MorningWord 9/21/12: Overnight equity markets continue their relative calm. Asian markets were flat to up (Hang Seng up 70bps, Shanghai flat and Nikkei up 25bps), while European markets are up across the board as rumors of a Spanish request for a bailout package, further lessens systemic risk in the region. Our futures are up 40bps on the morning of a quadruple witching options expiration, with most of the top headlines on most news feeds are relating to AAPL’s release of the iPhone 5.
AAPL has been straddling $700 all week which makes a bit of sense when you consider the concentration of open interest in September around that strike (almost 33k OI in the Sept 700c, 17k in the Sept 705 & 710 calls and 13k and 17k in the 695 and 690 calls respectively). This seems a bit obvious, but the stock very likely to close the day somewhere btwn 695 and 705.
The pent up demand for iPhone5 has led many analysts to conclude that fiscal Q4 (Sept qtr) iPhone units could be less than originally forecast for the second consecutive qtr as consumers waited to buy for new release. When the company reports in late Oct, any weakness post report will likely be met by buyers just as it was back in July as the company appears to be amazingly refreshed for the holiday season on the iPhone and iPod front, and a a whiff of a new iPad “mini” by Thanksgiving could send investors into an outright frenzy.
I haven’t said this in over a year, and it may be kind of shocking that I am saying it near all time highs, but for the next few months (through year end) the stock is probably a buy on any dip. The news flow is too powerful, but I mean this as a trade, and I am far more inclined to be long premium by way of call spreads or flys, or short put spreads than long stock. Yesterday I managed my AAPL Sept/Oct 700 call calendar and now have a tight Oct call spread on for a credit (read here and here), but I will look to add some long exposure into year end on a pull back, possibly post iPhone launch, as the stock may very likely close on the dead highs of the year barring any broad market meltdown.
This is not a mea culpa, I am the first one to admit that I missed the last 250 points in the stock, But I am a trader, not an investor, and while I have had many losing bearish trades in the name over the last year, I have had a couple decent ones, and couple decent long biased trades. I am in the business of hitting singles and doubles so I was almost risking what I was willing to lose. While I am not a believer that the stock doubles from here, the sentiment is just too strong, and the product line up and the seasonal factors at play speak to higher levels btwn now and year end. Some of you may use this little change of tune as a contrary indicator, have a ball, I have thick skin. My game plan is to ride out my Oct Call Spread, hope for a pull back after earnings to the 650 range and set up for a move to 750 by year end. Make no mistake about it though, I still hate the sentiment around the stock that borders euphoria, and ultimately we know how this will end, but for the balance of the year, the fix is in!
The chart below of AAPL since its 2009 lows shows the almost 800% move off of the bottom, but what is very apparent is the basing that the stock goes through before it goes on one of it’s parabolic runs. The stock could clearly keep running here as investors remained confused by the macro picture and the single name earnings picture, this company and stock seem to be immune to both, but I can’t get my long on till the stock has a pullback or consolidates a bit.
[caption id="attachment_16956" align="aligncenter" width="490" caption="AAPL 3 Yr chart from Bloomberg"][/caption]
MorningWord 9/20/12: Every morning I start my day by reading a dozen or so of Bloomberg’s top stories, then I move on to WSJ.com and eventually start trolling the Twittersphere and a gaggle of Blogs only to finally have delivered to my email inbox Business Insider’s 10 Things You Need To Know Before the Opening Bell at 8am. The peeps at BI do a pretty good job wrapping up the top overnight headlines from most of the sources above, but I always find it interesting to see what makes their top 10 after I have already read 5 times that amount. This morning’s top 10:
1. Markets in Asia sold off in overnight trade…..Europe lower and U.S. futures point to a negative open.
2. Manufacturing in China continued to contract in September…….
3. Japan’s trade deficit widened to ¥754.1 billion, or $9.62 billion, as exports declined 5.8 percent from the year-ago period.
