MorningWord 8/13/12: What could be better on a quiet Monday morning than a little rant focused towards the endangered profession of Sell-Side equity research analyst. Don’t get me wrong there was a time when these people moved stocks, and often times actually had some foresight, but now, just a bunch of kids looking to cut their teeth in the industry, or aging CFAs usually one or 2 steps behind their Buy-Side colleagues.
This morning Bank of America Merrill Lynch’s Telecom Equipment analyst (who I actually here from friends at the bank is very good at what he does) Upgraded Sprint Nextel (S) from a Neutral to a Buy with a $6 12 month price target, and raised estimates:
We have increased our 2013E and 2014E Adjusted EBITDA estimates from $5.4bn to $5.8bn and from $7.1bn to $7.6bn, respectively. Our revised forecasts are 8% and 10% above consensus. We have also increased our 2013E and 2014E EPS estimates from -$1.09 to -$0.94 and from -$0.38 to +$0.40.
The analyst prefaces his upgrade and thinks he is shedding some fresh light on the story:
We’ve been a longtime skeptic on Sprint’s stock and our comfort level at raising our rating comes at the cost of having missed a strong move off the recent bottom. The move has been a reaction to much better than expected 2Q results, a hike in guidance, and, more recently, the prospect for accretive M&A. Nevertheless, we believe Sprint’s shares merit purchase here for the following reasons:
1. Our new estimates lead us to believe Street estimates will rise through 2013,
a stock catalyst that proved especially powerful in the wake of 2Q results.
2. Meaningful upside to our target remains using conservative valuation
3. New disclosures this quarter lead us to believe Sprint will generate positive
EPS in 2014 which should broaden investor interest in the lowest PE multiple
to growth stock in our coverage. An important wrinkle we’ve baked into our
model the Street has not, is that accelerated depreciation which is
depressing earnings through 2013 will drop off in 2014, allowing the
company to generate positive earnings which should increase the size of the
potential investor base, and also allow Sprint to realize the benefit of $4.8bn
in accumulated NoLs.
MY VIEW: I guess I can’t argue with any of his analysis, I am not a telecom analyst, or an analyst of any kind, and if this experienced CFA has done a lot of work and believes that his new above consensus earnings estimates warrant a high stock price than so be it. My Biggest takeaway from this upgrade is the expected joy from the thousands of Brokers in Merrill’s “Thundering Herd” that probably think they just got an early Christmas gift, as they will no doubt be out in a BIG way pushing their clients to BUY lots of Sprint at $5 a share, which due to low stock price which should result in high volumes and thus lot sof commission$$.
Sorry to be so cynical, but come on, has that much changed other than the guidance that the company just gave on their Q2 call that BofA believes their clients should be buying the stock here rather than 2 months ago when the stock was more than 50% lower. And I guess I would ask, where the hell were you all spring and early summer,and why were you not trying to figure out how the stock in the lows $2 range would either end up with it’s equity be rendered worthless in the coming months or double or triple?? Isn’t that your job to be in front of moves like this? So when I look at a chart like this I have one thing to say, you better be right, or you will look like the biggest monkey in the world. I have no axe to grind either way, but it appear that the analyst is relying on a good bit of his enthusiasm on the stock from current levels on company guidance, and I guess that seems like the sucker play of the year when you consider how poorly this company has executed over the last 5 years. We at RR.com don’t buy stocks up on spikes like this no matter how good the story sounds.
MorningWord 8/10/12: Equities seem unstoppable at the moment, volatility has ground to a halt and most of the fears that precipitated the 10% April to early June sell off appears to be off the front page of the WSJ for the time being. From a macro standpoint, the news cycle went from slowing U.S. growth, Euro debt contagion/bank insolvency to reflation and band-aids. That’s all fine and good, but we don’t buy it, largely because the internals of the market rally stink and on a daily basis it seems that we are getting individual data-points from once high-flying stocks that suggest otherwise.
