit market disaster that had the potential to send the world back into a recession.

This morning has seen 2 pieces of news that had stemmed the early morning losses in the equity markets the world over; 1st China lowered the reserve ratios that banks need to maintain and this turned European and the S&P Futures positive to up 1-2% around 6am (the first gap higher in chart below), and 2nd the U.S. Fed and 5 other central banks coordinated to lower the dollar swap rates by 50bps to 50bps.(second gap higher at 8am).

S&P 500 futures Nov 30th intra-day from Bloomberg

 

 

My take for what its worth is that this sort of action needed to be taken for pure sentiment reasons as most investors have been scratching their heads and wondering why European leaders and central bankers can’t get their act together and put together a plan to attack their debt problems.  The overnight news does little to attack the problems and merely focusing on some of the symptoms, largely for fear of a large bank failure and what the aftermath could be for the global financial system (see LEH failure circa 2008).

In  a lot of ways this mornings actions by central banks remind me of the sort of action that we got leading up to LEH, the news would squeeze shorts, some hedge funds and dumb mutual funds would chase performance a bit for fear of missing the bottom but ultimately the markets would make new lows.

As I have detailed in this space for the past week I have been running a balanced book as far as single stock exposures and I just short the market through index etfs intra-day. I have not wanted to go out net short for fear of this sort of action, but i am happy to short this open with a relatively tight stop.  The bank stocks will be the key today, if they act similar to the way they did on Monday where they had fabulous opening gaps and then spent most of the rest of the day going down then I will tell you again, that they could see lower lows in the coming weeks. In a lot of ways they hold the key for me to the real sentiment of the market.  Yes I know that the sentiment is piss pour in the space but maybe for good reason.  It is also interesting to note that BAC made a new closing low dating back to March 2009 on day where a buyer of the Jan12 calls, (about 190k traded yesterday) were the most active single stock option in the entire market….This also came on a day that S&P downgraded the bank after the close.  SO again lots of crosscurrents and while the price action says that the sentiment is very poor there are clearly sum that are willing to take the other side of that (also remember there was a large buyer of Dec bank calls last Wednesday).

SO my game plan is the usual, Just as I wouldn’t press a down opening of 1% or more I wouldn’t buy an up opening liek this either, I will look to trim some longs and I will definitely look to short the opening (or a little after) with index etfs (with a tight stop).  Just as I have refused to get carried out short on an overnight gap (that is why I am just shorting intra-day rallies), I refuse to get carried out on a move of up 3% to up 5%.  SO I remain cautious but nimble, not to stubborn.