MorningWord 10/25/12: I Assume Barron’s Think’s FB is “Still Too Pricey”

by Dan October 25, 2012 9:29 am • Commentary

MorningWord 10/25/12:  To say FB caught a bid yesterday was an understatement.  The way the stock opened, up more than 20%, it acted like the highly anticipated strong IPO it was meant to be back on May 18th.  If I were a shareholder, which I am not, the obvious worry would be that the new found enthusiasm for the shares will be met with ample willing sellers, as it has on every rally since the failed IPO.  The other serious concern is whether or not the surprising performance in mobile advertising in the qtr could be the start of a trend, or merely a sort of “hail marry” pass in a must win game?   The impending Lockup expiration of 1 billion shares in the next month will very likely serve as a massive overhang near term, but could any associated weakness from the selling pressure serve as an awesome buying opportunity for a stock about to turn the corner?  

About a month ago Barron’s featured a cover story on FB when the stock was trading near current levels,  titled “Still Too Pricey” and detailed some analysis suggesting the stock could be worth $15.  At the time we agreed with some commentators and analysts that the sentiment might have been getting a bit too negative and we laid out a strategy for longs to juice returns from the depressed levels (following the article) to take advantage of the unusually high implied volatility (read here).  Here we are a month later and the stock has round tripped the Barron’s move, but from where I sit, I am not sure there is a ton more upside in the near term……. from a pure technical standpoint, $25 looks like some serious resistance heading into the LockUp.  From a fundamental standpoint, the company not only demonstrated, but articulated their ability to monetize advertising on their mobile platform, albeit from a very low base (FB reported more than 10% of their quarterly sales came from mobile) which should buoy the shares above $20 for at least the next few weeks and possibly speak to upside in the new year.

Last week I got a little spooked by GOOG’s results and exited for no loss or gain a Nov/Jan13 22 call calendar (read here) that I had initiated in late August as I felt the stock below $20 had some upside, but was likely to be held at bay up until the Lockup.  Well here is the thing, yesterday’s move doesn’t change my mind about that, and I would expect that we see sellers, both long and short creep into the name trying to game the Lockup.  I don’t want to over emphasize this event, but many thought that the Lockup in August was also an over-hyped  well telegraphed event, I have no clue how this will go but if there were technical sellers in Aug at or below $20, I have to assume the same holders will be inclined to lighten their load above $23 when they are finally able to do so.

Bulls will argue the Lockup is “IN” the stock here, Bears will try to draw comparisons to Aug and the associated weakness and the nature of the sellers, but we won’t truly know until the shares are free to trade, I suspect the overhang keeps the stock btwn $20 and $25 for the next month.



MorningWord 10/24/12:  As bad as yesterday’s sell off in equities felt, it could have been a lot worse if it wasn’t for some relative strength shown by some recently beleaguered tech and consumer shares.  For instance on a morning that saw major earnings disappointments from the likes of DD and MMM (down 9% and  4% respectively on the day), sectors like Semis, Software & Internet all got a reasonable bounce as investors sensed that the pessimism following disappointments last week from INTC, IBM, GOOG & MSFT had gotten a bit overdone.  In the consumer space, better than expected reports by COH, HOG and WHR helped sentiment, and stocks such as TJX, DLTR, COST & LULU all caught a bid after what feels like 2 weeks of consecutive weakness.  

Aside from the bounces listed above there was some pretty bad action in Consumer Staples, Financials and Energy shares, as investors continued the trend of selling winners.  As we get closer to the end of Q3 earnings and closer to Nov 1st, the end of many Mutual Funds fiscal year, we could see this trend abate a bit, but what will be most interesting is to what names/sectors they come back for.   Prior winners like AAPL, IBM, MSFT, GOOG, SBUX, CMG, T, VZ, KO, MO have clearly had their momentum broken of late, all down at least 10% from 52 week highs made since the spring, who will be the new horses to ride?  November may be a very volatile month regardless of the Presidential election outcome, as investors quickly get focused on the “fiscal cliff” and the potential of a global recession in 2013.

