MorningWord 2/20/13- $SPX : High Times

by Dan February 20, 2013 9:27 am • Commentary

MorningWord 2/20/13:   Last night I spoke on a panel at the Traders Expo in New York and met a lot of self-directed traders, just like you.  During the presentation we took a bunch of questions, and I spoke to probably 2 dozen individuals before and after, and to be frank I was mildly interested by the state of worry that exists about the market at current levels.  Maybe just maybe they knew exactly who they were talking to, a current bear, but my sense is that these people were not “all in” the market, and in some ways fearful of missing a blow off top, while looking for a near term pullback.   The reason I bring this up is it’s sort of opposite to the apparent levels of complacency that exist in sentiment readings and instruments like VIX.  

Josh Brown, writer of The Reformed Broker blog had a great quote last week on CNBC’s Halftime show, stating something like “this is the most hated rally ever”…….and by polling these retail investors and many so called professionals, I would agree with that assessment.   Let me be clear, this market is starting to make me absolutely ILL, the non-stop upward bias, the apparent levitation on consolidation days, the inability to sell off on what appears to be bad news and most of all the runawy break-outs to new all time highs in stocks like Proctor & Freaking Gamble without any regard for expected growth or valuation.  All that said, I am not that short right here, I have spent the last few weeks taking shots on the short side, but in fairly innocuous size, I refuse to dig in so early in the year. I have made this mistake in years past, and I have seen this movie before so to speak.

As Mike Santoli mentioned yesterday on his blog on Yahoo Finance, this year is tracking not too differently than the last couple years:

Yet in some important respects, the way the first weeks of 2013 have played out is quite similar to the opening acts of both last year and 2011. Consider: As of Valentine’s Day, the S&P 500 was up 5.9% year to date in 2011, and up 7.4% last year. This year, the index is up 6.5%, right between the two prior years’ appreciation pace. In both those prior years, too, the various investor-sentiment surveys were indicating some complacency, hinting that conditions were ripening for at least a market correction.

In both years, the market reached higher levels in April. In 2011, there was about a 5% decline from mid-February into mid-March, which fleetingly swept away all the gains from the first weeks of the year, before a q uick recovery stretched the S&P to an 8.4% year-to-date gain by April 28.

So I guess my point is, while there appears to be a fair bit of good news priced into stocks at current levels, which for all intents and purposes also appears to be discounting any potential bad news, trying to pick tops is difficult business, and can be costly if not sized properly or done so with stops.  This is one of the most important comments you will ever read on this site, and should be applied to most aspects of trading, not only just picking tops and bottoms.

The chart of the SPX for the last 3 years shows 4 peak to trough draw-downs of btwn 9% and 21.5%,m with the avg about 14.5%.

[caption id="attachment_22856" align="aligncenter" width="589"]SPX 3 yr chart from Bloomberg SPX 3 yr chart from Bloomberg[/caption]

The higher we go, and the further we get away from the Euro Sovereign debt crisis, the smaller the sell offs have become. But make no mistake, another one is coming and usually when we least expect it.   As a trader though, I have to keep my mind on the prize, capital preservation, and living to fight another day, so until it becomes apparent that we have made a near term top, I will continue to probe the short side with small size and low conviction and take down long exposure where possible.


MorningWord 2/19/13:  Sometimes when it comes to trading, I like to kick it Ol’ Skool by looking at company whose products I can see and feel in everyday use, or in the case of GRMN, RARELY see or feel.   The evolution of GPS devices from personal navigation devices (PNDs) a decade ago, to nearly universal in car navigation to now FREE turn by turn directions on Google Maps Apps (or if you feel like getting lost, Apple Maps) for nearly every smartphone has the potential to bring a multi-billion industry to its knees, if it hasn’t already.

I started looking at GRMN a few weeks back when I saw the gap on volume in late Dec on the announcement that they were being added to the S&P500 index (below).

GRMN 2 yr chart from Bloomberg
GRMN 2 yr chart from Bloomberg


Over the past few years when the smartphone wars have been raging, and casualties have been mounting (PALM, MMI, RIMM, MSFT, NOK), GRMN’s failure with their NUVI-phone a few years back has widely been forgotten.  As I do more work on the name I am trying to get a sense for their continued reliance on the auto/mobile segment in a VERY crowded field where cannibalization will be a new way of life for their entire suite of product offerings.

I am writing about the company this morning because they are slated to report Q4 earnings tomorrow before the bell.  The options market is implying about a 6.25% move vs the 4 qtr avg move of about 4.5%.   On the surface this a very cheap company, as 35% of their market cap is in cash, which is also equal to their annual sales.  They have no debt and pay a dividend that yields 4.6%.  The only obvious problem with the stock, is that earnings and sales have stopped growing, and are expected to flat-line or even decline a bit over the next couple of years.

The company is clearly at a crossroads, and how they choose to spend their cash to redirect will likely be one of the most important decisions the company will every make.  To stay the course will likely prove to be fatal, but an ill advised trans-formative acquisition could have  a similar result.  Given the company’s strong cash flow generation and no current leverage I would assume this could be an LBO candidate, but your guess is as good as mine as I have not seen it on any short lists.   GRMN is a very tightly held company with the top 6 holders representing nearly 50% of the shares outstanding, and 40% of which are founders or insiders.  With nearly 14% of the float short, my sense would be that if the company lays an egg on Q4 and substantially guides down for 2013, GRMN may very quickly be on the tip of banker’s tongues.

Just as I would not have bought DELL late last year on its fundamentals, I would not buy GRMN either, but DELL’s recent history could serve to be instructive to other floundering tech companies with massive leverage on the financial engineering front.   I will likely do a deeper dive preview later today.