MorningWord 12/24/12: Cliff Deadline Or Not, Let the WindowDressing Begin

by Dan December 24, 2012 9:28 am • Commentary

MorningWord 12/24/12:  First and foremost, all of us at RiskReversal want to wish you and your families a very Happy Holidays.  Enis, CC, Kristen and I will all be traveling to see family over the next week and a half and our posts may be a bit sporadic, but when we are in front of our computer screens we will be sure to post any thoughts or ideas.  

From my experience in quiet holiday weeks like this, it usually makes sense to fight urges to trade unnecessarily  unless of course the price action in single names or the broad market gets extended one way or the other in what is sure to be a low volume period.  Normally in the last week of the year you will see some odd action in single names as portfolio managers (at least in the hedge fund model) close their books for the year on Dec 31st and get paid on the performance of their year end tally, the age old process of “marking” your book.  What does this mean exactly? Very simply put, apply a little pressure on your longs or shorts to close as high or low as they can into the year end, thus getting paid as much as possible at year end.  Now this is not exactly ethical or even legal for that matter, but it goes on at least on a small scale, but for traders there can be opportunities to take the other side, usually in small or midcap names that have big moves.  We will keep an eye out for any of these situations as we head into next Monday’s close.

As for the broad market, I would be surprised to see the major indices give up any significant part of their ytd gains (SPX up 13.72% and the Nasd Comp up 15.96%) on what appears to be a moving target of a compromise on the “fiscal cliff”.  For many of the reasons listed above about the marking of single names, the “Big Money” has a very large vested interest in things not falling apart in the last few trading days of the year.  Many large money managers would rather book gains this year and deal with a little underperformance in the new year as they will have 51 weeks to make it back.   President Obama’s speech on Friday evening placed a tad more pressure on lawmakers to get something done prior to the Dec 31st deadline, while it is hard to see either side’s incentives changing under such tight conditions, in many ways the re-deadlining of the deadline only raises the chances for a sell off in January, in my opinion.

As a I write, the S&P futures have made up most of their overnight weakness (down only 2.30 after being down close to 8.00 at one point) and my sense would be we trade within a band that looks 50 bps either way today.  I for the most part will sit on my hands unless things get a little overzealous on either side of the equation.



MorningWord 12/21/12:  Last night saw a bit more action than most would have expected for the second to last Thursday of 2012.  Earnings from the likes of NKE and RIMM have those stocks moving, and as Enis referred to in his MacroWrap, the S&P futures saw their most active overnight session of the year.  

No matter how complacent things get, as traders, it is hard to ever let your guard down, which was one reason we wanted to introduce some relatively low risk ways to play for a near term vol spike earlier in the week with a call spread risk reversal in the VIX (here).  We are obviously not always right, and we don’t always get our best trade ideas into our portfolios, but we will remain focused on putting forth the ideas so that readers can make their own decisions about how to express their views based on some of the idea generation on the site.  Timing is not everything, but it is pretty darn important in trading, and we were a day late and a few dollars short on this one.

As for my trading around NKE and RIMM into yesterday’s earnings, I did my best to mitigate risk into what became somewhat binary situations for my positioning.  Yesterday prior to the print, we previewed NKE’s earnings release (here) and “Considered Our Options” for our hard earned trade structure (here).  This was  a tough one, as I had been essentially legging into this position for weeks, by selling 3 different put options against the one that I owned setting up for the event.  And in the end, after all that work, I didn’t love the set up into the event.  Some would ask then why I didn’t take the position off, and to be honest, I felt that despite the low probability of breaking even on the out of the money put spread, that risking .42 to possibly make 2.08 if the stock was down 6.5% today was fairly decent.  With the stock up 3% in the pre-market, this trade will obviously expire worthless, but as a trader, I have to put my chips on the table and sometimes make the least bad choice.  I felt that I had come too far with this position to just let it go.

As for RIMM, I was fairly well convinced that the stock was gonna go one way or the other, and frankly had no clue which.  I punted the Dec 12 Puts that I owned as the the likelihood of breaking even was far less than that of the NKE trade, as I not only needed to get the direction right, but I needed to get a move that was far greater than what was implied.

