MorningWord 8/2/12: Mind the Gap

by Dan August 2, 2012 9:14 am • Commentary

MorningWord 8/2/12:  As an aging trader who started in the business in the mid/late 90s, I have seen my share of bubbles emerge and then pop.  When I was just a lad in the 90s, I thought that buying momentum stocks was the only game in town, like many others, until it wasn’t abruptly in early 2000.  We rode the stocks up for a few days then sold and got short and rode them down a bit and then rinse and repeat.  Oh to be young, nimble, opportunistic and slightly ignorant.

There were a few occasions though, before it was obvious that the game was over that we stuck our toes in the water in a once beloved cult name only to watch a short term trade turn into an “investment” with a series of averaging down purchases.   As most readers know I love to quote dead economists (I wish there was a sarcasm font), but John Maynard Keynes quote,  “The market can stay irrational longer than you can stay solvent” was never truer in the bubbles of the last 15 years (Internet, Housing, Commodity, Treasuries).  Just as risk assets, in this case stocks, overshoot on the upside, they can and will do so on the downside, and likely for longer than you would expect.

The chart below is fascinating to me, and speaks to my point above.  If you overlay the 3 yr charts of CMG and SBUX, to the chart NFLX , if history is any guide, you see what could be a very nasty next phase for some once darlings of the consumer discretionary space.

3 YR CMG vs SBUX vs NFLX from Bloomberg


I am not saying CMG and SBUX are going the way of NFLX, they are far better companies, with far better products and prospects, but they all traded in lock step off of the 2009 lows, and all had similar cult like status among growth investors, and the most important point, the fundamental story as changed a bit.

So the main point is, if and when you stick your toe in the water to trade a broken ex-cult stock, be mindful that the “trade” could quickly become an “investment” if you don’t use a “Stop” on the downside.


MorningWord 8/1/12: Market sentiment is a weird thing, most of the time it does not exactly correspond with where the market appears to be heading or be indicative of the price action to come, while sometimes it is spot on.  Those that use Bull/Bear indicators usually refer to them when it helps support their market positioning, in the case below, a very savvy market participant makes a slightly different point.

Barry Rhitholtz who writes the very solid Big Picture Blog had the following tweet this morning:

He goes on in a post (read here) to show a chart (below) from Merrill Lynch depicting how  “sell side strategists are now more bearish on equities than they were at any point in the last 27 years.

Rhitholtz suggests, “After the Fed liquidity fountain, this is perhaps the single most bullish thing I can think of”.

I guess the thing that struck me when reading his post was that he is most certainly going to be correct about that chart, at some point.  But if the central banking liquidity fountain does not flow as expected in today’s FOMC meeting and tomorrow’s ECB, the “Strategist” herd may have their way in the near term.  SO my point is, we are traders, and these sorts of sentiment charts on a short term basis don’t really mean a whole heck of a lot, especially a bearish reading as the SPX re-tests recent highs in front of potentially market moving events.  Put another way, price is the best gauge of sentiment.  When prices are high, it almost always implies that sentiment is bullish, and when prices are low, sentiment is generally bearish.  Actions speak louder than words, and actions indicate that we’ve had more buyers than sellers in the last 2 months.

I kind of “feel it in my plums” that we will see 1300-1250 in the months to come.

MorningWord 7/31/12:  As we turn the page on July, and as we start to look downhill on what has already been an interesting 2012, I think it is important to recognize a pattern that has almost become an annual Spring/Summer ritual in the SPX.   Since 2009 you can almost take it to the bank that we would see new highs in the Spring followed by at least a 10% draw-down in the SPX in the following summer months, only to back and fill for a bit and then rally into year end, that has obviously been fueled by quantitative easing in each instance since 2010.  

[caption id="attachment_15080" align="aligncenter" width="589" caption="SPX since 2009 from Bloomberg"][/caption]


Optically it looks quite clear that the uptrend since the 2009 low is still in place, as the series higher lows and higher highs is quite powerful from a long term prospective.  I guess the big BUTs are the qualitative inputs at this point that speak to massive economic headwinds, the sort not seen since 2008/2009.  I am not fear-mongering, I am stating a fact (EM growth slowing, Fiscal CLiff in U.S. coming, weak economic data in U.S. that could be near recessionary, and obviously the mess that is Europe that is not likely to be fixed by jawboning of their Central bankers).

At any of those highs since the March 2009 bottom, I could have made a similar arguments about impediments to the global recovery, but at this point they all seem to be lined up right in front of our faces, and the investing public holds their optimistic hopes for higher prices for risk assets in the hands of central bankers, not sound fundamentals, which doesn’t speak to a sound investment strategy in my opinion.

