MorningWord: 3/21/12

by Dan March 21, 2012 7:50 am • Commentary

MorningWord: 3/21/12: Yesterday our equity markets showed their routine relative strength to weakness seen in Asia and Europe only closing down about 30 bps for the SPX vs the DAX and the Shanghai Comp down about 1.3% each.  Obviously those silly little markets don’t have a $565billion behemoth that makes new highs every day driving them……but i’ll sit this discussion out today.  

Overnight most Asian markets were flat (aside from Nikkei & Topix which were down 1/2% & 1.1% respectively ) and as of 7:45am most European indicies are struggling to maintain their modest gains (the DAX only up 24bps after yesterday’s losses and about 50 bps off of the morning’s highs).

Waking up this morning and doing my usual read through of “TOP” Bloomberg Stories I can’t help but be taken aback by the overwhelmingly positive tone of most as they relate to equities worldwide:

Stocks to Begin a ‘Steady Upward Trajectory’ Goldman Sachs Says

Bank Hedges Cut at Fastest Rate Since 2003 After Tests 

Emerging Stocks Cheapest Since 2009 on China Slowdown Concerns

Biggs Boosts Bullish Bets on Stocks to 90% Net Long

These are just a few from Bloomberg, but it seems like we are being bombarded from most sources, other than ZeroHedge of course.  For someone (me) who has been net short most of this year, this is becoming an increasingly difficult endeavor and I am very near throwing in the towel, but when I do, Please, Please get in there and get really short!  The fix just appears to be in by the big money, and to be honest I am really not that bearish (I was never playing for the 2011 lows, just a little 1250-1300 action), I mainly agree with most relatively bullish thesis’s out there for stocks, BUT just after a little bit of scare that re-traces a portion of the year to date move.

I guess, I can see the potential of many of the fears on the forefront abating over the balance of 2012: I can see the potential of tensions cooling in Iran and Syria, and thus oil prices coming down, I can see fears of a hardlanding in China as a bit of a head-fake, I can see the potential for austerity in Europe not having the worst case effects of a deep recession and I can envision U.S. housing and un-employment well off of their bottoms……all that Vision (reminds me of a great line from one of my favorite movies Butch Cassidy and the Sundance Kid, where Sundance looks at Butch and kind of affectionately/mockingly says, ” you got Vision and the rest of the world is wearing bi-focals”) and trust me, the likelihood of that scenario playing out without other unforeseen events coming into the fold isn’t exactly great, but with Bonds yielding what they are, it appears that the “Big Money” has made up their mind about investment yield.

SO for my own trading, I am gonna pull the plug on most “market shorts” very soon, in an effort to do a better job in risk management, especially as I have essentially given back all gains from last year.  This is frustrating because I entered the year with a healthy risk budget on some decent trading and market calls last year and have been just a one way trader this year.   I know we are fairly close to a pull back and at this point with less than 2 weeks left to quarter end it may come in the new month/qtr.  The SPX is up nearly 12% ytd and nearly 3% month to date setting the stage for a relatively historic start to any year.

SO for now, the likelihood of a significant sell off btwn now and the end of the quarter, barring some unforeseen event (remember the natural disaster in Japan in March last year sent the markets that were off to a good start into a bit of a tailspin) things are likely to maintain current levels.  I will continue to look for opportunities in single stock names where I think the price action might have gotten ahead of fundamentals as we head into Q1 reporting in April, but in many ways earnings will have to be the driver of the next leg of the rally, and we will get a good sense for that soon.


MorningWord: 3/21/12: Yesterday’s U.S. equity action was clearly all about AAPL, the stock got a lift from its dividend and stock buy-back announcement and dragged the 2 indices, that it is a large component of, up with it.  There is no other way to explain the Nasdaq’s out-performance yesterday (Comp up 75 bps vs INDU up 5bps), AAPL makes up about 12% of the Nasdaq Comp and 18.5% of the QQQ (which is the etf that tracks the Nasdaq 100).  [private]

That was yesterday, which saw the SPX make highs not seen since before the summer of 2008, but today world equity markets have a different feel.  The Shanghai composite was down 1.38% on the heals of China raising fuel prices for the second time in 2 months.  The chart below is kind of fascinating to me, and suggests that investors feel very comfortable with the notion that the U.S. economy and financial markets are likely to to “De-Couple” from China in 2012.

[caption id="attachment_9828" align="aligncenter" width="300" caption="1 YR SPX vs Shanghai Comp from Bloomberg LP"][/caption]


While the SPX makes new 4 year highs, up 12% (but flat on the year last year), the Shanghai Comp remains almost 23% off of its 52 week highs up about 8% ytd (but was down 21% in 2011).  U.S. equities are clearly being viewed by global investors as a flight to quality.

China is increasingly becoming the risk for the global economic recovery since the 2nd bout of QE in 2010 and the bounce off of the European sovereign debt crisis.  Forget nuclear tensions in Iran, a material slowdown in China’s economy would very likely bring the world equity market rally ytd to its knees.  Keep an eye on the FXI (etf tracking 25 of the largest Chinese stocks), the index (pre-market) is trading below it’s 200 day moving average.  Recent weak housing price data is another concern to throw on to the pile of worries in China, I am know I sound a bit alarmist, but a lot of the signs in China appear to be pointing to a similar sort of housing bubble that we had in the U.S. just a few years back.

[caption id="attachment_9829" align="aligncenter" width="300" caption="1 yr FXI chart from Bloomberg"][/caption]


So what to do with Europe down at least 1% across the board and a weak Asian close?  Our futures are only down 55bps clearly lagging Europe, even with some mixed housing starts data just reported that gives no evidence of a raging recovery.  If there was ever a morning to press a muted down opening it would be today….the AAPL news is finally out of the way, and the Banks stocks have all recovered there break-down levels from August 2011 when the bottom fell out.  My shorts are getting increasingly difficult to hold onto up here, which is why I know we are very close!



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: 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!