MorningWord 7/16/12: Past Performance Does Not Guarantee Future Returns

by Dan July 16, 2012 8:40 am • Commentary

MorningWord 7/16/12: Friday’s explosive rally in U.S. equities, in my mind represented a massive sigh of relief that JPM CEO Jamie Dimon on their Q2 conference call Friday morning did not drop “a bomb” on the investment community about what appears to be a whole host of obvious challenges (both near and intermediate term) facing his company and that of the banking industry as a whole.

In our opinion, the “Whale” losses will likely shift to the company’s potential involvement in the emerging Libor rigging scandal and then ultimately investors and analysts alike will be faced with the weakening earnings generation as a result of the new regulatory regime both internally and externally for banks such as JPM.  After last month’s testimony on Capital Hill, and his heartfelt performance on their Q2 conference call, Jamie Dimon regained his title and status  as “most favored CEO” in the banking industry.   Friday’s 6% rally in JPM’s shares signal that investors for all intents and purposes have given him a “mulligan” on the miss-fire that was JPM’s CIO office, with much of the loss quantified, the unit shut down and compensation clawbacks in place, they are probably hoping that the little mess was swept under the rug.  After their initial reluctance, Management acted, and fast, but maybe too fast in an effort to rip the band aid off in an effort to help investors, analysts and the financial press move on to other pressing issues that face the industry, where JPM does “less bad”.  We don’t buy it, we think that the second half of 2012 maybe a rocky ride for the the sector and we will continue to look to strength like Friday’s as opportunities to express our short bias.

To state an obvious point, MoneyCenter banks are complicated businesses, and JPM’s management has done a good of job as any weathering the storms of the last five years by avoiding most pitfalls that many of the competitors stumbled into and by making some fairly savvy/opportune moves.  But “Past Performance does not Guarantee Future Returns”, JPM may have pulled the wool over the financial press and re-invigorated it’s fairly solid investor fan-base, but if they have any level of involvement in the next scandal, the powers that be would very likely pounce. That’s not the reason in our mind to be short the stock, there are plenty of others, but if the political landscape is changing investors should be cognizant of greater scrutiny that is likely to be exist amongst both best and worst of breed alike.




MorningWord 7/13/12: I have to assume most China watchers were a bit disappointed with the nations’s Q2 GDP print reported overnight, only missing expectations by 1/10th of a percent to the downside.  Economists had been looking for a gain of 7.7% vs the previous qtr gain of 8.1%, showing what amounts to be a fairly healthy growth rate on relative terms, but the slowest level in 3 years for a nation that drives much of the world’s incremental demand.

Asian equity markets took much of the news in stride, with the Shanghai Comp basically closing flat on the session after trading in a fairly tight range, the Hang Seng closing up 35bps and the Nikkei closing flat.  So much for continued drama out of China, but most of what I read this am points to China’s central bankers insistence on continued monetary easing so they can once again see double digit GDP prints, F’Yeah.  Bringing the China slowdown back home will be commentary from U.S. multi-nationals about the demand picture going forward for the balance of 2012.  Obviously weak Q2 GDP prints and Q2 earnings/revenue misses are backward looking, but cloudy visibility based on a recessionary environment in Europe, slowing demand from emerging markets, and a U.S. economy that appears to be dragging on a continued weak employment picture may be the final shoe to drop for world equity markets like the SPX, Nasdaq and the DAX that are all up nicely ytd (6%, 10% & 10% respectively).  

What We Are Doing & Why:

Our positioning continues to be geared to the SHORT side, but we continue to trade around core positions.  We take profits and trim winners on big down openings like yesterday, and look to add to positions where conviction is strong on rally days.  At the moment, we are not positioning for a crash, we are merely set up for disappointments in some single names where we think expectations, and price action don’t fit the data that we are seeing from peers or the macro picture.  On the macro front, we continue to have the view that the EUR sees lower lows vs the $ and that outperformance of U.S. equities will give way to the realization that we are not merely in a “slow patch” for the economy, and that we are likely at the start of something (possibly a recession), rather than in the back half of something.

The one year chart of the SPX which clearly shows a ascending wedge pattern does not appear that bullish to me at the moment, especially when you consider the weakening economic backdrop, the fact the SPX is only 5.5% off of the multi-year highs made back in April and has been used as a serious flight to safety by global equity investors.

[caption id="attachment_14315" align="aligncenter" width="589" caption="1 yr SPX chart from Bloomberg"][/caption]


While we may not be that original, we are consistent, like every other chart monkey out there, we feel strongly that we  probably pause for a little at about 1310, and then make a quick descent back to 1250.  The real wild card with 1250 is that is where the SPX goes red on the year, and the closer we get to the FOMC’s Aug 1st meeting the greater the rally cries for QE3 will be with the backdrop of weakening U.S. equities…..this is one of the main reasons I continue to trade around positions, I don’t want my portfolio to get nailed by a “Tape Bomb” that blows me up, I want to take profits on portions of positions when I have them.