4. Spain successfully sold €4.8 billion worth of three- and ten-year bonds this morning, exceeding targets by €300 million…….
5. Eurozone PMI fell to a 39 month low …….
6. U.K. retail sales declined 0.2 percent in August, better than a 0.3 percent drop economists were forecasting.
7. Adobe missed earnings expectations yesterday and set guidance for the fourth quarter that was sharply below analyst forecasts.
8. Nike announced an $8 billion share buyback program overnight. The new buybacks come on top of $5 billion worth of shares the company will re-purchase through the second quarter of 2013.
9. Bank of America is speeding up job cuts as it looks to cut its workforce by 16,000 employees by year’s end, the Wall Street Journal’s Dan Fitzpatrick reports.
10. U.S. economic announcements kick off at 8:30 a.m. with initial jobless claims At 10:00 a.m. the Philadelphia Federal Reserve will release its regional manufacturing report
SO to wrap up the above headlines, Asian markets are weak because China and Japan (who also want to kill each other at the moment) have very weak manufacturing and exports, Eurozone data so weak matching levels not seen since 2009, a U.S. software company not only missed last qtr but had a substantial guide down, a U.S. multi-national consumer discretionary company has concluded that their results next week will stink so bad that they need to preemptively announce a share repurchase program double the size of it’s previous one, and just as the Fed is attempting to QE jobs growth, the BANK OF AMERICA is accelerating job cuts to the tune of 16k by year end…..wow. Kind of depressing.
So for my back of the napkin calculation, 6 really suck,1 or 2 are positive and the rest neutral. I guess my point here is that the news flow really stinks at the moment, and it really doesn’t appear to be getting incrementally better, regardless of recent announcements of QE & OMT, and I like many other market participants are very skeptical that Central bankers the world over can QE the needed growth to reflate the global economy.
I was surprised that the Crude Oil’s 8.5% decline since the Fed’s announcement of QE wasn’t on the list, but it has obviously caught it’s lion-share of headlines in the last few sessions. My view very simply is that the recent move has less to do with supply demand and more to do with all of the other headlines listed above, lack of demand due to a very weak global economy. As for the news flow as we head into Q3 earnings season, it appears that the news flow is likely to get worse before it gets better, and the SPX at 1460 or so has a lot of good news in it at the moment, but it also has a pretty hefty Put embedded in it too.
We remain cautious but a bit more open minded to the fact that if the FED is hellbent on moving risk assets higher than we are not going to fight it with broad strokes, but will continue to look for single name opportunities where we feel the markets are under/over pricing a range of possible outcomes, as I did with my Put Calendar in JCP yesterday.
MorningWord 9/19/12: The iPhone6, I mean iPhone5 reviews are out and as expected they are spectacular (Mossberg here &Pogue here). Both of these guys do their best to not just boil over with excitement for the new device, but in the end they are both right, AAPL just introduced the best smartphone that will be on the market come Friday. Most of the reviews I have read can only find issue in AAPL’s decision to abandon Google Maps for their own App, but I am sure their loyal fanbase will forgive and forget as they did with Siri. Reports from both AAPL and AT&T earlier in the week suggest that the opening sales have been above all prior launches and will likely be their largest launch by a long shot.
AAPL Sept/Oct 700 Call Calendar Trade Update:
The stock has quickly moved to that lovely round number of $700 and could very likely get pinned there this week given the fairly massive open interest at that call strike. I am still long my Sept / Oct 700 call spread and I am trying to be patient and see how long I can wait and have the Sept 700 calls decay a bit more before I cover them and look to sell a higher strike call in Oct to create a call spread.
