MorningWord: 2/16/12

by Dan February 16, 2012 9:22 am • Commentary

MorningWord: 2/16/12: Over the past week my trading strategy had become fairly myopic, fairly undisciplined and overly concentrated in an almost unhealthy way.  I had become almost obsessed with shorting AAPL, and desperately looking for ways to play for a near term spike in vol and an outright short for the broad market.  Well things sort of crescendo’d yesterday right about at noon……I swear I was this close to pulling the plug on my Feb AAPL puts (even said so in 2 different posts, should have been a great contra indicator) that were becoming increasingly less likely to be in the money with 2 1/2 days to expiration, but I did a fairly undisciplined thing with the stock up 3%!, I bought more… this is generally not a sound strategy, especially given the way that I had been trading in the name since last Tuesday, But I was less in survival mode and more in “F this” mode, I did not write about this yesterday as this is not the sort of behavior that I would want any reader to try to replicate, and to be frank I got pretty lucky, it could have very easily gone the other way…….

IN  a more disciplined manner though, and as posted on the site, I continued to look for other ways to get short exposure to AAPL without adding to my concentrated single stock bet and bought Puts in the XLK, an etf where AAPL had recently come to make up almost 18% of its weighting……Basically I went all in.  But, and there is a big BUT, not a single time over the last week or so, was I naked short AAPL common stock, even while being undisciplined as it relates to cutting my losses or adding risk at the exact wrong times, I was always able to define my risk, and that is the key……To be very honest, the stock could have gone to $550 for absolutely no good reason, and it probably will after a little bit of a pullback, but I was only exposed to the premium that I owned, and that helped me get my losses back of the previous week when the turn eventually came.  I am still long the March Put FLY and now actually really love the strikes and will look to close remaining Feb puts today or tomorrow morning.

As for the Vol spike, the VIX continues to act like we will be in a fairly different volatility environment for the next few weeks, now that the bulk of S&P earnings are behind us and the markets have to digest a host of geo-political risks, rising oil and the potential for a Greek default. As far as the VIX Mar Call Fly I bought last week, I am increasingly liking the structure but most specifically liking the risk reward as I only paid .27 for a $5 wide fly that is now in striking distance of being fairly profitable.

As for today, I would like to see AAPL make an attempt to get through $500 and then fail and I think you could see a stock settle in over the next few trading days btwn 490 and 480….this would be healthy and a signal that the fever has in fact broken…….

Also yesterday I mentioned I was keeping a close eye on the banks and this will be important again today…..BAC is now off about 6.5% from last weeks highs and I am hearing that the company’s buyback of their own shares for employee comp ends tomorrow and that once employees receive their shares next week and the company no longer supporting the stock you could see the stock pull back a bit, possibly back to about 7.20 which was support and where it broke out from earlier in the month.   Moody’s put some banks on watch today and this should obviously not help sentiment in the space.


Bit of a bonus….saw Guns N Roses last night at Webster Hall, Axl looks a bit roughed up these days, but he still has his voice, all in I give him a ton of credit for playing small venues without his original band mates……giving the people a least a bit of what they want…..



MorningWord: 2/15/12:  China to the rescue……after hemming and hawing about their participation in Euro-zone bailout, overnight Premier Wen Jiabao and  People’s Bank of China Governor Zhou Xiaochuan suggested that they will be “more involved in resolving the debt crisis”.   The DAX is up about 75 bps on the news, but about 75bps off of the morning highs….

AAPL continues to drive the train here, and during CEO Tim Cook’s talk at Goldman’s Tech Conf yesterday, the stock rallied about 1% in the last hour of the day to close at a new all time high, dragging the SPX up with it.  Obviously this is getting a bit over done near term, and it is not even borderline frenzy activity, it is all out mania….I am gonna throw in my hat on all Feb Puts that I own, But will keep on March Put Fly.   The price action causes me to ask myself once an hour, “Who the Hell is buying this stock at these levels?”, which reminds me of a classic line in one of my favorite movies, Butch Cassidy and the Sundance Kid, when Butch routinely asks Sundance, “who are those guys?”   The Buying is relentless and while I feel it is unsustainable there doesn’t appear to be any end in site!