Which leads me to investor complacency….there was obviously too much faith in central banks, and the ability for the announced actions in September to buoy stocks through whatever Q3 corporate earnings held in Oct.  Obviously that has not been the case as the past week’s weakness has been clearly the result of disappointing earnings, and Spot VIX has acted as expected rising more than 35% since near 52 week lows made earlier in the month.  What’s interesting to note is as Spot VIX is up a ton, the VIX futures curve still wreaks of complacency.  For instance, the last time the VIX tarded above 18, on Sept 4th, VIX futures 3 and 6 months out were at 23.65 (Dec12) and 27.75 (Mar13).  Yesterday’s spot close of 18.83 was the highest since early August, but futures 3 and 6 months out are down considerably, with Jan13 closing at 20.60 and Apr13 at 22.95.

The selloff might still have further to go, until we see signs of true panic (and potential VIX backwardation as a result).




MorningWord 10/23/12:  On RiskReversal, we spend a lot of time looking at and trading high-fliers, generally because it is a bit more fun than trading consumer staples and utilities, and the stories are more interesting.  Just because we don’t frequently trade “defensive” stocks doesn’t mean we don’t keep a close eye them in terms of price action and Vol .  Throughout the market rally from the early June lows we have done our best to avoid the temptation of fading the popular and crowded equity yield trade as investors flocked to names such as T, VZ, PFE,  LLY, MO, CL & PG (all with dividend yields of more than 3% and some over 5%) as they appear to act more like bonds than stocks.  This fixed income component of these stocks has also been Vol dampening.

The price action in the last few weeks, since the Oct 5th top, but particularly in the last few days has been a tad troubling, and has seen IV in many defensive’s pick up. GE for example, including this morning’s pre-market quote is down about 8% on considerable volume, wiping out more than a month’s performance, and now sits right on its 200 day moving average.

[caption id="attachment_18419" align="aligncenter" width="490" caption="GE 1 YR Chart from Bloomberg"][/caption]


CL is another stock that has perplexed us a bit, with just a 2.3% dividend yield, expected earnings growth in mid single digits this yr, and only 10% a year for the next 2, trading at 20x!!   CL just last week made new all time highs, with sales growth in the mid single digits expected for the next few years, this stock appears to be priced for perfection.  Where the hell is this thing going???

[caption id="attachment_18420" align="aligncenter" width="490" caption="CL chart since inception from Bloomberg"][/caption]


One last thing about CL, Implied Vol is very cheap, the chart below (blue line 30 day IV, white orange and green are the 30, 60 & 90 day realized) shows that until just last week, CL IV was at or below realized even with earnings due later this week.  CL is generally a very low vol name and given the stock’s steady ascent in such a low vol environment of the last few months, this doesn’t come as a huge surprise, it could serve as a huge opportunity.  We will take a closer look prior to Thursday’s Q3 print.

[caption id="attachment_18421" align="aligncenter" width="490" caption="CL 30 day IV vs 30, 60 & 90 day Realized Vol from Bloomberg"][/caption]


With earnings disappointments abound, the search for boring, low vol names may be the way to play for the balance of this earnings cycle which might had just shifted from a brush fire to a 4 alarm fire.

Another good example could be VZ over the last few weeks. VZ, also a mid teens IV name where realized vol had been basically inline with 30 day IV, and then BAM the stock started to move.  The chart below shows the Price (yellow line) vs the Implied Vol (blue line) and the 30 & 60 day Realized Vol white and Orange.  IV flat lined as the stock steadily rose to 52 week highs, and then the stock started to move up and down, and the IV exploded.

[caption id="attachment_18422" align="aligncenter" width="490" caption="VZ Price vs 30 day atm Implied Vol vs Realized 30 & 60 day Vol from Bloomberg"][/caption]


So by now you prob get the point when long premium directional trades start to give you vertigo at this stage of the earnings cycle, the ripe opportunities may be among the names less traveled by active traders.





MorningWord 10/22/12:  Shortly after AAPL’s introduction of the iPad in 2010, Steve Jobs famously dubbed competitors (who were slightly caught off sides in the category) efforts to introduce 7 inch devices as DOA or dead on arrival.  In what was a very uncharacteristic appearance by Jobs on  an earnings conference call, the commentary provided a massive jolt to the companies intentions to create and dominate the new product category, but in a strong sense of irony, the “DOA” quote will likely live in infamy, regardless of the Mini’s success of failure.  Tim Cook’s greatest opportunity and biggest risk is to differentiate himself from his predecessor, and with the completion of his first full year at the helm, the “honeymoon period” is likely over, and once the presidential election is over I fully expect Mr. Cook to be one of the most highly scrutinized people on the planet for the next year or two.  

