Dan Nathan’s MorningWord: 4/2/12

by Dan April 2, 2012 8:05 am • Commentary

MorningWord: 4/2/12: Here on a fancy Street called Wall we have many odd habits, none sillier than going on and on about things like gdp’s, pmi’s and ism’s.  The fumiest thing about those little 3 letter zingers is that most market participants (including yours truly) have never really spent the time to understand the inputs, and are generally focused on the range of outcomes as if it were a basketball game that we were gambling on.  In the U.S. these wagers are usually clear cut, but not so in China.  This past weekend brought China’s “official” PMI reading that came in better than expected showing expansion that was not as bad as originally feared after HSBC’s  “flash reading” a couple weeks back that showed contraction.  But wait, that’s not entirely it, HSBC’s “unofficial” reading showed contraction as the official reading showed expansion, hmmm, Business Insider, sliced and diced this yesterday (here), you be the judge.  Funny thing is, the ailing Shanghai Composite can’t be the “judge” as it is closed for a Holiday until April 4th.  Asian equities though were mixed over night as the Hang Seng was down a tad and the Nikkei was up 26bps.  IN the pre-market here, FXI (iShares China etf is down a 45bps), so I think it is fair to say that the jury is still out on this one.

No time to waste though, at 10am this morning, all eyes will be on the ISM reading we get over here, and with Europe generally down across the board as I write at 8:45am, this number is likely to move the markets one way or the other……obviously with the SPX above 1400, the risk is to the downside.  This holiday shortened week that we are about to embark on is filled with a smattering of economic data from manufacturing early on to employment data later on, with very little earnings data expected.  This could be the calm before the storm as earnings season will get kicked off next week with a handful or reports from the likes of AA, JPM and WFC, while the bulk will come mid-month.  One outlier this week could be any significant negative earnings pre-announcements, but if they have not come yet they may not come at all as we are now only 2 weeks away from most scheduled reporting dates.  Q2 Earnings guidance is gonna drive the train in the coming weeks, a good Q1 is already “baked int he cake” so to speak.

AAPL is obviously one to keep an eye on, while the stock managed to keep small gains for the week ending last Friday, the stock did close about 3.5% off of its all time highs made on Wednesday.  The SPX showed interesting relative strength on Friday, eeking out slight gains on the session while AAPL closed down by almost 1.7% (it’s worst day in weeks), if U.S. equities are going to continue to rally, the market rally will need to broaden out and be less reliant on the likes of AAPL and financials.  I think a short dated defined risk AAPL short could be in the cards prior to their expected fQ2 report, but not exactly into it the print.  Bloomberg has the report estimated for April 20th, which would be a Friday, and highly unlikely, but for the last few march qtr reports the company has reported them on April 20th, which is the reason for the estimate.  Why this matters is because options in April will either get bid up or sold once the date is set and it is determined whether earnings fall in April or May expiration.  Stay tuned, we should hear soon.

As for today, I am not sure I want to press this mixed opening right off the bat, especially as we await ISM reading and prior to the “big money” re-positioning at month and quarter start.

 

MorningWord: 3/30/12: Today’s opening of U.S. markets (S&P futures up about 50bps) feels like a fairly fitting end to what was a near historic quarter.  Sentiment changed on a dime in Jan, with the change of the calendar year, and there was no looking back.  For those who don’t believe in blind faith, especially in things as silly as financial markets, it was a very frustrating 3 months, for those who don’t  mind being herded like sheep it was profitable.   Being contrarian for the sake of it is not a long term winning strategy on Wall Street, but there is a time and a place for it…….what we are trying to do here at RiskReversal is to routinely add a dose of this skepticism into the readers investment/trading view, but by no means is it meant to dominate that investment/trading program. We will continue to shoot for defined risk ways to play shorts in a raging bull market, and look to find value in names where the baby is being thrown out with the bath water, what we won’t do is join the herd.

As for today’s markets. Asia was down small and Europe is up across the board, while the Euro, Crude and Gold all bouncing a bit.   I think we likely see equities held up until the European close and then maybe they start to float a bit lower as those who would like to see the SPX close on the dead highs for the year will likely run out of powder and realize the lack of utility in the effort.  Many traders I speak to want to short the “qtr end mark”, but I am not sure that will be a very fruitful endeavor as U.S. equities will likely see decent inflows in the new month/qtr.   As I wrote yesterday in this space, the real determinant in next week’s holiday shortened week will be China’s PMI print over the weekend……AFter Crude’s breakdown yesterday, the way to play this could be pressing that short on a pop….if we get a miss, slowing global growth fears will dominate and risk assets could get hit, but most notably Crude which seems to have a bit of an Iran Fear Premium built in.