Another important point that I want to make is not to press on the short side down openings in the range of 1%, this is not likely to be a consistent winning strategy, the one time you actually nail it and the market goes down another 1% it will not likely make up for the other 5x that the market rallies 50bps in your face.  Usually there is always one rally, where those who are short take some profits and you see a little re-tracement of the gap, and that is usually a good spot to take a shot.  Remember the name of the game is too leave some ammo free for those unexpected moves!




MorningWord 7/12/12: Technology shares, primarily in the U.S. have been the fascination of investors (both institutional and retail) the world over it seems for the last 15 years.  Tech shares, usually driven by the most recent secular trend seem to massively outperform as a group in bull markets, with the performance usually driven by a concentrated group.  In this last bull cycle, since the bottom in March 2009, AAPL, AMZN and anything with a cloud attached to it’s name have been the culprits of the Nasdaq’s recent out-performance, but as some of us who traded in the early part of the last decade remember all too painfully how the prior leaders massively overshot on the downside once the tech bubble burst in 2000, and for names like AMZN it seemed like technical support was ZERO (in Oct 2002 AMZN traded briefly below $6).  

We think that there are many tech stocks that are probably a little ahead of themselves, especially if some of the recent economic data, and some of the initial Q2 earnings/Q3 guidance are indicating the start of a sustained weak period, rather than the back half of a “soft patch”.

We are clearly in the camp that the global economy is likely to get worse before it gets better, and that high valuation Tech names (AMZN, CRM, VMW), or merely over-owned cheap names with massive ytd gains (AAPL, INTC, MSFT, IBM) have considerable downside in a recessionary environment, largely due to their ytd out-performance.  T here is nothing scientific here, just good old fashioned trading intuition.  If bulls want to make arguments that cheap group above are a steal because of their PE at ~10x next year’s earnings, stellar balance sheets, div yield etc etc, they are right, but that doesn’t mean that they are great buys.  INTC is 30% higher than the lows it made last Oct, MSFT up 20%, and AAPL up 7)%!!

SO I guess my point is those bulls are also monkeys, theymake those calls when the stocks are at the lows, and again when not far off of recent highs.  They are programmed to defend cheap stocks, and they rarely if ever suggest selling them when they get to a market multiple.

The tech names that have outperformed in 2012, or since the bottom in 2011, have done so for very different reasons, IBM, MSFT and INTC because they are slightly defensive with exposure to secular trends and pay dividends higher than the 10 year treasury yield, AAPL, AMZN and CRM because they have cult followings, no matter what the valuation.  But make no mistake about it, just as these stocks have enjoyed fabulous gains in a short period of time, they can also see sustained periods of selling that may far overshot bulls line in the sand valuation  support levels.  Just look at QCOM as an example, for all intents and purposes, QCOM was one of the best positioned stocks for the ever emerging mobile computing trend.  The stock is now flat on the year after making new 12 year highs earlier in the Spring, only to have sold off ~25% since late March.  Oh and the company pays nearly a 2% dividend, trades at a near market multiple in line with expected growth and has basically no debt and 28% of it’s market cap in cash!   The stock is cheap, make no mistake about it, but depending upon where you think in the global growth cycle, stocks like this could get a lot cheaper.  QCOM still trades about 16% higher than last years lows, and we would argue that the global economy is in a far worse place than it was 12 months ago.  So beware of monkeys and bulls.




MorningWord 7/11/12: Yesterday’s disaster du jour was CMI, Cummins Inc, which is a diesel and natural gas engine manufacturer that has long been considered one of the poster children for the global growth story. The U.S. makes up less than half their sales, and much of their future growth is expected  to come from emerging markets, where Brazil and China alone made up about 17% of 2011’s sales.  Yesterday the company sold off 9% on the biggest volume day since Oct 2007, after the company lowered revenue guidance for the year citing slowing demand.    I guess the main point I would make here is that even with the dramatic move yesterday to the lowest level of 2012, this shouldn’t come as a big surprise to most market participants who have watched prior market leaders from almost every super sector in the market (CAT, GS, NKE & QCOM to name a few) spend much of the last few weeks/months come undone one by one .  Prior to yesterday’s guide down, CMI was already down about 26% from the all time highs made in March, I guess the smart money had already gotten the “slowing emerging market growth” memo sometime back in early spring.