I haven’t said this in a while, but I think with today’s opening above previous highs it will be interesting to see if the banks can hold any early gains….while AAPL is still on fire, it seems that the fever might have broken in the banking stocks as most have appeared to top out last week on declining volume…..yesterday’s downgrade of BAC at Citi was an interesting call and one that you don’t see often from fundamental analysts when they are trying to be pro-active.

Here were a few highlights from Citi’s downgrade call on BAC from yesterday:

We are downgrading BAC reflecting our view that at current levels the risk/reward trade off for BAC is relatively balanced in the near term. Longer term, we believe BAC still offers attractive value as the company addresses its legacy issues, which should drive down the perceived risk in the stock (reflected via its 3 year beta of 1.6, which is the highest in our universe) and its cost of equity. However, we believe legacy issues will take a while to play out, and our Neutral rating reflects a 1 year outlook. Raising target price to $8.50 (from $8) to reflect slightly lower cost of equity assumption on beta (now using 1.5).

Investor focus will shift to earnings… BAC’s recent outperformance reflects the market’s increased comfort with its capital position, but at these levels we believe investor focus will shift to earnings, which have been weak. Core PTPP was at $10.2 bil in 1Q11, but has fallen to $3.7 bil in 4Q11. Note that our 2012 EPS estimate already embeds a healthy rebound in core PTPP to $6 bil/qtr, which assumes better
capital markets, realization of cost savings and modestly lower legacy servicing cost…yet our estimates still remain well below consensus.

…And we believe consensus EPS estimates are too high. Our 2012 EPS estimate remains $0.50 vs consensus of $0.71, and our 2013 EPS estimate of $0.70 is also well below consensus of $1.09. Note that our $1.00 EPS est. for 2014 assumes core PTPP of $8 bil/qtr with the benefit of lower legacy asset servicing expenses, slightly improved capital markets and execution on internal cost initiatives. It also
assumes another $650 mil ($0.15 impact to annual EPS run rate/share) reduction in the credit costs. Our EPS ests reflect the forward curve, and thus we are not looking for higher short term rates which would be a positive for BAC.

We struggle to find value in the group. The recent move in the group has been driven by multiple expansion as the market has gotten more comfortable with US economic outlook and is less concerned about Europe, but we think at these levels one needs to see positive EPS revisions to get the stocks to work. Given a prolonged low rate environment, we see more downside than upside to forward EPS estimates. Our only remaining Buys are JPM and GS.

ALso yesterday’s new high reading was unimpressive at 253, which not surprising on a down day but still weak when you consider the SPX is still at ~1350.


Bloomberg New High index vs SPX from Bloomberg LP


MorningWord: 2/14/12:  Late yesterday we posted a chart showing Bloomberg’s Composite New High Index as of Friday’s close vs the SPX which was clearly showing narrowing breadth of the market.  As of yesterday’s 4pm close this reading improved a bit from Friday’s dismally low reading of 183, but as we appear to be trading in a narrower and narrower range, readings that are less than 50% of those a week ago are just not gonna cut it.

Bloomberg New High Composite vs SPX as of Feb 13th close From Bloomberg


It appears that a lot of traders (including myself) are waiting desperately for a pullback, while the dumb money, I mean mutual funds just keep buying the same few names at all time highs…..I don’t get this one bit.

How Do You Like Them APPLES?

OK, now for our daily installment of our AAPL rant………The 18% rally since the company reported it’s Fq1 on Jan 24th, is obviously jaw dropping when measured in market cap, which has gained about $100 billion since the start of the year.  The chart below tells 2 stories, the first 8% or so following earnings shows the gap on better than expected results (very fair considering the magnitude of the beat) and then a very healthy consolidation at all time highs….the second period, the 10% rally since Feb 2nd ( a period the SPX was up less than 2.5%) shows something entirely different……..Some of you out there think that the “markets” are a “rigged game” for those in the know.  I believe this chart (below) could be exhibit A for the above rigged game theory, especially if on Feb 23rd at AAPL’s annual shareholder meeting the company does in fact announce a dividend.

