MorningWord: 1/9/12

by Dan January 9, 2012 8:48 am • Commentary

MorningWord 1/9/12:  If you want to wrap the whole European Sovereign Debt situation into one sentence, brought forth with a bit of German efficiency, I think the following Bloomberg headline from this mornings pre-Summit Summit does the trick:


Just like companies reporting December quarter earnings in the weeks to come, European Political leaders and Central Bankers will be forced to “manage expectations”.

As for this week there isn’t a ton of expected news, as impact-full earnings reports are limited to AA this evening and JPM Friday pre-open.    As far as economic data there will be a spattering of noise with the most significant reads coming from the Beige Book on Wednesday, Philly Fed on Thursday and U of Mich Consumer Confidence on Friday.  Oversees and I guess here too, all eyes will quickly be focused on the ECB’s rate deceion on a press conference to be held Thursday Jan 12th.

As for morning, as I write at 8:45am, the Euro is up a tad, Gold and Crude practically unchanged, European equity markets are mixed, with the DAX down 25bps, yield on the Italian 10 yr is off a smidge to 7.087% and our S&P futures are basically flat.  A relative calm has prevailed, for the moment.  I for one don’t exactly take the calm for a positive and remain on the cautious side with low conviction on the direction of the equity markets in the coming days/weeks.  I guess I would get a bit more constructive on a sell off in equities that equaled about 5%, taking us back to about 1200 in the SPX and then hold, a girl can hope can’t she?  But in the meantime, I sit an wait and take my cues from some central bank actions here and abroad and after getting a sense for Q1 earnings visibility.  IN the meantime I will take the scraps that I am given, look to make defined risk plays in names that are extended or overdone on the downside and always look to take advantage of what I deem to be miss-priced vol into events…….


Below are some thoughts of on last weeks trades that I posted last night in my Trading Diary: Jan 3rd-6th and a few tidbits on where my investing/ trading mind is at the moment:

Trading Diary: Jan 3rd – 6th

10:57 PM EST – JANUARY 8, 2012 BY  (EDIT)

The new year got off to a bang right out of the gates on the heels of an impressive rally on Monday in Europe while we nursed our hangovers for the second straight day.  After only just 2 trading days on Tuesday afternoon, the DAX had reclaimed almost a third of its 2011 losses of 15%.   The “January Effect” was in full effect.  The SPX got off to a decent start Tuesday, but after gapping up almost 1.75% on the opening tick above its 200 day moving average, the index spent the balance of the week trading in a fairly narrow range, mostly between 1270 and 1280.

5 day SPX chart from Bloomberg LP


In many ways this action has some conflicting messages for the early going, while it was fairly impressive that the index had 4 consecutive closes above the important technical level, it is also evident that we are in a bit of a holding pattern as the markets wait for news from tomorrow’s Sarkozy/Merkel meeting, and maybe more importantly given Friday’s U.S. unemployment data, Q4 earnings reports and Q1 guidance to either confirm or refute the recently improved economic data (barring pre-announcements, we will likely have to wait until the week of Jan 17th for earnings season to really kick off).

I for one am taking a wait and see approach and find myself with fewer trading positions than I have had in a very long time.  I honestly have no clue what is going to happen in the early going of 2012, and in many ways the markets are also telling you that most market participants don’t have a clue either.   The fact that the SPX closed on Dec 30th at the exact same spot it started 2011, after being up about 10% in the Spring, and down about 10% in the Fall, coupled with a historic spike in the VIX, tells me that no one has an effen clue.  Well except maybe the overseers of your 401ks, the genius mutual fund managers who usually only know how to buy high and sell low.

