MorningWord: 4/27/12

by Dan April 27, 2012 8:32 am • Commentary

MorningWord: 4/27/12:

We can debate and analyze and pick apart the internals of the market, but at the end of the day, the stock market’s broad resilience throughout the last week has been quite impressive.  Overnight was no exception, as the Spanish downgrade by Standard and Poor’s caused a blip for a few hours, but the buyers held the fort and futures show a slightly higher open at this moment, even after a weak U.S. 1Q GDP print of 2.2%.  Psychology’s contribution to performance is always interesting, as the U.S. market right now is in buy mode no matter the news, while the Japanese central bank does inject more stimulus (to 10 trillion yen as expected), but the market ends lower anyways as the Japanese have been trained to sell stocks on bounces for 20 years.
Corporate earnings continue to come in stronger, with AMZN and Samsung both reporting strong revenues from global content and smartphone sales respectively, which has been surprising given the weaker macro backdrop in much of the world.  If global growth is slowing in most regions, that should imply that corporate sales are weaker, or that there are losers as well as winners, but it is possible that the U.S. corporates specifically are gaining market share from the rest of the world.  Respective stock market performance over the last year seems to reflect that.
The market’s focus is going to shift today to next week’s busy macro calendar in the U.S., with ISM and payrolls.  If the going into the weekend vol crush happens today, as expected, we might look at some weekly vol buys expiring next Friday for good risk/reward bets.


MorningWord: 4/26/12:  I got to give AAPL a ton of credit, not only did they disclose Tuesday night that they seemingly brought great joy to 35 million people last quarter by selling them the only premium Smartphone (starting at $200) that is NOT  4G LTE compatible, but with the stocks almost 9% rally Wednesday did Fed Chairman Bernanke a huge solid as he took the podium for his scheduled post FOMC meeting press conference.  AAPL’s stock performance and it’s large weighting in the SPX and the Nasdaq served as a little QE 2.5 for the broad market sending the SPX up 1.36% and he Nasdaq up 2.3%.

So I guess my main takeaway from yesterday is if AAPL can maintain the pace of iEverthing sales, and continue to pulverize their foregign competitors like NOK, RIMM and Samsung, and the stock goes to $1000 like all the Wall Street analyst wizards are suggesting, then maybe Mr. Bernanke will not have to “DO MORE”.

Ok that was a bit dramatic, but come on…….I know I sound like a bit of a broken record, but if the SPX is going to stabilize and make new highs, the rally will NEED to broaden out and be less reliant on a handful of names.  In the Face of what appears to be economic data that is coming in slightly worse than expected (see this morning’s jobless claims), we will need to see better forward earnings clarity from U.S. corporations , especially at a time where it feels like Europe is most likely falling back into recession.  Many will continue to argue for the notion that we are “de-coupling” a bit from the woes in Europe and a slowing China, ask CAT how that is going to work out for them if emerging market demand falls flatter than most expect.

U.S. bank stocks continue to worry me, many such as GS, MS and BAC are at fairly key support levels and I would argue that Q1 earnings might have been as good as it gets for 2012.  Don’t forget that GS earnings expectations are suppose to rise 174% yoy, that means they have a ton of wood to chop, and any macro hiccups like last year could see the $12.36 earnings estimate in great jeopardy.  I continue to believe these stocks will re-test unchanged levels on the year.

I am in the mindset that the little 4.5% peak to trough sell off from the highs this month, that now only sits at about 2.2% from the highs is a sort of calm before the storm.  Over the next few days we are going to introduce some short biased trades that isolate July expiration, we want to leg into these trades and not get too far ahead of ourselves as complacency with little news could send us to new highs, then we really want to “lay into them”.


MorningWord: 4/25/12: Yesterday wasn’t a bad showing for equity markets that seemingly could have cared less about anything else other than AAPL’s fiscal Q2 earnings to be released after the market close.  In a lot of way’s AAPL’s 2% loss on the day weighed fairly heavily on the Nasdaq, while banks, industrials, healthcare, telco and energy names all traded pretty well.