15 day AAPL Chart from Bloomberg LP


I think it is very interesting that since the fall of 2009 we have seen numerous perp walks of hedge fund baddies busted for insider trading ranging from hundreds of thousands to no more than tens of millions of dollars in ill gotten winnings, but if the mutual fund community did get the “wink wink, nod nod” that AAPL was going to introduce a dividend (either a regular or special) then this could be the largest instance of insider trading by seemingly respectable institutions ever known.

I know, I know, I sound a bit bitter as I have been losing money trying to short the stock since last Tuesday, but losing money shorting stocks, happens, and trust me it wasn’t the first time and certainly won’t be the last, but this situation stinks, and if the mutual funds got the early call, and drilled the shorts by design, then I hope the feds will use the same fervor to investigate this price action as they have with the “villains of the hedge fund industry.”

One last point, yes I have been wrong in the name for the last week, but as my posts show, in all instances I have defined my risk and cut losses at different instances, this is the only way to trade a situation like this.  Very soon we will get a dramatic intra-day reversal, and the fever will break, but until then, I don’t think it makes sense to be naked short the stock, if it continues to consolidate in this $500 range it could easily make another move higher on the least bit of good news, although this will become increasingly more difficult as the market cap grows ever bigger and bigger, who the hell else will be left to buy the stock??


MorningWord: 2/13/12:  Tomorrow is Valentine’s day and in a household of 4 with me being the only male, I decided to pile it on and have a cavity refilled on the same day that I will have to shower my family with hallmark crap flowers and sweets just to get to max pain.  But lets talk about today, “AAPL Day”, this will be the day that the stock finally tops $500, and many of you will remember this day for a long time….I remember when CSCO topped MSFT to be the largest market cap company in the world in March 2000, and the question then was, “will CSCO be the first company to top $1 trillion in market cap?”   By no means is the stock trading above that round number, but with calls this weekend for DOW 15K, many will wonder how much higher this thing can go…………

Well oddly today on “AAPL Day” the thing on most investors minds is will the company announce a dividend at their Feb 23rd annual meeting?   My own quick thought here is that I would be fairly surprised if Tim Cook in his first full quarter as CEO made such a decision, which was something that AAPL founder Steve Jobs had not been in favor of for years since his return to the company in 1997….. This may sound silly but in some ways any big “about faces”  to Jobs’ way of doing things so soon after his death could have some odd optics.  Unless this was something that Jobs had been coming around too prior to his death in October.

Of AAPL’s almost $100 million in cash, the company on their last earnings call suggested that $64 billion of it is abroad.  AAPL is one of many US multi-nationals pushing for a tax holiday to re-patriot their overseas cash, but this doesn’t seem like strong possibility under the current administration, unless of course they were committed to re-investing it back on our soil, and I am not sure, paying a huge dividend to the Jobs estate and current officers (obviously shareholders too) fits the bill.  I guess more importantly is what does the company paying a large quarterly, or even a one time special dividend signal to shareholders, that their most innovative days are behind them, that the shareholders can find better use for the cash than the company can?

There is obviously a lot of good news in the stock at current levels and expectations have built up for an event that usually is a “non-event”.  So this short may take a little bit, but I am going to keep at it an define my risk!




MorningWord: 2/10/12:  The SPX continued its recent trading pattern yesterday of putting the daily lows in morning, prior to the European close, and then letting AAPL drag it up the rest of the day as that stock seems to slap on an additional $10billion in market cap a day!

For a stock like AAPL, with the largest market cap in the world to be up 3.5% yesterday making its 5 consecutive all time closing high on massive volume has to tell you something.  [private]Now as many of you know I haven’t exactly traded this well this week, but I think we are very near a point at which this could be a great near term short…..yes I did say the same thing this Tuesday, Wednesday and Thursday, but I really mean it today!  As I write at 8:40am, AAPL is trading up in the pre-market with the S&P futures with their worst pre-market action of the year (down 90bps) while the DAX is down about 1.8%.   AAPL wants to go to $500, and some very silly people are doing everything in their power to get it there…..My fascination with AAPL this week is not because I don’t like the company, the valuation, their growth prospects or their products, in fact I am a fan of all of the above, my fascination is with the “cult of the stock”……..I don’t buy into this sort of price action whether it be GOOG in 2007, AOL in 1999 or CMG now.   All the power to you guys that do, I guess I am just a bit jaded after living through the internet bubble and I know how this story ends.