But here is the deal, even with a stock like this down ~33% from the recent highs, and trading at a high single digit PE, it doesn’t exactly mean that the stock is cheap and should be bought.  To Enis’s point in his Macro Wrap this morning, if we really are at the precipices of a global recession, then next years earnings growth expectations are way to high and will continue come down.  JUST AS STOCKS LIKE CMI MAY HAVE OVERSHOT BULLISH EXPECTATIONS ON THE UPSIDE EARLIER IN THE YEAR, THEY MAY ALSO DO SO ON THE DOWNSIDE.  CMI went to from a then all time high of about $76 in mid 2008 to a low of about $18 in late 2008.

For those of you who like to buy dips and take a slightly longer term perspective than us trader monkeys at RiskReversal, than have a ball, wade in the water, but be mindful of the fact that this is a position that you should leave some ammo as you may very well have to average down.  Global recessionary weakness does not turn on a dime, and if Enis is right, we may be at the start of something rather than nearing the end.



MorningWord 7/10/12:  Market participants like to focus on #s, whether they be GDP, ISM, unemployment rates, or in the case of single stocks, previous highs and lows to name a few.   Equity market participants the world over like (ok love) to focus on AAPL too,  which is why I wanted to take a quick look at the name and a number that many will focus on as we approach their fiscal Q3 earnings report April 24th, 2 weeks from now.  Yesterday, AAPL closed about 5% away from its all time high made on April 10th,which was exactly 2 weeks prior to the company blowing out their fiscal q2 earnings estimates by more than 22%.  The parabolic move to the highs in April was matched greeted with a little fear fueled sell off of almost 14% heading into the print.  The action after that was obviously a bit schizophrenic (see chart below), but the previous all time high of $644 has and will be a Beacon for AAPL watchers.

AAPL 1 yr chart from Bloomberg


I mention all of this today as we are also exactly 2 weeks prior to the company’s scheduled Q3 earnings report and the stock has already rallied about 8% quarter/month to date, and I guess I am wondering when the skeptics will start o question AAPL’s ability to outperform again on iPhone and iPad units.  I obviously have no clue, but would be surprised to see a miss of their conservative eps guidance.  Looking at last year’s fQ3 results could serve as a bit of a guide as it was the first fQ3 in a few years that did not include an iPhone release (like this year, but both had a new iPad).

Last year the consensus earnings estimate for fQ3 was $5.87, the company reported $7.79 that was nearly a 33% beat and up almost 22% sequentially and up 122% year over year. Current street estimates are for a $10.36 down almost 20% sequentially but up 33% year over year. No one is expecting a miss of this conservative guidance, but as China iPhone demand served as the reason for out-performance in quarter reported in April, will some of the weakening commentary and data out of China serve as a dampening effect in the fQ3 quarter to be reported?  Possibly, but as I have said in the past, whether it be here or abroad, AAPL will be the last battle fought in the consumer battle, and I would be surprised to see demand turn on a dime.

That said, with the stock up on a spike heading into an earnings season that is already seeing some fairly downbeat results and visibility from AAPL’s supply chain partners, the skeptics will be sure to throw a little cold water on this recent rally, even while the Bulls gun for $644.


MorningWord 7/09/12: As Enis mentioned in this morning in his MacroWrap, volume was anemic last week, and aside from the move in the Euro/USD (making fresh 52 week lows), there wasn’t a whole heck of a lot to write home about, Except the almost 30% collapse of INFA in Friday’s trading.  INFA is a $3.3billion infrastructure software company that had a little less than $800 million in sales last year, with 25% of those sales coming from Europe.  The company stated on a conference call Thursday that “customers in Europe had an increasingly cautious tone”.   Whats most significant about the miss is that investors extrapolated European weakness to some very large software companies like SAP, CRM, CTXS and VMW, with all of them down btwn 4.50 to 7.9% on big volume.  

INFA taken with warnings from STX in the hard disk drive space and APKT in the networking equipment space on Thurs/Fri shed a fairly dim light on Technology shares on Friday with defensive meg caps like IBM taking it on the chin down 2%, badly under-performing the broad market.

Unmistakably, large cap tech has been a bit of a safe haven since the Oct 2011 lows due to their decent dividend yields and their generally defensive nature, while financially related stocks remained in focus, but a slowdown in China and a recessionary environment in Europe would likely cause massive under-performance in this very cyclical sector.  The tech sector has the potential to be  ground-zero for any market rout of 2012, as financial shares (particularly banks) are generally in shooting distance of last years lows, many tech stocks, like INFA, could take a 20% plus plunge to make those lows from last year, while many are still up 20-50% from the Oct lows…….I’m just saying, not fear mongering……but if I had lots of gains in Tech shares I would be pouring through the press releases of last week’s pre-announcements to make sure they were not just “company specific misses” as the Wall Street bulls love to label early cycle misses before a trend is confirmed.  We would never expect Wall Street analysts to be ahead of the trend.

