MorningWord: 3/19/12

by Dan March 19, 2012 8:15 am • Commentary

MorningWord: 3/19/12:  Just as it seemed like the fever might have been about to break in the Apple “stock” mania, the company is set to hold a conference call at 9am eastern to discuss their cash position. This obviously sets up for potential disappointment with the stock trading in the pre-market at all time highs, but I have to assume if the boys in Cupertino are willing to get up and hold a call at 6am their they have something “resolutionary” to say about their cash. My sense would be that a one time special dividend, a recurring quarterly dividend and a stock  buy-back would the sort of announcement that could keep the stock going from current levels, at least for the time being, while just a 2 to 2.5% quarterly dividend and a buy-back would be a neutral as it has to be in the stock, and the options market already anticipates this.  A big disappointment would just be an announcement suggesting that the company would pay a nominal dividend and would continue to explore ways to return cash to shareholders…..but we will know soon enough.  

As far as the markets are concerned,  an interesting aspect of the last month in the market has been what has led the market higher and what has lagged.  Most investors point to global liquidity as the key driver to the market, but in previous bouts of QE-type rallies since 2010, commodity and resource stocks, emerging market stocks, and the commodities themselves have been the leaders.  So far this year, and especially in the last month, the market leaders have been U.S. focused consumer discretionary and technology stocks, as well as financial stocks, particularly U.S. financial names.  There is a strong argument being made by price action that the U.S. economy has reached escape velocity, so a slight European recession, or a Chinese slowdown are not as concerning as they once were.  A good summary here of many asset prices I’ve been watching for the past month (and gold and copper specifically are indicating the same).

After 10 years of strong emerging market outperformance, has the baton been passed back to U.S. economic leadership globally?  I don’t buy it.  Let’s not forget that personal income data has and continues to be buttressed by government spending that yields $1 trillion dollar deficits.  Global deleveraging has not gone away.  Focusing on U.S. financials specifically, the CDS market does not have the same confidence as stocks.  Bespoke’s post

European financials continue to battle with their 200 day moving average, showing not nearly the same strength.  So many indicators point to a head fake here on this move, that it’s hard to recommend bullish trades.
However, if we are looking for weakness, it might be worth focusing on the materials and emerging market space more than U.S. consumer for now.

MorningWord: 3/16/12: I guess there are a couple other things going on this week other than AAPL’s meteoric rise, one of them being the massive break-out of the banks from a fairly well defined short term base.  As far as the banks were concerned it was kind of like a tale of 2 cities, as JPM, GS and Citi caught the headlines, BAC is up 15% on the week.  JPM got things going on Tuesday afternoon in an apparent snub to the Fed by front-running the Fed’s stress test announcement scheduled for Thursday.  Not unexpectedly, JPM passed with flying colors and was “allowed” to raise their div and buyback stock, while Citi failed and was not “allowed” to return cash to shareholders… worries though, the stock is trading back up around Tuesday’s closing highs.

GS was obviously the oddest story of the week as employees have been so ill treated of late, or I mean they feel the clients of the firm have been so ill treated that they feel it necessary to publicly quit and air their grievances in the op-ed pages of the NYT, stay classy Greg Smith!  In full disclosure I have done business with GS in some capacity for every year that I have been in this business since 1997 and honestly  can tell you that their clients aren’t likely treated any different than any other client of GS’s competition, and one thing I think that is lost on this whole argument is that GS is a publicly traded company that has shareholders and they have a fiduciary responsibility to be as profitable as possible seeing that they act in a lawful and ethical manner.  None of what Smith said in his fairly boring op-ed suggests anything new about the industry as whole, but probably unfairly singles out GS. Investors cared for a few hours as media seemed to blow the story out of proportion, but the stock is back up towards Tuesday’s closing high.

I remain cautious and I am starting to get really short at these levels, I obviously am actively day-trading weekly AAPL puts playing for the turn, yesterday’s action could have been a sign of the top, coupled with today’s iPad launch, this could be it……But i am also adding to XLK and QQQ positions as they are a much cheaper way to play for a potential AAPL reversal as AAPL vol continues to explode.