As for today, while I am bearish and short, I am going to be careful not to press the down opening and wait for a rally to press the short….I think this could be the near term top and AAPL’s action yesterday and this morning could be the tell, it just felt too giddy….

AAPL is going to defy the overall market action this morning and take a shot at $$500, and thats when I get aggressive.

The breadth has been getting worse and worse and in a lot of ways this last attempt at 1350 feels like it has been on the back of a handful of stocks…..

MorningWord: 2/9/12:  In what has been a fairly uneventful week so far as it relates to news flow, the SPX continues its trends of putting its lows for the day in the morning and seemingly spending the afternoon rallying post the European close.

5 Day SPX chart from Bloomberg LP


Obviously this is healthy looking action, but it appears that the breadth in the market is getting a bit narrower as we approach last years highs.  Chart below makes this point pretty clearly, with the SPX at 1350 (or there abouts) we had 397 new 52 week highs yesterday vs the readings of over 100o last Feb, Apr and May when the SPX traded above 1300, and specifically the 1200 reading on the May 4th, 2011 52 week high.

Bloomberg's New High Index VS SPX 1 yr from Bloomberg LP

It feels to me that this is the AAPL blow off rally in the market, because everyone owns AAPL and wants it to go higher it is and dragging the market up with it (AAPL the largest weighted stock in the SPX at about 3.6%).  I have gotten a lot of hate mail about my AAPL call the other day…..and such is life, some people out there are emotionally attached to the stock and that’s all fine and good, I tend to be emotionally attached to things like family and friends.  But I guess the point is I am a trader and tend to trade the speculative portion of my portfolio in a contrarian fashion, so with a gun to my head I would much rather sell APPL here than buy it, and Tuesday based on my overall market call (which has been wrong week to date…it happens) I decided to risk less than 1% of the underlying stock price to make a bet that the stock would start to pull back a bit and fill in a portion of the earnings gap……I will do this trade time and time again, and while I will usually be a bit early, this has been a winning strategy over the long run, it certainly isn’t for everyone.

So as I write, it appears that the Greek Parliament has reached a deal on a Austerity package and now maybe the SPX at 1350 with declining breadth can take a bit of a pause….


MorningWord: 2/8/12: It is not often that the first story that I read in the morning from Bloomberg top stories makes me vomit a little in my mouth, but this one, “BlackRock’s Fink Says Investors Should Be 100% in Equities, Take More Risk” takes the cake.   I think it is safe to say that Larry Fink, the co-founder of BlackRock which manages more than $3 trillion in assets (your assets),  just won the first of what will likely be an ongoing series here at for the most Self-Serving A-Hole of the week.

If that doesn’t make you want to take some profits in stocks that you own I am not sure what will.   Many of you have heard me say this on numerous occasions over the last year, but everyone and their mother want/need risk assets to go up, and most of the time those who have the most to gain from the investing public being “bullish” and calm will do their part to make sure they don’t send the wrong message and be a bit cautious while their still appears to be a whole host of risks out there.   But you guys know me, I am just here to rain on everyone’s parade.  

U.S. equities remain amazingly resilient, the last  2 trading days in a row the SPX shook off early weakness to close near the highs of the day.  This is obviously pretty good action, but again it seems like we are trading on fumes here….AAPL computer alone is not going to be able to break us out to new 52 week highs….

[caption id="attachment_8670" align="aligncenter" width="300" caption="2 Day SPX chart from Bloomberg LP"][/caption]


As for today/this week, Greek deal or not I am positioning for what I think is an impending decline in Equities….

The chart below shows the very tidy channel the SPX has been in, basically btwn 1350 and 1250 barring the early AUG to late OCT meltdown from 1250 to 1100….SO here we are, the markets moment of truth, do we get through and make new highs?  Well you guys know where I stand, but that clearly doesn’t mean it is not gonna happen, it just means that i am not positioned for it to happen, and the higher it goes in the near term the better the shorting opportunity will be.  I guess the real issue is sizing of the short at current levels and that is why for those of you who agree, you have to avg in a little to this position and then press it when it starts to go your way…..

