MorningWord 6/8/12: The Word on the Ground

by Dan June 8, 2012 4:50 am • Commentary

MorningWord: 6/8/12:  A couple quick comments before I head out to catch the ferry to do a little field work on a 24 hour fact-finding mission to Macau……yes I know sounds rough, but I ensure you we will have a few trades come out of my exhaustive investigative research.  First things first, I think it is safe to say that China’s surprise rate cut, the first since 2008 will likely be viewed as the start of a process rather than a silver bullett.  People I am speaking to hear in Hong Kong, just as they are the world over, are fairly surprised by the action, and with very little telegraphing, this act will for the near term raise more questions than answers.  

Yesterday’s price action in U.S. equities (opening on the highs, and closing on the lows) was obviously the result of a combination of market participants weighing the cause and effect of China’s easing, and Mr. Bernanke’s reluctance to front run the upcoming FOMC meeting on June 20th with hints of further QE.

So after the Wednesday’s more than 2% surge in Equities worldwide, the markets are back in their confused phase, with cross-currents abound.  With little company specific earnings news expected prior to early/mid July (although as we get closer to the end of Q2, begining of July I fully expect to get a plethora of negative earnings pre-announcements), we have to rely a bit on technicals to help inform our trading.  In the SPX, 1290 will be the level most will be looking at for Support, a break below that would likely signal a re-test of Monday’s low of about 1266.

[caption id="attachment_12898" align="aligncenter" width="589" caption="10 Day SPX chart from Bloomberg"][/caption]


As I write at 4:50am est, European markets are down in sympathy with a weak Asian close (Nikkei down 2% Hnag Seng down almost 1%), the DAX is down 1.3% in early trading and the Euro vs the $ has had a fairly big intra-day move for a currency down almost 1% from the morning highs at 1.246.

Our positioning remains light as we lack a great deal of conviction at the moment…..China and the FOMC have been the focus this week, and both were obviously a bit disappointing, but next week Greece will take center stage as we head into an expiration week that is promising to have its share of volatility as traders position in front of Saturday’s elections in Greece.

I am checking out, will be back in the states on Monday, and look forward to get back to trading, but WATCH ENIS ON OPTIONS ACTION TONIGHT ON CNBC AT 5PM.  Have a great weekend.


MorningWord: 6/7/12:  I am in Hong Kong, and well, you are not, so I am going to make a couple observations from my first 24 hrs in the city about 2 things near and dear to me, dumplings and iPhones.  First things first, I downloaded Instagram before I left (for free obviously), not really sure how FB is ever gonna monetize that $1bil purchase price, but as you can see from the featured image of this post, it lets you mess around with seemingly boring snaps and make them look cool.  Yes cool photo, but I still wouldn’t pay for the service.

This afternoon I went into an AAPL store a block from the harbor in a swanky mall, and I gotta tell you the place was packed (as expected) but probably about half the people in the store (pic below) work for AAPL(blue t-shirts).  This struck me as kind of odd because it isn’t exactly a huge store, and I can’t imagine that with all that staff they had a ton more room for more shoppers.

Apple Store Hong Kong-IFC Mall

One of the things I love most about traveling to far off places is observing how other people in other cultures do the same little daily mundane things that we do on the other side world but differently.  This morning for instance at my hotel, the breakfast items at the buffet included a ton of dims sum (dumplings noodles etc), not unusual for China at all, but not what most Americans would expect.  In the U.S. we have fairly clearly defined what foods we think should be eaten at what meals, few exceptions, but today I was happy to eat beef dumplings for breakfast!

When traveling abroad, I also find fascinating the choices locals make towards consumer products, not just food.  Which leads me back to AAPL, much of their iPhone growth is expected to come in the next few years from emerging markets such as China.  As many of my friends know I have a sort of “Rainman-ish” behavior at home in public places, but it only gets more acute when I am outside my home turf……I routinely make mental notes of passerby’s cell phones and make back of the napkin market share tallies in my head for that specific time period, place and demographic.  Yes weird, and wildly unscientific.

So far my tallies over a short period of time here in HK tell me that most expats (westerners, and there are a lot of them) use iPhones, while most Hongkongese appear to use Samsung or other Asian vendors, while maybe 50% still don’t use smartphones at all.

This doesn’t confirm or refute anything about the AAPL growth story, but what becomes blatantly clear to me, for AAPL to maintain and actually grow market share of an increasing pie, they will need to have multiple price points for iPhones, especially as they move into regions that do not rely on carrier subsidies.  There has been much discussion of this over the last few months, but I believe it will continue to be a tenant of the bear thesis going forward.

The Rally:

As for yesterday’s rally, it was obviously fairly broad and fierce.  Fear of this sort of multi-day snap-back was one of the main reasons that we have been peeling out of shorts for the last week or so, and why our positioning remains fairly light.  Just as the bulls might have thought that it was a bit overdone watching stocks like MS go down 1-2% a day for a month or so, I think it is equally strange that the stock is up 12% in 2 days!  However far we rally in the near-term, it will be a great opportunity to re-short the market, for what in our opinion will be a certain test of 1250 in the SPX and most likely 1200 in the next month or two.  The key here is not to be too early (we usually are)!  We are gonna hear a lot of garbage about QE, twists, bazooka’s, co-ordinated this and that in the coming weeks, thats all fine and good, but just more banda-aids and not any real solutions, but will no doubt add a little fuel to a fairly uncertain fire.

We get snapback rallies like yesterday because everyone, and I mean everyone, needs risk assets to go UP, and when markets get ground down so tightly over and extended period of time, and sentiment gets so bad so quickly, they can pop like a coiled spring.  Now we have to wait and see what sort of dry powder and conviction the Bulls have…….3 consecutive days in the green would certainly be impressive.  We will continue to keep an eye on breadth indicators, because when the new found enthusiasm peters out, we are gonna get right back in there on the short side for our perennial summer smack-down!

[caption id="attachment_12848" align="aligncenter" width="612" caption="Approaching Hong Kong Island on the Star Ferry from Kowloon"][/caption]

MorningWord: 6/6/12:  Dan is halfway across the world in Hong Kong for the next few days, and I hope he comes back with some insight into whether the China slowdown story is real or irrational fear.  In the meantime, I’m filling in for him on the Morning Word, though he should be posting a trade idea or two from his remote location.  

Today’s price action overnight has been quite volatile.  The dollar got smacked during Asia hours, partly from just being overbought with others assigning it to QE3 comments from Fed Governor Evans (though I put less weight on that because he’s always dovish, just like Governor Fisher is always hawkish).  The risk rally was on from there, and at their peak, futures were up 16 points, before the ECB rate decision this morning.

Unchanged rates and a bit of a tepid news conference from ECB head Draghi have moved the Euro back to flat vs. the dollar (though higher beta currencies are still broadly up vs. the dollar) and futures to up 8 points, halving their gains.  The 1300 level is the battleground for today.

In other markets, I have been disappointed by the price action in SLV overnight (trading around 28.70 right now), as my timing was obviously poor on the SLV puts.  I am going to watch precious metals over the next few days to decide whether to adjust the position.

Fed Governor Yellen speaks tonight, and Bernanke speaks tomorrow, so there is still plenty of fodder for central bank speculation over the next couple days.