Both instances are good examples of probably me getting a tad too cute on the trade structures.  When event trading, especially with options, timing can be one of the most important inputs that can determine profitability, and in hindsight some of our best earnings trades of late have been those that have been initiated hours before the event, JOY and FDX for example.

While we are on the timing thing, I have to give a hat tip to Enis yesterday as it related to my Dec / Jan 62.5 call calendar. With a a day and a half left to expiration, and the stock right at my strikes, and the trade worth a little more than double what I paid, his suggestion was to take it off rather than trying to squeeze out the last bit of profit.  We have to make decisions like this all the time, weighing the likelihood of potential outcomes, and in this case if I had left the position on it would have been the wrong one with the stock down nearly $2 in the pre-market.

The point here, is that we have to constantly evaluate and then re-evaluate our options positioning around events, there are lots of moving parts, and complacency and timing can be the difference of maximizing profits or mitigating losses.




MorningWord 12/20/12: The 3 month chart below of AAPL and RIMM’s price performance shows the stark difference in investor sentiment for the 2 smartphone makers of late.  AAPL has re-traced more than half of its 2012 performance (was up nearly 75% on the year back in Sept, now up ~30% ytd), while RIMM after being down more than 50% on the year at one point in Sept has since risen over 120% and now is down about 5%.

AAPL vs RIMM last 3 months from Bloomberg

Aside from the recent price action there isn’t a whole lot of other ways to compare these 2 companies or their stocks that would be nearly as favorable for RIMM.

RIMM is set to report their fiscal Q3 results tonight after the close.  The options market is implying about a 12% move post earnings which is slightly rich to it’s trailing 4 qtr avg move of about 11% and essentially inline with the 8 qtr avg.  

RIMM’s recent stock resurrection is likely less to do with a fundamental change in the company’s business and more to do with sentiment and some technical factors.  For instance, the chart below shows this years progression of Wall Street analysts estimates (red line) for the quarter to be released tonight, overlaid with the stock’s price performance (white line).  What is abundantly clear is that the price action and the earnings revisions traded in fairly lock-step with one another, until this summer/early fall, when the stock made 8 year lows, and investors realized that maybe just maybe expectations were getting a tad too dour in front of the company’s long awaited new operating system.   Back in Jan, analysts had expected RIMM to EARN about .75in the qtr to be reported tonight, but throughout the year, this number has been ratcheted down to an expected loss of ~.40.

[caption id="attachment_20856" align="aligncenter" width="490" caption="RIMM Q3 earnings estimates vs price in 2012 from Bloomberg"][/caption]


I guess you get my point, and unfortunately I didn’t make it back in Sept, and obviously hindsight is 20/20, but negative sentiment among investors (short interest was almost 30% in Sept) and analysts (there were 3 Buy ratings, 29 Holds and 16 Sells) reached a bit of a fever pitch in front of what is a last ditch effort for the company to revitalize their smartphone platform.

A couple weeks ago I made a play in the name to set up for the stock’s ascent to stall and own Dec Puts for earnings through a diagonal put calendar (here). The stock has since risen about 15% and my position is a loser. I will look to close or spread these puts prior to tonight’s print, and given the recent price action I would suggest than an outright short is by no means a layup Many of the factors that have driven the stocks rally could continue on the slightest bit of good news.  That said, there is an awful lot of good news being discounted in the stock at current levels and I am fairly certain that the company’s new phones (to be released in late Jan), despite ok early reviews, will not make a dent into the ever-growing lead of Android and iOS.

Stay tuned for a formal preview and a trade update this morning.



MorningWord 12/19/12:  Enis and I had a very interesting dinner last night with a former emerging market strategist for a large bank and a global macro hedge fund manager, where we debated the prospects for the global economy in 2013, and thus where we saw investment opportunities.  The conclusions were “clear as mud”, and not cause of the wine, but largely because the global economic outlook is largely predicated on continued central stimulus the world over at a time when some of the mightiest nations face austere times in a demand environment that seems tepid at best.  