[caption id="attachment_8671" align="aligncenter" width="300" caption="1 YR SPX chart from Bloomberg LP"][/caption]


MorningWord: 2/7/12: Greek default fears spooked yesterday’s opening a tad, but as we have become used to in 2012, the opening tick was in fact the low for the day, and quite impressively we closed on the highs, nearly unchanged.

Yesterday Intra-day SPX chart from Bloomberg LP


U.S. equities display amazing resilience even as they appear to be a bit overbought and approach last years highs.  It is my strong opinion though, that our equity markets appear to be trading on fumes as yesterday’s NYSE volume was the lowest of the year so far and that is not a good sign for those looking for volume to display conviction of buyers.

Yesterday late in the day I bought a March Call ButterFly in the VIX as I feel with the index trading at lows not seen since late July that the time is right to look for a spike in Vol btwn now and March expiration.  While there appears to be many reasons for the markets to take a pause after the first 38 days of the year and almost 7% rally in the SPX, it also appears that we will likely need a little push from elsewhere to get us on our way……maybe it will be the eventual Greek debt default and the realization that Europe will in fact go into a recession, or the 2nd consecutive Arab Spring, or maybe a hard landing in China, who the heck knows, but when thing I am fairly certain about is that when things are this complacent it usually doesn’t last too long.  The call fly above is not exactly a high probability play, but I am spending a small amount of premium for a trade that would be up substantially if the VIX spike some 40%, which it most likely would do if there was a meaningful sell off in the SPX.   The position could serve as a nice hedge to a long portfolio of stocks, or an outright bearish bet.

Speaking of complacency, a lot of you seem to be itching to short AAPL here, as I have gotten numerous emails with charts showing that AAPL has just touched the high end of the uptrend channel it has been in since last Spring….even with the futures down this morning, the stock is up in the pre-market, I obviously don’t get it and I think you would have to an absolute fool to buy the stock here at all time highs……Obviously thing are firing on all cylinders here and the company will continue to execute (for now) as they have the blue prints already in place for new iPads and iPhones, and anything else they can come up with will just be gravy, BUT everything that goes up has to come down at some point, and this stock seems very close….

[caption id="attachment_8633" align="aligncenter" width="300" caption="1 yr AAPL chart from Bloomberg LP"][/caption]


SO not to disappoint any of you, I have had my finger on the trigger and have been waiting to buy a near the money put spread that offers a good risk reward, or looking to leg into a spread.  Stay Tuned, as I was really waiting to look for an opportunity where the stock appears to be making a giddy blow off top!  I will be looking for a move to about $435, or at least an attempt for the stock to fill in a portion of the earnings gap.

MorningWord: 2/6/12:  Call it a bit of a Super Bowl hangover if you will, but the liklihood that the SPX’s close on Friday (the highest close since July 21st) would be able to follow through on today’s opening wasn’t particularly great……Since briefly flirting with 1200 in the SPX on Dec 19th, the SPX has rocketed nearly 12% with out a pullback of more than 1.5%, I guess my point here is that equities feel a bit extended and maybe discounting a fair bit of good news at current levels.  I know I know I sound a bit like a broken record here, but at this point I think it is fair to say that even if you are int he bull camp you would rather see the market consolidate up near last years highs and then make an attempt to meaningfully breakthrough.

Last week prior to QCOM‘s earnings I posted a long term chart that I thought was kind of interesting (below).  The stock on a few occasions in the last 12 months had flirted with the $60 level, a level that it had not traded above since crashing below in June of 2000 during the tech wreck of that period.

QCOM long term chart 1991-2012 from Bloomberg LP


While this is an amazingly bullish chart, last weeks breakout wasn’t exactly that convincing as the volume seemed fairly mediocre when you consider that the stock broke out of a 12 year range.

1 yr QCOM chart from Bloomberg lp


Volume for instance on Thursday (the day after their Q4 report) was about 35 million shares vs the 44 million shares the stock traded on November 3rd the day after the company beat their Q3 estimate.   So i guess my point is we want to see break-outs that are confirmed by volume and in this instance while price action is fairly impressive, I am not sure this one sticks…..Much like my discussion above of the SPX, I think there is a good chance that QCOM will need to consolidate here before making a meaningful move higher…..