A perfect example of this behavior is the 4 day rally in MSFT this year,  seriously WTF??  Can anyone tell me what changed in the story between Dec 30th when the stock closed at 25.96 and Friday Jan 6th when the stock closed at 28.10?  I’ll answer my own dumb question, nothing changed other than some genius at Fidelity, or Wellington decided that after 10 years of sideways action this was finally the year the stock would outperform its peers and quite possibly the markets. But yes,  the company does have a 2.84% dividend yield, $45billion in net cash, and only trades at 10x earnings.  If I had a buck for every-time someone suggested buying MSFT over the last decade because it was cheap, well you know the rest, but I guess that is probably not the reason to buy the stock….the reason to buy cheap stocks is because you feel they have a catalyst that can help them grow future earnings.  Given some of the negative semiconductor pre-announcements in December (including INTC) I would suspect that MSFT will have less than inspiring Dec qtr results when they report Jan 19th and offer very little hints as to how they really intend to grow their earnings from the less than inspiring 5% expected growth this year.

On Wednesday I made the case that implied vol in the name looked very cheap and decided to buy some out of the money Jan Puts, and followed up on Friday (after the stock had rallied ~2% from my initial trade) by buying closer to the money puts.  I think there is a fairly decent chance that if the stock does not go too much higher, or possibly retraces a bit of the recent strength that implied vol in the name will at least stay bid at current levels or possibly go higher between now and their earnings announcement.  I like fading this recent move.

Early in the week I wrote a bit of “think piece” on AAPL after reading the Steve Jobs bio over the holidays.  I laid out a case, 99% conjecture why the company might be on the verge of an innovation plateau and why the stock may have a far more difficult time over the couple years as it has over the last couple.  We encourage readers to take another look and have opened it up for comments.  We are very eager to hear what you guys have to say, as we expect that most will disagree with the thesis………..but that’s what makes a market.  (Read and comment here)

Thursday morning I tweaked a position in INTC that I put on in early December playing for negative sentiment in the Semi space heading into what I thought would be disappointing outlook from TXN into their mid qtr update.  Not only did TXN disappoint, but INTC pre-announced a poor 4th qtr.  At the time I took some profits on half of the position in my Jan Put Spread as I had a nice gain that turned out to be a double from my initial purchase price.  On Thursday I decided to cover the short strike of the balance of the Jan put spread and add the long strike as the stock had risen all the way back above the level where I first put the position on.  At this point I am averaging back in, albeit at much cheaper price levels given all of the decay in the options since early Dec.  I am now playing for weak Q1 guidance, as we already know that Q4 will come in below expectations.  This may be pressing things a bit as many analysts figured that some large orders were pushed into Q1 and the company may be able to actually beat Q1 if they are able win back some of the lost Q4 business, I would say at 25.40 that is in the stock, and disappointing guidance could send the stock back to 23.00.

Late Thursday staring at BAC’s 8.5% rally on the day and the 13% ytd rally at the time I thought things were getting a bit frothy as the stock hadn’t seen a downtick in hours on the rumors that the White House was about to announce a mortgage refinance program……With a low dollar stock like BAC that has been down so much over the last year, and sentiment probably the worst in the space I think you would have to be a bit crazy in the first week of the year to outright short the stock, but with 50 cent strikes, there are plenty of low premium ways to express this view while defining your risk.   With the stock up on a spike, I bought a .5o wide (kind of close to the money) Jan Put Spread that would capture the company’s Jan 19th Q4 earnings release…..I paid .10 for a .50 wide Put Spread that pays 5 to 1 if the stock is trading at levels seen in the last week of 2011.  It won’t take much to break-even on this trade with the slight bit of bad news, I like these sorts of contrarian plays into events where I define my risk and risk what I am willing to lose.

Sticking with the bank thesis,  on Friday’s Option’s Action (and previously on the site) I laid out a near term bearish thesis on JPM heading into their Q4 earnings report on Friday morning Jan 13th.  I bought the Jan13th weekly 35/33 Put Spread for .45, playing for a pull back heading into earnings and possibly an outsized move following….the options market is only implying about a 2% move.  The action in Deutsche Bank last week, down about 9.5% vs the DAX which is up about 2.7% in that same time period is a bit troubling.  Something stinks here, and with the yield on the 10 year Italian treasury handily closing the week above 7%, and the Euro in a free-fall closing at practically the dead lows of the week and at 52 week lows, our banks stocks don’t appear have gotten the same memo as their European counterparts that the Sovereign debt crisis has not been resolved.

