MorningWord 6/22/12: What We’ve Got Here is Failure to Communicate

by Dan June 22, 2012 8:15 am • Commentary

MorningWord 6/22/12:  Many readers have heard me say this before, and yes some may say it is a bit pedestrian, but the simple fact is, everyone and I mean everyone needs risks assets to go up, and when they don’t, or it feels like they are about to turn south, we get violent and quick sentiment shifts as we did yesterday.

The “sellers” of risk assets have gotten pretty darn good at convincing the investing public that they need to be long them no matter what the economic backdrop.  Heck it’s not just the fund management community, the Feds have spent hundreds of billions of dollars purchasing debt securities over the last few years in an effort to make riskier assets look more attractive to the people.  What a joke, buyer better always beware.  This is also the time where those “sellers” of risk assets wil be all over the tv and in the financial press suggesting to the people not to panic and that this is a great entry point…..remember they are sellers of the securities and funds to you, so you are the one that owns them not them.  They are a bunch of self-serving u know whats.  For instance like this guy, Larry Fink, he has made billions on convicing people that buy and hold is the way to go.  Remeber this headline on Feb 8th:

Fink: Investors Should Be 100% In Equities

“I don’t have a view that the world is going to fall apart, so you need to take on more risk,” he said in an interview with Bloomberg Television in Hong Kong today. “You need to overcome all this noise. When you look at dividend returns on equities versus bond yields, to me it’s a pretty easy decision to be heavily in equities.”

A simple truth is that Larry Fink will never have the view that the world is falling apart, he is not wired that way, that would mean that you shouldn’t buy his equity products.  I would bet he and his sales peeps didn’t get negative on equities to sometime in early 2009. I assume his fear of equities going down and the world falling apart keeps him up at night, but he would never communicate that to the people.

The other funny thing about the predominant need by most, for risk assets to go up, is that when those who have become accustomed to the Feds QE’ing equities higher, and then they don’t get the their way (like Wednesday) they sell risk assets possibly with the intent that the negative price action in the near term will force the Fed’s hand in the intermediate term.  “So we get what we had here……(yesterday).  I don’t like it anymore than you men”  (see video below from one of my all time favorite movies Cool Hand Luke)

Most market participants got it in their heads that the only way for equities to hold onto ytd gains with the increasingly uncertain economic backdop for more QE, that was a fairly dangerous set up, and we are left scratching our heads why exactly there was this breakdown in communication, heck Bernanke telegraphed his lack of intent in front of Congress just 2 weeks ago.

As most readers know, we trimmed a few shorts yesterday, and felt that the rumors of the Moody’s bank downgrades late in the session were more likely to cause a bounce today than an immediate sell off.   We feel good about our positioning (short) but will continue to trim shorts on big down days like yesterday, we are not playing for a crash, but a retest of 1300.  Sorry to disappoint the perma-bears, but the crash doesn’t happen in June, sorry you’ll have to wait for at least August.


MorningWord 6/21/12: With the Fed’s 2 day June meeting done and dusted, we now have to endure 40 days of slicing and dicing of yesterday’s statement and Bernanke’s answers at the his titillating press conference, ’til their next meeting, Aug 1st.  For all of those calling for QE3 at yesterday’s meeting, the Fed obviously didn’t shut the door on it, but to be frank, in an election year, the window is getting narrower and narrower.  The period between the Aug 1 FOMC meeting and their annual Economic Policy Symposium in Jackson Hole in late August will likely be go time for the Fed, especially if employment and manufacturing data continues to worsen in the U.S., coupled with a recesionary environment in Europe and continued slowing of growth in China.  Storm clouds are clearly massing for the global economy, but don’t worry, our fearless Fed “stands ready to act!”

As for our positioning, we have plenty of short exposure in July that we aren’t that worried about at the moment, but I am keeping a close eye on the SPY June weekly 135 Puts that I bought on Tuesday, I will be careful not to let these expire worthless if the market appears to have found its footing. At this point, rather than sell into strength we are going to sit on our hands a bit and look to press weakness…..