 

MorningWord: 3/29/12: I think it is fairly safe to say that decent Q1 earnings are baked into the cake with the SPX at current levels, the real question for any near term continuation of the ytd market rally will be Q2 guidance.  I have to suspect that most management’s will take a slightly guarded tone as it relates to their outlook, especially for the company’s who’s stock have enjoyed 50% rallies off of the Oct lows.  

The real trick for investors will be navigating the period  btwn Q1 end (tomo) and the start of earnings season the week of APR 10th, next week (also a holiday shortened week) will be dominated be economic data both here and abroad, but almost more importantly in China which will release it’s PMI data this weekend which could dramatically influence Monday’s trading.   Yesterday morning I spent some time on China, in this space, but for those who aren’t paying that close attention, the Shanghai Composite was down again over night (-1.65%) and at this pace is a day or so away from being down on the year.  When the Shanghai Comp goes RED, we could see some risk aversion come back into the market as a bit of a wake-up call that we may not be out of the woods just yet.   Chart below shows the massive divergence bwtn the SPX and Shanghai Comp, and my strong feeling is that something has to give in this relationship, and soon.

[caption id="attachment_10124" align="aligncenter" width="300" caption="1 YR SPX vs Shanghai Comp from Bloomberg"][/caption]

 

I also think it is important to watch names other than AAPL (there I said it) and the banks, that have shown some great relative strength in the last few days broader weakness.  Stocks like CAT and NKE, which I am long APR Put Spread’s which are very dependent on continued global growth act very poorly.  AAPL will be the last battle fought by the bears, and I think your time may be better served focusing on names that don’t have a cult following.

SO with the futures down 50bps, it looks like those looking to mark stocks right into quarter end ran out of ammo or will…..I remain cautiously short…..  

MorningWord: 3/28/12: Thank goodness the European leaders feel that their crisis is” almost over”, just as China’s “slowing growth crisis” is about to begin.  There has obviously been a lot of debate for the last few months about whether China’s overheated economy will have a soft or hard landing, but most signs at the moment point to something softer than the best case scenarios.  Business Insider this morning reported on a Barclay’s Capital analyst Gayle Berry who just returned from China and had the following to say in a note to clients:

  • Demand for copper in China remains weak, and the outlook for the rest of the year doesn’t look so great.
  • Some manufacturers cranked up production in January/February in anticipation of a rebound in Q2, but “demand has been softer than they expected.”
  • Appliance demand is weak thanks to slow construction and poor real estate sales.
  • Copper inventories are rising.  

I guess this doesn’t come as a huge surprise for those who have been keeping an eye on the Shanghai Composite which is massively under-performing most global equity markets ytd.  Last night the index had it’s worst day in weeks down 2.65% and now it only sits about 7% from the 52 week lows made in early Jan.  Chart below shows the SPX’s massive divergence from the Shanghai Index, I can’t for the life of me think of a bullish conclusion in the near-term for this relationship.

[caption id="attachment_10070" align="aligncenter" width="300" caption="1 YR SPX vs Shanghai Comp from Bloomberg LP"][/caption]

 

But as this shakes out in the coming months, there could be an interesting pairs trade as developed western equity markets push ahead to multi year highs and China approaches 52 week lows……..As many readers know I don’t buy the notion that our markets/economy will be able to “de-couple” for too long from either China’s woes or it’s eventual rebound, but ultimately there is likely to be a reversion pairs trade here that will work decently.

The chart below is a 10 yr chart of the one above, and while it just looks like a couple lines with some massive divergence for the first 5 years then general similarity for the next 4, the last year has been the area where I want to focus on, and what I think will likely be the next year’s relationship.