MorningWord: 3/15/12: {##34##}Divergences continue to be massive, whether they be in our own equity markets or those abroad.  Yesterday’s sideways action in U.S. equities was a generally unexciting consolidation day after the previous day’s breakout, but when you consider AAPL’s almost 4% rally to a new all time high, and when you consider that AAPL makes up ~12% of the Nasdaq and ~4% of the SPX, something is seriously wrong with this market.  When you further consider that AAPL, IBM and MSFT are 3 of the 5 highest weighted stocks in the SPX making up a little more than 8% of the entire index  (and all were up on the day yesterday), you can quickly come to the conclusion that the rally is getting narrower and narrower, even as it appears that new 52 week highs are slightly improving from near dire levels just a couple weeks back.   While the 2 year chart below of the SPX vs Bloomberg’s Composite New 52 Week High index shows an uptick in stocks making new 52 week highs, when you compare it to the last 2 years performance it becomes clear that the rally in late 2010 into 2011 was much broader as the new high readings were confirmed the whole way up, the divergence we are seeing now is fairly massive in my opinion.  We are either going to collapse very soon, likely when AAPL finally breaks and goes back to $500, or we are going to get a massively broad break-out to the upside.  Flip a coin at this point, but I think you guys know where I stand on this.

[caption id="attachment_9571" align="aligncenter" width="300" caption="Bloomberg Composite New HIgh Index vs SPX 2 years from Bloomberg"][/caption]


One of the main reasons I lean to the downside is the divergence btwn our markets and that of the Shanghai Composite, the Divergence is massive, and if China’s equity market is a reflection of the impending slowdown then it will only be a matter of time before this relationship reverts a bit.  Chart below shows how we have basically traded in lock-step with the Shanghai Comp since the March 2009 bottom, but have recently become disconnected.

[caption id="attachment_9572" align="aligncenter" width="300" caption="3 yr Shanghai Comp vs SPX from Bloomberg"][/caption]


I don’t buy the “de-coupling” theory, and when you consider that it was emerging market demand from China and Brasil that basically got the Western Economies going back in 2009, I am hard pressed to see that an economic slowdown in China will not ultimately crush exports from Western Europe and the U.S.

I know I sound a bit like a broken record, but if you guys missed this one yesterday u got to check it out, Doug Kass sent this chart into Business Insider and it shows GOOG‘s parabolic price action prior to the 2008 global  market collapse…..I think we could be setting up very similarly here, as Kass obviously does.

[caption id="attachment_9573" align="aligncenter" width="300" caption="GOOG 2007/2008 vs AAPL 2012 from Doug Kass via Business Insider"][/caption]


The break in the market is coming people, don’t be the last moron to buy AAPL at $580, $590 or $600, you may not get a chance to sell it until below $550.  Now Moron may be harsh and many have called me a Moron for missing the last $150 points, but come on this is a mania, and I don’t buy into this sort of garbage, I have seen this movie before and I know how it ends!

MorningWord: 3/14/12: Well if you said Breadth and Momentum 10x fast like I suggested yesterday morning it didn’t exactly pan out like I had expected….not only did Momentum (price action) pick up in a meaningful way, but Breadth did too as the SPX broke out to new 4 year highs.  Our stock market got off to it’s usual start of the day with AAPL opening up 1% on no news and closing up almost 3% at the highs of the day.  This action resembles and all out mania, and even as the rally broadens out a bit, AAPL’s concentration in many portfolio’s poses more and more risk as we go higher.  

For those who traded back in 2000 remember similar action in Jan-mid March when stocks like AOL and CSCO would be bid up pre-open for no apparent reason and then just keep going as they had become vehicles for momentum traders…..when this pattern started to abate, the stocks would start to see intra-day reversals that would take the market with this… for AAPL we have seen 2 of these such moves in the last month and once the fever breaks they may become more prevalent.

[caption id="attachment_9538" align="aligncenter" width="300" caption="20 day chart of AAPL from Bloomberg"][/caption]


The banks got a massive push from JPM’s announcement that they had obviously passed the Fed’s stress tests and were “allowed” to raise the their dividend and stock buyback.  This tide lifted all boats into yesterday’s case, but this may not be the case as certain banks did not have the same success as the perennial best of breed.