AAPL’s stock got drilled last week, down 3.3%, all of it coming on Friday, but the stock now sits 13.5% from the all time high made on Sept. 21st the date of the iPhone5 release.  The pattern seems oddly similar to the stocks assent into the New iPad release in April, with the stock making a new high on the product and then sell off of about 13.5% into the fiscal Q2 print.

Here is Feb 2012 to June 1, 2012:

[caption id="attachment_18355" align="aligncenter" width="490" caption="AAPL Feb thru June 2012 from Bloomberg"][/caption]


Here is July 1 2012 to Oct 19, 2012 (look familiar?):

[caption id="attachment_18356" align="aligncenter" width="490" caption="July 1 to Oct 19th 2012 AAPL chart from Bloomberg"][/caption]


To say that this is a big week for AAPL, and CEO Tim Cook would be a bit of an understatement with the product launch tomo, and fiscal Q4 earnings on Thursday.  Both events at this point are likely in the stock, as we have a good sense for the Mini, and expectations for the quarter and guidance are  likely to be disappointing.  Wall Street Analysts have a full on case of “Stockholm Syndrome” when it comes to this stock, they have become so used to the company “sandbagging” guidance, they will all likely be the last ones on the planet to recognize when the story is actually over, but for the meantime, they just damper expectations heading into the prints.

As for the stock, the momentum is clearly broken after a series of new highs, but for the meantime,the stock should be able to hold the $580/550 area.  The stock’s break of the 100 day moving average was the first since their Q3 miss in July, and the stock seems poised for a test of the 200 day moving average which it has not closed below since Nov 2011…..the stock did double from that point.

Enis thinks the top in AAPL is in.  We’ll only know that in retrospect.  But regardless, this one-way gravy train is finally showing some two-way risk.


MorningWord 10/19/12:  As traders and even as purveyors of, we make mistakes on a daily basis.  Most readers of the site get what we are trying to do, and understand that we will have hits and misses, we are human, heck look at A-Rod going 3 for 23 in the post-season this year, and trust me none of us have ever been MVPs.  

In retrospect, it would have been nice to have a bearish trade on CMG.  But one thing we won’t do is try to catch a falling knife on these broken growth stories.  Maybe just maybe, as was the case in RIMM, when the name looks thoroughly washed out we will take a defined risk bet to the upside, but while the story is still unfolding, as it is with CMG, we will not.  Enis had a great preview of CMG’s Q3 on Wednesday, very succinctly running through the inputs we use to arrive a trading decisions.  While he had a clear bearish bent, his conclusion:

I think CMG will have a very tough time regaining the $350 level unless they see an unexpected sales surge over the next year (which management does not seem to expect).  If management is correct in expecting mid-single digit sales growth, then the valuation still looks rich.  My main concern on the short side is that Einhorn’s commentary 2 weeks ago might have introduced some Johnny-come lately’s to short the stock.  But if I take any position, it will likely be selling volatility, and likely short biased (I don’t expect another 20% move this quarter).  Regardless, Chipotle’s days of spectacular growth are behind it.

So in the end, we feel pretty good about our analysis, we won’t always get our trades right, but we have never stated we would, I know few who do!  We hope you appreciate the process as well.

OK NOW MORE IMPORTANTLY, lets look at a trade that we have stuck with, and have a good bit of conviction on, Bearish MSFT.   Last night the company reported their fiscal Q1 that saw revenues slightly below expectations, and EPS .03 worse than consensus.  One of the main tenants of the bear case is affects of mobile computing on MSFT’s Windows franchise which, despite deferrals for Windows 8 (launched next week) the segment was down high single digits year over year.  Given the recent results from DELL, HPQ, AMD & INTC and the PC shipment data from research firms Gartner and IDC earlier in the month, this should not come as a huge surprise.

While many investors are squarely focused on the presumed upgrade cycle for Windows 8 (we think cycle would be massively overstating what we feel will be a mandatory upgrade by all of those who are still on XP and will need to upgrade because MSFT plans to stop  supporting XP in 2014) but the recent pricing of MSFT’s Surface tablet at a starting point of $500 may be more instructive to the future of the company.