[caption id="attachment_10071" align="aligncenter" width="300" caption="10 Yr SPX vs Shanghai Comp from Bloomberg"][/caption]

 

The SPX clearly feels like it has some legs, even at current levels, especially if we see some consolidation at the 1400 level.  Many want to short the month end/qtr end market, especially when you consider that q1 2012 will be the best performance for the start of the year since 1998.  While I remain net short here, I do so nervously.  So what I am not doing is shorting the Q1 mark for the sake of it, we could very likely see some inflows in early April which could keep things propped up.  While I don’t think this is healthy, it is still very likely.  At current levels, the hard trade in my opinion is too stay long here, and as one smart trader that I speak with daily keeps saying to me is that a lot of people, Pros and normal folk a like, “have a lot of PnL leeway with their gains from AAPL this year”, and aren’t nearly as nervous about a 5% pullback in the broad market as they should be because of the AAPL cushion.  SO for the most part I sit on my hands and remain net short….I am either going to press things when it seems apparent we are breaking down, or do so on what I perceive to be a Blow-Off Top.

MorningWord: 3/27/12: Pre-opening yesterday morning, with the S&P futures up 60bps and the DAX up more than 1%, I suggested that all eyes would be on last week’s intra-day high of 1414 in the SPX and that it would take a broadening out of the rally to hold the gains…….Well we did see broad participation, not on particularly fantastic volume, the sort of volume you would like to see as the market makes new highs to levels not scene since May 2008.

One confirmation of the new found breadth in the market came yesterday morning at about 10:30am, AAPL went down on the day as the market made new highs on the session, this was fairly impressive, especially when you consider how some market participants (including me) won’t shut up about how important AAPL is to the rally as it makes up more than 4% of the SPX and more than 12% of the Nasdaq.

Another input we have kept a close eye on is Bloomberg’s Composite New 52 week High Index, while yesterday’s reading of 536 was impressive, and appears to be trending higher, it has also become fairly volatile.  The chart below shows the 3 yr performance of this measure vs the SPX and you can see that while it it appears to acting a bit better the reading of about 500 vs the SPX at 1416.50 is fairly weak.

3 yr Bloomberg Composite New 52 High Index vs SPX from Bloomberg

 

So what to do at current levels?  I know I sound like a bit of a broken record, or the boy who has cried wolf, but this rally because less sustainable the higher it goes.  I have missed the rally, and I have sold longs too soon, and held on to losing shorts way too long, I have mad many of the worst mistakes a trader can make over the last 2.5 months, but I am not going to compound these problems and do an about face and get long.  If the market keeps going, so be it, I won’t be there and will continue to be tactical and look for opportunities to sell extended names, and buy weak miss-understood ones.  AT SOME POINT SOON $107 OIL WILL START TO TAKE IT’S TOLL ON THE CONSUMER.

The Chart below shows the inverse relationship of Crude Oil vs the VIX over the last 12 months ,this is not entirely intuitive as one would think on a very simplistic level that high oil prices would hold back equities and thus increase volatility.  With the VIX near multi-year lows and the oil near 52 week highs, something is going to have to give soon.

[caption id="attachment_10019" align="aligncenter" width="300" caption="2 yr Crude vs VIX chart from Bloomberg"][/caption]

 

MorningWord: 3/26/12: As I write at 9am, Fed Chairman Bernanke just got done speaking and the the S&P futures reacted positively, up about 5 pts since the headlines of his text hit at 8am:

*BERNANKE SAYS ACCOMMODATION NEEDED TO BRING BIG GAINS IN JOBS

*BERNANKE SAYS UNCLEAR IF PACE OF JOB GAINS CAN BE SUSTAINED

*BERNANKE SAYS `THE JOB MARKET REMAINS FAR FROM NORMAL’

*BERNANKE: WEAK ECONOMY MAIN CAUSE FOR LONG-TERM UNEMPLOYMENT

*BERNANKE SAYS STRONGER ECONOMY NEEDED FOR BIG GAINS IN JOBS

Source: Bloomberg

All this talk of jobs is very interesting to me as I keep reading about how un-competitive our workers are in the U.S. for a whole host of reasons, yet at the same time U.S. multinationals continue to suggest trough slight margin pressure that labor costs in emerging markets like China and Brazil keep going higher.   My friend Jay Pelosky got me thinking about this a little bit in one his latest pieces (read here), nothing that is gonna help you for today’s trading, but a great thematic piece looking at what could be another reason for the U.S.’s resurgence as a world economic power following the ills of the last decade.  On the manufacturing front, Jay outline’s the following:

America is a world-class manufacturer today — this is not rhetoric but reality. America’s manufacturing prowess never went away, it just went up in market. Shop floor productivity kept high-value added work onshore while low-value added production moved offshore, just as one would hope. The U.S. remains one of the world’s leading exporters of manufactured goods, joined by Germany and China. What did change was that the number of workers required to manufacture the same amount of products fell sharply. Today, manufacturing employment is growing at its fastest pace in thirty years which is good news more broadly given the jobs multiplier effect: Estimates suggest every 100 manufacturing jobs support an additional 291 jobs.