I like my short exposed trades in IBM & INTC (both July premium, may look to roll to Aug on anyt real weakness this week) and will like be adding more through weeklies (puts and put spreads) in QQQ or Aug in XLK as we head into the meat of Tech earnings next week.


MorningWord 7/05/12:  There is lots going on this morning, and I not exactly certain there is anyone here in the U.S. is here to witness the rash of Central Bank action from Beijing to London (and Brussels in between) that was dropped on global markets in the last few hours.  Enis did a nice little round up here in his MacroWrap about the PBOC and BOE, and since, the ECB came in as expected and lowered interest rates to record lows and their deposit rate to zero.  Nothing really that unexpected other than the S&P futures relatively frantic reaction, up 7 handles then down 7, just to settle in a bit below break-even on the session.  Low volume and few market participants have the potential to make for volatile markets.

While the Marco set up gets a lot of attention, I think it is important to keep a close eye on some retailers that reported worse than expected same store sales for June.  While many want to look to Europe and China for guidance on the direction of the global economy, I would suggest that we are getting data points right here at home that may be more telling for the near term future of the S&P500.  There is a ton of money parked in U.S. equities from U.S. and overseas investors for that matter that see the U.S. as a bit of a safe haven relative to the potential recessionary environment in Europe, and slowing of growth in emerging markets.  Many see the U.S. consumer in the same light as they saw the emerging middle class consumer in EM back in 2009, the last bastion of hope for a global economy that was going through a massive de-leveraging process.  Well as most over here know, the U.S. consumer is fickle, and with unemployment not showing signs of hope for what is now 4 years, this may be the exact wrong place to look for “de-Coupling” action. This morning alone we saw decreases in comp sales across the spectrum in retail from TGT to M, (I will add that TJX is bucking the trend and actually raised full year guidance, but I have a feeling that has something to do with M weakness).

I guess the point is, U.S. consumer alone ain’t gonna save the day, we will need to see a gradually improving global economy, and at this point, as evidenced by this morning’s central bank actions, they see a quickening decline!


MorningWord 7/03/12: To state the obvious, there is not a whole heck of a lot going on this morning.  Most market participants have likely checked out till Thursday morning at the very least and possibly Monday July 9th!  The path of least resistance for the time being (meaning this Holiday shortened week) seems sideways to up, barring any big surprises out of the ECB on Thursday.   The price action on weeks like this are generally not very instructive to the overall trend in my opinion, usually they are of low volume, and thus low conviction.  

Looking at last year’s performance in the SPX concluding what had been a fairly volatile late Spring, may shed some light on what is in store for us in the coming weeks.  The chart below shows the Spring sell off concluding at about mid June, with another test of those lows towards the end of the month, only to make one last attempt at the previous multi year highs.

[caption id="attachment_13975" align="aligncenter" width="589" caption="June/July 2011 chart of the SPX from Bloomberg"][/caption]


The chart below shows the SPX ytd, which we are all fairly familiar with at this point.  Much like last year the index had a very steady and healthy rally into May setting new multi-year highs only to quickly descend nearly 10% from those levels.  Much like last year, following some supposedly backstopping action in Europe in late June, equity markets looked like they were off to the races heading into the July 4th Holiday.

[caption id="attachment_13976" align="aligncenter" width="589" caption="SPX ytd 2012 from Bloomberg"][/caption]


This whole analysis is a bit pedestrian, I know, but what I find interesting is that much like last year, when U.S. economic data that was apparently weakening, was explained away by most at the time as a “soft patch”, while now the data is very clearly more than just a patch, and aside from Housing it appears that we could be headed towards an all out stall of the economic recovery that has been in place since early 2009.  If the data does not get better over the course of the summer from seasonality adjustments fading, and S&P earnings continue their softening pace, the SPX will once again be vulnerable to a summer/autumn swoon.  This is not fear-mongering, the stage is clearly set, and for those who don’t see it refuse to open their eyes.  While I am fairly certain we re-test the early June lows at some point in the near future, most likely August at this point, it would take the global economy to turn on a dime, and some new-fangled QE here in the States and a lights out solution to the Euro debt crisis to stop this from happening.  I am not calling for a crash by any means, merely a test of the previous lows, and then at that point, who the heck knows, but for now, “while the Cats away, the mice will play”.

One last thing, the 1250/1300 range has been the danger zone for the SPX over the last couple years, we obviously bounced from there (~1265ish) last month, but it wasn’t until that level that we really collapsed last summer.  Make no mistake about it, it is not just a nice round number, it is a HUGE technical level.

[caption id="attachment_13978" align="aligncenter" width="589" caption="SPX 2010 thru present chart from Bloomberg"][/caption]



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.