MorningWord 7/02/12: July, She Will Fly?

by Dan July 2, 2012 9:17 am • Commentary

MorningWord 7/02/12:  As many of you know, Traders are creatures of habit and often times drawn to make decisions that are influenced by history, with the calendar providing some framework.  As a kid I was a big fan of Simon and Garfunkel, and one of my favorite movies growing up was The Graduate starring Dustin Hoffman, whose soundtrack featured many now S&G classics.  The following lyrics (the only lyrics in the short song), are from S&G’s, April Come She Will, which feels like it was written for star crossed lovers and traders alike:

April come she will
When streams are ripe and swelled with rain;
May, she will stay,
Resting in my arms again

June, she´ll change her tune,
In restless walks she´ll prowl the night;
July, she will fly
And give no warning to her flight.

August, die she must,
The autumn winds blow chilly and cold;
September I´ll remember.
A love once new has now grown old.

What I love most about this song is how concise it is, and it’s focus on just the months that make up the 2nd and 3rd qtr of the calendar year.  As a trader April thru the end of Sept have often times been the toughest to make money and in my career and have been fraught with many pitfalls.  For instance my track record while at hedge funds was often times marked by great starts out of the gates in Q1, when incentives to take risk are very high, as time is on your side, and often times equities are buoyed by seasonality that assists the “Long” trade.  Much of the years gains happen in this period for many hedge funders.  Q4, Oct thru the end of Dec are often reflective of defensive positioning to maintain gains, and not “blow it” so you can get PAID!

Which leads me to April Come She Will, the song’s lyrics come to my head in the start of each month featured in the song (oddly only months in Q2 and Q3).  As hinted to above, traders can be sentimental and superstitious, so when I start a month thinking about a classic lyric like, “July, she will fly,  And give no warning to her flight”, I think about where my market call is and whether I am thinking about things properly?  Sometimes I even peak ahead a little to the next month for a little preview of what I should be thinking about, in this case, “August, die she must, The autumn winds blow chilly and cold”…….this is more my speed, as many of August’s have been rocky months for the markets during my career and I much prefer that the market “Dies” than “Flies”…….but you get the point.

Don’t be shy to get inspiration from sources other than the WSJ, FT, BI, GS, MS, BAC etc, and even for that matter.  Trading is like many other challenges in our lives, we are not robots, we are sensitive thoughtful beings, so lets trade that way.  Ok enough with the Tony Robbins crap, lets make some money in Q3.



MorningWord 6/29/12: Well it certainly wasn’t a Bazooka, but with expectations not particularly high heading into the EU summit, it didn’t take much to get risk assets moving higher.  This was clearly not what we had been playing for of late, but as I said yesterday in this space, in volatile markets like this, you have to have a trading book/portfolio that can’t get blown up by one headline or one short term move in the markets.

We have had a short bias of late, but we have said it on many occasions, we are not playing for a crash, not here, not now, we fully expect a test of 1250 at some point this summer, but right now we are fully aware of the pressure on the “powers that be” that signs of inaction will spell greater market volatility (downward).  


So while it appears the investment world is focused on the macro, I will continue (aside from an FXE or SLV play here and there) to identify single stock stories where I see a disconnect btwn perception and what we deem to be the reality of massing storm clouds for U.S. multinationals as we head deeper into what appears to be a recessionary 2nd half of 2012.

For example in just the last 24 hours, we have had some massive moves in some single name stories that we have short exposure to….AZO, Enis closed long Puts that became profitable after a competitor guided down, the stock is down 8% in a week.  RIMM was another one, where we were by no means bullish on the fundamental story but we took a shot on some weekly calls heading into their earnings event last night, these will be worthless today with the stock down 13% in the pre-market, but this was an outcome that we were fully aware of the potential for, but like the defined risk, low premium way to play for an unexpected out-sized move higher.  And the last one, which very much fits into our theme of a challenged environment for U.S. multinationals, NKE, we are long July Put Spreads, and with the company’s earnings disappointment last night, this spread will likely be worth close to the full width of the spread with the stock down 9.5%.

This theme is where we are going to make our money over the next month or so, separating the forest from the trees.  I am fully aware of my limitations as macro strategist, and recognize the challenges of fighting the “powers that be”, so we will continue to drill down on single stock stories which is what we think we do best.


