MorningWord: 5/2/12

by Dan May 2, 2012 8:25 am • Commentary

MorningWord: 5/2/12:  As earnings have taken a back seat to economic data and Fed Speak in the last week, it appears that we are likely to be in a slightly less predictable trading environment for the weeks to come.  Yesterday’s rally in the SPX of 57bps was seemingly ok with decent breadth (the Bloomberg composite New High Index had one of it’s highest readings in almost a month), but the index closed down 65 bps from the mid-day highs.  As we noted yesterday, small caps dramatically under-performed their larger brethren,  with the IWM closing basically unchanged on the day down 1.73% from the morning’s highs.

All in all there was fairly broad strength in most sectors, with banks, retail and energy leading the way.  It is interesting to note that AAPL‘s opening tick the day after earnings was in fact the high and now the stock has re-traced almost 2/3rds of the explosive 1 day earnings move.  The fever appears to have broken in AAPL and a re-test of the pre-earnings lows of about $555 seems like it is in the cards, and at that point your guess is as good as mine.

Stocks like CAT continue to disturb me a bit, at least from the standpoint of what it says about global growth.  The stock sits just about 2% from a very key support level and I find it hard to believe that more market participants don’t view the price action in the name as more troubling.

While our ISM yesterday was better than expected, one of the first pieces of important economic data to surprise on the upside in weeks, it clearly caught many off sides thus causing a bit of a catch up rally, that frankly couldn’t stick.   As I write at 9am, the S&P futures are down about 50 bps reversing yesterday’s entire move on a slew of disappointing economic data out of the Euro zone.  Spanish equities are getting drilled this morning down about 3.3% on disappointing manufacturing data and higher than expected jobless rates across the entire region.   The Euro is down about 80bps reversing much of the last week’s gains in one fell swoop.  Listen people, this thing is coming undone, and soon, it just can’t keep limping along this way, last fall we saw band aids put on gaping wounds, and as many suspected Euro-Zone politicians and central bankers just kicked the can down the road.  With elections in the coming weeks, Euro-Zone stability will take center stage.  I continue to believe that the likelihood of our economy and markets being able to “de-couple” from a recession in Europe and/or political upheaval is not great, while many of our multi-nationals rely a great deal on exports to the region as a large portion of their sales.

I stick with my contention that one of the best ways to play a weakening Europe is short U.S. banks, and I will start to lay-out tactical shorts in names like KO, AXP, MSFT and INTC to name a few that could see hiccups to earnings visibility as we get deeper into Q2.


MorningWord: 5/1/12: If yesterday’s action lulled you to sleep, be prepared to keep snoozing this morning.  Overnight most Asian markets were closed for Holidays, except the Nikkei which was down 1.78% after a few high profile earnings disappointments.  Data out of China overnight should keep the answer to the question of hard or soft landing as “clear as mud” as the Purchasing Managers Index came in at it’s 5th straight month of expansion and the highest reading in a year but still at less than stellar levels that should inspire much confidence.  The Shanghai Comp was closed overnight so we will have to wait to see the reaction from most Asian equity markets.

Sticking with the China growth “clear as mud’ theme,  the Reserve Bank of Australia cut rates by 0.5% vs. the expected 0.25% cut, to 3.75%, sending the Aussie dollar down by almost 1%.  This cut can be viewed as another sign that Chinese growth continues to slow, particularly affecting commodities demand (and hence Australian growth), but it can also be viewed in the context of central banks worldwide continuing to aggressively provide liquidity at the slightest sign of growth concerns.  Interestingly, the Aussie stock market could not sustain a rally on the news, and remains a global laggard over the past 2 months.

On to Europe, equity markets are closed for May Day Holiday, but the Euro is trading at 3 week highs vs the dollar on what can only be described as a “no news is good news” sort of positioning.

Unfortunately the highlight of the day may be the Occupy Wall Street is gearing up for a day of fun here in the U.S. and particularly NYC where they are hoping to disrupt normal day to day activities of some of us hardworking, tax paying citizens…..Funny thing is these guys are still coming at all the “fat cats” here in the financial biz, and the irony is most in this biz have felt like crap about their career prospects and many just this morning are just waiting to hear their number called.

In my humble opinion, OWS has it wrong they are sitting out in front of the New York Stock exchange, which is a basically irrelevant institution, when they should be changing their sites a bit to our friends in Silicon Valley, particularly to those at 1 Infinite Loop who are hell bent on denying  federal and local government their fair share of their enormous profits by paying less than 10% in taxes a year.  As many of you have read in the last couple days, AAPL is engaged in tax schemes, like most other large corporations to be fair, with the sole intent of avoiding paying  taxes through silly tax code loopholes.  Whats most interesting is that the state of California which by all accounts has been a welcoming and accommodating home to hundreds (if not thousands) of technology companies over the last few decades, is basically now bankrupt and companies like AAPL are spending millions a year, to uncover every little trick in the book in an effort to avoid paying billions on technicalities.  Without getting political it doesn’t seem right no matter which party you identify with, I buy lots of AAPL products with post income tax dollars, then pay NYS sales tax of close to 9% and these greedy u know whats pay less than 10% .  Ok there is my little rant for the day, again not political, just cynical.


MorningWord: 4/30/12:  Not a ton going on overnight aside from the strong showing by the Hang Seng  up 1.7%, this close which matches the highest levels since mid March can largely be attributed to strong earnings in the banking and commodity sectors, sigh.  As I write at 9am, Europe is generally in the red with Spain down about 1% with the DAX only down 17bps, but down about 80 bps from the morning highs.

With the bulk of S&P earnings occurring in April, the SPX is only down about 36bps on a month that saw some fairly divergent guidance going forward.  We came into the month after a near historic Q1 from a performance perspective with relatively high expectations for corporate earnings…..the bulk of U.S. large caps delivered on a solid Q1, which by all accounts with the SPX up 12.5% coming into the month was a necessity to keep thing going.  Guidance was a slightly different story, and I think fair to say that the jury is still out on whether or not the coast is clear as we head into what could be setting up as an uncertain summer.

May will start off with the usual May Day crap that appears to be the 2012 reboot for the “Occupy” crowd, ugh.  While many were hoping these guys got bored and froze their butts off in city parks over the long winter, it seems like anarchists have some staying power.  I don’t have a strong view on the merits of their “cause”, I just feel that it has never really been properly and succinctly articulated.  So for now it just seems like a lot of smelly disgruntled peeps trying to aggravate my daily commute.

Most interesting move of the day is MSFT’s $300 million investment in BKS and what will be a new subsidiary around the NOOK e-reader product.  While AMZN is down about a buck on the news, the more notable move is BKS’s pre-market surge of almost 100%.  Shorts have been swarming around the name for months now with Bloomberg suggesting that almost 50% of the float was short.  This is Exhibit A why most of the time, even when options are expensive, as it has been in BKS for months, that the best way to make a speculative contrarian bet is through options structures that offer defined risk.

Lot of economic data this week from Manufacturing to Jobs at the end of the week, with earnings reports waning, the general health of our recovery, both here and in emerging markets like China, and the situation in Europe are likely to dominate headlines for the weeks to come.  With the SPX back in striking distance of the 52 week highs, and the VIX back at 16 we could be setting up for the perfect pre-summer opportunity to get long premium to express views, either for stock replacement, or out-right directional bets.


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.