Henry Blodget of Business Insider had a great post this morning about MSFT’s chances to compete in mobile, in short he sees that they have no chance given AAPL and Androids formidable lead, but as he states,

there is very little chance that Microsoft and its hardware partners will ever be able to turn around Microsoft’s fortunes in mobile. But any chance is better than no chance. So these product launches are critical.

The computing world has faced a dramatic shift of late, as Blodget notes:

Last year, in the most profound change in the computing market in two decades, more smartphones and tablets (mobile) were sold worldwide than PCs (see chart below). Overall, Windows has only a tiny sliver of this mobile market. The more share Microsoft loses in mobile, the more share Microsoft loses of the overall personal computing market. And the more share Microsoft loses in the personal computing market, the less valuable Microsoft’s “platform” becomes.

[caption id="attachment_18247" align="aligncenter" width="439" caption="Global Internet Device Sales From Business Insider"][/caption]


It is our view that Surface, as will Windows phones will be DOA, and MSFT will be left to make one or many trans-formative acquisitions to just stay in the game as a  distant number 3 player on the platform level.

I am long an Oct 29/28 Put Spread that expires on the close today, with the stock down only 2% in the pre-market, I will look to close and roll out a bit.  As Enis mentioned yesterday in his Q1 preview of MSFT, the 3% dividend yield, rock solid balance sheet and valuation at multi-year lows should buoy the stock to some degree, but we see no reason why lackluster sales of Windows, their own hardware and a general sense of apathy towards their products but consumers and businesses a like should cause a reset in valuation despite optics that could suggest otherwise.


MorningWord 10/18/12:  This past Tuesday I was on CNBC’s Fast Money at 5pm, and the unthinkable happened……..AAPL earlier that day had sent out a media invite for the iPad Mini announcement, and there wasn’t a single mention of it on the program. I am not really certain how TV sets across the country, or the world for that matter, did not explode without their daily fix, especially given the magnitude of the announcement…..A NEW FREAKING iPAD!   But Seriously on a day that saw abrupt management changes at Citi and a fairly bitterly divided nation focused on that evening’s presidential debate, a 7 inch (expected) iPad was just not that newsworthy….oh how the mighty have fallen.  

Since AAPL’s Sept 21st release of the iPhone 5, and the stock’s subsequent decline from all time highs, the momentum in the story has shifted fairly dramatically in a very short time (Enis speaks of this daily to anyone who will listen!).  The 20 day chart below shows the almost 11% peak to trough sell-off from iPhone 5 release day until Tuesday’s announcement of the announcement.  But the approximate 2.5% rally since the invite went out seems a bit muted, and just this morning AAPL trading lower on VZ’s headlines about iPhone sales: *VERIZON SAYS 6.8M SMARTPHONES SOLD IN 3Q, 3.1M WERE IPHONES-Bloomberg.

[caption id="attachment_18166" align="aligncenter" width="490" caption="AAPL 20 day chart from Bloomberg"][/caption]


There were a couple other stories overnight that could be weighing on AAPL, one from the WSJ’s All Things Digital Blog suggesting cannibalization rates of the Mini vs the regular iPad.  Another from the WSJ talks about AAPL’s headwinds in India, talking about AAPL’s challenges in emerging markets such as India where distribution remains a huge obstacle in a market where carriers don’t offer subsidies for phones and AAPL’s price-point may be too high for a population that rarely pays more than $100 for a phone, which for most can serve as their land-line, computer and mobile phone all in one.  One huge issue for AAPL’s future growth, and a question that we have brought up on many occasions on the site: have they picked most of the low hanging fruit in the maturing mobile markets in the West (those that can afford, or stretch to afford the next iGadget) and as they attempt to compete with lower cost options in emerging markets, will they give up a good chunk of their eye-poppingly high gross margins?

The other question as it relates to the first story I reference above, is how crowded will AAPL’s mobile offerings become?  With the intro of the iPad Mini next week, there is evidence that there will be 24 different configurations to chose from in the iPad family.   And then you get to the price points, you have iPod’s that offer video and Web starting as low as $200, 4 inch iPhone’s starting as low as $200 (with contract), new 4 inch iPod Touches starting at $300, 7inch iPad Mini’s starting maybe as high as $400, but possibly as low as $300, 10 inch iPad 2 starting at $400 and finally the New iPad starting at $500.  Wow that is a crowded field, and likely the sort of product offering that would make Mr. Jobs ill.