This trade has the potential to be a decent winner, with much more profit potential if the stock can just sit right here, but at some point soon I may have to make a decision to take the profit and move on, or cover the Sept and decide which strike to sell in Oct to create a call spread. As of last night’s closing prices, the stock went out at 701.91, the Sept 700 call could be bought for 6.70. That would be added to my original purchase price of 10.50, so a total of 17.20. But the Oct 700 calls that I am long can be sold at 21.10, so basically a profit of 3.90. So if I were to cover Sept and I thought there is more upside, which I do, I would look to sell a higher strike call in Oct to lower my break-even, but limit my profit potential. Hypothetically, I could sell the Oct 720 call at 12.10 and thus have the Oct 700/720 call spread on for only 5.10. Or Sell the Oct 715 at 14.00 and have on the in the money 700/715 call spread on for 3.20. These would both be great trades if you thought the stock could take off on any rumors of iPad Mini coming in Oct or Nov.
Some of you true believers are probably inclined to just wait for Friday’s expiration cover the Sept and then let them ride, that is also a good use of the Calendar, lowering the cost of Oct. This one is likely to come down to the wire, but my ideal situation is for the stock to straddle 700 for the next couple days and let Sept premium bleed. I will be sure to update when I manage the trade.
ON ANOTHER NOTE: I bought the Samsung Galaxy IIIs last week, primarily for market research, but also to see if I could get out from under AAPL’s smartphone yolk (to be fair I am a huge AAPL product fan, I have 3 macs in my house, 4 iPhones, 3 iPods, 1 iPad, 2 AppleTvs and prob some other iCrap that I am forgetting about). And to state the obvious, once they have you they have you. I use iCloud for calendar and contacts, I use iTunes for management of my music, pictures and movies, while Facetime has become a fairly useful and fun App to communicate with family & friends. On the Galaxy, I have successfully managed a bunch of work around for a lot of the cloud and media stuff, Facetime obviously a non starter, but for those who lack patience and curiosity about such things it is not easy to do, you have to submit to a GOOG/Android world.
So if and when I go back to iPhone it will be cause I miss the AAPL ecosystem that works so well with all of my and my families AAPL devices and that while the Galaxy is a great phone, it is great for someone who had never used an iPhone and who lives in a Google-centric world. Setting my history with iPhone aside, my gripes with the Galaxy are the following; Battery sucks, the phone is too wide to manage a lot of tasks with one hand, the back of the phone is very slippery, and typing almost anything is an onerous task, especially after using multi-touch since late 2007. Oh and I think the nail in the coffin was last night, I was at a Killers concert in the Bronx and I usually like to take one good video per show that I see, the video below is perfect but the sound absolutely stinks.
Ok I’ll stop whining and I know a lot of you are gonna say I told you so, but lets figure out how to make money off of my little foray into the Android world.
Killers – All These Things That I’ve Done – Paradise Theater Bronx, NYC- 9/19/12
MorningWord 9/18/12: After the excitement of the summer of 2011 (excitement = extreme volatility) many market participants expected a redux in the summer of 2012 given the EuroZone’s apparent continued inability to halt their Sovereign debt crisis. But since ECB chief Draghi awoke from his apparent late spring/early summer slumber, and pulled out his little Bazooka with his “whatever it takes” pledge on July 26, he, in hindsight, put an end to near-term systemic risks in capital markets.
After an initial surge in equities (and the expected crush in Sovereign Yields), the SPX settled into a veritable calm. The Aug chart of the SPX shows the almost 3.5% move at its onset and then the basing above 1400 the set the stage for the expected actions from the ECB and the FOMC.
In a month that saw volatility get absolutely crushed, the price action predicated on central bank intervention was somewhat fascinating when you consider all of the Unknown Unknowns that Enis referred to in his Macro Wrap this am. I am not going to list the old list of Known issues, but they still exist, and as Enis mentioned this morning they continue to be borne out in Q2 earnings (backward looking), but also continued murky guidance. This morning FDX (which had already pre-announced worse than expected Aug qtr guidance on Sept 4th) guided down for the current qtr and the balance of the year by almost 10%.