America’s manufacturing competitiveness is its best in decades. U.S. unit labor costs (ULC) a principal way to measure competitiveness, have fallen over the past three decades while those in Germany have risen by close to 90 percent. At the high end, German manufacturing ULC today are 30% more expensive than in the US. At the low end, China’s wages have increased 600 percent in the past decade and are rising 15 to 20 percent per annum. Class A office space in Beijing is more expensive than in Manhattan while trucking costs in China’s main export areas are over 50 percent more expensive than U.S. levels on a per mile basis.

I guess my point of adding this discussion is that some, like Pelosky feel that we have great potential to fix our own lingering employment issues and it may be at the near term expense of U.S. corporate profit margins (as it relates to building manufacturing facilities here, and re-training workers), but  in the long term will leave us much less dependent on foreign competitors /partners.

AS FOR TODAY, Asian markets were basically flat on the session, while Europe got a healthy lift from the Bernanke comments, the DAX is now up 1%.  At 10am, we will get some data on Pending Home Sales, and I wouldn’t hold your breath for better than expected data, as last week’s smattering of housing data was less than stellar, Business Insider’s roundup from last week here:

  • Monday: Homebuilder sentiment missed, coming in at 28 vs. expectations of 30.
  • On Tuesday, housing starts came in just below expectations.
  • On Wednesday, mortgage applications for teh week fell 7.4%. Also existing home sales came in at an annualized pace of 4.59 million, vs. expectations of 4.61 million.
  • On Thursday, the FHFA house price index showed no gain vs. expectations of 0.%. Last month was revised from a 0.7% gain to just 0.1%.
  • And then today we got New Homes Sales of just 313K vs. expectations of 325K. Also today, the major homebuilder KB Homes reported a big miss, and the stock is getting crushed.

All eyes will be on last week’s multi-year intra-day high of 1414 in the SPX made last Monday.  With the Futures opening up 60 bps, and the DAX trading near the highs of the day, it will take a good bit of momentum, and a little broadening out of this rally to keep things going today in my view.

 

MorningWord: 3/23/12: Yesterday’s 72 bps decline in the SPX, the second worst performance of the year so far was less than scary when you consider that we are only down about 1.5% from the multi-year high made on Monday. U.S. equities continue to benefit from a sort of flight to quality on “risk off” days, a reflection of investor fears concerning potential recession in Europe and a continued slowdown of China’s overheated economy.  [private]

Overnight, The Nikkei had it’s worst day in 2 months, down 1.14%, as the Shanghai Composite fell 1.1% to it’s lowest level in a week on continued fears of global economic slowdown.  China has increasingly become the focus of global investors, even as markets get comfortable with the idea of sub double digit growth, concerns of a housing and credit bubble bursting, similar to what we had here in 2008, could be the next real worry on the horizon.

As I write at 8am, Europe is down marginally across the board, but was unable to hold early gains, the DAX is down about 1% from the morning highs.  Our futures are basically flat ahead of New Home Sales data to be released at 10am.  We have had plenty of housing data this week and for the most part it has been mixed at best, I am not sure this will be a big catalyst one way or the other.

As we have recently stated on numerous occasions of late, the fate of the ytd rally is likely to be held in the hands of U.S. corporate earnings not the fact that European Sovereign debt yields have gotten crushed.  ORCL‘s 2 day debacle since reporting what appeared tobe better than expected results Tuesday after the close maybe a precursor for things to come as we head into Q1 earnings season next month.

[caption id="attachment_9963" align="aligncenter" width="300" caption="3 day ORCL chart from Bloomberg"][/caption]

 

The opening gap of 3% Wednesday morning seemed fitting given the fact that investors feared a second consecutive disappointment by the software vendor which would have been the first time this has happened since 2008.  But it appeared that the stock fell victim to buyers exhaustion and then spent the rest of the next 2 trading days barely seeing an uptick, and both days closing at or very near the lows.  This is obviously bad price action, confirmed by better than average volume, while breaking through its 50, 100 and 200 day moving averages.

NKE, will be of particular importance today, as the company reported their fiscal Q3 last night after the close, which beat analysts estimates but showed higher inventories and input costs which hurt margins.  Investors will breath a sigh of relief that futures orders were better than expected as the company anticipates strong seasonality as they head into the summer olympics and European Soccer championships this summer.