The S&P futures are trading up about 60bps after very a disappointing Durable Goods Orders number came in far worse than expected, which comes on a day where the UK’s GDP print officially confirms recession.  While U.S. corporate earnings on the whole appear fairly solid for the period just ended, the uncertainty appears to lie more on the macro front as we head out of earnings season and into what has been a volatile couple months for the last 2 years, facing many of the same issues that we faced ranging from European Sovereign debt crisis, slowing worldwide growth and don’t forget our little debt ceiling drama.

As for this afternoon’s FOMC announcement, expectations aren’t exactly running very high, but watch the Euro and gold for a quick indication of whether markets view the language as dovish (higher Euro and gold) or hawkish.  The had a nice preview of today’s meeting (here).

SO back to the main event, AAPL, the company crushed consensus estimates with and eye-popping 35 million iPhone units sold in the qtr, while iPad and Macs came in slightly below the whisper numbers.  The stock is up close to 10% in pre-market, blowing though the implied move that ended up being about 6.5%.  The options market clearly got this wrong and this is a very good example where often times a quantitative assessment can be aided by a little qualitative judgement.

I was reminded in the middle of the night last eve of why iPhone units beat so dramatically by some genius who apparently doesn’t agree with my generally contrarian view towards AAPL’s ytd move,   DBM writes, “it would appear you got the Apple estimates WAY wrong! Like most, you forgot about the international growth”.  But here is the thing, I don’t make “estimates” I am not an analyst, I make trades where I think the odds are in my favor.  So “fading” the implied move as I did by selling an Iron Condor with weekly options will be a bad trade, but it certainly wasn’t predicated on any “estimates” of iPhone sales.  Interesting thing is, this trade would likely make money 7x out of 10, but here we are in the midst of what will be the largest one day move in AAPL shares  following an earnings event since Jan 2008.  But I guess the main point here is if you a really bullish analyst or market commentator on AAPL, you don’t have to look very hard, just turn on the TV, open up your web browser, call your broker, or hell ask your cab driver.  This is a mania, and I won’t play this game, that is not the value proposition here at RiskReversal, no, I won’t make apologies on some wrong way directional trades in the name, or in the above case wrong way % moves, I will just try to be right a lot more often than I am wrong.  Thnx DBM for giving me the opportunity to address this issue.

As for today’s Price Action in the stock, I would expect the stock to settle in and those who were taking profits over the last 2 weeks for reasons ranging from carrier subsidies, to weak domestic carrier iPhone activations, to the simple law of large numbers are likely to come back into the fray. IN my opinion I think it is very likely that the stock finds a home somewhere around $600 this week which would be almost the exact mid point of the 2 week peak to trough range of about $644 to $555.  The stock will need to base a bit before it can make a new all time high, which is most definitely in the offing.

As for today, will be interesting to keep an eye on Europe as it heads into it’s close prior to the FOMC announcement, on a day that Euro banks are bouncing nicely, the Euro Stoxx Bank Index (SX7E) is having one of it’s biggest rallies in weeks. I also want to keep an eye on industrial names like CAT and BA which reported better than expected Q1 earnings, if we see a bit of “sell the news” and AAPL can’t hold above $600, I would expect the broad market to follow.  Personally I don’t see much to do in front of the Fed, but regardless of expectations for Bernanke’s press conference this afternoon I would guess that the markets will definitely move one way or the other.



MorningWord: 4/24/12:  Yesterday’s action in Europe was about as bad as it gets and is very likely to portend a fairly rocky spring for the region, both politically and economically.  On the flip side, our equity markets acted about as well as can be expected, continuing demonstrate impressive  relative strength with the SPX closing down less than 1% on the day and at the high end of the daily range.  Not Bad.