Spot VIX at 17 or so screams near term complacency, but we know this can go lower before it goes higher. The lower it goes the stronger the case is for stock replacement or expressing outright directional bets with options, and that will be our task in the weeks to come as we head into earnings season.

We see very few positive inputs for the case to own equities at the moment, we fully recognize that any coordinated central bank action to combat Europe’s debt crisis coupled with continued easing in China could easily cause a rally, but in our opinion it would be one of the best opportunities to short the market since last Spring.





MorningWord 6/20/12:  It’s likely to be a fairly uneventful morning as we head into the 12:30 FOMC rate decision, even though it appears that aside from the extension of Operation Twist, we will just get words……words like: standing, ready, act, expand, balance, sheet, exceptionally, low, rates….ok you get the point.  Markets the world over are pretty calm, European equities are flat to up, while Sovereign debt yields are down.  Our futures are also up a tad, off of the lows of the overnight session, while weakness in U.S. Treasuries signal complacency, not to mention Gold testing 1600 on the downside.

Readers of the site know where we stand as it pertains to today’s Fed meeting and what we feel is an increasingly tenuous situation in Europe that is likely to cause similar volatility in Equity, Credit, Commodity and Currency markets that we saw last year in the coming months.  We don’t believe in silver Bullets or Bazookas, we believe in thoughtful measured responses, and time.  The Quiet Little Voices are hoping for QE, but not hear not now with the SPX at 1357.

A couple things we have been harping on….U.S. corporate earnings, or the weakening pace of them.  Overnight, large Dow component PG cut their eps and revenue forecast for the second time in 2 months siting slowing sales in the U.S. and in Europe.  ADBE‘s downgrade to their outlook for the August qtr last night could also weigh on large cap tech today, as the stock is trading down in the pre0market by about 6%, also citing weak demand in Europe.  ADBE’s commentary flies a bit in the face of much larger software rival ORCL‘s pre-announcement on Monday, but I think after a couple disappointing qtrs, ORCL’s results may be more a function of company specific adjustments, and fiscal year end seasonality, rather than a robust enterprise spending environment.

Earnings will be the next big focus after all of the central bank and global macro “event” mumbo jumbo ends with next week’s EU summit.  But let’s not forget that the last month or so was fraught with earnings disappointments in the consumer space specifically……..TIF, LOW, M, CLX and LULU all gave disappointing outlooks during the month of May, and given the macro uncertainty during this time period, I strongly doubt that the economic environment has improved much, and we should continue to see cautiousness as it relates to outlook as we get into the meat of Q2 earnings in July.

So for now we sit and wait, yesterday afternoon I bought some weekly SPY 135 Puts as a way to put my money where my mouth is on my belief that we will not get new QE (again I have no idea what the Fed will do, but with the SPX up 8% ytd in an election year, the idea of full on QE seems a bit pre-mature on a lot of levels).  This will be a fairly binary trade, I am risking what I am willing to lose, basically gambling, yes there I said it.  Kind of like putting a little $ on the Superbowl to make it “fun”, regardless of the outcome.


“Quiet Little Voices”  We Were Promised Jetpacks


MorningWord 6/19/12: Relative calm has descended on global markets for what feels like the first time in weeks.  Spot VIX settled meaningfully below 20 for the first time in a month, which is just taking the air out of the June contract that expires on tomorrow’s open.  When you look at the VIX futures curve it tells a fairly different story than spot VIX below 19, the term structure is fairly steep, with the summer contracts reflecting a bit more easiness as opposed to the mid 20s readings in the Fall that signals investors fear a resumption of volatility.

VIX futures curve from Bloomberg

Tomo’s FOMC statement will dictate the course of the markets for the balance of the week, and we are likely to rally into the meeting or consolidate gains as we did yesterday, obviously barring any negative news out of Greece, like their failure to form a coalition government, all should be clear until the Fed disappoints hopeful equity investors.

