|Buzz on the Street: To Find a Job Is Like a Haystack Needle, 'Cause Where We Live, They Don't Need Any People|
By Minyanville Staff SEP 07, 2012 2:45 PM
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Last night Gulfport Energy (GPOR) - one of my E&P longs against the SPDR Explo. & Prod. (XOP) short - released results of another Utica well test, and they were almost as exceptional as the results from the 1-28H well, from a couple of weeks back. As a point of reference for how impressive these wells are, the combined production of the 1-28H and 1-33H wells alone is almost as much as GPOR's total production in Q2.
At risk of sounding greedy, and perhaps as a function of my vested interest in this name, I am somewhat surprised at how "muted" the stock response has been so far to these wells' tests, and if more Utica wells track as nicely as the first two, it's not crazy to imagine GPOR trading with a $40 handle over the next several months.
Gold Near Unchanged on "Sterilized Bond Buying" Headline
I'm a little surprised (a lot really) that gold hasn't sold off more on the fact that the ECB's bond buying program will be "sterilized." In the past, this meant that the ECB would take deposits from member banks to balance out the bond purchases they made, essentially meaning that no "new" money was pumped into the system.
However, the EURUSD reacted reasonably, spiking higher by about 55 pips.
Even though the headline said the purchases were "unlimited," there is in theory a limit to them because the ECB can't drain Eurozone banks of all their reserves, unless they talk about easing collateral limits. But thinking of it from a different angle, Draghi was thinking ahead when he cut the deposit rate to 0 two months ago. Before this cut, Eurozone banks kept EU800b in deposits overnight at the ECB, earning 0.25%. After the cut, EU450b of deposits were freed up as banks now hold only EU345b overnight. Certainly frees up a lot of deposits to be used to sterilize bond purchases without putting more pressure on the banks' balance sheets.
However, the downside is that the "good" money/deposits are just being "shifted" from the healthier banks to peripheral countries, which is why Merkel, Germany, and the Bundesbank aren't jumping up and down to get this thing started.
Because the ECB is directly purchasing bonds off the bank's balance sheets (Greece is out, as they don't fit the "counterparty criteria) is this a backdoor way of recapitalizing the banks? If that is the case, it could/would be bullish for Euro banks. Admittedly, I feel like I'm reaching a little bit with that, but with Spanish banks owning 32.3% of Spanish domestic debt, it could only be helpful.
I've included a chart of the ECB's overnight facility below for reference.
Dragh's Plan Said to Pledge Unlimited, Sterilized Buying
So what does this mean?
The market is nervous about "sterilzation". That this isn't money printing. Is that a valid concern? Maybe.
Draghi has been stuck working within "the mandate". This is the first mention of "unlimited" that I remember. SMP had always been limited. Does sterilization put an effective limit on it? That is a concern, but will he stop with sterilized intervention? That is the other side of the coin.
He seems to be trying to push the envelope. To stretch the mandate and introduce terms that have not been used before. While the initial pop then re-tracement is understandable, this looks like a buying opportunity, but primarily for those assets/countries that will be impacted the most.
We have to be cautious as we have had a big run, and no details are out, but, I am looking to add risk, but particularly where the impact will be felt, Spain, Italy, MAIN, even US CDS. Not so much in the S&P or Nasdaq.
We also haven't seen any mention of how the EFSF would work. There is risk that ESM will be shot down by the German courts, but the most accurate assessments are that it will put some limits on it, but it will be workable.
We will keep you informed on our take of any ECB headlines, but I think the concern over sterilization will dissipate. Maybe I'm being complacent, but I don't think so. Also with the VIX up to 18, I think a lot of defensive positions have been built up, helping the bull case.
Thursday, September 6, 2012
FYI -- S&P futures are off their morning highs by a few points, but crude oil is spiking.
It's quite common for equities to follow commodities, so keep your eyes open.
I get the sense that like last week with Bernanke at Jackson Hole, market participants were too cautious heading into the Draghi show today and the jobs number tomorrow (ADP may get folks pumped to go long or cover shorts near-term).
Click to enlarge
I will try and break down what happened with Draghi at the ECB press conference and what the possible implications are:
The ECB's new purchases won't be senior, which is good, but the existing SMP purchases are still senior, which is negative in the long-term as it should cause further problems with Greece if they decide to undertake another round of debt writedowns/forgiveness/fill in the blank.
