MorningWord 6/5/12: Coordinated Action

by Dan June 5, 2012 7:32 am • Commentary

MorningWord: 6/5/12:  So what now you may ask? After Friday’s jobs report put the nail in the coffin for those expecting the U.S. economy to “de-couple” from the woes in Europe, and the apparently slower than expected growth in China, we now fall back into a fairly familiar pattern from the last couple of years. We sit and wait for central bankers and politicians to come together at the last possible second to avert certain financial disaster. There will obviously be fits and starts in equity markets, for the last month more fits though. But at the end of the day, whether it be at 1200 in the SPX, or 1100, we will get some coordinated intervention which will cause a short squeeze.  Sentiment among investors took a very sharp turn a little more than a month ago, and we have become painfully aware what this can mean for a well defined short thesis, equities can get ground down to a point where they become a coiled spring and the snap-back can be fierce.

We are of the mindset that when the snap-back rally comes, it may be a great opportunity to re-short equities, much like last year.  The chart below from Apr 1, 2011 to the end of Oct 2011 shows, in hindsight, the opportunities to catch some fairly spirited moves in the markets.

[caption id="attachment_12755" align="aligncenter" width="344" caption="April 1st 2011 to Oct 31st 2011 SPX from Bloomberg"][/caption]


Last spring saw an 8% decline in the SPX, off of a multi-year high in April (much like this year’s peak to trough 10% sell-off) on fears of Greece’s debt woes causing contagion, only to snap back fiercely in June and early July as it appeared the “troika” had come to a solution.  Well, here we are a year later reliving the nightmare, and the stakes are higher.

There are many potential “tape-bombs” that will catalyze sentiment shifts in the months to come; band-aids for Europe’s sovereign debt crisis, easier lending in China, and a tad more QE here, but as recent history has shown us, they just won’t solved the ills of what has now been 5 years of economic activity that is the direct result of coordinated, and re-coordinated govt and central bank intervention.  This is not sustainable.  Much like late 2007 to early 2009 served as a period of reckoning for our over-indulgence in debt when our own credit bubble burst, Europe may now have its own sacrificial lamb(s).



MorningWord: 6/4/12: It’s been a fairly eventful 16 hours, as Asian equity markets had a little catching up to do with Friday’s weakness in Europe and here in the U.S.   One of the hardest hit indices over night was the Shanghai Comp, down 2.73%, holding on to ytd gains of 4.96% making it one of the best performing equity markets this year.  BUT, when you consider Enis’s Chart of the Day post this morning on the 200 day moving average, the Shanghai Comp dating back to early 2011 tells a slightly different story, and says a lot about what has or hasn’t been discounted into the discussion about the strength of global growth.

[caption id="attachment_12675" align="aligncenter" width="300" caption="Shanghai Comp 1/1/2011 to Today from Bloomberg"][/caption]


What should be obvious to most when  looking at this chart is that the index has made a series of lower highs and lower lows, but most importantly, it has spent the better part f the last 17 months, below its 200 day mva.  Since Jan 1st, 2011 the index is down almost 16.5%, in that same time period, the SPX is up almost 2%.  For those market participants looking for the “reflation of global growth” to bail us out as was the case in 2009, I wouldn’t hold your breath.  Investors in Asia, particularly in Chinese equities have apparently been cautious for some time relative to those of the U.S.

Which leads me to the fact that U.S. equities on a relative basis, and obviously treasuries appear to be the last investment safe havens left the world over.  This makes me a bit nervous, as if last week’s economic data told us anything, it is that our own economy is teetering a bit at the moment.  Without the proper stimulus, or if this isn’t another seasonal adjustment issue, our economy could enter its own double dip and the SPX likely to move ahead of such a scenario, back towards last year’s lows of approx 1100.

The month of May had a little for everyone, an orderly sell off in equities and wild gyrations in currencies and credit markets.  June could be another story all together for equities given the slate of potential market moving events in the coming weeks (Greek elections June 17, FOMC meeting June 20th and EU Summit June 28th) and the potential for coordinated action to combat unstable currency and credit markets.  Last May June things felt a bit similar to the way they do now, and it took a little time for central bankers and Politicians in Europe to figure out the script, but when they finally did in mid June, equities got a huge boost of almost 8% from mid June to early July.  Something is coming, it’s just a matter of how long we can wait, but there are obviously no assurances that additional QE here in the U.S. is the answer, and maybe Europe has run out of road to kick the can down.

We remain fairly cautious and continue to see oversold rallies as great opportunities to lighten equity positioning.  That said, we have covered many of our shorts and will continue to trim whats left on further weakness, and you may just see as add some short term “trading” longs on the next puke. Readers know that we were early to this trade and feel that we have let our profits run a bit, but at this point, we are not willing to risk the premium that we have made to try to capture the last bit of whats left in most of our recent put spreads.

