MorningWord: 12/29/11

by Dan December 29, 2011 9:12 am • Commentary

MorningWord 12/29/11:  Wednesday’s early enthusiasm regarding Italy’s debt sale didn’t take long to wane as the DAX started to sell-off around the time of the U.S. open and closed at the lows of the day down about 2% from the earlier highs.  The SPX was obviously down in sympathy also closing down a bit below 2% from the high made overnight in the futures.   The bullishness relating to Italy’s ability to sell debt at lower yields (albeit at still relatively historic highs) ended up being trumped by the realization that the Euro-zone can not avoid heading back into a contraction or worse a recession as their member nations embrace austerity measures in an effort to secure much need aided to shore up their banking system.  I know, I know, all that seems sooo October 2011, but I guess those that think the U.S. and northern European nations will be able to “de-couple” from the woes of the PiiGs in 2012 may have that thesis seriously tested.

As for our markets yesterday there were few places to hide and in some ways I was a bit surprised by the magnitude of them move to the downside.  With 2 trading days left in 2011, the SPX sits practically unchanged on the year which i is also a bit mind blowing when you consider the near historic volatility that we saw this year.

As for my own trading, I continue to watch, I have a few postions that are working (or about to be) at the moment that I really don’t want to mess with (Long FXE Jan 130/125 Put SPread, Long HANS Jan Puts/Spreads, Long LNKD Feb Put Spreads and a few others), but my positioning was deliberately culled down into year end as I lacked some conviction as where we would close on the year.  I figured that it would be up or down about 5%, but wasn’t sure which and frankly decided the most profitable thing to do would be to sit on my hands….that also comes after having 2 bad event trades last week in ORCL and NKE where I just pissed away a little money.

As for the new year, I think there is a decent chance that if the U.S. bank stocks continue to sell off and close near the lows of the year you can maybe buy some of the most beaten up names like BAC or GS for an early year rally. The stocks have obviously been under massive pressure all year long and if the selling crescendos into year end you could see some bottom fishing buying in the new year……

Aside from that some of the bizzaro high valuation consumer names like LULU, DECK and HANS were all down 3% yesterday…….I think this is a trade that will continue to work in 2012 as it just started to come undone in names like GMCR, NFLX, AMZN and CRM in the second half of 2011.  I think stocks like CMG, WFM, PNRA and HANS better watch out, because as some rationality comes back in the market these names could be seriously vulnerable.

SO for today I do nothing and wait for maybe a continuation of yesterday’s move and look to pick up some bank stocks…..but again, I have not formulated a strong fundamental thesis as to the direction of the markets in early 2012, which may not happen until we start to get a wider swath of data from companies reporting Q4 earnings in mid January.


MorningWord 12/28/11: Yesterday’s action in the equity markets was anything but exciting, closing practically unchanged on the day on fairly light volume.  I guess the big news was the fairly sizable jump in consumer confidence in December, reaching an 8 month high, and possibly buoyed by the better than expected employment reading that we got earlier in the month showing the unemployment rate at the lowest in 2 years.  The skeptic in me can’t help to speculate that consumers were falling into a little self full-filling prophecy getting all geeked up before the Holidays……like they needed to just feel good before going out and spending on a bunch of crap that they and their gift recipients don’t need in what should be more austere times. (yeah yeah bah humbug)

If there is one sector to watch this week it will probably be the financials, as the only really important scheduled event this week was this morning’s planned bond sale by Italy…..BusinessInsider had a nice little summary of the sale which was a huge improvement over their late November sale:

$9 billion euros worth of 179-day bills sold at 3.251% versus 6.504% on November 25 — an impressive 325 basis point improvement.

A total of 15.2 billion euros were requested, for a bid/cover ratio of 1.69.

The 2 yr zero coupons also posted decent results: 1.73 bn at 5%, with a bid/cover ratio of 2.23 (data via @gusbaratta).

Everyone was watching Italy’s auctions today and tomorrow for a verdict on whether the ECB’s rescue measures have been effective. Good news on this front is contributing to a 0.9% 1.2% rally in Milan and gains across Europe.

The Italian 10-year yield is also falling today to 6.78% from 7.12% yesterday. Here’s a chart of the 10-year, which goes on the market tomorrow

The sale came at a time when the equity markets’ calm over the last week was at telling us that things at least appear to be under control for the moment as it relates to Europe’s sovereign debt crisis. But, this may be a tad misleading as the yield on the Italian 10 year bond has crept back up to the psychologically important 7% level(its now down to about 6.8%).  When it comes to the really smart sounding sovereign bond auction stuff I obviously have nothing important to add, but it would seem in a quiet/low volume market we are currently in that moves in the equity markets can be exaggerated by the least bit of good news in the credit markets.

The banks continue to underperform the broader market with most names down about 2% yesterday…..BAC was in focus today as the media reported that the company is considering more asset sales to raise capital to appease investors who worry about the country’s 2nd largest banks liquidity in the “next” financial crisis.  These guys just can’t get a break and with the stock down 58% ytd I would expect one more puke (in the coming weeks/months) in the name below $5 before it is really safe to wade in the water again.  I guess the real question will be at what level will Buffett average down if we do in fact get another sell off in the name…..I think at that point you want to go all in.