SO the real question as we head into the end of Q3 (that we know was likely less than stellar on the earnings front) is how the backward looking data will be viewed and will poor earnings visibility be further discounted on the heels of perpetual central bank interventions?
Taking a quick look at the price action of the SPX over the last month, it’s easy to see a continuation of the late July/August price action of surge, then consolidate then surge again. We know the causes of the 2 Surges in Sept, ECB and then the FOMC, both fairly well telegraphed events, but at this point, as less than stellar Q3 earnings become the expectation, a lot will hinge on forward guidance.[caption id="attachment_16787" align="aligncenter" width="490" caption="SPX 1 month from Bloomberg"][/caption]
My sense would be that the SPX will likely need to see a bit consolidation before it is able to surge again. The index will also need to see a bit of rotation out of some of the things that got us here and then a broadening out (which is in fact underway) to more speculative and possibly cyclical names and sectors.
Probably not a surprise to most but this is not a rally I believe in, it is not predicated on sound fundamentals and to me still poses many risks. The farther risk assets go without any real economic improvement, the greater the risk of the next mini-crisis, which will most certainly come in the months, years to come. So for my part I will try to be less stubborn and opinionated and continue to find both good and bad stories in what appears to be a mini-Bull market.
All that being said, as I mentioned yesterday in the Word (below), the one Known and Unknown could be the pace of the pace of the slowdown in China, and if things started to accelerate to the downside, (we will likely get a sense for this from earnings reports and guidance from multi-nationals earnings like FDX today and many more to come in Oct), this could be the one thing to derail this central bank induced Bull.
MorningWord 9/17/12: Central Bank’s monetary policy/intervention in the U.S. and Europe of late, have tamed the “Bear” for the time being in their respective equity and credit markets, while Chinese equities continue what appears to be a quest to make new 4 year lows, in stark contrast to ours. Given the importance of Chinese demand in the global economy, we would be remiss not to keep a close eye on the health of the Shanghai Comp, at least as a near-term sentiment indicator.
The 12 year chart below shows the long term importance of the 2000 level.[caption id="attachment_16715" align="aligncenter" width="490" caption="12 yr Shanghai Composite Chart from Bloomberg"][/caption]
The one year chart shows the fits and starts of this year which appear to be fairly consistent with that of it’s Western counterparts, early year rally topping out in the spring only to test unchanged levels, but unlike the SPX and the DAX, actually go down on the year and remain that way.
[caption id="attachment_16717" align="aligncenter" width="490" caption="1 yr Shanghai Comp from Bloomberg"][/caption]
Next I want to look at the price action in the since the July 26th “Draghi Bottom” where Shangahi’s performance is clearly negative, down about 2% vs SPX is up ~9.5% and the DAX up is yp ~15%. The last little bit of the chart, the price action since Sept 7th is what I find most interesting. The massive bounce off of the bottom on the whiff of stimulus from the Chinese Govt sent the shanghai comp up 3.6% on Sept 7, only to have the index go sideways on most of the news that sent U.S. and European equities soaring since that time. Last night’s price action of down 2.2% is troubling as it appears left to it’s own devices (meaning less stimulus and easing than expected) the index is sure to see new lows.[caption id="attachment_16718" align="aligncenter" width="490" caption="2 Month Shanghai Comp from Bloomberg"][/caption]
The last chart in the series and possibly the most interesting is one that my main macro man Enis likes to look at, an index compiled by Bloomberg that tracks the openings of new Stock trading accounts in China. The chart below clearly shows that they are approaching 5 year lows and that they have been trending lower with a series of lower highs and lower lows.
But let’s not confuse equity market weakness, and the lack of interest in equity markets for the potential for future economic weakness. What these chart tell me is that individuals and institutions that can invest in local shares of China view them as undesirable but equities can be a lagging indicator and show us little else than investor sentiment. If the PBOC decides to do “Whatever it Takes” to reflate their lagging economy, the Shanghai comp will go up for days if not weeks. So for now the Shanghai Comp’s price action is worth watching, maybe not as a “Tell” for our equity markets, or not even for the health of the Chinese Economy, but merely as a near term barometer for the sentiment of the Chinese Punter!
