|Buzz on the Street: Hello iPhone 5. We Love You!|
By Minyanville Staff SEP 21, 2012 3:15 PM
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter. Below are some excerpts from this week's Buzz. Click here for a 14 day free trial.
Note: Some links may require Buzz subscriptions.
Monday, September 17, 2012
The T-Report: The Rule of 3
This is a simple little rule that could also be called the “by the time your mother knows it” rule. It certainly isn’t an exact science, but it seems to work.
The premise is that when everyone “knows” something will happen, it doesn’t. The first time something happens, relatively few people are aware of it, or position themselves in expectation of the event. The second time the “something” happens, more people are prepared, but not everyone believes something so simple can work. By the third time, everyone is so into the trade that it fails.
This often applies to simple things like “the market rallies whenever Europe closes” or “we reverse the futures move on the open” or “we always rally from 3:30 into the close”. It also seems to work on bigger issues, like “we always rally after a bad NFP”, etc.
It certainly isn’t a hard and fast trading rule, but I don’t think it should be ignored. Now in the case of QE3, it is hard to fight against $85 billion of monthly purchases, but there really aren’t many people left who don’t know that.
As I wrote in this weekend's lengthy Heart, Head, Gut report, I come out cautious. I don’t think you need to rush to buy financial assets. That trade, while not over, has largely run its course. The next most likely positive catalyst is EU turning from talking about a plan to Europe implementing one. The ECB not following through would be negative, but in near term I’m more focused about what is going on in Treasuries. It is a calm start today, but that market has my close attention. China could swing the market either way. I don’t think U.S. economic or company specific data does much over the next week or two since everything will be “pre QE” and deemed less relevant.
Risk assets are off a little this morning across the globe but the moves are very small, but at least for now confirms that we may have seen the peak of the rush to buy.
You Get An iPhone, You Get An iPhone, You Get An iPhone!
Apple (NASDAQ:AAPL) looks like it's on the verge of breaking $700 as the initial reaction to the newly-announced iPhone 4 is very, very positive:
-Apple said pre-orders topped 2 million in the first 24 hours, more than double the previous record set by 2011's iPhone 4S.
-Some preorders won't be delivered until October (remember, shortages are BULLISH)
-Key carrier AT&T (T) said iPhone 5 is the fastest-selling iPhone the company has ever offered. (curious that it specified fastest-selling iPhone rather than fastest-selling smartphone or mobile phone)
-As of now, AT&T's website says all iPhone models will be shipped in 14-21 business days.This implies delivery between October 5-17.
-Verizon's site says it will deliver iPhone 5's by October 5.
-Verizon will in all likelihood issue its own press release celebrating iPhone 5 sales.
-Apple.com lists a shipping time of 2-3 weeks for all models.
Keep an eye on those delivery dates -- the more they get stretched out, the better Apple's doing. In 2010, the long wait times were an indication that the idiotic Antennagate scandal was having zero effect on sales.
Market Sentiment Reading
The market's meteoric rise has pushed some sentiment indicators into overbought territory.
S&P Short Range Oscillator had spiked to +9.1, as of the end of Friday. This is the highest level it has recorded since October 18, 2011. In October 2011, the market was coming off extreme oversold conditions. At times like that, while the first foray in overbought conditions is often short-lived, the market's oversold conditions provides fuel for a longer-term bounce.
Conversely, these overbought readings are coming after the market has already gone up a lot; so, the market may face a short-term retreat.
However, as I have shared earlier, most fund managers are seriously underperforming the S&P 500 (INDEXSP:.INX) this year. And as the 4th quarter approaches, this performance anxiety is only going to get worse. This means potential buyers may be waiting at every minor dip for the next few months. This is Something to keep in mind.
Tuesday, September 18, 2012
I BB Strong!
22 days and $10 higher, the iShares Nasdaq Biotech (NASDAQ:IBB) has exceeded my wildest expectiations. Now what? One would think that buyers continue ramping this one into quarter-end, but this ETF is up more than 20% in less than 4 months. I'm inclined to let this one go and replace it with a short of the January 2013 $135 puts for about $3 and a long of the January 2013 $145/155 call spread for about $4. I'm buying myself a $10 cushion to the downside, and it's costing me $1 to play the next $10 to the upside. If you feel more aggressive, overwriting the $155 calls on further strength might also work ok since there's no risk that you'll wake up and the IBB will be taken out at 30% premium.