One other point:

The chart below of the SPX since mid 2009 overlaid with Bloomberg’s Composite New High Index shows how much narrower the rallies of 2011 and 2012  have been as opposed to that of the 2009 bottom and 2010.   We have had fewer names and sectors doing the heavy lifting, which is my mind poses more risk due to the concentration of positioning.  The chase for yield in a world where 10 yr U.S. treasuries are at a mere 1.5% have caused mini-bubbles in stocks like WMT and T, and caused concentration in safe havens like AAPL & WFM.

[caption id="attachment_15082" align="aligncenter" width="589" caption="SPX vs Bloomberg Composite New High Index from Bloomberg"][/caption]


One other interesting point, the Nasdaq under-performed the SPX in July by more than 1%, this is probably the first time this has happened in a while, and with the Nasdaq up 13% ytd vs the SPX up 10%, this also probably signals weakening momentum.

We remain cautious near-term, primarily as we believe the U.S. fed will likely under-deliver what is becoming increasingly high expectations at tomorrow’s conclusion of their scheduled FOMC meeting.





MorningWord 7/30/12:  Not sure if I used that hashtag thingy right in the title, still trying to figure that whole thing out, but while many of us were busy watching the really delayed, “Live” opening ceremonies of the Summer Olympics Friday night, the New York Times officially launch the 2012 Twitter Games in their report that evening titled “Apple Officials Said to Consider Stake in Twitter”.  There was little meat to the story other than to suggest that AAPL has been in supposed discussions for months to make a strategic investment of hundreds of millions of dollars in the Social Media darling, which likely places the value of the company near or north of $10billion.  Bare with me here, this is a bit of a think piece on a quick Monday morning.

While AAPL has enjoyed great success over the last decade in almost every product category they have entered, they have barely stuck their toe in the water in the Social Media space, and probably rightfully so as a hardware and software provider, “why buy the cow when you can get the milk for free”?  Their only attempt to date to “go social” has been in Music with Ping, but as an avid iTunes user I have have never even used or explored it.  Their products enable customers to use Social Media, and if Ping , MobileMe and iCloud are the only examples that we have to gauge their potential on the world wide web, they are right to considering partnering or buying.

I am sure us know-nothings outside of the valley and certainly those outside of 1 Infinite Loop could dream up some lame reasons why AAPL would benefit from such an investment, but the truth of it is, anything less than a $12-15billion knock outbid for the private company is just not that exciting and unlikely to advance any real Social initiatives other than guaranteeing slicker Twitter Apps for iPhone.

Remember the “strategic” stake MSFT took in FB back in 2007 for $240million valuing the company at about $15billion at the time, while that turned out to be a great investment from a financial standpoint I am quite certain it as not helped MSFT one bit in their own pursuit for Social Media relevance.

While many AAPL watchers would scratch their head at an all out take-over of Twitter, I would argue what the hell else are they gonna do with their $117billion  in cash that at best earns 1.5% in Treasuries? As AAPL enters a new phase paying a dividend and buying back stock the next likely progression is a dumb transformative acquisition, but this for a company that is still expected to grow earnings and sales at far superior rates to over 90% of the mid to large cap companies in the world.  The real risk would be much like GOOG’s acquisition of MMI and AAPL’s history of denying their software applications to be licensed to other hardware manufacturers is that without the service being open to all mobile platforms it cedes much if not most of its value, which is why unless AAPL is going to have a tectonic shift about how they distribute thier software, an outright deal for Twitter ain’t happening.

So my money wouldn’t be on AAPL acquiring Twitter, and why I would focus more on companies like MSFT that have become very accustomed to squandering their war chest’s on large ill conceived acquisitions like aQuantative for $6Billion and their failed $30 plus billion YHOO bid a few years back.  The Jury is still out on last years $8.5billion Skype acquisition, but heck if they are buying that asset with no real idea towards monetizing its hundreds of millions of users why not Buy Twitter too.

Google would be the most obvious choice as many web users are snubbing the desktop search model in place of their mobile device, this poses a huge threat for GOOG and it appears that the trend towards mobile and social search is growing by the day. How many of you are searching on Twitter on your desktop or iPhone App for something realtime before you go to Google?  I certainly am.  I would assume a GOOG/Twitter deal would face massive opposition by competitors and by the FTC, and it would surely launch a flurry of other interest by the others mentioned if just to keep out of the others hands.

Last but certainly not least is FB, and this is the one that probably makes the most sense in my opinion as FB is quickly losing it’s relevance among certain demographics in mature markets.  I am not a fan or a user of FB, but I would bet my cat that those active users stats that the company quotes are a bunch of BS.  I know I will get a lot of pushback from a lot of people who are long FB at much higher levels, but this company might have seen its better days (think MySpace circa 2005).  If there was one headline that I think would send FB shares back above $3o, maybe even mid $30s, it would be “Facebook to Acquire Twitter in a $12.5billion Cash and Stock Deal”.  Hell the company has $10billion in cash on their balance sheet as a result of “their” wildly succesful IPO (emphasis on their, meaning for them), why not use their still overvalued equity and some cash to buy the one competitor that has the ability to make them less relevant at a much faster pace than any of their more established foes.