MorningWord 9/14/12: Your resident geniuses at RR.com don’t have a ton to add on the merits of additional QE at this stage of the game. We do believe that Fed Chairman Bernanke has the best intentions in mind while trying to QE the unemployment rate to a mere 7%, we just don’t have any confidence that the medicine offered is suitable for the symptoms and that this time around will cure the jobless recovery ills that are plaguing our stagnant economy.
I am not an economist, and don’t even play one on tv (just a monkey equity and options trader), but after watching Bernanke field question after question from the financial press yesterday about the intended results of the “new” bond buying plan, I am still a bit confused. The fed has basically pledged unlimited resources for basically an unlimited period of time to fix our nations unemployment problem. I got that part, which is essentially what they have been doing for the last few years, with the intention of keeping rates so low savers can’t save and need to invest in assets. So the Fed has set out to reflate a bubble, they believe that if the SPX is at 1600 soon that people who own stocks will feel a bit richer and go buy a bunch of crap they don’t need, hell maybe they even buy a couple condos in Las Vegas on spec. So I guess my point is, we have seen this movie before, and we know how it ends, but in the meantime, fighting it is futile. So Mr. Draghi and Mr. Bernanke, Mission Accomplished, Again.
On Another Note…..
I got a gem of a piece of hate mail from a reader overnight who told me in no uncertain terms that “I am on a short leash”, meaning his subscription to the newsletter is under careful review because we have been too bearish. I get that that, we have been bearish on the macro and on the micro, and had a tough summer. But here is the thing, we can only trade off of our convictions, and there is no one who has been harder hit by our trading than us. This year has been market by fits and starts where we have had some very solid gains on the short side, which on a couple occasions turned into not taking our profits quick enough and then remaining short for 10% plus move higher. SO we missed the rally, but our process and our convictions did not lead us to the conclusion to buy it, and we are not going to just change our mind on whims. We put our money where our mouths are and we take our trading very seriously, so it would be a mistake for any reader to think otherwise. We appreciate feedback and we strongly encourage it whether it be critical or not, we want to make RiskReversal.com one of the foremost educational destinations for equity and options traders on the web, and we can’t get there without you the reader. But I want to remind you of our mission statement that has been on the site since our inception in April 2011, we have definitely tweaked it a bit as we have evolved, but the general theme has been consistent (Read here).
Make no mistake about it, we get the game, and we know that many of you are looking for guidance and we are here to help where we can, but what we can’t do for you is make you $ in the markets, that is up to you, but we hope that through our very transparent process you can learn from our success and failures and make your own process that much better which enables you to make better risk decisions. We are trying very hard to look at the markets and individual stories with a much less critical bent, in the last month alone I have intimated bullish trades in FB, AAPL, BBY and AIG, not because I felt that I needed to, but because I liked the trades, we will continue to look to balance the trades that we detail because we were wrong to be so one sided short biased.
MorningWord 9/13/12: Last night on Fast Money we spent the first 13 minutes discussing the merits of of AAPL’s new iPhone release and what it means for the company and the stock, I was hoping for the full hour, but I guess to be responsible we had to touch on the FOMC! The lead up to the launch and then the basically non-event Event seemed a bit anti-climatic to me, and the phone while a nice upgrade to a very dated iPhone 4 & 4s, was nothing more than evolutionary. I mention this because what I find most interesting about the iPhone 5 intro is that it comes on the heels of AAPL’s patent victory over Samsung, and the irony that the iPhone 5 is basically just adding features such as 4G service and larger size at 4 inches which have been the standard on Samsung’s top of the line Smartphones for more than a year.