MBS Purchases Relative to Supply, Comparing to QE2
According to Bloomberg data, average agency MBS issuance for 2012 is $133.3 billion per month. Given that the issuance has accelerated due to record low rates, you could probably attribute at least a third of this issuance to refi (I'm not an MBS expert so I'm purely speculating). This prepayment could increase and essentially feed on itself if the Fed keeps rates where they are. So with the Fed's monthly purchases of $40 billion of of MBS, conservatively, this is only about half of the new origination.
Compare this to the Fed's QE2 programs of buying Treasuries, where on the average month the Fed was purchasing the entire supply of 5-year notes, at about $90 billion total per month (I looked at May 2011 and it was $101.4B). From peak to trough during QE2, the 5-year moved 137bps from 1.03% to 2.40%. At the same time, M3 (using the reconstructed formula from nowandfuture.com) went from -4% MoM to +12%. Today, the Fed is buying all of the supply in the 30-year bond (99% during my sample month of May, but I rounded up), but their purchases are balance sheet neutral, hence dollar positive.
So in terms of money supply growth and inflation expectations, it's much less comparatively to past QE's, for now. Not to mention the fact there is the incalculable effect of diminishing returns. Because the Fed's balance sheet is so large and the fact that these tools have already been used before, their effect will be smaller. Also, because many of the assets that the Fed is targeting, such as stocks, corporate bonds, mortgage bonds and Treasuries, all have nominal prices at record highs, the effect is further diminished in my book.
One thing I did want to point out was something Vince Foster brought up in his weekly article yesterday that is somewhat contrary to what I've laid out above. If rates get moving higher in a hurry, this could be very dangerous to Treasury investors. In the current environment, if you are investing in Treasuries you are doing so for the return OF capital vs the return ON capital. The on-the-run 10-year note has a coupon of 1.625% duration of 9.16, so if 10-year rates were to rise to 3%, you would lose about 13 points from the current price. This is even larger in the 30-year bond. Pretty obnoxious for a safe asset.
However, given the current search for yield, I don't think we'd ever get that far, but it's nice to know for perspective. My first stab is that the 10-year yield could rise to a mid-range of 2.15% in the next 6 months, as the Fed owns much more of the long-end, thus the "move from safe assets to risky assets" will be more muted. But I'm more concerned with how the market digests QE3 in the near-term. Overall, the move by the Fed seems like panic and desperation.
NOV Trend Weakening
In a possible sign of trend change National Oilwell Varco (NYSE:NOV) is stabbing below the recent outside up day from last Thursday, September 13th.
Coupled with the Gilligan sell signal from Friday (a gap open to a new 60 day high with a close at/near the low of the day), today’s move offsetting the 9/13 outside up day after a persistent trend generates a Pivot Point sell signal.
Why? Because NOV has violated the 82.25 low from 9/13.
Assuming NOV closes below 82.25 it will also leave a bearish Reversal of a Reversal.
Next stop the 20 dma. and the 80 strike.
Click to enlarge
Wednesday, September 19, 2012
NUGT: The Golden Nugget
The COMEX gold-futures contract (GCZ12) remains on a tear after breaking away from a twelve-week Double Bottom price pattern on August 21, 2012. Over the past month, the 143-point break-out move has driven the gold contact up nearly nine percent as of the September 18th close at 1771.20. This dramatic break-away move has also triggered the breakout a much larger Descending Triangle price pattern that measures to a contract high of 1942, which was set back on September 9, 2011, or nearly ten percent from current levels.
For traders that choose to trade ETFs in lieu of futures contracts, Direxion's Gold Miners 3x ETF (NYSEARCA:NUGT) is one way to play the bullish move currently under way in gold. Referring to the Daily and Weekly charts below, we direct your attention to the aforementioned Double Bottom pattern breakout which likewise occurred at $14.40 on the NUGT ETF. The Double Bottom pattern measurement projects a price target of $21.10 for NUGT, a gain of nearly 15 percent from current levels. Looking further out on NUGT's week chart, however, there is no real price-structure resistance until the $27 area, a target that we think is entirely achievable by the close of 2012 for a gain of over 46% from the $18.45 close on September 18th, 2012.
Click to enlarge
Don't Rush Me
This morning, Bloomberg has an article on FedEx (NYSE:FDX) which notes that "cheap trumps quick"
Maybe it's just me, but this is another way of saying that is that it pays to wait.
While a lot of folks are talking about the risks of inflation, I am seeing more and more examples of "cheap trumps quick" thinking out there.
And I'll have to think more about it, but I can't help but wonder whether FedEx was the quintessential peak social mood company - interconnecting just-in-time transnational corporations in a hurry.