One of the most interesting take-aways from a business perspective in Walter Issacson’s Biography of Steve Jobs, was how horrified Jobs was on his return to AAPL in 1997 to see the lack of product focus as evidenced by the dozens for product SKUs…….One of the first things he did was to shut down production of most and focus on one or two products in each key category.   I guess my point is, the iPad Mini may be the first product introduction in over a decade viewed as defensive, rather than category creating, or re-creating.  Steve Jobs himself said in 2010, that the 7 inch tablet was DOA, so will AAPL’s entry do more harm than good?  Or will we see more defense of their market-share with products that would not get the approval of Jobs?

A few weeks back when the stock started its descent, I was of the mindset that it would likely bottom, at least for the short term, below $650 and then bounce into and out of earnings, but the lack of momentum in a rip-roaring market this week on perceived positive news is a bit disconcerting.  Enis thinks the story is done, put a fork in it, he wants to sell the next rally and stay short.  My sense is that institutions have been locking in profits over the last few weeks, but one last new high could be left  in the cards. We are not trying to confuse people here, but we are obviously 2 different people with 2 different points of view and much like the market, it takes 2 to tango.  Next week’s iPad announcement on Oct 23rd, followed by their fiscal Q4 report will likely present multiple trading opportunities for both sets of views.  Stay Tuned.



MorningWord 10/17/12:  As we get into the meat of earnings season this week and next there appears to be a slightly some divergent inputs btwn the Micro and the Macro.  First off, Enis last week highlighted the worst ratio of negative earnings pre-announcements for Q3 (91 to 21) since Q3 2001.   With the market off ~3% from the Oct. 5th high heading into this week, market sentiment was clearly negative, this was a fairly treacherous set up when you consider how poorly WFC and JPM acted on Friday.  

And then Bam! we continue to get better than expected data on the Macro front with encouraging retail sales, manufacturing and housing data just this week, all coming on the heals of last weeks really mysterious (I wish I had a sarcasm font) jobs numbers last week.  Oh and the Germans and the Spanish appear to be playing well together and appear to be close to a Spanish bailout agreeable to both countries.  Despite the usual geo-political stuff in the mid-East, the macro seems to be suggesting smooth sailing at least for the balance of the year.

Which brings us back to the micro, as I am surveying the damage from some select earnings over the last 16 hours, I see multiple disappointments, from INTC & IBM in Tech to HAL &APOL. Even those that that don’t particularly look bad are trading down like PEP and BAC.  My sense is that there is a bit of good news priced into equities as we once again approach 5 year highs in the SPX.

On another note, I think it is curious that the recent top in the SPX on OCT 5th, came the morning after Romney’s shellacking of Obama in the first Presidential Debate, I had read some theories suggesting that a Romney Administration would mean Bernanke Out and a far more Hawkish Fed Chairmen in, putting an end to the easy money policies of Helicopter Ben. What does last night’s performance from the President do to this line of thinking?

Lastly, a little comment on how we are trading earnings. We like to trade earnings, we see it as one of 4 great opportunities to formulate a view on vol and juxtapose it against other inputs and arrive at a trade.   Often times this results in calendars as we have done in JPM and GS in the last couple weeks, if you get no movement or the direction right, these are very high probability trades.   The hardest part for most traders is getting the direction and sentiment right, which is one reason why in the last couple of weeks I have taken off a handful of trading positions into earnings. For example, MSFT and GOOG in just the last few days and INTC last month.  At a certain point on a pure directional basis with long premium trades, the events become fairly binary (like YUM last week, ugh), and you better have conviction to leave them on.

During this earnings season we are putting out our work on individual names as we have done in INTC, IBM, EBAY & CMG in just the last few days.  When we have strong conviction and a trade structure that we feel gives us an edge, we will trade it, some trade for the sake of trading, this can be a difficult time to do so.   So we urge readers to take a hard look at our previews, and try to use the inputs that we throw out there to come up with smart trades with better than avg risk/reward profiles.

Trading/Investing in equities over the last 21 months has not been an easy endeavor, as we head into the close of the year it is imperative to not make things more difficult than they have to be, so we will continue to attempt to lay down a few bunts, but generally shoot for singles and doubles, and avoid getting struck out looking or while swinging for the fences.