MorningWord 6/28/12: Today in Brussels leaders of the EU nations will meet for a 2 day summit to discuss measures to stem what is now becoming an annual summer ritual in the region, a good ol fashioned debt crisis!  Expectations have been rising that there will be some form of solution announced this week, as the SPX as of yesterday’s close was up about 1.7% from Monday’s lows.  If recent history has shown us anything this month, anticipatory rallies fueled by hope are not sustainable.  We just have to go back and look at the equity market’s reaction to the news of the Spanish bank bailout early in the month, the Greek elections mid month, and the FOMC meeting on June 20th.  None of the rallies stuck.

Which leads me to the whole Tape Bomb thingy.  What is a Tape Bomb you may ask?  It is trading lingo for headlines that could come out at any moment and blow up your positioning in the market.  Look no further than this morning’s price action in the S&P futures and all of the headlines coming out of the EU summit with the media miss-quoting or finance leaders having their comments lost in translation…..German will consider shared debt, than they won’t, then they will under certain conditions, but then those conditions would never be agreed on by member states… get my point.

S&P mini contract ontra-day June 28th, 2012 from Bloomberg


I guess the point is, we are going to be under seige buy rumor, innuendo, misquoting and good old fashioned poker playing tactics by the EU’s political and finance ministers over the next 30 hours, so your portfolio better be “Bomb” proof.  What does that really mean, well merely that if you have a trading book that can get blown up by one solitary headline, than you probably are not positioned properly.  It is one thing to have a strong bias (which we at usually do, SHORT), but it is another thing to have a book where most components are extremely correlated.  So beware of Tape Bombs, they are coming, but maybe take a closer look at your trading book to make sure a direct hit won’t knock you out of the game!


MorningWord 6/27/12: Equity markets over the last 2 months or so have just started again to feel the stresses that have existed in the credit and currency markets that had never really abated since last summer/fall.  But not all equity markets show the same stresses, as u can see from the chart below the massive divergence btwn the Shanghai Comp and the SPX.  Shanghai is only about 4% off of the 52 week lows made back in Jan, and down about 11% from the 2012 highs, while the SPX is up ~20% from the 52 week lows made in Oct, and down about 7% from the 52week highs.

Shanghai Comp vs SPX 1 yr chart from Bloomberg

What I find most interesting about this divergence is that many economists as calling for growth in the U.S. of sub 2% for the balance of the year, while China is still expected to grown near 8%.  China is easing, and we are not.

The 5 year chart of the Shanghai Comp shows an ever so slightly falling wedge pattern that could signal a reversal higher in the months to come……

[caption id="attachment_13714" align="aligncenter" width="589" caption="5 Yr Shanghai Comp chart from Bloomberg"][/caption]


I am certainly not a master technician, but when I look at the pattern forming, whether it is a falling or rising wedge, it is a pattern that is going to break one way or the other, and fairly soon.  The tension is building, and as my friend Carter Worth from Oppenheimer, who is a master technician says, “something has to give, and the debate will be resolved soon!”

The trade that sticks out to me after looking at this relationship is keeping a close eye on FXI vol as it becomes cheap to realized……

[caption id="attachment_13718" align="aligncenter" width="589" caption="FXI 30 day Implied Vol vs 30 and 60 day Realized Vol from Bloomberg"][/caption]


If FXI implieds continue to settle and approach the low 20s, but the wedge has bot broken, long vol could be the play.  Stay tuned for any updates on this one, not that attractive yet.



MorningWord 6/26/12:  In yesterday’s market action there were very few signs if any, that things weren’t as bad as they seemed, and trust me people, WMT‘s strength (up 1.3% yesterday) is not Bullish for anything other than WMT.  Quick note from Captain Obvious – the Weakness in Crude & Euro, Strength in Bonds and Gold/Silver with not a single intra-day rally in the SPX of more than 40 bps, and to close only 40 bps off of the lows, regardless of the volume on the day, is just downright bad price action.