It will be interesting to watch what happens to FedEx as our nationalistic just-in-case "cheap trumps quick" weak social mood economy continues to evolve.
Does Write-Off Equal Risk-On?
I've been writing for a mightily long time -- I've seen a lot of things, and have chronicled them in real-time for the last twelve years. Much like many of us studied The Great Depression, history will review this historic stretch and provide valuable lessons; most of them, I would imagine, will be similar to what our grandparents taught us.
One of the more persistent themes in the 'Ville during the last few years has been the notion that policymakers are making decisions that are akin to drugs that mask the symptoms (cheaper credit) rather than medicine that cures the disease (debt destruction). It's an intuitive argument; never in history has a problem been solved by exacerbating the same behavior that caused the problem in the first place.
Yesterday, while sharing some thoughts about how insane it is that a recession is considered anathema, I had a random thought (shocker, right?). I share it below to save you the click,
"And then there's this -- what if the USA is acting as a toxic debt mortgage dump? What if they -- I mean, we -- are Fannie and Freddie in reverse, the ultimate -- and perhaps only -- conglomerate big enough to digest and ultimate retire the excess debt? That would seemingly address the fact that risk hasn't been destroyed, it simply transferred from one reality (corporate America) to another (America Corp)."
I hearken back to the days when Intel (NASDAQ:INTC), Dell (NASDAQ:DELL), Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT), the four horsemen of the tech Apocalypse -- decided to sell OTC (off-board) out-of-the-money puts in lieu of buying stock. As shared in the 2007 article, Fire on the Mountain, when the BKX was a stone's throw from all-time highs and we fingered Level III assets as a root cause of concern, we touched on the tech topic:
"I started my career in 1991on the worldwide global equity derivative desk at Morgan Stanley (NYSE:MS) as the off-balance sheet proliferation began. We were pioneers in the field and during my seven years there, I watched as the largest technology companies in the world sold massive amounts of downside puts in lieu of traditional buy-backs.
Their motivation was clear -- if they were to put the stock, their cost basis would be considerably less than it would be through straight stock purchases. If their short puts expired worthless, the gains weren’t taxed as ordinary income. That loophole always seemed strange to me but alas, that’s a conversation for a different time.
They played the game because it was playable. And when they lost, they simply swallowed hard and wrote it off."
It's the last line that continues to play in my head. They swallowed hard and wrote it off.
We strive to see both sides in Minyanville; that was the genesis of Hoofy and Boo and remains at the core of our mission to effect positive change through financial understanding. There is a reason the stock market has doubled in the last three years, above and beyond the trillions upon trillions of dollars in synthetic stimulative demand.
There is a belief that the government will be able to retire this debt -- make it go away -- so we can return to our credit-driven spending habits of decades past. In other words, this is the debt destruction, albeit in a stealth manner.
The trick to that trade -- and make no mistake, it is the biggest trade in the history of mankind -- is managing the unintended consequences, be it the socioeconomic landscape -- which continues to devolve -- or the structural implications, such as an alternative world reserve currency, massive de-leveraging, trade wars, isolationism or hyper-inflation. Many of these scenarios were considered grassy knoll conspiracy theories when we first discussed them. Not so much anymore.
As always, the path we take will trump the destination we arrive at and the current price action, through objective eyes, remains constructive as we work off the overbought condition as a function of time rather than price. I am still short the NASDAQ -- timestamped at QQQ $69.65 with a $1 stop--and while defined risk removes emotion, I can tell you that a 42 cent move against me -- 42 cents -- has never felt so...anxious.
Whether the toughest fade proves to be a good trade remains to be seen; from here to there, we'll continue to follow our road signs and take our journey one step at a time>
As always, I hope this finds you well.
Thursday, September 20, 2012
Sell the Central Bank News
I'm sticking to my belief that last Thursday's news from the Fed culminated the central bank rally that started in earnest in late July, when ECB President Draghi took out his verbal guns, rather than being the impetus for another leg higher.
Sell on the central bank news, I continue to say for now as the reality of slowing economic and earnings growth that was swept under the rug for a few months pops back out again over the next month as we get more of a feel for Q3 earnings that will very likely show the 1st negative y/o/y earnings rate in 3 years. On the heels of the FDX earnings news, NSC last night attributed part of its earnings miss to "volume declines in certain markets."
Today, the initial Sept HSBC mfr'g PMI in China remained below 50 for an 11th straight month at 47.8 vs 47.6 in Aug, sending the Shanghai index lower by 2% to the lowest since Mar 2009 again. The euro zone Sept mfr'g and services composite index fell to 45.9 from 46.3, the lowest since June 2009 as while Germany showed some improvement, it was more than offset by declines in France.