SO early this week Europe will likely dominate the headlines as we sit and wait for the bulk of U.S. corporate earnings to get underway. As usual I like most others have little edge on this front.  As the Euro approaches 1.25 against the U.S. dollar I will look to take some more profits in the FXE Jan 130/125 Put Spread that I bought in late Nov as this has been a nice gainer for me.

I remain a bit cautious here and as evidenced by my positioning (or lack there of) I don’t have strong conviction, but I want to take advantage of situations where I think vol or price appears to be mis-priced.


MorningWord 1/6/12:  Forget Iowa, if we continue to get the sort of incremental improvement on the employment front like we saw this morning, it won’t matter who the Republican presidential candidate is, he will be toast.  I am not an economist, and generally not a fan of the term “de-coupling”, but it appears that is what we are doing as it relates to our economy vs the apparent malaise in Europe.  For a time in the fall our economic data seemed “less bad’, and now it is appearing to actually look fairly decent given the backdrop of the problems in Europe. I have problems with the notion that our economy can “de-couple” from Europe because we both rely so heavily on each other and the likelihood of a sustained slowdown in economic activity in Europe not negatively affecting us isn’t great.  Back in our own financial crisis in 2008/09 there was a lot of talk of Europe or Emerging Markets avoiding our troubles, but inevitably it was impossible, we are all just too interconnected.  

As I write at 9am, Europe is up a  little less than 1% across the board, with the DAX actually serving as the weak link, practically flat on the day.  There continues to be trouble signs abound as the yield on the Italian 10 yr keeps climbing for the third day in a row, now not far from the November highs of 7.35%.  The price action in German equities and Italian Sovereign debt should not be looked in my opinion and in what has been a light volume holiday shortened week I wouldn’t exactly say that the early rally out of the gate is that bullish.

Despite the impressive Jobs data our futures are only up about 30 bps which is quite surprising when you consider the fact that investors want to be bullish at this early stage of the year.  The SPX started the year above 1250 and above its 200 day moving average and many market participants are eyeing the fairly significant 1300 resistance level.  I would expect the market to test this level in the coming days but I think it will take a bit of confirmation of better than expected U.S. corporate earnings for it to break and close above.

I continue to look for opportunities to sell extended names as I did late in the day Thursday in BAC. As we headed into the close with the stock up 8.5% on some rumor about a national mortgage refinance plan, I just couldn’t help myself to look for a low premium defined risk way to play.  Aside from a couple little trades this week, I want to be patient and lean towards the cautious side until we get a sense for Q4 earnings at the back half of next week.  


MorningWord 1/5/12:  Some things change (like the calendar) and some things just stay the same…….The Euro is extending its Q4 decline this morning making new 52 week lows agains the U.S. dollar at about 1.2835.  Since May hihghs (which actually corresponded with the 52 week highs in the stock markets both here and Europe) the Euro is down about 14.5% vs the $.  The next real level  of technical support is ~1.27 .  While this appears to be a fairly significant move, don’t forget the peak to trough move from late 2009 to mid 2010 was a little more than 20%.  I remain long an FXE Jan 130/125 Put Spread that I initiated in late November which remains one of my best performing positions in that time period.

3 Yr Euro/USD chart from Bloomberg


European equity markets have been moving around this morning, the DAX opened unchanged, only to sell off about 1.5% and now back to about unchanged on the day as of 9:15am.   Fears back in the markets about Europe’s Sovereign debt crisis as evidenced by the yield on the Italian 10 yr back above 7%.

Back over here our futures are down about 50 bps but up about 50 bps from the early morning lows.  At one point after some better than expected unemployment data the futures were practically unchanged, but since pared the quick gains.

The real news this morning is the mixed results from retailers with same store sales and some corresponding earnings pre-announcements.  Some standouts to the downside would be JCP, GPS, TGT and M……all with earnings misses (excluding GPS who just disappointed on same store sales) that will likely be explained away by heavy discounting.  JCP is trading down about 6.5%, GPS down about 5% and TGT down about 4%.  Will be interesting to see if some of these disappointments drag down other retail and consumer discretionary names that have outperformed the broad market of late.

