MorningWord 2/28/13: Bill Ackman is probably one of those guys who thinks it’s good luck when he gets crapped on by a bird overhead. Ackman’s hedge fund Pershing Square is the single largest shareholder in JCP with an 18% stake, and despite what could be another oncoming train from the Carl Icahn express, Ackman reiterated his confidence in CEO Ron Johnson and his plan to turn around the beleaguered retailer just a couple weeks ago. In early February, ZeroHedge reported that bondholders in JCP were trying to force the company into bankruptcy based on what they deemed to be a default on the company’s debt (read here). Without getting into too much detail, ZH speculates that this action could have been instigated by Icahn in his efforts to set his sites on Pershing investments that he thinks are vulnerable due to Ackman’s concentration in them and what he feels could be a shaky investment thesis to begin with.
While the jury is still out on the two hedge fund moguls HLF spat, the fat lady might have started warming up last night, after the dismal Q4 results that showed a far worse than expected loss, and missed on almost every metric. The company is quickly depleting their cash on Johnson’s ambitious turnaround which is not showing any real signs of potential success. The company and the supposed turnaround are running out of time.
From a trade perspective, what I find interesting about the set up, is that it is almost the exact opposite situation of Ackman’s stake in HLF, a highly controversial story with very high short interest (JCP ~43% of the float short, HLF ~32%) and large hedge funds digging in on both sides. The only major difference is that Ackman is long this one while he is short HLF. JCP is down about 17% in the pre-market as I write (the implied move was ~15%) and to be frank I am not sure where the floor may be. I am not sure who steps in at $17 as many hedge funds who are short think that the company is finished and the stock could be a hat size by year end. Is it time for Ackaman to go all activist on JCP, has he been too nice? It looks like he will have 2 options in the near future, massively turn up the heat on Johnson and the board and affect some real structural change, which could cause a short squeeze, or he will likely start liquidating a portion of his holdings.
Ackman has taken his share of lumps in the retail space in the past, losing most of his investments in Borders and a much larger hit in TGT over the last 6 years. My sense would be that given the level of scrutiny on him in his HLF position, his investors will not wait till JCP goes to zero and may start to force him to sell through redemptions.
I for one think it is bad luck to get crapped on by a bird and it usually causes me to change my vantage point!
All of the above comes with one important caveat, Bill Ackman appears to me to be a very thorough and thoughtful guy when it comes to his concentrated investments. I have a ton of respect for anyone who puts themselves out there the way he does, fully knowing that his success or failure will be a very visible event. It is easy to sit on the sidelines (or a website) and poke fun at, or holes in someone’s investment thesis, but it is a whole other thing to stake your livelihood on it, and I have a ton of respect for that. Right or wrong on his JCP thesis, he did his work, he made his bet, he has tirelessly worked to affect positive change and that’s far more than 95% of us do with our investments both personal or professional. Sorry to get so preachy, the guy has been like a pinata for rival hedge funds and the media, and I don’t think it is fair to just sit here from 30,00o feet and just pile on with out giving the man some props.
MorningWord 2/27/13: Its a sad state of affairs for AAPL bulls when they have to look to a Shareholder Meeting as the next and only real near term catalyst for the stock. AAPL’s $137 billion and quickly growing cash hoard has been the hot topic on investors’ and the financial media’s tongues since it has become apparent that there will be little news or announcements of new innovative products in the first half of 2013, the very thing that had driven AAPL’s amazing corporate and stock success. The iTV and iPhone Mini have taken a back seat to financial products such as iPrefs (read David Einhorn’s preferred share proposal here), stock splits, increased dividend and share buybacks. AAPL shareholders have every right to be pissed off about this cash being massively underutilized on AAPL’s balance sheet. For heaven’s sake, it is the shareholder’s cash. But expecting the unexpected from AAPL’s management will likely end in disappointment.
Make no mistake about it, Tim Cook has clearly set his own course since taking over as CEO for Steve Jobs. At the same time last year, less than 6 months after Jobs’ death, many AAPL watchers were very surprised to see Cook’s departure from previous AAPL norms to issue a dividend and 3 year share buyback. While many investors had hoped for something a bit more substantial than the sub 2% payout, and a buyback that was more geared to offsetting dilution from corporate stock grants, the likelihood of Cook setting a consistent precedent kowtowing to investor requests on their capital management seems slim.
The options market is not pricing in a heck of alot of movement for today’s event. With the stock around $450 the weekly at the money straddle is about $12.00, suggesting that if you were to buy it you would need a close above $462 (hasn’t traded there since Feb 15th) or below $438 (a level it was trading at yesterday before a gnome heard a thing from his dentist, who heard a thing from a guy who knows someone who was long AAPL and wanted to get out before the shareholder meeting!).