Metals Have Some Big Buyers, Still (Beginning to Get Overrun)
While the metals have offered a slew of nice trades on the short side over the past four days, you’ve had to be somewhat nimble. The NY NYMEX session has seen huge buyers still ravenously entering bids. Gold and silver have thus avoided the type of mini-meltdown that hit the oil market over the same period. It’s pretty astounding. Nonetheless, the sellers have absorbed it for now. I can’t wait to see this week’s COT report. At some point, whether it’s here, or perhaps at 1900, there is going to be a very aggressive correction, likely slated for early October. Far less risky entry points exist. I have spent this morning cleaning up my book a bit. I was short a heck of a lot of Euros as well which has came in today. I am trimming (perhaps significantly) my metals short on the weakness. I still like a low 33 target in silver for now, perhaps 1738 gold.
I saw KISS and Motley Crüe last night, once again reminding myself that it must be far more fun playing guitar in from of thousands of adoring fans than slogging the keyboard. I am always far more anxious being short than long. Seeing the 500 contract orders, one after the next, in the 1770s was scary and frustrating. If I were long here, I would begin to worry about just how many people just bought these things at now underwater prices. Repeat: Friday's COT report could look quite ugly for the bulls.
Grabbing a Small Starter Position in Skyworks
I'm grabbing a small starter position in Skyworks Solutions (NASDAQ:SWKS) (half tranche) here in the mid 26's (26.74). There must be some analyst or hit piece concerns swirling here but you guys know me. I stick to my long-term theses and investment views. That said, I'm also keeping the size of this position smaller than normal until I get a little more clarity. Again, I think a guidance bump is a good thing and feel that the machines are nailing the weak hands here who are fearful of having Audience (NASDAQ:ADNC) nightmares again.
Speaking of ADNC, I think the Google (GOOG) Android food chain traction is worth noting and I'm circling the wagons on this name again. I caught a nice fast bouncer last time, and I still think that name should be trading closer to $10 than $6.
Friday, September 21, 2012
It's an old but familiar saw; expiration action is typically bookended by the bells. Index options expire in the morning and individual options are toe-tagged on the close. Pin action -- when a stock is pulled to a strike price -- occurs when open interest (of a particular line) is out-sized relative to average daily volume.
The market -- and by extension, my process -- is in a holding pattern after the opening pop this morning. The bulls will point to the tape working off the overbought condition as a function of time rather than price. The bears will note that the VXO is below Bar Mitzvah levels, which is where it has bounced -- and stocks have retreated -- in the past, per the chart below.
In terms of today's tells -- above and beyond expiration, so let's toss an asterisk on this -- the cyclicals are pretty in pink (Alcoa (NYSE:AA), Dow Chemical (NYSE:DOW), Dupont (NYSE:DD), Caterpillar (NYSE:CAT), Deere (NYSE:DE)), NYSE internals are better than 3:1 positive, commodities caught a bid (and commodity volatility typically precedes equity movement) and high beta is mixed, with Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) doing their upside thing, while Amazon (NASDAQ:AMZN) and LinkedIn (NYSE:LNKD) take a breather.
Other than that, Mrs. Lincoln, not much to report. Just remember that boredom is not an actionable catalyst when trading the market.
As always, I hope this finds you well.
Minyan Mailbag: TIPS In an Inflationary Environment
Michael A. Gayed
I am curious about your thoughts on TIPS in an upward inflation environment. Since I do not believe we will succumb to higher inflation next week, there is no need to rush a response to me. IMHO tips have done pretty well in a declining interest rate environment which to me is counterintuitive. I wonder if tips will respond as expected in an inflationary environment or will they fail? Can tips really work both ways?
While TIPS adjust their coupon based on actual CPI, price is based on expectations. In a declining interest rate environment, there are always some buyers who "expect" inflation to return based on those low rates, to ultimately still find those rates go lower. The demand for inflation protection from an expectations standpoint is why we have seen a number of TIPS auctions with negative yields despite actual inflation data being tepid. In a rising rate environment (presumably due to actual inflation picking back up), TIPS could go DOWN in price, but ultimately still outperform (be up more/down less) than nominal bonds. This makes TIPS attractive within the bond market space as an "inflation hedge" relative to those nomional alternatives, but not necessarily in absolute terms do well as stocks could perform better on a relative basis.
Key point is the expectations for inflation which set price, while coupon is set by actual CPI.