All of this is just conjecture, and I have been talking about the FB/Twitter match made in heaven for sometime, while I can see larger tech giants like AAPL, MSFT & GOOG (don’t forget Samsung too) yearning for Twitter, I see FB as really needing them right now.  As far as Twitter is concerned I know little about their management or their investors, but I have to assume a couple things, both would prefer to avoid the debacle that was the last 4 months for FB, and while I know I just painted a slightly downbeat view of FB’s current competitive positioning as a standalone, I am sure the geniuses in the Valley have already white-boarded it out how the combined entity would own social media in whatever incarnation it takes for years to come, much like GOOG has dominated desktop search with little to no competitive threat for the last 12 years.  I have to also assume that many of the early FB investors who sold on the May IPO, are also big in Twitter and that a merger would give them the opportunity to monetize both investments through a far better positioned joint asset.

So while the Twitter games may have just begun, they are not likely to be delayed “live”, they could get heated early and often.

Oh, follow us on Twitter @RiskReversal


MorningWord 7/27/12: As I was short yesterday, I really can’t stomach going through the play by play of yesterday’s price action so rather we will do a little “trade school”.

At about 2:30pm yesterday an hour and a half before SBUX was set to report earnings I closed what was a winning short position in the Aug expiration in the stock.  Back on June 29th, when the stock was $53.10, I paid .85 for the Aug 50/45 put spread, which at the time seemed like a decent risk/reward given my bearish thesis about consumer discretionary names like SBUX, my overall bearish thesis on the market, the time that I had for this thesis to play out, and last but not least the fact that Aug expiration would catch their earnings event.

So with the stock at about $52, and the spread worth a little less than $1, I made the decision to close the spread for a small gain before what I felt could be somewhat of a binary event, either the stock’s reaction could be like NKE’s in late June, or like WFM yesterday.  As a trader we are emotional beings, and it can be hard to ignore the most immediate price action right in front of our faces. The broad market’s explosive rally and the 11% gain in WFM yesterday led me to believe that I was either going to have a decent winner or an all out loser on my hands following SBUX ‘s results.

Obviously in hindsight with SBUX down about 10% this morning after lowering their out quarter guidance, it was the wrong decision and as I had answered a reader’s email earlier in the week, “I had this position right where I wanted it”, I should have stuck to my guns and kept at least a half position on as I did in AXP.

I guess the main point is, as traders, we make lots of decisions everyday, hopefully we make more good than bad, but the truth is, and not to sound defensive, it is best to make the bad decisions that don’t cost you money.  Make no mistake about it, I am annoyed, if I had not touched my position, I would have likely had my biggest winner of the week, and one of the biggest one day single postion gains in a while. No point crying over spilled coffee, I just thought some of you would appreciate the thought process behind yesterday’s decision.  That’s it for now, I gotta run out and grab my vente half caff skimmed latte at SBUX.

MorningWord 7/26/12:  The real news of the morning is that the ECB chief Mario Draghi is back from vacation since his trip to Brussels in late June and decided with the equties of European banks making 25 year lows and the sovereign yields of Italy and Spain making record highs that it was time to jawbone the markets a bit.  These headlines from a speech in London caused the massive reversal in European equities and our S&P futures, and the Spanish and Italian 10 yr yields to get creamed (for now):


More of the same from where we sit, but the price action is very clear that investors/traders are nervous to be short, and plain scared to miss a rally.  We don’t think this is a very astute way to invest/trade, but we recognize that many prefer to be told what to do in the markets as opposed to forming their own opinion (I of course just listen to Enis).

Lets see how long this move lasts, the big money geniuses may try to run them into Quarter end which also coincides with the start of the FOMC meeting Aug 1st where the trial balloon has already been floated by the fed through their main man at the WSJ Tuesday afternoon.  The thought of mutual funds underperforming  a down market is too much for most portfolio managers to bear in a month that as of yesterday’s close had the SPX down 1.78%, why not attempt a month end mark up.

As Enis wrote in his MacroWrap this morning, there are no quick fixes to any of the messes the global economy and thus markets face, so a few headlines from an institution that has been caught off guard for at least 2 years on a crisis that has been brewing right under their noses for years does not instill confidence on our part, and  Draghi just asked us to “believe him”, that what they are prepared to do will be “Enough” to “Preserve the Euro”.




MorningWord 7/25/12:  In this space yesterday I spoke about how the “Fever” surrounding AAPL as a stock, at least from an anecdotal standpoint, was in the process of “Breaking” so to speak.    The stock’s overnight reaction (-5%) to a miss of expectations in their fiscal Q3 and their weaker than expected fQ4 guidance in some ways appears to be a tad muted given the fact that the options market was implying a little over a 5% move, which was in line with the 4 qtr average of about the same.