This week alone we have had 2 once consumer discretionary darlings (PCLN & MNST) taken apart on weaker than expected results or outlook. Now many could argue that these high valuation stocks are merely a victim of their past success, and some would also argue that taking out some excess in the market is a bullish thing, especially as the market rally looks to broaden out. I get both arguments and agree on some levels, but I would add one important point, when investors are willing to take out whatever excess in a single name in one fell swoop it signals to me a heightened level of nervousness that has the ability to spread like wild fire.
And to be honest, the moves in PCLN, CMG & MNST etc, are a bit of a sideshow, as I think investors should be more concerned with the price action, and the news out of large multi-nationals like MCD. Just this week MCD released July same store sales that were down in all 3 major regions (North America, Europe and Asia) for the first time since 2004. As Enis pointed out in his nearly award winning appearance on Talking Numbers on CNBC the other day, the stock is in the process of breaking the massive uptrend that has been in place since the lows in 2009.[caption id="attachment_15447" align="aligncenter" width="589" caption="MCD 5 yr chart from Bloomberg"][/caption]
So at this point, we want to try to be a little patience here, and time our bearish bets a little better than we have done in the last few weeks, we will continue to look for both directional opportunities where we think the fundamental outlook is out of whack with recent price action (MNST) and where the market in general miss-prices the potential for volatility (BAC).
MorningWord 8/9/12: Hindsight sucks in trading as most of the time it exists to make you feel a bit more stupid than you already feel, especially when you are wrong. Last week I made an ill timed bearish trade in CSCO when the stock was at about $15.80 and then only to compound the problem I added to it this week when the stock was at $16.80. Well now after a 15% run in less than 2 weeks, “the Street” is getting behind the name in front of next week’s Q4 earnings report, 2 upgrade this morning and the stock is trading up to about $17.80 in the pre-market.
My Sept Put Premium has gone out the window. A reader this morning asked when I say “Uncle”, and the truth is, I really already did. When I originally laid out the idea I suggested:
I want to be clear here, I would not short a cheap stock like this with some of the positives that I mentioned above, But I will allocate some trading capital to the idea. This is not a high conviction trade as I will need a lot of things to go wrong in a short period of time, but I like the risk / reward set up, risking .35 to make 1.65 if the stock matches the 2011 low following what has been a historically volatile event for the company.
Now I am not being defensive because I have plenty of losers and not sure why I would just pick this one to talk about, but when entering a trade like this I have essentially already cried “uncle” when purchasing out of the money premium in front of the event, it is either going to work or it is not, but as usual RR way, especially on event trades I was risking what I was willing to lose to make this bet.
Make no mistake about it, placing long premium trades on an event is much like placing a bet with a bookie on the Super Bowl, at halftime if your team is down 31-7, their is no re-do. Don’t mean to sugest that us options traders are doing a legal form of “gambling” but there are obvious similarities, and just as you want to employ a little risk management on your next bender to Vegas, we do so by defining our risk, and risking what we are willing to lose. This is a very different proposition than investing, and we make no illusions about that here, RiskReversal.com exists to give a window into one component of our trading, how we use options for leverage, speculation, yield enhancement and most importantly risk management .
MorningWord 8/8/12: Since the “Draghi Whatever it Takes” bottom on July 26th, the DAX is up more than 10%, the SPX up 4.7% and the Shanghai Comp 2%. With much focus of late on the supposed fixes to Europe’s debt issues and the expected easing by central banks at the first sign of continued economic weakness in the West, there has been little attention paid to the one economy that in most market participants’ minds has a shot of reigniting global growth: China.
While central bankers in the West threaten further easing, China has been easing fairly aggressively of late with 2 rate cuts since early June & 3 instances of lowering lenders’ reserve ratios since November to combat slowing GDP that hit a new 3 yr low in Q2. Coupled with a slowing economy, China appears to be facing the long stretch of a protracted unwind of an equity market bubble as the Shanghai Composite lags all major indices down almost 2% on the year and raising concerns of the China Securities Regulatory Commission which appears to be taking actions to help prop up their lagging equity markets by reducing trading fees and loosening polices for investment by non-Chinese buyers.