MorningWord 10/16/12:  On numerous occasions in the last few weeks we have highlighted the weakening momentum among previous market leaders.  The jury is still out on whether we have just seen a bit of profit taking as we head into a potentially volatile earnings season, or whether we are seeing a broad shift in sentiment away from many of the 2 or 3 baggers in the bull run of the last 3 years.  We spend a lot of time writing about high-fliers on the site, but the recent m&a news in the wireless services space has caused a few intended consequences among the larger players (T & VZ), at least the way their shareholders view the recent performance and likelihood for continued upside.  

Since early Oct when DT’s intention to acquire PCS and combine it with their T-Mob operation became public knowledge, AT&T shares have been down about 8%, giving back about a third of the ytd to gains.

From a technical perspective, T has had an interesting year, under-performing the broad market throughout the early stages of the rally, right up until the May highs, but then grabbing the interest of investors focused on domestically focused defensive names and those that offer a serious dividend yield.

[caption id="attachment_18027" align="aligncenter" width="490" caption="T vs SPX ytd from Bloomberg"][/caption]

This morning, Enis wrote about the performance of the Healthcare sector in his MacroWrap, and these stock share very similar characteristics to the telecoms.

Setting aside the company’s 4-5% dividend yield for most of the year and the fact that they receive 100% of their sales in the the U.S., T’s valuation seems a bit stretched for a company only expected to grow earnings 8% a year for the next couple years, trading near a market multiple.

What’s also interesting about T is that the street has been slightly on the wrong side of this trade, as Wall Street analysts have 13 Buys, 25 Holds and 4 Sells on the stock with and avg 12 month price target of about $35.8, which is below where the stock had been trading for the last 2 months.

The company reports Q3 earnings on Oct 24th, the options market is implying about a 3% move vs the 4 qtr trailing avg move of only 2.2%.  The spike in short dated vols makes sense given the stocks recent collapse, but as the chart below shows, the 30 day implied vols have likely overshot what can be expected around earnings events, and the 5 point surge above the 30 and 60 day realized is highly unusual.

[caption id="attachment_18028" align="aligncenter" width="490" caption="AT&T 30 day Implied Vol vs 30 & 60 Day Realized from Bloomberg"][/caption]


No Matter what your directional bias is, calendars could make sense, we will take a closer look early next week prior to earnings, in the meantime though I am slightly intrigued of playing for a bounce if it can hold yesterdays lows.


MorningWord 10/15/12:   Last week at their annual analyst meeting, Dollar Tree (DLTR) guided revenues to the low end of the previous range given in July.  The stock got drilled, down about 12.5% in 2 days since the warning, and down ~28% since late June when it was trading at all time highs. The 1yr  chart of DLTR could be filed under “classic broken story” in the annals of stock trading.

1 Yr DLTR chart from Bloomberg


The three circles depict three consecutive disappointments on one metric or the other, I guess the third time was a charm.    Which leads me to the question, Are all Dollar Stores created equal?  The chart below tracks the performance of DLTR vs Family Dollar (FD) and Dollar General (DG), generally showing the correlation btwn the 3 stocks.  They have for the most part moved in lock step this year making new all time highs in June, only to give back about a third of their ytd gains and until DLTR just lowered the boom and now shows a fairly massive divergence to the other 2.

[caption id="attachment_17952" align="aligncenter" width="490" caption="1 YR DLTR vs DG, vs FDO from Bloomberg"][/caption]


Based on some of my quick analysis, the answer the above question won’t be easily determined…..Less than 2 weeks ago, FDO reported earnings that were slightly better than expected and raised 2013 guidance slightly.  Apparently they do not share the same concerns that DLTR management gave for the weaker forecast, election uncertainty, high gas prices and long term unemployment.

The weak is generally weak for a reason, and the strong is strong for a reason.  But that’s a large divergence for 3 companies that all sell products for $1.  Hard to see a competitive dislocation when all the companies sell similar products for the same price.  This isn’t a case of AAPL vs. RIMM.  So we’re more likely to play for convergence in the weeks ahead.



MorningWord 10/12/12: Yesterday’s action in U.S. equities was a fairly clear indication of declining momentum as many of the prior market leaders seem to be losing a little steam.  The SPX and the Nasdaq opened up more than 70bps only to spend the rest of the day selling off to close on the day and leave the indices unchanged and at or near 1 month lows.  SO this leads to the obvious conclusion that while momentum of market leaders is waning, we are seeing a rapid decline in the breadth of the market.  When you look at the 3 year chart below of the SPX vs Bloomberg’s Composite New High Index it becomes very clear that a small amount of stocks/sectors have been doing much of the heavy lifting in rally from the 2011 lows, and only just recently when the SPX made new 5 year highs did we see any real broad participation.