Citigroup was downgraded from Buy to Neutral today at JPM, here are some highlights:

We are downgrading shares of Citigroup to Neutral from Overweight following the Fed’s refusal to approve Citi’s capital return plan. Increased capital return in 2012 has been one of the key tenets to our Overweight rating on Citigroup. In addition, we think this denial also hurts management credibility, which had been tarnished following 4Q earnings when expenses were above expectations. Valuation remains attractive, but we see limited upside in the near term until Citi can begin to return capital.

 In the near term, C should benefit from a seasonal improvement in trading revenues in 1Q12, similar to peers, and a decline in expenses. However, credit trends are flattening out and credit costs may start to increase in 2013.

 Federal Reserve stress test showed that Citi did not meet the 5% Tier 1 common ratio hurdle in 2013 when including planned capital actions – the ratio fell to 4.9%. However, Citi exceeded the stress test requirements excluding capital actions, at 5.9% Tier 1 common to risk weighted assets, but the gap between the two scenarios of 100bp of Tier 1 common implies about $9 bil of total capital return. This return includes redemption of some TruPs but the amount is not disclosed.

 This is the second consecutive time that Citi has been an outlier among the large banks, which is surprising and hurts management credibility in our view. The previous occasion was last month’s State Attorney General settlement when Citi was the only one of the five banks that had to take an additional charge.

 The adverse case stress test results reflected highest loss rates at Citi for home equity (18.5%), first-lien residential mortgages (9.7%), and other consumer (23.4%) loan portfolios.

 C will continue to pay out its $0.01 quarterly dividend and received approval to redeem some TruPS.

So today I want to keep a close eye that certain banks like JPM, GS and BAC are able to hold yesterday’s again and whether or not C which at this point pre-open has given back most of yesterday’s gains, does not continue to get worse….If the stronger banks are able to consolidate recent gains, then this will be healthy action, but if they start to re-trace a 30-50% of yesterday’s move in sympathy with C than this would be a sign of declining momentum.


MorningWord: 3/13/12: Breadth & Momentum, Breadth and Momentum, say it 10x really fast and it still makes the sound of the equity market rally losing steam.  Yesterday’s volume across all equity exchanges in the U.S. marked the lowest volume day of the year  and saw the S&P500’s volume down 17% from Friday’s. Low Volume=Low Conviction from where I am sitting and as I continue to look for divergences like, the widening gap between the Dow Transports and the Dow Industrials (Transports peaked early last month, and Induistrials holding strong) and then the Bloomberg New Composite High Index vs the SPX  (2nd chart, yesterday’s reading only 271 with SPX at 1371, last year’s reading with SPX at current levels were greater than 12oo at it’s peak).

[caption id="attachment_9518" align="aligncenter" width="300" caption="Dow Industrials vs Dow Transports from Bloomberg"][/caption]


[caption id="attachment_9519" align="aligncenter" width="300" caption="SPX vs Bloomberg Composite New High Index from Bloomberg"][/caption]


ALso we just linked this to Twitter, but great post from blog QuantifiableEdge (here)  about price action and VIX performance on FOMC announcement days, market has been resilient, and if we finish strong with a clean breakout above the previous highs that then that will be nothing short of impressive when you consider the weakening breadth and momentum, but it could pay to be cautious btwn now and the close.

MorningWord: 3/12/12:  China’s weak export data overnight has risk assets down this morning, Crude, Gold, Euro all down on reports that China posted it’s biggest trade deficit in February in 22 years.  With U.S. equity markets back at 52 week highs, and European indicies like the DAX back above last week’s pre sell off levels, the markets seem priced for perfection when you consider an unfolding hard landing scenario in China. On a week that is too get it’s share of “Fed-Speak” with our FOMC meeting tomo, many market participants are more interested in getting a sense for how China’s central bank will look to stimulate demand in what they have already acknowledged as a slower growth environment in the near future.  