The price action in the Shanghai Composite is atrocious in my opinion and the chart below only reinforces the potential for much further weakness if stimulus measures fail to reinvigorate their lagging economy. The chart mapping China’s GDP vs the performance of the Shanghai Comp since 2005 clearly shows how correlated the equity market crash was to declining GDP , from the 2007 highs when equities topped 6000 and GDP hovered btwn 11 and 12% both measures cratered in lock-step in what can only be called a less than gradual pace.
Easing measures by policymakers are usually in response to poor conditions. The market will usually anticipate the turn in growth before the trough, but the Shanghai market is clearly showing a concern that the trough in growth is still a ways away, easing measures or not. It’s a perception in stark contrast to western stock markets, who currently perceive easing measures as the elixir to cure all ills.
MorningWord 8/7/12: A year ago this very week, the SPX concluded a peak to trough draw-down of nearly 20% that started in early July largely related to Europe’s Sovereign debt crisis but quickly morphed into a U.S.-centric issue focused on slowing domestic growth and then S&P’s downgrade of U.S. Treasuries.
Since retesting, and breaking the intra-day lows in OCT, most major equity indices have not looked back, with the SPX up nearly 30% and quickly approaching the April highs. Time Heals All Wounds?
A year later things certainly feel less panicky, especially when you consider the fact that this year’s peak to trough draw-down of nearly 11% was half the size and took twice as long to complete as last years…..ORDERLY to say the least.
SO this is when I go down a little laundry list of charts that have served my bearish instincts well over the last 18 months.
The first relates to market breadth (or lack there of), the 3 year chart of the SPX vs Bloomberg’s Composite New High Index. As the chart below shows fairly clearly, the market bottom in 2009 corresponded with a fairly large group of stocks making new 52 week highs at market highs, which persisted into 2010, with readings well north of 1000 at intermediate term highs… as the rally got some legs in 2011 these readings tempered a bit between 500 and 1000. Since last summer/falls market bottom the readings have been in a fairly dismal range for the most part between 100 and 500 due in part to the increasing relevance of names like AAPL and a few other defensive large caps that have been responsible for a lot of the S&P’s performance. But come on people, as the SPX is poised to make new multi-year highs, yesterday’s reading of 243 is downright anemic and speaks more to me about the potential for near-term disappointment than the likelihood of sustained break-out rally.
This is also when I pull out my SPX vs spot VIX chart that has generally served me pretty well on short term basis as an input as to just how complacent equity investors have become. There is obviously nothing scientific here, I generally like to visualize the inverse relationship and try to get a sense for how long history suggests it can persist on an intermediate term basis, which it clearly could for the time being.
If the SPX breaks out to new highs, the VIX will see new 5 yr lows, which really doesn’t mean a whole heck of a lot, but when you look out at the VIX futures curve pointing to about 23.50 in December (one of the lowest readings for a 4 month out contract in a while), it screams one thing to me, no matter what your directional bias, that being long options to express that bias could make sense from a risk management standpoint.
I am not going to go into the litany of potential risks to economic and market health at the moment for the fear of sounding like the “boy who cried wolf,” but make no mistake about it they persist. I also recognize that the investment world we live in is desperate for yield, and on a relative basis, with the S&P trading at just 13x this years earnings with a yield north of 2%, and 10 yr U.S. treasuries at ~1.5%, it ain’t such a hard decision for most.
SO at this point, with investor complacency high after a massive short term sentiment shift, and most looking up rather than down, stock replacement strategies could make sense in situations where you have nice gains. But for those who are fearful of missing a potential rally, long calls, rather than long stock at these lofty levels could make sense.