The price action in the stock leading up to the event and once concluded was muted to say the least, and in hindsight it appears there was very little that the company could do or say that would send the stock sharply lower. The stock essentially traded in a 2% peak to trough range, closing at the dead high of the session as it felt like investors were waiting for a drop but when it didn’t come they said screw it, what’s next. And the what’s next is probably what sets the stage for the next 50-100 points in the stock, the iPad “Mini” which has been rumored to be introduced sometime in Oct or Nov in time for the holiday season.
But there was some interesting tidbits in yesterday’s release that could and should shed some light on potential price point of such a device. AAPL introduced new iPod Touches, which are essentially tricked-out 4inch iPhones with out the phone, but they start at $299. AAPL currently sells 2 models of iPads, the New iPad, which has a 9.5 inch screen and starts at $499, and then they sell the iPad2 of the same size, which starts at $399. So I guess my question is, where the hell do they slip in the iPad “Mini” into this equation without cannibalizing 2 very new products (New iTouch and New iPad)?? So to refresh, they have iTouch at $299, iPad2 at $399 and New iPad at $499 (those are all starting prices). The logical answer is that once the iPad2 inventory is gone, the product will be discontinued and then the iPad “Mini” slots into the $399 range, but if it is a 7inch screen to compete with recently introduced models by AMZN, MSFT and GOOG, those products start at $199. Now AAPL will tell you that their product is head and shoulders above the competition, and it likely will be, but it still doesn’t change the fact that AAPL is creating its own competition among its own devices, and at some point their intention to offer consumers greater choice to stave off competition could be the final nail in the coffin for disproportionate amount of profit AAPL enjoys of the entire tablet pie. Again, I have no axe to grind here, I have plenty of AAPL products, I still contend that the best electronics that I have ever bought are the 2 MacAirs that I own, but as some of you know, after owning all 5 iPhones to date I just switched to the Samsung Galaxy IIIs and so far so good.
MorningWord 9/12/12: It’s all becoming very clear now, the fix is in. The price action in global equities, both developed and emerging has been one way since the ECB has articulated it’s plan to save the Eurozone and since Friday’s U.S. employment data was so bad that it was good for QE on this side of the Atlantic. Central bankers in Europe are once again going down a path to stem systemic risks without addressing the issues of stimulating growth, while the U.S. Fed is going to try to “QE” growth again back into our economy for the 3rd time in so many years. At this point I think it is safe to say that it is time to try something new!
So back to the Fix Being In, the obvious trade this week is to NOT Fight the Fed……why would you when we saw last weeks reaction to the ECB plan? I honestly can’t think of a good reason to do so, and at this point of the year, all systems could be a go until we get through the election in early Nov and start to focus on a grand compromise on the so called “fiscal cliff”.
As we head into the end of Q3, with the SPX up 14% ytd, earnings guidance for Q4 will likely hold the key to the continuation of the rally, but given the few peeks at Q3 (FDX, INTC, TXN, KFT) it appears that earnings visibility is going to be clear as mud. I think there is a huge distinction that needs to be made between equity markets that are trading at multi-year highs and economies that are seeing weakness that rivals that of pre-financial crisis levels. Weak earnings visibility, Obama re-election, fears relating to fiscal cliff and some fairly unforeseen global macro event could through a tiny little wrinkle back into the rosy equity return environment, my sense is that it would be prudent to be a tad cautious when it appears the investment world is complacent.
One more things: I bought a Galaxy III s last night and put down my iPhone4s, and at first blush I love it. My biggest issues are work around with all of my data and content that are very much intertwined into the iTunes/Mac halo thingy. This will be work in progress, but the irony here is that AAPL won a huge victory against Samsung for patent infringement, when it is clear that the Galaxy is the far more innovative phone from a hardware and software standpoint. If AAPL does not release a game changer today, get ready for more and more litigation.
Also Last night in Brooklyn I saw one of my favorite fairly new bands, We Were Promised Jetpacks at the Bell House, they opened with Keeping Warm, here is a clip from my new tricked out Samsung Smartphone: