MorningWord 11/08/12: Yesterday’s almost 2.5% sell-off in U.S. equities was far less confusing to me than Tuesday’s 1% rally. On Tuesday I put my money where my mouth was and bought near the money Nov SPY Puts, as I felt an Obama victory would clearly cause Tuesday’s gains to evaporate. Well they did and then some, but the price action turned into a bit of a pile on with disturbing headlines and images out of Europe, market leaders like AAPL being sold aggressively as some investors look to avoid the potential for paying higher capital gains taxes in the U.S, investors unwinding the “Romney” trades, and obviously the focus shifting to what some market participants fear could be a fairly binary event, resolution of the “fiscal cliff”. Take your pick, there were a lot of reasons to sell risk assets yesterday, but one not mentioned above is the weak economic backdrop as evidenced by the less than stellar Q4 guidance of late. The investment environment for the time being looks fairly challenged for equities for the balance of the year, but we felt that way prior to the election.
The worst performing sector was financials. Huge moves, as MS, GS, BAC, C, and JPM were all down btwn 5% and 8.5%. Financials are stuck between a rock and a hard place, since they like QE as it boosts asset prices, but they don’t like very low rates as it hurts their rate spreads. It feels like the juice from QE has become much less fruitful, leaving them with only the downside of low rates. In this environment, add more aggressive regulations, and you have a rather negative cocktail for bank management teams. After a strong performance in 2012, I expect fins to lead to the downside in 2013. I currently own Nov put spreads in JPM and GS that expire next week, and will likely wait for a bounce into the end of the year to get involved again on the short side.
This morning, JPM got approval from the Fed to buyback up to $3 billion worth of stock in Q1 2013, the stock is up 2% in the pre-market, and I would I assume the group as a whole should catch a bid this morning after yesterday’s bloodletting. The price action in the space this morning could be the “tell” for these stocks for the balance of the year, if they quickly give up early gains, I would expect to see most bank stocks drift lower to support levels as they have recently gotten fairly extended leading up to the election.
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MorningWord 11/07/12: With the election over, we can now get back to the important business of talking about AAPL again… just kidding. OK, probably not. But your guess is as good as mine what the next few weeks brings for financial markets, if the price action over the last 24 hours in the SPX is any indication, we are likely to be in for a bit of a bumpy ride into year end as investors look to hold onto ytd gains. For the balance of this week we will probably see a bit of a knee-jerk volatile trading as investors realign their portfolios for 4 more years of the same, and get them battle ready for the next political fight in an effort to find a compromise on the “fiscal cliff”.
The obvious trades have been bandied about for weeks, Obama victory good for alternative energy, hospital stocks and insurers, bad for financials but good for equities (maybe) as Bernanke can keep the printing press on…….we don’t think you chase these trades……On the Romney side, hmmmmm, who knows, coal stocks retreat a tad? My sense was the markets few % point decline off of the multi year highs in Sept seemed to align with the Romney bump after the first presidential debate in early Oct and the potential for a more hawkish Fed. But, it all seems a bit boring to me, this election was basically the same as it was in June, with a few temporary moves in the polls that reset back to their long baseline after, and all that money and spent on the campaign, and all those commericals changed nothing.
But the fact of the matter is, if you avoided getting caught up on the macro for the last few months (as we have tried to do), it may well be time to start brushing up on all those geo-political issues that seem so 2011/early 2012! We are very focused on the micro, we believe very strongly that a large part of our value proposition to readers is not regurgitating most of the crap that you hear from the big money in the financial media or from your broker/brokerage house, but taking a unique, multi disciplined, sometimes contrarian approach to the norm. WE WANT TO BE RIGHT AS OFTEN AS WE CAN, AND WE ARE TRYING VERY HARD TO CUT LOSSES QUICKER ON LOSING TRADES. This means rolling up our sleeves and doing work on individual stories where we feel we can use multiple inputs to get any form of edge when looking at a story or situation.
So in the end, regardless of your political leanings, for us, the election was just another distraction to the task of trying to make money in an increasingly littered minefield called the financials markets. Our goal is to finish off the year in a very strong manner, avoiding big blowups, avoiding death by a thousands cuts through over-trading, but by trying to hit singles and doubles. One thing is certain, there will be many tradeable moves in what we will be a fairly abbreviated balance of the year.
Yesterday at 3pm I bought some SPY Nov 142 Puts as I thought the 1% rally on the day seemed a little odd given what seemed obvious to us that an Obama win would be met with some selling this morning and possibly for the next week. With the S&P futures down 1% I will watch this very closely with an eye towards closing at a double or spreading by selling a lower strike put. Stay tuned.
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MorningWord 11/06/12: Back on Sept. 6th our main macro man Enis was on CNBC’s Fast Money Halftime program with another fairly esteemed guest, hedge fund legend Leon Cooperman. Enis and I have had a few conversations about Cooperman’s candid comments that day, but just yesterday Enis reminded of Cooperman’s expectation for the SPX given the potential presidential election outcomes:
from the roughly 1400 area a Romney victory would add 100 points to the s&p and an Obama victory would probably be maybe a 50-point decline. I think it is very important. We’re at a crucial point in economic history of the country and I think what happens in November is very important.
Now that is just one man’s opinion, and this could have changed by now, but what is clear to us is that all the opinions that we hear and read in the financial press about where stocks are going based on the election outcome really don’t amount to a hill of beans. The fact of the matter is there are probably 100-200 people in the world who determine the immediate direction of the market after such a significant political/market event, Big Money Managers at mutual funds and hedge funds like Cooperman. And here is the thing, the Big Money is sort of like a Mafia, they have their “Meets”, (they used to talk on the phone, before the Feds starting tapping them) but my sense would be that they come to see things fairly similarly. If “Don” Cooperman suggests that we have 100 points up on a Romney win, and 50 points down on an Obama win, he’s most likely projecting who he wants to win, but that’s probably a fairly common sentiment among people like Cooperman that we (the little guys) should be aware of anyway. But tomorrow, the news cycle will quickly turn back to Europe and lame duck session negotiations over the “fiscal cliff” and I would be very surprised to see an outsized moved based on an outcome that polls have allowed most poll watching money to game ahead of time.
Last night I was on Fast Money and we were tasked with picking stocks/sectors that should perform well/poorly based on the potential outcomes. One of my fellow panelists put it fairly clearly, a lot of the good news is in the stocks, so probably not wise to chase them, which also only leaves potential disappointment for those that have rallied, like coal. Gaming this process can be a bit risky and not likely to profitable. Back in Oct I used Calendar Put Spreads to define the range of stocks like JPM & GS with the hope of owning Nov Puts cheaper in the event of an Obama win and some downside volatility in banks stocks. The stocks remained above my strikes, and then I spread the puts, now I own verticals. This was the extent to me trying to game the outcome of the election, but I think a clear-cut decisive win for either candidate this evening should be a very short-term positive for transparency issues, but then the dialogue will quickly fall into “Fiscal Cliff Hell” as the losers will be far less inclined to play nice on any compromise. This could bring with it some volatility, which is interesting to note a decent size trade in the VIX options yesterday, someone bought 35k of the Nov 20/30 Call Spread for .78.
We will sit on the sidelines for now and stick to the micro and let the “made” guys determine the next 50 to 100 points.