Buzz on the Street: Heaven Is a Taper on Earth
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Tuesday, December 17, 2013
Four Santa Stocks and a Keeper
As the end of the year draws near, I start looking at who can finish strongly. Here is a quick list of four that I think can take off from here into year end, and one that I think you can still have buried in the backyard.
C&J Energy Services (NYSE:CJES) -- It had a perfect 50-day moving average touch after a golden cross. This is one you can buy and put away for a while too. It looks to be taking off on a momentum run as fracking becomes the new internet. No lump of coal in my stocking. I just want natural gas!
Flotek Industries (NYSE:FTK) -- Yes, I was early, and there was a reason I only bought half of a position in this one. I am rounding it out to a full position now. It had a perfectly controlled pull into the 200-day moving average. Now, it's time to see if this one can rocket back. I am in it for the long haul, and this is the second pillar of my natural gas thesis.
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Apollo Education Group (NASDAQ:APOL) -- Minyan Mike brought this one to my attention a while back, and I have been watching it ever since. I am considering a position very soon as the moving averages finally caught up after a monster move that punished the shorts. This looks to be setting up to go higher too. Watch the downward-sloping resistance, as it should break the wedge and shoot for new highs.
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Check Point Software Technologies (NASDAQ:CHKP) -- Bouncing off the long-term trend line and the 50-day moving average, this continues to be a momentum move in a growth-oriented and still undervalued stock. It looks like it is about to break the wedge up here and shoot for new highs soon.
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The Keeper - I have mentioned Gentex (NASDAQ:GNTX) several times on the Buzz. I said that I wasn't going to sell it into that last pop, and this is why: It is breaking out again. This business is the fastest growing business you have never heard of. I will continue to hold it and see if it can hold higher once again. This stock has officially entered beast mode as it loves to keep defying gravity.
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Wednesday, December 18, 2013
S's over N's
The S&P (INDEXSP:.INX) out-performance of the NASDAQ-100 (INDEXNASDAQ:NDX) continues post-Fed, with the latter matter struggling to hold the flat-line. An old school trader would opine that the inability (of tech) to follow through to the upside is a bearish tell, and I would agree, particularly as I watch the price action in LinkedIn (NYSE:LNKD) and Apple (NASDAQ:AAPL). We must balance that against the price action in gold (now flattish) as we edge toward the close.
The talking heads are discussing the "rate taper" vs. the "money taper" as an important distinction. Eh, maybe -- I still think that by the time the dust settles on this puppy, the Federal Reserve will no longer be able to control interest rates. That, to me, is when the clothes will fall from the Emperor.
Thursday, December 19, 2013
The curve is taking on a dramatically flatter tone today. Roll adjusted the 5/30 is 8.5bps flatter, hitting a narrow of 10.5bps. The 10/30 trade, which I think is the "QE off" trade, continues to scream tighter, blowing through 100bps again. Bottom line, the takeaway I have from the Fed is that QE in the form of asset purchases is coming to an end. You can interpret that however you want for whatever asset class, but the signal came through for me.
Judging by all of that action, my honest guess is that this is all an unwinding or squaring of positions. The Street owns a disproportionate amount of the five-year from yesterday, and that seems to be the hardest-hit sector with what looked like panic selling. I also think that the significant weakness in MBS today is playing a role in the overall higher rates. This morning, 30-year FN 3's hit the widest options-adjusted spread since they went into production in 2011. Keep in mind, though, that the Fed owns the majority of these notes. I'm keeping an eye on how these act because I want to see what it's like when there isn't such a large uneconomic buyer present every day.
Since I was breaking down the trade for a Minyan earlier this morning, I'll share the analysis here. There are a number of trades that stand to benefit over the coming six months as interest rates get more normal. Most involve being short the three-year or the five-year vs. the long end of the curve -- 10-year or 30-year, take your pick. Both will remain more or less anchored in 2014. On a notional, duration-weighted basis, shorting $3.75 of five-year futures vs. long $1of the ultras (30-year) would give you an equal-weighted position. From there, reducing the long position or adding to the short would position you for the spread to tighten or widen.
If you are able, I think an interesting trade into the new year would be to be long or "pay" the five-year swap (same thing as being short the note) vs. long the 10-year or 30-year cash Treasury. The five-year swap spread reached a record tight this morning, even adjusting for the roll, which means that at face value, hedging for interest rate risk - or any risk - in that sector is at its lowest. If what we think happens in 2014 with the short end and intermediate duration bearing the brunt of the sell-off, logically you would imagine that this spread will widen. So, the trade would essentially be a juiced up flattener.