My sense is that all of the speculation about what they will do with their cash has set up for a mild disappointment among those with great expectations. It would not be out of the question for the company to do what most companies do who are new to the capital return plan – modestly raise dividend and share buyback and create a track record of consistently doing so. And these things will cause rallies in the stock. But any near-term bounces in the stock are likely to bring out more trapped sellers. So any trades from the long side have to be especially quick and nimble, I am inclined to sell rallies as I think lower lows are likely if the market shows more weakness.
MorningWord 2/26/13: Lets just call it the “Italian Job”. Yesterday’s much anticipated sell off, came from where most least expected it. Conventional investment wisdom has been that Europe was “fixed” and posed little systemic risk to investment portfolios on this side of the Atlantic. As someone who has been waiting for a pullback, I can’t sit here and tell you that I feel very good about the reason yesterday’s weakness is upon us, but the fact that it is here is a healthy reminder that straight up usually comes with some fits and starts.
As many readers know we have been probing the “short side” for weeks while lowering long exposure in long only holdings, but continuing to trade our shorts (see Enis’ numerous WHR trades here, here, & here). We have been strong proponents of selling into rallies, while also covering on weakness (despite how little we have seen, until yesterday).
This morning’s pre-opening bounce with S&P futures up 50 bps sets up as a classic fade and I will attempt to do so with stop, but my sense would be that some serious technical damage was done yesterday, and the spike in short dated vol, while likely a bit overdone, suggests that new highs in the coming weeks are not very likely. I would be fairly surprised to see another down day (today) equal to yesterday’s weakness. But, past support should serve as future resistance, and I am fairly certain this is a much healthier market for nimble traders. As I said last week in this space, tops are a process and rarely is it easy picking one, but probing, and participating in small trading size, with defined stops keeps you in the game and should give confidence to those looking to play bounce openings like this morning. I am a seller of rallies until it doesn’t work any more.
On the single stock front:
Mid last week there was bit of bullish interest in a stock that for the most part is not that interesting, JOY. On February 20th JOY was up almost 8% at one point on takeover rumors (6 day chart below), and call buying was brisk, causing a spike in implied volatility and a sharp increase in average daily volume.[caption id="attachment_23035" align="aligncenter" width="490"] JOY 6 day chart from Bloomberg[/caption]
As for JOY, the company is set to report their fiscal Q1 earnings prior to the open tomorrow morning. The options market is implying about a 6.5%*, which is rich to the 4.3% avg move over the last 4 qtrs. (*the March 1st 60 straddle is offered at about $4.10, if you bought that you would need about a 6.5% move either way to make money).
Depending on how the stock acts today this volatile price action in the last week could provide a trading opportunity into the print. stay tuned.
MorningWord 2/25/13: Over my fifteen year career trading equities I have compiled a so called “process” for identifying potential trades, both long and short. This process uses many inputs and it usually begins with a “something” that catches my eye like an event, price action, unusual options activity, insider buying or selling, or some sort of corporate action – you get the point. As an active market participant, now more than ever we are inundated with these “somethings” from our financial firms that we deal with, and the financial press seems to be coming at us from every possible angle (print, tv, online, social media, etc etc). The best traders these days embrace all this noise but have a skill for separating the forest from the trees. When I started there was just brokers’ noise. That usually came through a phone call, or the WSJ, IBD or Barron’s (sadly there was no RiskReversal.com in 1997!).
The guy I initially learned to trade from had a process and his starting point for trade ideas was almost always a chart. His evening routine was scrolling through the same few thousand charts in his quest to find the next inflection point. We have said it in this space on many occasions that we are not technicians but we rely on technicals as an important input to our process. Rarely if ever do we place a trade solely on a technical setup.
Here is a real-time example of how a chart may stimulate the idea for a trade. Just this morning I saw that VMW was upgraded to a Neutral from a Sell at Citibank. They were the lone sell rating, now placing Wall Street analysts at a fairly even 22 Buys and 22 Holds. The Upgrade was the “Something” that got me to look at the chart. The chart of the 5 yr was sort of eye popping to me, see below, textbook Head and Shoulders top.[caption id="attachment_23000" align="aligncenter" width="490"] VMW 5 year chart – Head & Shoulders top from Bloomberg[/caption]
So the Upgrade, and now the Chart, is gonna have me taking a closer look at the stock in an attempt to find out what’s going on in VMW.
Obviously there was an earnings miss last month, but how big, and what sort of whack did management take to guidance? Is the full year guidance now achievable and set up for a series of beats? If I had been scrolling charts daily looking for chart patterns that appeared to be at inflection points I am not sure that VMW prior to the gap last month would have suggested a screaming short but coupled with a fundamental view, and maybe some sort of insight from the options market there might have been a trade with the strong notion that a break of 2 year support would most definitely see lower lows…
Now what to do? Well some work on the name with the strong notion that $80 could serve as some serious resistance for the time being.
