MorningWord 6/14/12: Crisis Fatigue?

by Dan June 14, 2012 9:15 am • Commentary

MorningWord: 6/14/12: Please Check out Enis’s “Macro Wrap”  which will be a fixture every morning on the site.

As for this morning, things are fairly quiet as of 9:15am, European equities are off of their lows, with the DAX down 55bps.  The real story continues to play out in the debt markets as yields on the Spanish 10 year continue to creep higher, briefly touching 7%. 

Back on this side of the Atlantic, equities remain a volatile space to be……looking at the 10 day chart of the SPX, since making a short term bottom the SPX has been bouncing a round a bit, up 1% one day down 1% the next.

[caption id="attachment_13159" align="aligncenter" width="589" caption="10 day SPX from Bloomberg"][/caption]


I wouldn’t exactly categorize this as BULLISH action, especially when you consider the price action yesterday in prior market leaders like NKE & SBUX. The air is really starting to come out of growth stories and this could be the nail in the coffin for those “De-Couplers” out there.

Yesterday we highlighted the intra-day price action in WFM, and what has become apparent is that investors are shooting first asking questions later.

[caption id="attachment_13160" align="aligncenter" width="589" caption="June13th chart WFM from Bloomberg"][/caption]


Things are getting a bit whippy as we head into tomo’s expiration, and what will be the last hours to hedge or place bets ahead of Sunday’s elections in Greece. Barring any intervention prior to tomorrow’s close, I would expect to see some volatility in tomorrow’s trades, specifically into the Euro close through the U.S. close, so eat a big breakfast, you may not have time to eat lunch!

We will look for any weakness in the next 2 trading days to take shorts off into what is a very uncertain outcome in Greece.

We are not Playing for a crash and frankly we see a slight risk to CRISIS FATIGUE by investors, so much like Monday’s response to the “Spanish bank bailout”, the intended market reaction may not be exactly what we get.


MorningWord: 6/13/12: The U.S. data this morning will amplify the arguments for monetary easing from the Fed at the FOMC next week.  Given that Ben was reluctant to prepare the market for QE3 in his comments last week, we think it’s more likely that the Fed announces a continuation of Operation Twist at next week’s meeting as a placeholder to give themselves more time to prepare the market for QE3 later this summer or fall.

The PPI MoM reading (at -1.0%) was the lowest since 2008, and the retail sales data was the second lowest since 2009.  Each subsequent data set in the U.S. is adding more evidence that the U.S. will not decouple from global weakness.  While the markets await a policy response, what might be most interesting is the price action as the market waits.  With Spanish and Italian bond yields back above 6%, and the way the market reacted to the Spanish bailout, the market’s patience seems to be running quite thin.  Our plan is to catch the next downdraft as the market loses patience, and then wait for the policy response and rinse/repeat.


MorningWord: 6/12/12: This is the chart that is freaking everyone out……and obviously not the intended result of the Spanish leaders requesting aid to shore up their financial system.  The Spanish 10 yr govt bond yield is now approaching last month and last year’s highs.

Spanish 10 yr Govt Bond Yield from Bloomberg


Apparently, market participants the world over are pushing risk assets to the point to which they will start to hear things like, “central planners working on Bazooka response to growing crisis”, or some crap like that……what a Bozo headline for a problem that needs a bunch of case by case fixes rather than the over the top kitchen sink responses we have become accustomed to over the last 5 or so years.

One thing is for certain, policy responses are coming…….and likely to be a bit forced depending upon the results of this weekend’s elections in Greece.  Recent polls show the race tight, and if Syriza is able to foil a new Democracy victory, forcing another vote, U.S. and European central bankers and policy makers are likely to change their tunes at their forthcoming central bank and summit meetings in the coming months…..the markets as usual will dictate this change.  Syriza victory this weekend = Italian sovereign yields  back into the danger zone (prob above 6.5%) and equities the world over re-testing last week’s lows and likely breaking support.  This price action could come prior the weekend as fear a negative outcome could dictate the balance of the week.

I obviously have no clue what the outcome will be, but fairly certain that a third vote, means increased uncertainty and higher volatility.  We remain cautious, our positioning light, but BEARISH.  We would be Bozos not to recognize the fact that when markets push hard enough, the Bazooka’s eventually come out.  They are rarely silver bullets, but they can for the short term cause shorts to scramble.  We are dying to lay out bank shorts again, but frankly we just didn’t get the pop we were looking for over the last week.

ALSO READ ENIS’S chart of the day for some more color on one particular bank stock (here).  I thought this was a particularly good read and one that will likely face some push-back from all of those Jamie Dimon lovers (what a bunch of unoriginal market zombies).

One last thing, a friend forwarded this to me, and as CC said he thinks it is closer to “Astrology” than solid technical analysis, but BofA strategist (not sure which one) noted yesterday that the “SPX is  dangerously close to a technical bearish indicator called the “death cross”. That is when a long term moving average crosses above a short term moving average. At Friday’s close the 100 DMA (1358.00) crossed above the 50 DMA (1356.90). The last time this occurred was 6/30/11. At that time it took several more days before there was a clear divergence between the averages, but then the market proceeded to fall18%”

1 YR SPX "Bearish Cross" pattern from Bloomberg



MorningWord: 6/11/12:  Taking a page from the U.S. Treasury’s 2008/2009 playbook, Europe now enters their own bank bailout program.  Obviously this does not come as a huge surprise as it was rumored late last week, helping equities achieve one of the best weeks of the year, but what it does do is accelerate the focus on Italy which could be a potentially larger problem.  Let’s not forget from our own experience in bank bailouts from 2008, that the request and promise of aid, does not immediately translate into investable equities of bank stocks, or any stocks for that matter.  Let’s not forget the worst part of the market rout during our banking crisis really started in mid October when TARP was introduced, the SPX went down another 30% before bottoming in March of 2009.   

We have often heard the terms “band-aid” and the expression “kicking the can down the road” as it relates to our “bailouts” from 2008, but make no mistake about it, thats exactly what there were relative to the equity of the bailed out banks. Yes most major U.S. banks are infinitely better capitalized that they were 4 or 5 years ago, but they still suffer from short memories of investors who will sell with impunity at the mere mention of the word “contagion”, as evidenced by last year’s European Sovereign debt crisis and this Spring’s reversal of Q1 price performance.

Asian and European equity investors treated the Spanish bank aid plan with a bit of enthusiasm to say the least with with Hang Seng up almost 2.5% and the DAX up almost 2.5% on the open (now only up about 1.65%).  The initial excitement was met with selling, and as of 9:10am, the S&P futures are only up 50bps, well off of the overnight highs.

I will be keeping a close eye on the SX7E (the Euro Stoxx bank index) which should serve as the best proxy for investor sentiment as it relates to the risk appetite for equities.  As of 9:10am the index is well off of the early morning highs, and in my mind almost 3.5% off of the highs of the day, the risk is clearly that we see an outright reversal of the whole move.

[caption id="attachment_12979" align="aligncenter" width="589" caption="Euro Stoxx Bank Index 1 Day chart from Bloomberg"][/caption]

Equity investors should also keep an eye on Spanish debt yields, most would have expected them to be a bit softer on the news, but they have actually ticked up a tad, and are quickly approaching last months highs.

So I am back and fired up to get back to trading, this morning is going to be a tough one, and in a lot of ways it may make sense to sit on your hands a bit and see how U.S. markets trade into the European close at about 11:30am.  I will be looking for any major divergences btwn our markets and that of the overnight strength seen the world over.

Bonus: After seeing this video, some of my friends have said that this might have been one of the clearest views they have seen from the Peak.

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.