At the bottom of the “great recession” in 2009, coupled with the tailwinds of massive government bailouts of the private sector and hundreds of billions of dollars of stimulus, the global economy was sparked by emerging market demand for raw materials that eventually flowed over to many other sectors, but particularly to Tech in the last few years.  There are some obvious factors for Tech out-performance, most notably AAPL’s prominent weighting in the Nasdaq, but also certain secular trends such as mobile computing that exploded during this time period.  The chart of Nasdaq (orange) vs. SPX index (black) since March 2009 bottom:



So as we debated the prospects in 2013 for equities, Jay Pelosky (some of you have read his guest posts on here), former Emerging Markets Strategist at Morgan Stanley, asked the question, “where is the new leadership going to come if AAPL’s recent descent in both earnings growth and stock performance is signalling a Tech stall?”  One of the obvious answers would be energy if we get the reflation of global growth, particularly from emerging markets, but issues of newfound overcapacity appear to be keeping the energy sector range bound.  Consumer Staples appear a bit expensive to their historical multiples, while Consumer Discretionary may be priced for perfection. Homebuilders and related material suppliers and Retailers appear to discount a good bit of the supposed U.S. housing recovery, while Utilities and Telecom and other popular “yield trades” appear to be a bit crowded.  Investors are climbing over each-other to get in Financials stocks, for what doesn’t appear to be fundamental reasons at 18 month highs, more of a beta chase.  So this basically leaves Healthcare and Industrials.

Industrials have recently broken out to new highs.  This price action is in spite of weak global manufacturing data in the past 6 months.  As we approach Q4 earnings season, watch this sector to see if it can take the baton of leadership, or fails when it’s asked to lead from the front.  Will the recent rallies in stocks like CAT, CMI an JOY carry through into Q1 2013 and continue the late year rotation into 2012 laggards?



MorningWord 12/18/12:  All seems clear on the western front, so to speak.  Mr. Boehner appears to be spending more and more time with his friend Mr. Obama, maybe they are both feeling a bit sanguine with the Holiday’s upon us, or maybe the smoke signals coming out of said meetings are actually signalling some progress on bi-partisan “cliff” deal.  Your guess is a good as mine as to the when, but make no mistake, it appears that both parties get the optics of appearing to be working hard for their constituents, and we will likely have some framework of a deal in the coming weeks.

However, we don’t think that’s any reason to get the egg nog out and give the all clear signal.  As Enis pointed out in his Macro Wrap yesterday, the buy-the-rumor, sell-the-news possibility of price action after a deal is reached has prior precedent.  With the market only 3% from 5 year highs, it is imprudent to get too excited about a well-telegraphed resolution.

As we have suggested on many occasions on the site over the last few weeks, equity and vol markets have not seemed to be too bothered by the prospect that we wouldn’t get a deal, regardless though we used the opportunity to position for one more 2-3% sell off prior to year end, which seems be increasingly unlikely as we get nearer to Christmas.  Including today (and a half day on Christmas Eve) there are 7 and half trading days left in the year, and I think it is fairly safe to say that the range is in, likely up or down 2.5% from current levels, with the strong bias to flattish as portfolio managers do their best to mark their books in what is sure to be a low volume “holiday” trading environment.

But the look of calm could be in for a rude awakening when a page is turned on the new year if earnings and sales revisions continue their negative trend.  That’s still how stocks are valued at the end of the day.

On the single stock front, an apparent trend over the last couple months, particularly in tech, has been the roatation out of some ytd winners into laggards, such as out of AAPL into stocks like CSCO, FB, YHOO, DELL and RIMM.  While this is not an uncommon trend into and out of mutual fund’s year ends, it can often mask the under-performance over a greater period of time.  Consider CSCO for instance, which is up about 11% ytd, up 35% from the 52 week lows made in July, but basically flat over the last 2 years, a period where the Nasdaq composite is up about 13.5%.  In hindsight, CSCO was a fairly easy name to rotate into as the company has a fortress balance sheet with 30% of their market cap in cash, has a dividend yield 1% higher than the 10 yr treasury, a monster share buy-back, generates a ton of cash, is in the midst of a company-wide restructuring, and trades below a market multiple.   My sense would be to hold off on chasing some of these names, the higher we go into year end, the greater the potential pull back could be in January as investors brace for what could be a rocky Q4 earnings reporting season.