MorningWord: 6/1/12: This morning’s weak U.S. jobs data should be the nail in the coffin for those who think the U.S. economy had the potential to “De-Couple” from the near recessionary environment in Europe, and the slowing of growth in emerging markets.  Before the dismal U.S. jobs report at 8:30am, manufacturing data from China to Europe broadly disappointed for the month of May, causing severe equity weakness.  

As of 9am, the S&P futures are down nearly 2%, outperforming the 3.7% decline in the DAX which is holding on to a little more than 2% gains for the year.  The round-trip action of many major indices like the DAX is obviously troubling from a technical perspective, but the for the first time all year we may start to see a little panic reassert itself back into equities, as the sell off from the recent multi-year highs has been all too orderly.

As many readers know we try to keep it simple, and throughout the run up in Q1 we tried to pick our spots and gain short exposure that corresponded with a generally bearish contrarian thesis predicated on emerging market growth slowing and redux of Europe’s sovereign debt crisis.  I am not doing a victory lap here, as we were clearly early in some instances, tech in Feb/Mar, but spot on with financials and industrials in Apr/May.

Back to be simple, we throw out lots of charts to u guys, and prefer the ones that tend to be a bit obvious but overlooked.  One chart that we have to go back to, that seems a bit pedestrian to some is the VIX overlayed against the SPX.  I first introduced this chart on April 15th.  This is what it looks like of as of yesterday’s close:

[caption id="attachment_12618" align="aligncenter" width="300" caption="1 YR VIX vs SPX from Bloomberg"][/caption]


Our contention was simple back in mid April when the spread was as wide it had been in years, that it wouldn’t take much of our bearish thesis to take hold to get these 2 charts to converge again.  From a risk/reward standpoint we thought the odds were clearly in our favor.   At this point 1250 in the SPX and 30 in the VIX are a foregone conclusion, and now we wait for central bank intervention.

We will continue to take profits on shorts, and look to be opportunistic on the long side with an ever increasing risk budget.  The lower we go, the better the opportunity on the long side will be, but we don’t want to be early.  Over the last couple weeks we have been adamant that any short squeeze bounces were “un-investable” and in our mind a perfect opportunity to re-short.  As always we don’t want to press down openings, but from an intra-day basis I would be very surprised if we didnt make one attempt to rally but close back towards the lows……we will hear cries for QE3, and there will be tape bombs to scare shorts, but they could offer the trading opportunities some of us are looking for without taking the overnight risk.


MorningWord: 5/31/12: May 2012 started off with the increasingly familiar question asked by many market pundits heading into the guts of the second quarter, “Sell in May and go Away?”   For the last 3 years if you had sold the SPX in late April you would have avoided a peak to trough draw-down of ~17% from April to July 2010, almost 20% April to Oct 2011, and now the almost 8% re-tracement from the April multi-year highs.  

While May 2012 has been the the worst month for most stock markets since Sept 2011, much of this weakness seems to be masked by the fact that all major U.S. indices and the DAX are still up on the year, for now.  Like a monkey, when the SPX got off to a strong start out of the gate on Jan3rd, and never looked back, I was fairly insistent on suggesting that if you think we saw the lows of the year, well you better think again.  At this point, I am fairly certain we will likely be down on the year, maybe not the Nasdaq as AAPL will likely keep it afloat, but the financial, industrial, energy and tech-laden SPX will continue to fall on the weight of actual slowing global growth, not the fear of it.

As always we don’t love pressing oversold conditions, and at some point soon we would fully expect sentiment to shift a bit as market participants get focused on the potential for central bank intervention heading up to our FOMC meeting on June 20th, and the EU summit in late June.  Prior to that their will be much attention paid to shifting sentiment in Greece heading into their June 17th elections.

At this point we don’t want to press the short too hard, and look for opportunities in names like MS (read trade here) where the potential payout as a result of the trade structure trumps our better judgement of pressing such an oversold name.

So as we remeber May, while some try to forget, we are going to stick to our bearish guns, but do it tacically, we fully expect to see trade-able rallies, but we are more inclined to short them.


MorningWord: 5/30/12:  I like technicians, I really do, I have some good friends who made great careers gleaning things from squiggly lines that strategists, analysts, pm’s and traders are unable to do through exhaustive hours combing over fundamentals.  In My opinion, Technical Analysis is an input (and a very important one) to a broader investment/trading regime, as a standalone, it can be a very difficult backbone for consistent trading/investment returns.

When I started in this business in 1997 as a clerk at a long/short equity hedge fund, I worked for a young guy whose primary input for entry and exit points of most of his trades was his exhaustive technical analysis, coupled with certain momentum indicators.  In the volatile markets of the late 90s, this guy was one of the best, but it wasn’t until this trader combined a top down macro view, with a bottoms up fundamental view of the companies he was trading to his technical inputs did he really help separate himself from most other active traders in the field at that time, and in doing so achieve very out-sized returns for an extended period.  And no, this trader was not me, but I did learn a lot from him and the environment we were in.