I guess the big news today is that the Gracious leaders of the G-20 (well most, excluding the U.S. & Canada) have agreed to pony up more funds for the IMF’s bailout fund.  This is comical to me because it’s all funny money, countries that don’t need the aid now give and then they get back when they need the aid, but the headlines in the meantime are reassuring to investors.

Corporate earnings are starting to take center stage and will likely be the focus after the FOMC, G-20 and EU Summit.  Last night ORCL pre-announced better than expected earnings with guidance for the Aug qtr that was basically in line with expectations.  The stock is up 5% in the pre-market, but this is a stock that has severely lagged many of it’s large cap peers over the last 6 months…..The stock is cheap by all accounts, and their addition of $10billion to their buyback should buoy shares, but I want to be a seller of overzealous strength in the name today, if the stock gets to the $29 level today.

FDX reported this morning fiscal Q4 earnings that beat expectations, but guided eps down meaningfully for the coming quarter citing weak air freigh traffic from Asian to North America and Europe. Stock is only down 2% in the pre-market, but this is one that I think could be a good short on a resumption in broad market weakness or if for any reason the stock reversed this morning to the upside.

Make no mistake about it, equities act fairly well at the moment and the price action clearly resembles a “glass half full” mentality.  1350 should serve as fairly decent resistance for the time being, but as highlighted in the 1 yr chart of the SPX, I expect that we spend more time in the shaded area btwn 1350 and 1250 than above.

[caption id="attachment_13338" align="aligncenter" width="515" caption="1 yr SPX from Bloomberg"][/caption]


So for now, I sit on my hands and wait for Mr. Bernanke, and what I expect to be a near term grounding of his helicopter for scheduled maintenance.


MorningWord 6/18/12: The build up into this past weekend’s election in Greece got me thinking yesterday about a Kink’s classic, This  Time Tomorrow:

This time tomorrow where will we be?
On a spaceship somewhere sailing across an empty sea
This time tomorrow what will we know?
Well we still be here watching an in-flight movie show
I’ll leave the sun behind me and watch the clouds as they sadly pass me by
Seven miles below me I can see the world and it ain’t so big at all

Yesterday afternoon, as I contemplated the narrow victory for New Democracy, I had a hard time looking beyond what was to be a certain opening pop in overnight futures and figuring out how after the late week surge, equities would build even more momentum on what will at the very least be classified as an uncertain outcome for the future of Greece.  

As of 9:10am, the S&P futures are down about 1.25% from the opening tick and practically trading at the lows of the session.  Asian indiceis were the primary beneficiaries of the news with the Nikkei closing up 1.77% and the Hang Seng up 1% (possibly playing catch up to our strength on Friday).

European markets have been on a bit of a roller coaster ride as the DAX is now flat on the day reversing all early gains, the Euro reversed lower off of levels not seen since May 22nd, and yields on the Spanish 10 year are blowing out to new all time highs, well above 7%.

In his MacroWrap this morning, Enis very succinctly laid out what he deems to be some warning signs for global markets, that have very little to do with yesterday’s elections in Greece.  We see storm clouds massing overhead, and we want to try to separate the forest from the trees a bit as we head into the end of the second quarter and when U.S. corporate earnings should start to take focus.  But first we will have to get through a couple of days of speculation as to what sort of stimulus the U.S. Fed is likely to drop on us at their meeting Wednesday.  Anything short of an extension of Twist will disappoint equities in our opinion, and frankly after Bernanke’s speech to congress a couple weeks back it doesn’t seem that likely with the SPX around 1340, up nearly 7% on the year.

So to answer the poignant  questions This Time Tomorrow, where will we be, and what will we know?  Unfortunately the answer is hard to swallow, but much less than bulls had hoped for yesterday.

darjeeling limited – kinks “This Time Tomorrow”