SPX vs Bloomberg Composite New High Index

Which leads me to the point that Enis was driving home earlier in his MacroWrap about Rotation by the Big Money out of massive winners into relative under-performers.  It appears this has already started to happen, as many mutual fund mangers are quickly looking downhill the the last few weeks of their fiscal year, and looking to lock in some gains while also positioning to add some alpha in some under-perfroming stocks/sectors.

Enis gave some good examples in his post, and I would take it step further by adding that hedge fund managers also game this process, and have their own little tricks by causing short squeezes in controversial names.  A couple examples of this just yesterday could be the 8.4% rally in JCP, the 4.5% rally in DECK and the 7.1% rally in BKS.  All of these names are in the retail /consumer space are very controversial, have massive short interest, and in the case of JCP and BKS have activist investors involved who control large stakes of the float.

-JCP: 41% short interest, top 5 holders control ~50% of the shares outstanding

-BKS: 31% short interest, top 5 holders control ~50% of the shares outstanding

-DECK: 38.5% short interest, top 5 holders control ~31% of the shares outstanding

Put another way, these activists and large holders are practically daring shorts to get in.  The flip side of this is that savvy hedge funds know how to game this and we have seen a ton of upside call buying in BKS over the last week as the stock has rallied 30%!  As an example, yesterday 13k of the Jan13 20 calls traded.

Sticking your neck out to short these sorts of stocks at this time of year can be quite dangerous.  If you have a strong fundamental view, then options can make more sense, on both the big winners and the big losers, as volatility in single name stories will probably stay high for the next couple months.


MorningWord 10/11/12:  Last night, in his Too Many Options, Enis flagged a large options trade that caught me by surprise in NOK.  Someone bought 44k of the Jan14 5 calls for .37, with a break-even in 15 months more than 100% higher than current levels.  NOK sits about 65% off of its 52 week highs, about 55% off of the 52 week, and 15 year lows made in July.   The company, and the stock for that matter, has been relegated to the once dominant but now also ran category among handset makers (see RIMM & MOT).  

Just to put things in perspective, AAPL’s Q3 revenues  alone of $35 billion will be greater than NOK’s expected full year 2012 revenues of about $29 billion.  Of AAPL’s $35 billion $25 billion can be attributed to iPhone and iPads.  Make no mistake about it, many of NOK’s woes have been self inflicted, but AAPL’s emergence to the mobile space was kind of the nail in the coffin.  In 2007 when AAPL introduced the iPhone, NOK reported record sales of $51 billion, which has steadily declined ever since.

Yesterday’s trade was interesting to me because I read a blog post from last week entitled Why Apple Should Acquire Nokia.  Here are a few of the highlights from the post:

  • A large por­tion of progress in the mobile space will be dic­tated by the avail­abil­ity and own­er­ship of patents. While Apple and Sam­sung are most famous for their spe­cific fights over patented tech­nolo­gies and approaches, Nokia has qui­etly built up a very strong and rel­a­tively young patent port­fo­lio
  • A 2011 sur­vey showed that Nokia was the largest patent holder for essen­tial tech­nolo­gies relat­ing to LTE.
  • In fact, Nokia’s patent port­fo­lio may be valu­able enough on its own to jus­tify buy­ing the com­pany. With ana­lyst putting its value at any­where between US$6 and US$10 bil­lion, one could buy a patent port­fo­lio and get a telecom­mu­ni­ca­tion and map­ping com­pany for almost free.
  • Nokia has made a num­ber of bets on loca­tion and map­ping, with the 2007 U$8 bil­lion acqui­si­tion of Navteq. This acqui­si­tion made Nokia the largest provider of map­ping ser­vices in the world. In fact, the com­pany pro­vides map­ping ser­vices to Google, UPS, Fedex, and many of the largest play­ers in the auto­mo­tive industry.
  • When looked at in con­trast to the recent release of Apple maps, it seems that this invest­ment is one that would greatly ben­e­fit Apple and allow it to quickly catch up and sur­pass Google. The com­pany could decide that it would not renew its offer­ing to Google when that con­tract expires, forc­ing the search giant to go and build out a greater capa­bil­ity in that arena if it wants to retain its lead in the space.
  • Of course, an acqui­si­tion of Nokia would have quite an impact on Microsoft as it tries to make its way back into the mobile space. With Nokia as its most impor­tant part­ner, Microsoft’s hope to become a likely con­tender for con­sumers’ hearts might be dealt some­thing pretty close to a death­blow.
  • Mean­while, the increase in the size of the patent port­fo­lio Apple would con­trol would prob­a­bly have a large impact on the company’s law­suits against Android man­u­fac­tur­ers. In a world where Android is promi­nent that you get a free Android phone when you buy a mag­a­zine, Apple’s law­suits could even­tu­ally start cut­ting into that rate of growth.