Yesterday’s late day rally in the equity markets was impressive, and I would expect continued resilience in the new year as mutual funds get re-weighted.  Once we get into the meat of earnings in Mid Jan and a better sense how European leaders plan to tackle their debt crisis this year, I would expect to see more convicted trading patterns .  IN the meantime, I am gonna remain slightly cautious and look to take what the market gives me……Yesterday I posted some thoughts (ok to be fair a lot of thoughts) on AAPL and why the stock may under-perform this year and offered a way to protect longs while still offering upside participation.  I think in uncertain times these sorts of strategies are prudent, especially if you have sizable gains……Also in the theme of taking what the market gives you a put on a little trade (albeit low conviction) in MSFT as I thought Jan options were cheap form both a vol perspective and a dollar perspective.  Stay tuned for more trading in names that get overdone on either side of the fence.


MorningWord 1/4/12: If you were to look at the performance of the German equity market and see the DAX up 3.6% ytd (off almost 2% from yesterday’s highs), after just 2 1/2 trading days you would think that some one knows something in front of Merkel and Sarkozy’s pre-summit summit meeting scheduled for Jan. 9th.  As our equity markets have been only open for half the time thus far this year our gains are a bit more muted up only about 1.5% in the SPX (less the 40bps in the futures this morn, so about 1%).  Economic data out of Germany that was better than expected is clearly the culprit for the DAX’s early out-performance of the SPX, but this could also be a little bit of catch up game as the SPX was unchanged in 2011 and the DAX closed down 15%.

There is nothing like the changing of the calendar to help you forget the ills of the prior year.  The “January Effect” can be very compelling for professional fund managers, to play a little bottom fishing with last years losers, but by no means does it signal the course for the balance of the year.  If anyone thinks for a second that the lows are in for the year than you better get your head checked early and often this year…..The VIX’s muted sell off yesterday was a clear indication that uncertainty remains, and when the SPX was up a little more than 2% at one point mid day yesterday I would have expected to see the VIX getting creamed, especially on a day that saw, the Euro, Gold, and Crude all rallying with serious equity market rally the world over.

Yesterday in my morning post I suggested that I would be very interested to see how the banks act and if they actually can lead the way……Financials were clearly one of the best performing sectors yesterday with charts of stocks like Citi appearing to be at an important inflection point.  Since making an intra-day low in early Oct in the low 20s, and then rallying almost 60% from that point, the chart has made a series of lower highs and higher lows and looks like the triangle pattern that has formed is about to be broken one way or the other……This is a tough call here because when the U.S. bank stocks finally bottom they may go up for weeks……

1 Yr Citi Chart from Bloomberg LP

Stay tuned on the bank stocks, it won’t be long before we start to get some earnings out of the group, as a week from Friday we will see what the usually upbeat CEO of JPM has to say when the company reports their Q4 and gives guidance for Q1 2012.  With most of the major banks up btwn 4-6% (C being the outlier up more than 7.5%), it may make sense to see how these stocks act on the next piece of scary news out of Europe before piling in the first few trading days of the year.  This morning’s sell off in Europe could be just that test for the space, if they can hold in a down market and then continue to outperform in a stable to up market than they could be at the start of a stage where they will begin to discount any additional bad news.

So here is the thing, I want to be optimistic as we head into the meat of January and Q4 earning seasons, but at this point given the mixed earnings news that we got in Dec, and the unlikely chance that much changed in the last few weeks I think at this point a dose of caution makes sense for individual investors.  If you are a mutual fund manager or a hedge fund manager who feels deeply wounded because you didn’t get a fat bonus in 2011, then by all means shoot for the feneces right out of the gate, because frankly that is what you are paid to do, but for us regular folk our main goal is still preservation of capital and take what the market gives us by making best attempts to define our risk.  So I remain cautious and continue to wait to short extended stocks or buy ones that get overdone on the downside always with an eye towards identifying a catalyst that I think the market is mis-pricing.