SPX intra-day June 25th, 2012 from Bloomberg

Unfortunately it is becoming an all too familiar situation for European leaders this week as we head into the EU Summit, where their action, or most likely inaction to halt the growing likelihood of debt contagion of Sovereigns to their banks (or vice versa, can’t keep track), is probably make of break for equity markets ear-term as indicies like the DAX is quickly approaching a key Support level at 6000.

[caption id="attachment_13664" align="aligncenter" width="589" caption="DAX 1 yr chart from Bloomberg"][/caption]


Overnight, Asia with mixed, with the Shanghai Comp continuing its weakness, approaching multi-year lows (read Enis’ Marco Wrap on this here), while European equities continue to teeter a bit, with most down small of the day.  But I guess the chart to watch over the next few hours will be that of the SX7E, the Euro Stoxx Banking index, as it display’s further weakness this morning on Moody’s downgrade of Spanish banks.  It appears equities of banks are taking this in stride, but the Index is approaching once again a key support level at about 80, which also marks a level just above the 20 year low made last month.

[caption id="attachment_13665" align="aligncenter" width="589" caption="SX7E Euro Stoxx Bank Index 1 Yr Chart from Bloomberg"][/caption]


At this point we sit and wait with our shorts, and continue to trim on big down days like yesterday, we are not going to be afraid to take profits, as the lower we go in the near term, the more likely some feeble policy response will be that is likely to cause short squeeze, albeit a short lived one. We at RiskReversal think that equities go much lower over the course of the summer, but we want to re-short oversold names on rallies, which we are sure to get.  Our trading around positions is likely to become more frequent, even though the amount of positions may stay in a range that is manageable (small), we want to focus our attention in these volatile markets in situations that we are very familiar with and do our best not to get caught off sides.  For example, last month we closed out 2 short trades in Citi, waited for the stock to bounce almost 10% and initiated a new position last week, that we trimmed yesterday when we had a quick double in the position.  As the old trading saying goes, “you won’t go broke taking profits”.   So we will continue to move our feet and stay nimble, and always have cash ready to deploy.


MorningWord 6/25/12: We are not gonna lie to you, things look fairly ugly this morning….I can’t remember the last time we had the futures down close to 1% pre-market on no specific news, maybe once the entire year, and that was also in sympathy with overseas markets.  Which leads me overseas, well past Europe for that matter, to South Korea and China.  The most interesting take-away for me of the overnight action was not that Europe is getting drilled overnight on European debt fears, that is so 2011, but that the Shanghai Comp closed at levels not seen since January, and that the Samsung (which makes up 16% of South Korea’s largest equity index the Kospi, was down 4.2%.

1 YR Samsung Chart from Bloomberg

Samsung’s price action is significant to me because it is like the AAPL of our markets, the largest single contributor, and widely owned by institutions and retail investors. Additionally, the stock showed horrible relative strength to the index which was only down 1.2%, and the technicals just look broken as it blast through support and seemingly leaving the trend channel in place since the Aug ’11 lows in the dust.

Comparing the charts you can see that they have traded in lockstep with one another over the last year, with both having a blow off top in the spring.  The chart below shows Samsung’s (005930 KS) top coming a few weeks after AAPL’s but BOTH stopping about 17% lower and then finding some footing.  The recent divergence btwn the 2 stocks could signal global investors concern for growth slowing in Asia and the fear of imports to Europe Slowing dramatically in the months to come.  I guess the biggest take-away for you peeps, is what does this say about AAPL’s price action in the weeks/months to come?

[caption id="attachment_13628" align="aligncenter" width="589" caption="1 YR Samsung vs AAPL from Bloomberg"][/caption]


So as for today’s open, you guys know the drill, we don’t press down openings like this, and as we are predominately short, we will look to trim shorts as we get closer to 1300 in the SPX, as it is likely a near-term support level as we head into the EU summit later this week.  While we are not looking for a crash, we do think no news out of the Summit could cause a resumption of the downtrend and close to certain re-test of the June 4th lows (~1265 in SPX).  And frankly we are not looking for any “substantive measures” out of EuroZone leaders.  SO we trim shorts on sell offs, and add to shorts that we are most convicted on on rallies.  We think rallies are to be sold for the weeks/months to come.  Please read yesterday’s trading diary of last week’s trades, should be helpful to see how we want to move our feet in volatile markets.

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”