MorningWord: 5/11/12

by Dan May 11, 2012 9:20 am • Commentary

MorningWord: 5/11/12: Another day, another disaster…….Yesterday’s swoon in CSCO, down 10.5% on a disappointing outlook might not have had the sort of impact on technology stocks as a whole that some might have expected (INTC, AAPL, IBM & MSFT all up small of down small), but the affects were felt in the relative high valuation tech names like CRM, FFIV, NTAP, VMW/EMC, RHT.  make no mistake about it though, CSCO was a drag on the broad market as we did the opposite yesterday of what we had done in the prior 3, we opened higher and spent the rest of the day going lower.

CSCO’s CEO John Chambers on every conf call refers to the “factors that they can control” which sets up nicely as we turn our attention on today’s disaster which was JPM‘s acknowledgement of a large trading loss that CEO Jamie Dimon described on a conference call with investors as `EGREGIOUS’ MISTAKES, ‘SELF INFLICTED’, so not only did they violate the “Dimon Rule” but it appears they Violated the “Chambers Rule” too.

Enis has done some great analysis on this situation so please read here and here, it is our house view that this will not be a “one off ” situation,  until there is more clarity on the size and the exit of these positions with a defined PnL, we think that investors will leave the stock in the penalty box, as the whole notion of “best of breed” has been turned upside down for the time being.  It will take many quarters for JPM’s management to earn back investors trusts.  It is not our view that investors need to try to catch a falling knife here, wait for the stock to settle in some where, probably in the mid 30s and then depending upon your time horizon maybe you start to nibble at it.  But we are also not buyers of the banks near term as many readers know we have been very negative on the banks and in fact after the “London Whale” story came to light in early April we put on a Put Calendar into their Q1 Earnings report.

Earlier in the week we trimmed short structures in MS and C for nice gains and will closely monitor the price action today and possibly look to take them off….I am more focused on the MS May 16/14/12 Put Fly as it expires next Friday, as we have a bit more time with the July 32/27 Put Spread in Citi.

As for today as usual be careful pressing a down open, but this could definitely be a day to get short the first rally.  If the XLF sees some relative strength as WFC and BRK/B make up ~17.5% of the index, possibly offsetting a bit of JPM’s weakness at about 8.6% of the index, then I think you can short it through out of the money Put Spreads in July.



MorningWord: 5/10/12:  Well the one thing I nailed in yesterday’s “Word” was the Groundhog day thingy, the Titanic thing, not so much.  But going back in looking at my first take on how I thought things would play out yesterday and why I thought there was a definite potential to have a different outcome is fairly important for some of you (including us) who are looking to get things right, not only on an intermediate to long term basis, but also some days on an hour by hour basis.   The biggest take-away should have been, and as we tried to make the point through out the day with Enis’s fancy charts and relative strength observations on QuickHits and the Twitter, that we are getting to a near-term over sold condition and whether or not you think we break 1345 in a meaningful way in the coming weeks (as I do), there will be rallies, SO DON’T PRESS DOWN 1% OPENINGS. Additionally if you have noticed over the last few days we have taken some profits on a postion of our short biased positions like C, MS & MCD, by taking our “cost” of the initial position off of the table, and leaving half of the position on, thus greatly increasing our odds of success.  That is an enviable position to be in, and we think given the likelihood of increased “tape-bomb” activity, both positive and negative, that it makes a ton of sense to be nimble not dig in there, and take profits when you have them, on positions with shorter time horizons.

As for the news overnight, while the markets have been fairly pre-occupied with the global macro picture over the last few weeks since the end of the meat of earnings season, last night’s commentary from CSCO on their fiscal Q3 earnings call was a bit sobering for those who have been shrugging off the notion that U.S. multi-nationals will somehow be immune to a slowing economy in Europe.  CSCO CEO John Chambers might have given an overly downbeat assessment of enterprise spending and how once again the uncertainty in Europe is affecting cap ex decisions by corporations, or maybe he is spot in line and things are about to get much worse as they did last year at this time.  Who the heck knows, but if fund managers aren’t looking very closely at large U.S. technology multi-nationals that have similar geographic and customer concentrations to CSCO this morning than I would be very surprised.  I would first start with those companies like INTC and IBM that clearly showed  some signs of potential weakness in certain verticals and then broaden out to names like MSFT that are relying on significant product cycles that are very dependent on corporate upgrades in the coming months to keep the ship moving forward.

As for CSCO, I am not sure I would press the stock on the short side below $17.50, but if the stock rallied to $18 I would look to Buy some July 17 puts, or possibly the 17/15 Put Spread as I think Q2 reporting season could be a rocky one, and while CSCO’s Q4 report will not come until Aug expiration, the July options may be cheap on a relative basis to Aug and you may get some bang for your buck as the stock will clearly be influenced by potential Q2 pre-announcements and or early disappointments in tech that could fall in July expiration.