Draghi said that collateral requirements were suspended across all "marketable debt instruments" of debt issued or guaranteed by national governments. This is big, but if you read between the lines, this only means that sovereign debt, regardless of currency, is available to be posted as collateral at the ECB. It means that corporate debt will NOT be allowed as collateral. But it means that Greece debt is out, because they aren't eligible for ECB programs. However, will we see a spate of European banks issuing bonds to themselves with sovereign guarantees like December/January again? The Bundesbank doesn't accept this type of debt as collateral.
The bond purchases will be sterilized. Under the SMP program, when the ECB bought 1 Euro of bonds, they would offset this 1 Euro of deposits from member banks, meaning that there was effectively no NEW money/credit being pumped into the system. Following the same system, now European banks have EU450b more deposits to work with that they pulled out of the ECB, as we mentioned yesterday. Seems to me that Draghi was thinking ahead when he cut the deposit rate, in my opinion. The sterilized purchases also mean that the ECB is buying bonds directly off the balance sheets of European banks, which only seems bullish to me as they attempt to raise more capital or writedown bad debt (especially the case for Spanish ones). It really reduces the potential for a systemic event to occur, which Draghi himself said.
Draghi said there will be "no quantitative limit" to the purchases. I'm a little curious on some clarity for that statement, as there seems to be a theoretical limit.
The EURUSD is about unchanged, as the program is essentially inflation neutral from a monetary policy standpoint. But I'm not focusing on the EURUSD, because if anything it has headwinds from the bullish ADP and ISM Services numbers. The moves in the EUR against the other major currencies like the CHF, JPY, and GBP are more pronounced because this is bullish for the EUR in the short-term.
I see European banks having huge rallies, including SocGen, BNP, Deutsche and even the smaller ones like Commerzbank, Unicredit and Santander.
Options Still Show Concern
The VIX is down some 10% to 16.20, a level that two weeks ago many described as complacent and therefore a bearish indicator. But as I had pointed out in this buzz this was actually a pretty healthy premium to the realized or historical volatility, which was running just above 10% thanks to the very narrow range of August. Also noted was that VIX futures had sizable premiums on expectations that events such as Jackson Hole, today’s ECB meeting, tomorrow’s jobs data, coming elections in both Europe and the U.S. would lead to an increase in volatility. AKA a sell off in stocks.
Today’s rally actually produces an increase in realized volatility, but given that it puts two of the above mentioned events in the rear view mirror it’s no surprise that front month volatility is taking a hit. It's not much different than after a company reports earnings. No matter the result, implied volatility usually takes a hit. But note while the cash VIX is off some 10%, the declines in the futures contracts diminish with each month. The October contract is down 7.5% to 19.25, and the December futures are off 6.5% to 22.10 which indicates that people still expect volatility to pick up going forward.
Another sign that people are not in complacency mode is in the put/call ratio. The p/c for index products, which are used by most institutional investors for broad market portfolio protection, was registering 1.17 at midday; for perspective the 20 day moving average is 0.89 and a reading above 2.0 is extreme, bordering on panic. So this is a fairly high reading for market hitting new highs and suggest there is hefty safety net being put in place in preparation for a decline. This should provide a floor allowing money managers, especially those lagging in performance, to buy any forthcoming dip. Combine that with shorts scrambling to cover and technicians getting buy signals from today's break out that dip may not be forthcoming.
Friday, September 7, 2012
Freaky Friday has arrived and on cue, Beeks released the payroll data. It's somewhat anti-climactic after world peace broke out yesterday but every data point counts--or at least it used to!
The headline number--or, at least the one that that Obama will trumpet--is that the unemployment rate dipped from 8.3% to 8.1%. This, of course, was due to some shrinkage in the labor force as folks left the labor force (a sign of stagnation). And not only did the change in non-farm payrolls miss estimates (96K vs. 130K), last month was revised lower, from 163K to 141K.
Reports like this are a reminder that there's a massive difference between a stock market rally and an economic recovery.
Be that as it may, the bulls continue to shrug and say, "What, me worry?" The worse the numbers, they'll argue, the more likely we'll see QE3 (which is all but a given anyway after Big Ben expressed "grave concern" over the U.S employment situation). Heads I win, tails you lose? Perhaps--but I will tell you, after 21 years of running money, that this sorta sentiment scrunches my nose.