One of the main goals of is to put forth daily discussions of the inputs that we use to express our views in the market, both qualitative and quantitative.  We spend a lot of time looking at charts, but as stated above, we use them as one of many important inputs.  Lots of technicians like to put a minimum of about 5 lines on a chart or it won’t adequately tell the story, we like to dumb it down a bit and use about 2.  The chart below is of the Hang Seng over the last year.   There are 2 lines that tell the whole story.  The Uptrend from the Oct lows had been intact until the massive gap lower in early May on slowing growth concerns in China and specifically some weak earnings data out of some large Chinese companies.  This technical break should have been all you need to see when combined with a macro view focused on slowing global growth and a micro view of overly optimistic earnings expectations.

[caption id="attachment_12524" align="aligncenter" width="300" caption="1 YR Hang Seng from Bloomberg"][/caption]


The red circle shows the obvious danger zone that led to further significant losses for the index, but now it is in another sort of troubling point,  the chart has based below what has served as an important support resistance level.  The chart is broken, and now it is in the technicians hands, the fundamentals have started to affirm the technicals and this could be weakness worth pressing on the short side.  We want to be careful in this endeavor though as any whiff of broad stimulus in China could cause a fairly painful short covering rally.  But this is the exact sort of combination of technical analysis, macro view and fundamentals that we think like to think is in out wheelhouse, even though we have not been in the “China trade”, it has definitely helped inform our trading investment thesis (bearish), and we could not have been of this view with solitary inputs.


MorningWord: 5/29/12: It was a relatively quiet weekend, with the most market moving news coming out of Greece (shocker), as multiple  polls showing the New Democracy party back in front (ahead of Syriza) giving a boost to the Euro and European stocks early yesterday, but they ended up closing flat, and are hovering around flat again today (despite the DAX’s  1.1% gain as of 9:15am).  Having said that, Asia was a bit stronger (up 0.5% to 1.5%), and emerging market currencies and S&P futures are a bit perkier, with futures hovering between up 7 and 10 handles for most of the last 36 hours.

The bailout of Bankia spooked Spanish bond investors, with 10 year yields near their highs of the last year, and European banks trading near their lows of the last 2 weeks.  U.S. markets feel resilient given that price action.

Bonds are relatively flat after closing for a half day on Friday, and focus in the U.S. will be on ISM and Payrolls on Friday.  With earnings season basically over, so next few weeks will be very macro focused, with everyone eyeing the June 17th Greek election date.  

With our positioning light, we will be keeping a close eye on long premium plays as we inch closer to June expiration.  Enis laid out every options traders internal (daily) debate about long premium in his Chart of the Day this morning, and if June 17th elections in Greece increasingly appear to be “bail-out” friendly, then the markets are likely to calm a great deal and we will witness volatility seep out of the market.

With a Holiday shortened week off too a decent start so far I think it makes sense to see how Europe closes, if they can hold their gains, unlike yesterday and look to build on a what appears to be a short term base above the 200 day moving average in both the SPX and the DAX.


MorningWord: 5/25/12: Yesterday’s late day recovery in the SPX, the second in so many days, was once again fueled by rumors that ze Germans were warming to the notion of joint Euro bond sales.  The strength felt nothing like Monday’s surge, and quite different from Wednesday’s late day heroics, as it felt purely futures driven…..many stocks that I was looking at (or short) didn’t rally.  What I also find curious is that the SPX as of yesterday’s close has recovered about 2.25% from Friday’s close, yet bank stocks have barely participated, GS, C and BAC all up about 2% during this period.  This is bad price action, I would have expected out-performance given how badly the stocks have been battered, and this suggests to me that these stocks are very likely to make new lows on the year in the coming weeks.  

A little more than a month ago, we highlighted the simple fact that CDS on bank stocks had been picking up but implied vol was not following suit.  This led us to believe that credit traders were far less complacent than those focused on the equity and helped inform our bearish view on most large cap banks exposed to Europe.  The chart below is of GS implied vol vs its 5 yr CDS, which clearly shows the elevated levels in the credit market vs the recent pick up in implied vol from levels not seen since last spring.

[caption id="attachment_12374" align="aligncenter" width="300" caption="GS 5 yr CDS vs Implied Vol from Bloomberg"][/caption]


We think this is worth keeping an eye on.

July options in banks will be very interesting, and we want to own premium if implied vol comes down dramatically in bank stocks as a result of any calming to the situation in Europe.  We think that the mid July earnings period should see most banks report Q2 prior to expiration, and could signal a whole host of other problems for the banks, primarily a lack of earnings visibility for the balance of the year.