2 Day SPX chart from Bloomberg


As for today, European equities got off to a decent start after Bond auctions in Spain, Italy, and the Netherlands all passed without much fanfare, but have since give back most of the gains as of 8:45am.  Asia was mixed, with Japan lower and Hong Kong higher, with investors eyeing the Bank of Japan’s stimulus decision on Friday amid rumors of a doubling of the asset purchase program to 10 trillion yen (approx. $120 billion).

Speaking of central banks, the language in the Fed’s release will once again be the subject of much scrutiny, though no surprises expected this month.  The reaction will be more important than the actual release.  The has a great preview of tomorrow’s meeting (here).

As for Today, yesterday’s playbook probably still holds, U.S. banks stocks need to continue to show relative strength, and not start trading in lock-step with it’s Euro Cousins, if this starts to happen and we see stocks like BAC meaningfully below $8, or GS approaching $100, you can be sure that the SPX will once again be testing 1300.

Additionally, stocks like AAPL that are the “poster-child” for this year’s rally, need to remain orderly, or  the Nasdaq’s out-performance will be very short lived as the stock makes up a disproportional amount of the index’s gains given it’s 12% weighting.   As AAPL heads into it’s much anticipated fiscal Q2 earnings report tonight after the bell I would expect the stock to continue to be whippy, the stock has already traded in a pre-market range of nearly $18.   This morning it traded as high as $579 and now as of 8:45 it is trading at $561.   AAPL’s swings today, and we will get at least one rally most likely to up on the day, will dominate the Nasdaq trading as it is really the last tech titan to report in this cycle that has market moving implications.

Check back after the open, we will have a preview of the report and later in the day we will update the trade idea of selling a weekly Iron Condor.


MorningWord: 4/23/12: So much for all that enthusiasm early last week regarding Spain’s successful debt auction…..the bottom appears to be falling out with the Spanish 10yr yield briefly trading above 6% for the first time this morning since Nov.  Spain’s largest equity index, the IBEX  is down 20% on the year with all of these losses coming in the last month.

5 yr chart of Spanish IBEX 35 from Bloomberg


That chart is nothing short of frightening as it is within 2% of the 2009 low and apparently in a free-fall.  But that is just Spain’s relatively insignificant equity market, to drill down a bit deeper would be to look at the European banking sector as a whole.

The most recent ECB data from Feb 2012 indicates that the total size of European bank balance sheets is 33 trillion euros.  For comparison, the size of all U.S. bank balance sheets combined is around 16 trillion dollars, 33 trillion euros is approximately 2.5 times larger than all U.S. bank balance sheets
It is our opinion that the the investing community is incredibly complacent in the face of a financial crisis with much more far-reaching implications than the 2007-2008 crisis led by the weakness in the U.S. banking system.  Meanwhile, European bank equity prices (SX7E) approach levels not seen since the 1990’s, the most glaring warning signal flashing bright red.  

[caption id="attachment_10784" align="aligncenter" width="300" caption="Euro Stoxx Bank Index 1986 to present from Bloomberg"][/caption]


Our futures are down about 1% as I write at 9am, vs the DAX down 3%.  Our bank stocks hold the key in my opinion to our day’s trading, if they can hold then we likely hold, but I am still of the opinion that they are sales on rallies, that their Q1 earnings are likely as good as it gets for 2012 and that Europe appears to be on the precipice of a redux of last years credit crisis.  Sorry to sound so somber on a Monday morning, maybe it’s the weather…..As many of you know I am not jumping on the bandwagon here, we are merely just starting to see some of the cracks emerge after a fairly complacent investment period, Operation twists, EFSFs and LTROs were like putting band aids on gaping wounds, kicking the can down the road can only prolong the symptoms, not cure the disease.  I am not exactly going to press the opening, but look to short a rally, I had a lot of short exposure roll off with Friday’s expiration, and I am not going to compound my frustration with making a worse mistake of pressing a 1% down opening.