I am long a Apr 105/100/95 Put FLy that will be unprofitable on the opening, with the stock unchanged, but if NKE were too mimic the performance of ORCL this week, I may be down, but not out on this trade.

NKE is trading less than 2% from an all time high and at a healthy premium to it’s growth rate, the stock seems priced to perfection, especially when you consider where the broad market may be in it’s rally cycle….obviously this is a little wishful thinking but I certainly wouldn’t being initiating new longs positions based on last night’s report, prior to a pullback, regardless of the anticipated summer catalysts.

SO for today, I sit with shorts and wait our relatively orderly sell off’s to turn into a multi-day route and put a little fear back into the market, and then I start legging into some longs, while continuing to ride shorts…..at least that the plan!

Fed Chairman Bernanke speaks today at 1:45pm

MorningWord: 3/22/12: Yesterday’s price action in equities had the makings of being one of those sleepers, until late in the day, just when it looked like the SPX was going to close on the highs of the day, (albeit on relatively low volume), something happened.  The chart below of yesterday’s intra-day of the SPX vs AAPL may hold the clue.  At about 3:34pm AAPL started to sell off and break down below the previous low of the range made about 10 minutes earlier, and then at about 3:37pm the SPX broke it’s previous low of the last hour.  When this previous lows were breached both fell at least 30bps near the lows of the day.

[caption id="attachment_9916" align="aligncenter" width="300" caption="AAPL vs SPX March 22, 2012 from Bloomberg"][/caption]

 

Tail wagging the dog?  [private]

As for overseas markets today, Europe is down across the board on weak manufacturing data, first from China and then out of Germany, with the DAX down for the second day in a row about 1.4% mid session.  The 20 day chart of the DAX shows the almost 3% sell off since last weeks 7 month highs, but also shows a potential air pocket of about 2% to the next level of support at around 6800, but still more than 5% away from the mini-panic lows made earlier in the month.  I focus on the DAX because we are likely to see an over reaction first abroad before our markets really catch any steam to the downside.

[caption id="attachment_9917" align="aligncenter" width="300" caption="20 day DAX chart from Bloomberg"][/caption]

 

Yesterday morning in this space reader got to hear a bit of whining on my part, largely related to my continued commitment to staying net short this market…….but as I listed the handful of worries that could derail the rally or abate and add fuel to the fire (WSJ listed similar here, mine differ a bit), one very important one on both lists was Corporate Earnings.  Yesterday we got a nice little preview how investors would perceive generally positive news from a fairly large tech bell-weather, and as the chart shows below, it wasn’t a very warm reception.  ORCL opened up about 3% on a beat of previously lowered fQ3 earnings and spent the rest of the day grinding lower to close down more than 2% near the lows of the day, on the second biggest volume day in almost a year.

[caption id="attachment_9918" align="aligncenter" width="300" caption="March 21st Tick Chart ORCL from Bloomberg"][/caption]

 

This is not great price action to say the least, and while ORCL is not one of these large cap extended tech stocks like MSFT, INTC or IBM near multi-year highs, it has come a long way since it’s December lows, and shows that investors are not indiscriminately buying any old piece of garbage.  What it also shows is the markets inability to broaden out a bit to other names…….I have been asking this question for some time this year, but how much AAPL, MSFT, IBM and INTC can tech investors or any investor for that matter buy in such a short period of time?  At some point they have to reach position limits, or come to their senses that it doesn’t make a whole heck of a lot of sense to continue to add to positions that are up 30-40% in a matter a months before a health pullback or consolidation.

So that’s my story and I am sticking with it…….we either need a healthy pullback or a consolidation of gains before I can buy stocks, it is just that simple.   If you are the sort of true believer who feels that we are going to be much higher 12 months from now and you really don’t care if we pull back 5% in the meantime, then I get it, get in there, but that ain’t me. Now many would say that very psychology has cost you 10% in broad market gains and potentially far more in single names, but that’s all I know how to do in the markets, I have never been the sort of blind faith, buy and hold sort of guy, I’ll leave that for the geniuses at the big mutual fund complexes.

SO I haven’t pulled the plug yet on “Market Shorts” and as for single names like CAT, WMT, NKE, MSFT and IBM they seem to be just where I want to be as we head into Q1 reporting season next month.

Check back for a pre-earnings NKE preview later today, company reports after the close today, see my trade here.

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…..no 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!