GS and MS also continue to limp into the close of the year and I would be fairly surprised to see any late week antics to the upside, If I were a large holder of these names I would much prefer to see this sector close on the dead ass lows of the year and hope that sentiment was also near lows just as the sentiment for the broader market appears to be getting better……it will be maybe a little telling to see how the banks act today as our futures are up this morning in sympathy with European strength on the heels of the Italian auction.

As for today, I continue to see little to do and will sit on my hands and wait for any late week ridiculousness that may present an opportunity into the New Year.



MorningWord 12/27/11: While I am kind of back to it (I still have a few slopes to get nasty on this week), I want to reiterate that this is not the sort of market that you want to dig your heels into…..Last week saw the SPX start the week by testing its 100 day moving average of about 1200 on the downside, only to bounce and break-through, and close above its 200 day moving average on the upside.

6month SPX chart from Bloomberg LP


This is obviously pretty healthy action from a technical perspective when you also consider that the SPX gained about 3.5% in that time period to place the index in the green for the year with only 4 trading days left.

This sort of window dressing in a normally seasonally strong/low volume/low conviction environment doesn’t really impress me too much, and thus my dis-interest gauging any sort of trend from the recent performance.

There continues to be cross-currents, and last week happened to show-case a couple in a very stark manner.  It is difficult to argue that the economic data here in the U.S. is not getting better and that it appears that we are “de-coupling” a bit from the potential recessionary environment in Europe and the fear of a cooling in the emerging markets, specifically China.  Our data on the housing and employment from are showing slight sings of life,  albeit from decade long low readings, but I guess the icing on the cake has been the better than expected durable goods and consumer confidence data that we got last week.

All of this may be explained away as seasonal in the coming weeks but I guess the real test, and what I perceive to be the real cross-current will be U.S. corporate earnings that have seen some signs of weakness as Q4 limped into its final month of 2011.  Last week’s earnings disappointment and guide down for the current quarter caught many (including me) by surprise.  For a company like ORCL who has been consistently meeting or beating expectations for the better part of the last year, to see some of their weakness come from their bread and butter licensing revenue and application sales caused many analysts to cry foul.  When weakness arose over the past couple years since ORCL’s acquisition of SUNW in early 2010, the company had usually explained it away as growing pains in with their new hardware initiative, but while SUNW’s business continued to stink, the overflow to ORCL’s core business was certainly cause for alarm sending the stock down 12% the following day, back within in a few % of the 52 week lows and down solidly for the year at about 17%.  ORCL’s disappointment has implications that could throw the U.S. “de-coupling” theory on its head a bit as the company gets ~30% of its revenues from Europe and a disproportionate amount of the overall comes from businesses and governments.  One disappointment does not make a trend, but in early December a number of Semiconductor companies pre-announced misses for Q4, including INTC and if we continue to see misses as we head into Q4 reporting season with murky visibility for the first quarter of 2012, then any gains we have (including last week) into the new year could be setting up forre-trace early in the new year.

The way I see last weeks and this week’s potential for a rally is that we would be “stealing from Peter to pay Paul”.  When you consider what has gone on this year, the May 2nd to Oct 4th peak to trough (intra-day) sell off of more than 21% and the fact that we are basically right back to where we started the year with 4 days left, is by some accounts fairly impressive, but by my account fairly manipulated.    I’ll go back to my little thesis, that everyone, and I mean everyone (well except the ballsy short-sellers) have a vested interested in everything (risk assets) going up!  SO when we are this close to year end, and large fund managers think that by gunning their favorite names into year end they can help performance or maybe even get them paid$, they semi-consciously say why the hell not.  I would go as far to say that some smaller fund managers probably play a little game with some illiquid names with high short interest by establishing positions and then buy them right up into year end in an effort to pad (or add) a little performance to what has been a dismal year for most hedge funds.

The wild card continues to be Europe and as expected the news flow out of the Euro-zone, as it related to their debt crisis ground to a halt over the Christmas Holiday.  I would not hold  your breath for any significant news from policy makers this week and in many ways this lack of news is helping our equity markets, but don’t get lulled to sleep here as the yield on the Italian 10 year has worked it’s way back up above 7% on the eve of the country looking to sell as much as 20billion Euros worth of debt this week.  All eyes will be on this sale (or lack thereof).  As for today, European markets appear to be trading on fumes as most markets are trading about 20bps around even, while the SP500 futures are down about 25bps.  The Euro continues to hove around 1.30, while Gold is down a bit and Crude up hovering around $100.

There are no corporate earnings to speak of this week and just a few economic reports including Jobless Claims and pending home sales on Thursday. The Bond Market will be closed for Friday afternoon, so I would expect things in general to be quiet by Thursday afternoon.  My Plan for the week is to avoid day-trading and look for goofy moves to take the other side of as we head into the new trading week in the new year.  Specifically what I mean is that if banks stocks for instance which have been very hard hit this year, find them on the wrong side of some late year hate selling, or some silly window dressing rally I will look to take the other-side.  Also I will look to see if names like ORCL, which are cheap in my opinion get beaten up into the final tick of the year Friday and will look to buy some of that for a bounce as fund managers may re-establish positions or get back up to market weight…… check back for updates and some names that I will start to put on a hit list….