MorningWord 7/18/12: Dear Prudence

by Dan July 18, 2012 9:22 am • Commentary

MorningWord 7/18/12: U.S. equity markets continue to be a bit manic, one moment looking like they will retest 1300 on it’s way to 1250, the next sizing up 1400 on the way to the April highs.  It’s all a bunch of noise to us, and frankly we are fairly convinced that even if we touch 1400 in the weeks to come we are also likely to touch 1300 and then 1250 in the months to come.

Sorry People, we thought it would be sooner than later, but it seems like most investors are just hell bent on getting  long in front of the Fed’s next “substantial step” and what appears to be their new mandate to juice the returns on risk assets at any moment where it appears investors are losing their will to own them.  

Global economies the world over, coupled with risk assets have been trading on massive stimulus fuel and then just the fumes, and then back to the fuel for the last 4 years, and where has it gotten us, we have avoided an all out collapse of the financial system as we know it, but for the FOMC to consider a “More Substantial” response to what appears to be a weakening global economy, with the SPX up almost 8.5% ytd, in an election year mind you seems downright crazy to me, and possibly a bit manic.

The next 2 months will be dominated by investors gaming the U.S. Fed as they have their next meeting Aug 1st, then their annual boondoggle in Jackosn Hole, WY in late Aug and then the last real opportunity before the Nov elections to introduce new easing at their Sept 13th meeting…..

Oh and don’t forget as Enis warned in his Macro Wrap this morning, “Ignore Europe at your own risk”.  Earnings at this point appear that companies in general will meet already lowered earnings estimates on cost cuts and share buybacks, and miss on revenues as demand weakens, don’t be fooled here people, this will not be bullish, but the mindless financial press will continue to print headlines of earnings beats, regardless of lower expectations and decelerating growth.

So we sit and wait, and get a little more cautious about our positioning into what can be binary earnings events.  INTC last night was a great example and how I left certain trading urges on the sidelines.  Two weeks ago I had a good bearish trade in the name and I took off last week near the lows.  I really wanted to re-short, but given expectations, and where I think the market is, I thought better to play from a vol standpoint than a pure directional one.  This was not the case in JPM last week prior to the Q2 results and it cost me, so being tactical, and sometimes waiting until after the event can be the prudent way to trade.




MorningWord 7/17/12: In Enis’s Macro Wrap this morning he mentioned the unusually long period of low volume that we are experiencing in the equity markets. Low volume does not signal conviction, and when spot VIX is at 17, it could speak to future weakness. But readers know where we stand on this front.  Given the plethora of worries facing the global economy, and what appears to be nothing short of disappointing corporate earnings so far for Q2, the SPX trades fairly well, now less than 5% from the multi-year highs made in early April.

The ytd chart below of the SPX shows what looks to be a constructive ascending wedge pattern, making a series of higher lows and higher highs from the June 4th lows.  But when you look at it from the April highs, it has made a series of lower highs on what appear to be declining volume.

[caption id="attachment_14421" align="aligncenter" width="589" caption="1 yr SPX chart from Bloomberg"][/caption]


The thing about charts is that without any qualitative judgements thrown into the mix, they can be deceiving. Especially in low volume, low conviction environments like we are in now.  Adding some subjective inputs, aside from the apparently constructive technical set up (SPX up 7.6% ytd and the 10 yr treasury yield ~1.5%), it appears the battle that is being waged between 1300 and 1350 will be resolved and will likely happen sooner than later.

As a reference, many market participants (including moi) in a fairly unscientific way, have compared this year’s price action to last year’s set-up in the Spring which led to the summer swoon that resulted in a double bottom in Oct.  Taking a quick look at last year’s set up into Q2 earnings announcement season it appears that the SPX traded fairly similarly to this year.  It made a multi-year high in the spring, only to have a quick descent based on fears of Europe’s Sovereign debt contagion spreading, only to have fears abate after half measures taken by political leaders and central bankers. (sound familiar?)  Last June into mid July it appeared that we were out of the woods and that a new high would be made in a matter of days if not weeks.  Then Q2 earnings, and more importantly, the realization of a weak second half earnings environment, coupled with a whole host of other concerns (that still exist……um…. debt ceiling = fiscal cliff) the market tanked.

[caption id="attachment_14430" align="aligncenter" width="589" caption="SPX 2011 Chart from Bloomberg"][/caption]


I guess the point is, the technicals may not be setting up too differently to last year and for a lot of the same reasons, We are not changing our stance because of a late June/early July melt up on low volume, we have seen this movie before, and we know how it ends.. Spoiler Alert: It wasn’t pretty, but Jennifer Love Hewitt lived.





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. [private]

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!