Maybe yesterday’s buyer read this opinion last week as I did and was equally intrigued by NOK’s $5 billion enterprise value and the how the sum of the parts could far outweigh the risks to their hardware business near term.  Additionally given MSFT’s reliance on NOK given their recent smart-phone partnership, any interest by a competitor such as AAPL would force MSFT into the bidding.  NOK’s Q3 is likely to be horrible, and given the stock’s recent 50% rally of the lows it may make sense to wait for the next dip to step in, but given the recent M&A activity in the wireless services space (PCS/T-Mob and this mornings report of Softbank for Sprint) traders may not be able to contain themselves as the lower dollar stock, and the low dollar premiums in NOK allow for low notional exposure with large amount of shares or contracts.




MorningWord 10/10/12:  Last night YUM reported Q3 earnings that were better than expected, while revs were a tad light, but slightly raised FY2012 eps growth forecast from at least 12% to at least 13%.  As it relates to China, where they will see much of their future growth and receive about 45% of their current revenues, the company reported comp store sales in line with consensus and suggested they will open 750 stores in China this year, up from previous target of 700.  I guess the most interesting take-away from the report, is that while most investors were focused on China being the cause for concern (me included), many had expected the U.S. to be weak after seeing disappointing results this summer in the U.S. from MCD and CMG.  U.S. comp sales were actually better than expected, up 6% vs the estimate of up 4.4%.  Could YUM’s U.S. performance be a result of one of the main tenets of hedge fund manager David Einhorn’s short thesis on CMG that he laid out nearly 2 weeks ago at the Value Investing Congress?  His view on CMG (he declined to offer and investment opinion on YUM) is that Taco Bell’s New Upscale Menu in the U.S. may eat CMG’s lunch so to speak.  Some guys are just really good at this.

The stock is up about 4.5% in the pre-market in line with the implied move, as investors’ worries about slowing sales in China are allayed for now and the U.S. is outperforming.  This is one fast food chain that appears to be bucking the trend.

Yesterday prior to the close,  I adjusted a bearish position in YUM that I have had on for 2 months, and rolled up and out a bit, my new position as of yesterday’s close is long the Nov 65/60 Put Spread after taking a loss on the Oct 62.5/55 Put Spread.  In the post I outlined 3 options for my Oct trade and how I was thinking about going forward, and they were:

1. Sell the Spread for a loss and wait for the news to come out and then make a decision about how to express the bearish view if the news confirms the thesis (albeit at lower levels).
2. Sell the spread and roll to higher strikes and possibly even out to Nov in an effort to stay in the game.
3. Leave the position on and play for an out sized move post earnings.

In hindsight, number one was the right option, but here is the thing, if I am going to trade earnings, which I do frequently, I have to go with what I feel my best trade ideas are, knowing that I will not always be right.  The prudent thing to do would have been to take a step back after 2 months in the trade, and wait for the news to come out and make my next move with the knowledge of the results.  At this point, I am just wrong on the story, or maybe my timing is wrong, but now I have had 2 losing trades in the course of 2 months in the name, and it is likely time to bail and move on.  I will officially update this trade this morning, after I see how the stock trades.

On another note, Enis nailed CMI with a Bearish play into their Q3 earnings and will get paid early after last night’s negative pre-announcement.  Whats interesting about CMI is that their exposure to China is obviously one of the main drags on the company.  Also last night, AA once again cut their demand forecast for Aluminum due to weakness in China.  Both China related warnings come on the heals of FDX and NKE’s results in the last month that also both signaled to weakness in China.