Fear continues to be in the air, the yield on the Italian 10 year remains near highs just below 7% and the Euro has just broken back below 1.30 about 1% off of this mornings high…..So the name of the game in the early going, similar to the end of the year, is no disasters, you have the whole year ahead so no need to be foolhardy out of the gate.


MorningWord 1/3/12:  After a fairly volatile year in 2011 that saw a 21% peak to trough draw-down in the SPX and a 30 plus point surge at its highs in the VIX (but still closing up over 30% on the year), the SPX closed dead flat on the year, who would have thunk it?

The DAX has had a heck of a year so far up almost 4% in less than 2 days of trading after closing down about 15% on the year in 2011.  This sort of early enthusiasm could have some legs, but I sincerely doubt that we have seen the lows of the year (haha).  The higher they go in Jan the harder they will ultimately fall when European sovereign debt fears hit once again…..

Even with the relative calm int he equity markets over the last few weeks, there continues to be signs of fear……..As I mentioned above,  the VIX remains elevated well above the historical average of ~20, but with the new year rally it will be interesting to see how long it holds before once again becoming a teenager (the VIX has remained above 20 since July 26th).  As European equity markets rally the yields on European Sovereign debt remains elevated towards last years highs….the yield on the Italian 10 year continues to hover around 7% signalling continued fears that the crisis is not over.

As I write at 9am the S&P500 futures are up about 1.6%, about 50 bps off the opening highs……while Europe’s equity market strength can be attributed to better than expected manufacturing and unemployment data in Germany, but all eyes will be on our own ISM Manufacturing data to be reported at 10am today.

The Euro is trading at a one week high vs the US dollar and back above 1.30, while crude oil is back above $100……Gold is having a day after collapsing into year end to close at the lowest levels since mid July after falling almost 20% from the peak made in Sept.

As for our equity markets I think it is important to keep an eye on the banks, after many suffering their worst performance ever (excluding 2008 of course) it will be very telling to see if they fall right back into the pattern of last year of taking one step forward and 2 back, or whether they can actually start the bottoming process……As I noted in this space on a handful of occasions in December, many fund managers might have been exciting very unprofitable holdings in the banks to get them off of their sheets into the year end, possibly for tax reasons only to reestablish new positions in similar but different names in the new year.  Many savvy market participants feel that the banks stocks hold the key to any sustained rally in US equities…..and this relatively un-savy market participant agrees.

I am also keeping a close eye on many of the high valuation growth names that in my opinion started to come undone last year, names like HANS, GMCR, LULU, DECK, RL, CRM, NFLX, GRPN, LNKD, SINA, BIDU, WYNN and the like…….early strength in this group clearly shows conditioned appetite for risk, but I would argue the more bullish would be the selling of these sorts of names and the move into more stable holdings……..Either way I expect these stories to come back to earth one by one as AMZN, NFLX and GMCR did in Q4.

Oh and then there is AAPL…..everyone’s favorite.  I have a lot to say here and am writing up some thoughts regarding this stock for 2012 and beyond.  After fairly dramatic out-performance last year (up 25%) vs the SPX unchanged and the Nasdaq down a little less than 2%. I think the likelihood of an early rally followed by under-performace as investors digest the company’s prospects for its first full year without Steve Jobs is fairly strong.  The company will get an early test as media reports suggest that the company is holding a press event in late Jan that will focus on iBooks, my goodness who cares, just put out a press release and get back to trying to innovate.  Remember the Stocks reaction in Oct to the “evolutionary” release of iPhone 4s, get ready for more disappointment, or “sell the news” price action after Tim Cook fails to captivate the Apple faithful during these events.

As for my own trading I come into the year with the least amount of positions in more than a year and find myself largely in cash……..I will look to the 2011 playbook of taking profits on longs when things get extended and laying out shorts soon after and conversely covering shorts when things get oversold and even getting long shortly after.  Again it comes back to not forcing things in an uncertain market, I am going to sit back a bit until a clear trend exists or things get a little overdone on either side.

Either way I am excited to get back to trading after a couple weeks off, stay tuned.