One more thing on CSCO, a story on Bloomberg this morning caught my eye, ” Cisco Seen Needing Citrix-to-NetApp for Growth“, laying out the case that CSCO has a history of large acquisitions and that as recently as their Dec 7th analyst meeting, CEO John Chambers hinted at the potential for one on the offing.  As I mentioned above, CSCO is by most standards a cheap stock given cash generation and balance sheet, but the company is only expected to grow earnings and sales in the middle single digits for years to come.  The company will need to shed some slower growth capital intensive businesses and make a trans-formative acquisition if they have a prayer of getting back to the days of double digit growth that were common in the late 1990s and the middle part of the 2000s.  With the perceived bull market back for the broad market, many, as Bloomberg did this am will start with the parlor game of “whos on the block”, I would also be cautious of chasing these “take-out” names as they have been rumored for years!



MorningWord 12/17/12:   U.S. equity markets on Friday were once again dominated by AAPL’s plunge from its all time high made in Sept, with the stock making a new 10 month closing low.  Even though AAPL confounded alot of investors and pundits during its 2012 parabolic move from $400 to $700 in the first nine months of 2012, the move from $700 back down is probably going feel a lot worse.  In the last week we have seen a handful of analysts lower their 12 month price targets (some below $600), lower their 2013 earnings estimates (as a result of rumored iPhone5 order cutbacks in Asia) and now just this morning a DOWNGRADE from a bulge-bracket bank (Citi downgrades to Hold and $575 target).  

As My esteemed colleague Enis just said to me, “story often follows price”.  Now Enis is one of those geeky stock almanac sort of guys and loves to riff with ol’ skool Wall Street sayings, but as many think Citi is probably late to the game after the stocks 25% plus decline in the last 3 months, I would suggest that to downgrade the largest market cap company in the world at one of the largest banks in the world takes some serious vetting and would likely be the result of some serious conviction by their technology research team.  This doesn’t mean they are going to be right, but I would also guess if the stock drops from here to below $450 that these guys would likely to slap a Buy rating back on the stock.

AAPL traded below $500 amidst all these headlines including AAPL’s press release that the company sold 2 million iPhone5’s in their opening weekend in China. Now the stock is actually trading up a couple bucks at $511 at 9am, I would suggest that the stock will likely break back below $500 and will need to find some footing early today or things could once again get ugly.  The bulls and the bears will be pitted in a fierce battle today, and from a technical perspective it is going to be an uphill battle for the Bulls from where I am sitting. The fever has broken, the momentum has shifted, and if the stock can’t react positively to positive news, then watch out below.  By no means do I think AAPL is a good press here on the short side, but for nimble traders (with defined risk, likely legging into weekly put spreads) it has been worth the shot. These are the sorts of trades that you can only risk what you are willing to lose, because much like the reversal we saw last month from $505, the turn will happen quickly and will likely be an intra-day reversal and if you are not in front of you screen to catch to action then you are likely to screw it up.

I am playing for the AAPL break of $500 through QQQ put spreads (laid out here), but I am very cautious to press the 10 month lows and at some point will look to be outright bullish in the name. On Friday I decided to play AAPL component supplier QCOM with a bullish slant looking at the Jan13 expiration as I felt the chip maker was being unfairly beaten up in sympathy with AAPL. I Traded 2 structures, the first was a Dec/Jan13 62.5 call calendar and the second was a Jan13 62.50/65 call spread.   Again, just as I am not willing to step in and Press the short in AAPL, I don’t think it would be that prudent to try to “catch a falling knife” with an outright long in QCOM, as the stock’s technical set up could look challenged.