From ENIS:  Based on the oversold signal I mentioned yesterday, we are due for a bounce.  In fact, if the Euro ended down vs. the dollar today, it would be the first time the Euro has been down 9 straight days in its history, according to HSBC.  So the green opening is not surprising, and Dan, CC and I discussed initiating some long ideas yesterday throughout the day, but what kept us from pulling the trigger was the lack of strength on the up-move.  XLU continues to outperform, even when the indices briefly touched green yesterday, and broader risk indicators like emerging market currencies remained weak on that rally.  So we sit tight for now.

MorningWord: 5/9/12:  This week is kind of shaping up like a bad version of that brilliant Bill Murray movie Groundhog Day.  While that movie had a happy ending, this one may be shaping up like the final scene in the less than brilliant movie Titanic.   Open lower, rally, open lower, rally….well today we are opening lower, but I am not sure you want to hold your breath waiting for that rally, I have a sneaking suspicion that today is a bit more like Friday where the open lower and close lower, near the lows is the set up.  Lots of market participants think that the last couple days afternoon moves off of the lows were a sign of sellers exhaustion, I would contend that those who tried to pick a bottom maybe quickly reversing course if we get a close below 1350 in the SPX as the next bit of support isn’t till 1340, and after that could be a straight shot to 1300.

[caption id="attachment_11542" align="aligncenter" width="300" caption="2 Yr Chart of SPX from Bloomberg"][/caption]


Yesterday’s price action in names like SBUX, CMG, CRM, PCLN and RL to name a few was less than bullish to state the obvious and if those names give up things could be about to get very ugly.  Oh and I spent a full hour on Fast Money last night and the Word Apple wasn’t mentioned once, must be the first time in weeks or maybe even months.

As usual, and this is where I start to sound like a broken record, but I don’t want to press the market here and in some situations where I am outright LONG Puts I want to look to lock in gains by legging into Put Spreads by selling a lower strike put.  This is a great time to do this, as the puts I am long are benefiting from elevated implied volatility, and then I am selling an option that will be pumped on a vol basis. I will look to Spread MCD and GPS today on any significant weakness and I am keeping a close eye on the May FXE 129/125/121 Put Fly as my long strike is finally in the money.

On the Flip Side, check out Enis’s chart of the Day:   He makes a pretty good case why the breadth indicator he is looking at could be signaling a near term bottom.  Key word there, could.

I guess the key point though is that there has been a high level of complacency in the markets for months, and I have no clue how big of a deal the political fall out in Europe will be, but I am fairly certain that we are in for a much more uncertain near term future.  And in situations like this you don’t want to be pressing oversold conditions or buying stocks or the markets at highs.

So, as always, don’t press down openings, look to take some profits on a portion of your shorts and live to fight another day with your longs……


MorningWord: 5/8/12:  Yesteday’s price action in European equities, was nothing short of impressive when you consider the political events in the region in the previous 48 hours.  The headlines overnight Sunday were already written the previous week, and the region’s early equity market weakness late last week into Monday morning was a clear example of “sell the rumor, buy the news”.  The gazillion dollar question at this point is, “how long do we hold em?”

Our equity markets essentially closed flat on the day, which was nothing short of a minor victory when you consider the SPX faced it’s potentially fourth consecutive lower close.  There were clear pockets of strength yesterday, but our banks ability to quickly reverse course after a down opening and hold the gains for the better part of the trading day set the stage for for a stable session.   As many readers know I am very focused on the banks and their ability to hold onto year to date gains while most are at least 10% off of their April highs.

We may get a clear test of investors faith in the sectors de-leveraging and new found “financial health” in the reaction to what is likely the most advertised ratings downgrade by Moody’s of the likes of MS in the coming weeks.  The bank has gotten out in front of this issue and management has stated in sec filings and interviews with the press that they are prepared to post additional collateral and and has sufficient liquidity reserves to face a 2 or 3 notch downgrade.  I want to be a continued seller of banks on rallies as we get nearer the summer months.

As for today, the question on most traders mind should be whether or not we get a repeat performance from yesterday?  Just as I suggested in this space yesterday morning that I don’t think it is prudent to short a down opening after the weakness we have had over the last few days, I would probably stick to that playbook for this next couple hours……If our markets try to hold this morning then I think you have to let them breath a little, there is a decent amount of support in the 1365-1370 range.  That said, if the Euro meaningfully breaks 1.30 vs the $ and Euro equities close weak, I would be inclined to press the short a bit and see if we can get a test of 1350 in the next day or so.