For all of you who believe in the notion of “De-Coupling”, that the U.S. economy can continue to outperform Europe as they deal with the hangover from their debt crisis, I just want to suggest that the likelihood of this short term anomaly persisting with the backdrop of potential hard landing in China is very unlikely.  I have clearly been a bit early on my sell off call, but I believe storm clouds are brewing and I continue to focus on some more technical indicators like breadth and momentum to instruct my views.  New highs across most indicies with the SPX at 1370 continue to be fairly week with Bloomberg’s Composite New High Index posting only 421 on Friday, this is in comparison to readings of over 1000 last May when the SPX was at similar levels.

[caption id="attachment_9463" align="aligncenter" width="300" caption="Bloomberg Composite New High Index vs SPX from Bloomberg "][/caption]


I am also starting to see stories about the “Dow Theory” pop up on top stories on Bloomberg, like this one here, “Dow Theory Signals Sluggish Economic Recovery”.    I guess this is what I feel is the most important takeaway from the story:

The Dow Jones Transportation Average has fallen 3.9 percent from its six-month high on Feb. 3, while the Dow Jones Industrial Average (INDU) added 0.5 percent. The gauge of 20 shipping companies from FedEx Corp. to United Continental Holdings Inc. (UAL) peaked before the rest of the market when the technology bubble popped in 2000 and began slipping into a bear market three months before broader benchmark indexes in 2007.

SO I continue to watch for divergences in single stock names like I observed with MCD and NKE , and posted a trade idea on Friday (here), but also on a macro level, like described above btwn the Dow Industrials and Transports.

[caption id="attachment_9464" align="aligncenter" width="300" caption="Dow Industrials vs Transports from Bloomberg LP"][/caption]


The name of the game at this point is Breadth, Momentum, not so obvious divergences. I remain cautious and net short here.  I am also waiting for the fever to break in AAPL and still believe that significant reversal is in the cards, prob once we have a close above $550, which would be a new closing high.




MorningWord: 3/9/12 at 9:25am: Well there you have it, the all important Jobs data…..and unemployment holds steady at 8.3%, as payrolls were slightly better than expected and Jan revised higher.  Not that this comes as a huge surprise given the recent data that we have seen, but after a week that felt a bit like a yoyo in equities, today’s close could suggest the direction of the market for the balance of what has been a near historic quarter so far.   Over the last couple days, U.S. equities have caught a decent bid into the European close, and practically closed on the highs of the day, with a lackluster open today, digesting a good bit of news in the last 24 hours, I would be surprised to see much more than a consolidation day.  As I stated earlier the next real resistance level in the SPX is 1375-1378, this will be a key level and likely one that will need a bit of additional positive news to get through.

On the earnings front, TXN lowered the mid point of their q1 earnings and sales forecast below what analysts were expecting , citing weakness in some wireless chips like the result of disappointing tablet sales of the Kindle Fire and the Samsung offerings, while they are still well exposed to RIMM and NOK.  TXN has mildly under-performed the SOX ytd, but their exposure to iPad and iPhone competitors is certainly not an example of “rising tides lifting all boats”.

MorningWord: 3/9/12 at 7:45am:  If the price action earlier in the week was dominated by slowing growth concerns in China and the worry, then enthusiasm about Greece’s debt swap, the focus now is squarely in the U.S. economy, and specifically our employment data due out in an hour.  

The DAX is up 30bps as I write and is basically trading at the level of Monday’s close, prior to Tuesday’s nasty sell-off of about 3.5% (below). Not bad action when you consider many market participants had been expecting a multi-day pullback in equities that would re-trace ~30% of the global equity rally since mid December.

[caption id="attachment_9421" align="aligncenter" width="300" caption="6 day DAX chart from Bloomberg"][/caption]


As for our markets, S&P futures are basically flat as we head into the data, and this will likely not be the case at 8:31 am.   If the data is better than expected I would fully expect a blow-off rally that could get the SPX back to the previous highs around 1375, a level where I would expect considerable resistance, and with Greek default averted and the U.S. economy firing on most cylinders, this could be the moment of truth for the ytd rally.

[caption id="attachment_9422" align="aligncenter" width="300" caption="20 Day chart of the SPX from Bloomberg"][/caption]


Stay Tuned, we will check back after the print.