As we digest the report, and the expected reaction, I think it would be a bit premature to assume that this morning’s opening in the stock will be “the move”.  Lets not forget, AAPL is (was) a $562billion company, and it takes a bit more than some day traders and hedge funders in after-hours/pre-market trading to move the stock in a meaningful way, so the real action will happen after the open, and could become the beginning of a trend for days/weeks to come.  

As of yesterday’s close AAPL was up over 48% ytd, and has been the source of a good bit of ytd gains for many fund managers and retail investors alike.  AAPL management, whether they know it or not, sounded the least confident about their “road ahead” than they have in sometime.  I have listened to their quarterly conference calls for years and have rarely heard them as defensive and basically flat-footed as they were on last night’s call.  If they had an iPad “mini” in the works, their guidance and the nature of their commentary did not in any way reflect any sort of guarded confidence that the weak trends in Q3 were set to abate prior to new iPhone launch in the fall.  On the call the CFO actually mentioned that the “rumors” of a new iPhone likely hurt demand, REALLY?  For a company that does respond to market rumors, that seemed like an extremely lame defensive of iPhone underperformance in the period just ended.

Also the back and forth about inventory re-shuffling, channel inventory, geographic mix etc etc on the call regarding iPhone units sounded a whole heck of lot like the crap we used to hear from the managements of MOT, PALM and RIMM as they were shifting from the rapid success or adoption of a product and moving into a more mature phase of said product (think RAZR, ROKR, PRE & Torch).   While AAPL is certainly not, and never will be  remotely similar to any of those crappy companies, they will not be immune to some of the same headwinds as it relates to the unavoidable commidization of their mobile products, which will result in the eventual pricing pressures that will ultimately cause margin degradation.

The company mentioned on their call that the U.S. and China remained good sources of growth while Europe, Brazil, Australia and Canada were weak in the quarter……with the sort of miss to expectations for Q4, the guidance could actually prove aggressive if we were to see a material slowdown in the U.S. and China as many other high end consumer companies have hinted to already.

With no real catalyst in sight until the expected Sept announcement of an Oct iPhone5 release, the stock could be dead money for a bit as investors with large ytd gains look to lock them in as we sit and wait for the next big thing.   Frankly we are very surprised that the stock is only down 5%, but as we said above, the big boys havn’t joined the party.  If the shares rally after the open we will look to buy either July weekly Put Spreads, or Aug.  We think the stock tests $550 in the days to come. We will look for the best risk/reward opportunities to “press the short” on a rally.



MorningWord 7/24/12:  As  many readers know we have a little love/ hate thing going with AAPL for the last 9 months or so, the love is mostly reserved for the products and the company’s near flawless execution, and the hate primarily for the hype around the stock, which to be fair the company has little control over. (CC- editor’s note – Wha?! Hype is their biggest product)

To be contrarian  for the sake of being contrarian in a stock like AAPL could have been near fatal for the last 3 years as a trader, so we have tried to pick our spots.    In many ways the story and the price action of late has become far more rational since the stock declined about 17% from the blow-off top and all time highs made in early April, as the stock has settled down a bit at the mid-point of the 4 month range.

1 yr AAPl chart from Bloomberg


While the fever has broken a bit from a price action perspective, the hype in the media has also cooled down a bit, as it appears the financial press and the Wall Street analyst community have gotten a bit used to the company’s methodical product release schedules (ie. iPad release April and iPhone release Oct) and they find refreshes to iMacs/Macbooks/iPods as an added bonus.  I will mention that the blow-off top in April did correspond with the fever-pitch speculation about AAPL introducing an iTV by Christmas and it seems once that talk subsided, so did the irrational price-action.

On another note, I have graced the screens of CNBC on that nearly award winning program Options Action since April 2009, and I think that this past Friday’s show might be the very first show prior to AAPL’s quarterly earnings report that we did not preview the event in that time period.  Additionally on my weekly fly-by on CNBC’s Fast Money program the AAPL chatter has probably decreased  80-90% on any given day in the last few months from the prior few quarters.  MAKE NO MISTAKE ABOUT IT, THIS IS BULLISH FOR THE STOCK, OR MIGHT I SAY LESS BEARISH IF THE COMPANY DOES HIT A ROADBLOCK IN THE NEAR FUTURE.

None of the above comments constitute a bullish posture on my part, just some quick anecdotal observations of the sentiment surrounding the stock, from a guy who has recently loved to hate the euphoria in the name.  The Fever has Broken, and maybe just maybe the stock may trade like a mere mortal in the months, years to come and cynical guys like me could actually own it without fear of joining the mania.

Please stay tuned for a detailed quarterly preview, and commentary around trades that we are considering on Quick Hits throughout the day.