I will add one more thing, the price action in stocks like CAT should continue to spook investors.  While the stock is still up a little more than 7% ytd, it is down about 16% from it’s February high.  I am focused on  CAT because it checks a lot of boxes for investment themes popular with investors since the Oct bottom: reflation of global growth, leveraged to U.S. recovery, healthy dividend payer, to name a few……but the stock sits at lows not since mid Jan and is sitting right on it’s 200 day moving average.  Former market leaders like CAT are gonna have to firm up in my opinion or we could see a bit of swoon from some other multi-nationals like KO, MMM, MCD and UTX as investors lose faith in the pace of the recovery.

[caption id="attachment_11432" align="aligncenter" width="300" caption="1 yr CAT chart from Bloomberg"][/caption]


From ENIS:  While the headlines are focused on European elections, European bailouts, and European politics, I prefer to watch price action.  Price action is more valuable than headline news stories, “expert” opinions, or current events, as it lets the money do the talking.  The strength of U.S. markets has been impressive over the past year, particularly relative to Europe (SPX has outperformed Euro Stoxx by 10% YTD), and just a glance at the headlines would offer myriad reasons why that’s the case.  But price action is starting to offer signs that the U.S. might be on the cusp of underperformance, despite stories of renewed American dominance.  The seeds of this trend have certainly not yet bloomed, but I point it out because my feeling is that most institutional investors are hiding in American stocks as a means of avoiding the European crisis.  Whereas 3 months ago, the U.S. markets seemed to rally right after the European market close, in the last week it’s been more likely to sell off.  It’s another cause for concern as the market toys with support levels established in the last 2 months.


BONUS: for those of you who missed the NY Rangers stunning game 5 playoff win over Washington last night, here is a clip I took from my iPhone of the tying goal with 6.6 seconds in regulation.



MorningWord: 5/7/12:  If  you missed last night’s post introducing Enis Taner, our first major editorial addition since launching the site in Q2 2011, please take a minute to get familiar with his background, as you will be seeing his contribution to early and often.  For the time being Enis will be contributing some thoughts on fixtures like the “MorningWord” while also developing his own regular content in addition to contributing trade ideas and strategies.  Now to the markets:


With the French and Greek elections dominating the headlines, it can be difficult to parse what matters on the morning after overnight futures and markets overseas made big moves.  Intrade had the chances that Hollande would win the presidency last week  at 90%, so the market’s reaction was more likely based on the two pro-EU program parties in Greece losing in dramatic fashion, potentially sending the bailout program back to the drawing board.  The two parties combined won 149 of 300 seats, 2 seats short of a majority, though it would have been flimsy regardless.  Asia traded quite poorly throughout their session, with the Nikkei falling to its 200-day ma, down more than 2.5%.

However, the positive developments this morning in Europe take a little bit of the overnight sting out of the news, and it’s important to remember that the market was down the last 3 days of last week, likely anticipating some of these negative developments already.  European banks (SX7E index) rallied from near the March ’09 lows back to flat, and the Euro regained the 1.30 level.  The levels to watch for support in SPX are the Apr intraday low of 1357, and the March intraday low of 1340.


The dreaded financial “Twittersphere” lit up like a Christmas tree last night upon our futures diving more than 1% in sympathy with European equity futures and the Euro breaking 1.30 vs the $ for the first time in a meaningful way since January.  The echo-chamber that is RiskReversal’s Twitter page was particularly dire as it relates to the potential for a EuroZone break up and talks of the abandonment of the common currency…….come on that is so 2011.

We are not economists and we don’t have a line into politicians or central bankers, so we are not going to have a ton to add on that front, but as experienced market participants I think it is fair to say that pressing last night’s futures on the short side, or puking out of longs after an almost 4.5% (including the lows of the overnight session) decline from Tuesday’s highs, might have been a bit panicky.

While many readers of this site know we have a generally unwavering commitment to the “Short-Side” of most trades, we do our best not to press tightly wound situations and usually wait for bounces to “lay them out”.  This morning’s set up with Euro equities making up a good part of today’s losses (the French CAC is actually up on the day, more than 2% off of it’s lows) could be just that opportunity to “short on a rally”.  We have some shorts on that should benefit from the increased uncertainty in Europe, specifically a May put fly in FXE, a May put Fly in MS and July put spread in Citi.  We are going to keep a close eye on the May’s and will look to take some profits on half a position on anything that looks remotely like a “double” and let the other half ride.   Additionally I don’t want to be too quick to try to short the market after last week’s late weakness as we could see a little “sell the rumor, buy the news” set up, and the last thing you want to do is get caught short in a nonsensical squeeze.

So we sit on our hands and wait to see how Euro stocks trade into their close and how our banks react to what could be increasingly murky situation in Europe as it relates to a potential flare up of their sovereign debt crisis based on the notion that new leaders in France and Greece will look to undo some of the austerity commitments that helped to secure aid for nations and banks in the region.