MorningWord 2/22/13: Now What?? “The Most Hated Rally Ever” finally got one of the most “anticipated” pullbacks over the last 2 trading days. The SPX’s peak to trough sell off from Tuesday’s multi-year highs was only 2.2%, which was likely very disconcerting to those (me included) who were expecting something in the magnitude of 3 – 5%. BUT we are not likely done just yet. putting aside the disastrous action in the commodity complex this week, equity weakness was very orderly, with little notice of “risk off” action reminiscent of 2011/2012. This suggests to me that this week was merely a screen-test for what could be, as Marc Faber of the Gloom,Boom & Doom Report stated on Fast Money last night, it could be an “intermediate top” for equities.
With yesterday’s late afternoon bounce off of the lows, and this morning’s 50 bps lift in the pre-market, bears will likely use this opportunity to lay out some shorts. On Wednesday in this space, I suggested that while I am short the broad market, I wasn’t that short, and:
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.
This morning will be an interesting tell so to speak, with Europe up strong out of the gate, the ability of the SPX to hold early gains and attempt to re-trace the last couple days move could be the one thing that keeps me sitting on my hands a bit. But if there is no early leadership, and prior leaders like the XHB, XLP and XLF quickly give up, this could be a great opportunity to press them on the short side. A close below 1500 in the SPX in the next day or so, would likely cause a re-test of support at ~1475, and at that point your guess is as good as mine. While I am near term bearish, I would be shocked to see weakness in the next month or 2 that would cause the SPX to go down on the year (another 5.5% lower), but I do think at some point in 2013, there will be shock-waves through equities that causes at least a 10% peak to trough sell off caused by fears of the Fed shifting gears on QE.
MorningWord 2/21/13: We have gotten our share of questions about GOOG of late, most of which relate to how to get short at all time highs. We have done our best to fight certain urges in the recent run up. Many traders want to make the comparison to AAPL’s run to all time highs, and subsequent 30% plus decline in 2012. From where I sit and taking off my contrarian hat, there are few AAPL related analogies that suggest GOOG is set to decline 30% over the coming months, barring, of course, a market meltdown and / or substantial consecutive disappointments.
The chart below, since GOOG’s IPO in 2004, shows the steady run up from $85 to almost $750 in its first 3 years, and its almost 65% decline from those highs in the throes of the financial crisis. Since the 2008 lows (and it’s interesting to note, that GOOG bottomed well before the SPX) the stock has made a series of higher highs and higher lows, building up some steam that ultimately led to the breakout to new all time highs.[caption id="attachment_22901" align="aligncenter" width="490"] GOOG chart since 2004 from Bloomberg[/caption]
From a pure technical perspective, the stock will likely have to base btwn current levels and possibly as low as $700 for a bit more time before the stock has any chance of hitting that nice round $1000 price target of many.
So back to the question of, Why not short here? GOOG has clearly been a beneficiary of AAPL’s price action since the Sept highs. The big money guys who rode the AAPL gravy train for years needed to find a big liquid name that had similar growth characteristics as AAPL did just a couple years ago. The chart below has been passed around a bit by some of the conspiracy theorists out there who liked to think the whole market thingy is a rigged game. The one year chart of AAPL and GOOG shows the perfect symmetry of AAPL and GOOG’s run to all time highs in late 2012 and the subsequent bifurcation in mid November that has seen 25% gains for GOOG and 15% losses for AAPL since.[caption id="attachment_22902" align="aligncenter" width="490"] 1 Yr AAPL vs GOOG from Bloomberg[/caption]
From a purely valuation and expected growth perspective, off the top of my head, I can’t think of another $250 billion plus market cap company that analysts expect to grow earnings and sales at 15% plus for the next 3 years that sports a PE consistent with that growth rate (GOOG trades ~15x next years expected earnings). I don’t have a ton to add on the fundamentals as I am fairly neutral on the story, but if I were an investor, I would continue to worry about competition from FB and Twitter for real time search, the lack of traction in Social and obviously the continued threat of the secular shift to mobile computing, which sports lower cost per clicks than desktop. But, as I am not an investor in GOOG, I will defer to some recent bullish reports from large Wall Street houses that suggest that GOOG is well positioned to increasingly grab more dollars of advertisers’ entire budgets on other mediums, that smartphone ad revenue will be an incremental positive despite being lower margin as it will be made up in volume and that the market share opportunities overseas will be the real driver of the next leg of growth.
So to sum it up, GOOG appears to be in a fairly enviable spot compared to most large cap tech stocks (AAPL, MSFT, INTC & IBM). They still have expected growth north of 10% and the stock is likely to continue to be bought on pullbacks by the “Big Money”. So for now, despite being at or near all time highs, the stock does not look or feel particularly overbought when I consider other inputs aside from price action and technicals. I am not a buyer here, but on a broad market downdraft, possibly back at $750, I might dip my toe in, oh and still fighting contarian urges.
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[/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).
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.