Intel (INTC), oh-by-the-way, slashed its third-quarter guidance (to $13.2 billion, plus or minus $300 million, from the previously projected range of $13.8 billion to $14.8 billion). Hey, what's a billion dollars between friends anyway; I remember when that was actually considered to be a lot of money. Either way, and as always, the reaction to news is always more important than the news itself.
As it stands and as I write, S&P and NASDAQ futures, despite Intel and the non-farm payroll miss, are flattish--and in fact, gold and silver futures are rallying hard on this number (on expectations that Mr. Bernanke will again spur the herd with an infusion of liquidity). Call it a shell game, a game of chicken or a FUBAR market but please respect the psychological power of performance anxiety.
Case in point; my high-water mark on a YTD trading basis pretty much top-ticked when I mentioned it in an impromptu Twitterfest in mid-July (a first for me; I never talk performance while a trade--or a year--is still open). I am now well off my highs and while I still have a healthy lead on the market averages, I've been pretty anxious about the relative dip--and I don't have to answer to anyone. Put yourself in the shoes of a fund manager who is trailing the proxies, whose job is on the line and, well, you get it.
In terms of forward catalysts, please circle September 12th on your calendar. As per this excellent Bloomberg article:
"In the morning, the German supreme court will rule on the constitutionality of the planned permanent rescue fund, potentially upsetting Germany’s more than half-century pursuit of European unity; at lunchtime, the EU commission will lay out its proposals to put the ECB at the heart of continent-wide banking supervision, already questioned in Germany; and at sundown, polls close in an election in the Netherlands after a campaign marked by calls for more spending at home and less on fiscally irresponsible neighbors."
Minyanville Professor and T3 Maven Scott Redler, whose trading vibe I respect tremendously, recently called the upside trend a friend and the short side "cute." That proved prescient as fund managers returned from the beach to find themselves fending for a job and chasing performance (with a perceived Bernanke backstop). I would add to that thought that the only thing more dangerous than "cute" is being "comfortable" and when a direction appears obvious, the path of maximum frustration typically isn't far behind.
I enter today with a a right-sized put position in the QQQ (I raised my stop from NDX 2800 to NDX 2850 to allow for a pop-and-drop). Whether I'm early or wrong will depend entirely on where the averages are when I close out the position. As of now and always honest, I'm under water and feel pretty silly to be on this side of the market. While the best trades are usually the hardest fades, this jury remains on this particular try.
Separately, and at the risk of blurring the lines between church and state, some of you might have seen the eSignal media campaign that (officially) launched yesterday (this is one of the spots; filmed in 105 degree heat no less!). Over the course of my career, I've fielded persistent queries about what trading system I use and (those who know me understand that) I wouldn't put my name to something that I didn't believe in. We're stoked by this alliance while we don't "do" advice in the 'Ville, I would suggest taking advantage of the free two-week trial.
Thanks so very much, and good luck today!
Not All Breakouts Are Created Equal
The S&P finally satisfied a tag of 1430.
This is 6 squares up or 6 revs of 360 degrees up from the 666 low.
In addition, the kiss of 1430 “opposes” the March 6th 2009 low. September 6/7 is opposite March 6/9th the date of the low in ’09.
Remember 666 is 90 degrees or square March 6th.
Likewise, 1430 is 90 degrees or square September 6th.
Markets sometimes have a tendency to overthrow highs (and undercut lows) in carving out culminating moves so this is something to keep in mind.
This is what occurred in the big picture in October 2007 on an overthrow of that year’s July primary top.
This is what occurred in the big picture when the market undercut the November crash low in ’08 on the way to the climax selling in March ’09.
While the undercut of the November ’08 low was deep in terms of price, it was brief in terms of time lasting only 2 weeks.
Drilling down to the shorter term technical picture, this year’s June low also showed the same pattern: the early June low was an undercut of the initial low on May 18th. The undercut lasted 2 days.
The first leg up from this year’s June low was 97 S&P points. From the 1338 close on July 26th before Draghi’s Bumblebee Speech a 97 point measured move gives 1335.
So while the S&P broke out of a large Cup & Handle formation yesterday, it could be a false 1 to 3 day overthrow.
Given the seasonality and cycles and the significance of the 1430 level (an overthrow notwithstanding), we may be witnessing climax buying defined by performance chasing putting the cherry on top of a 5th of a 5th wave up from March ’09.