For those who follow the space, mortgage REIT American Capital Agency (NASDAQ:AGNC) lowered its dividend yesterday for its fourth-quarter payment to $0.65 from $0.80 in the third quarter. Annaly Capital (NYSE:NLY) reports its fourth-quarter dividend after the close today, and I would expect a $0.05 cut to its quarterly dividend to $0.30. If that annual dividend keeps up, which it should, it implies a fair value price between $8.57 and $9.23 with a 13%-14% dividend. If you're looking for a beat-up sector to explore in 2014, this seems like a decent area for a trade. My vehicle of choice would be Ellington Residential Mortgage REIT (NYSE:EARN).
T-Report: The Stranger, the Better
Treasuries continue to leak post-FOMC. We are back to 2.92% on the 10-year. I like it here and don't think we are going to breach the 3% support. Eurodollar futures are somewhat surprisingly lower after yesterday.
Stocks obviously had the best reaction yesterday. The sell-off was incredibly short lived, and every stop got taken out.
Credit did only okay. CDX was a couple tighter, and high yield bonds were up a touch (in spite of treasuries being lower).
This morning, we are seeing a strong rally in Europe. The MAIN index is back to levels before PIIGS became a word (early 2010).
The SNR FIN index continues to outperform and is now only 14 bps wider than MAIN. We are thinking about calling that trade off. While we still like the big-money center banks, particularly in the US, there are some sketchy names in SNR FIN.
We think as the dust settles, we will see bonds and credit spreads perform extremely well over the next few weeks as investors try to chase yield again.
There are really only four ways to increase your yields.
1. You can extend duration. But this seems particularly dangerous. In the treasury space, the 10-year is closely watched by the Fed due to its impact on the mortgage market, and it is far more easily controlled than the long bond. In credit spreads, the 30-year bonds are always very technical as they remain the domain of pension funds and insurance companies. I could see taking some longer dated spread risk, but I would be cautious there.
2. You can decrease credit quality. You can move further down the credit curve. Pick credits that six months ago you would have made a disgusted face at. This usually ends badly, and much of this has already gone on. Everyone has drifted a bit lower in credit quality already, so the value isn't obvious, and mistakes will be very costly.
3. You can move into less liquid assets: private placements, small deals, and middle markets. This is more difficult for hedge funds, but it will become part of everyone's process. There is value in this space because everyone has been so focused on liquidity. The problem is that some of the spaces are pretty small, and it won't take much capital to drive out the value.
4. You can increase the structured risk you take. CLOs were the first to return. We are now seeing more synthetic CDOs. The reality is that we are in the early stages of a new cycle of structured credit. There will be value there because the "building blocks" are still relatively cheap. CDS spreads for example are still much wider than they were in 2006 and in the first half of 2007. That makes it easy to create real value. Many investors will initially refuse to participate in structured credit. Many investors are no longer well-positioned to analyze the risk in structured trades. That is where the value is and why we think we will see real growth.
So we don't like the idea of extending duration, moving to worse credits is too dangerous (and this from the firm that liked European Financials and Spanish and Italian bonds). We like the idea of moving to less liquid assets for a portion of the portfolio. We just aren't sure how much of it there is to be had, and can be less helpful there. We really like the idea of moving aggressively into structured risk here.
If you think back to the strangest most exotic product in the pre-crisis era, whether it was CPDO, CDO^2, LSS, ABX, TABX, or some other acronym, you can assume someone is trying to resurrect the product. Probably not in the exact form, but the ideas worked for a reason, and the conditions are being set for them to work again.
Overall, the return of structured credit will force spreads tighter. So just being long is good but finding the right trade here will be a key to driving performance.
We like Mezz Bespoke, Mezz tranches, and super senior if you can do it.
Tomorrow we will go through another round of reasons why we think those offer so much value and why they can tighten quickly.
Friday, December 20, 2013
So we survived the taper announcement, just like we survived the debt ceiling debate, the continuing resolution, the shutdown, the NSA scandal, Benghazi, tax increases, etc. In fact, it looks to me as if all of the bad stuff has already happened, leaving the door open for a dearth of bad news in the months ahead. And maybe that is what Wednesday's stock market leap was all about. I must admit, I was not only surprised by the size of the move, but also by the number of large "block trade stock sales" on the tape; as well as the fact that a +300-point session failed to qualify as a 90% upside day (meaning 90% of total volume and total points traded did not come in on the upside). I don't recall the statistical history of that, but my sense is that it is pretty unusual. Accordingly, I thought the day was indeed stock constructive, although hereto, there were some weird things going on in Wednesday's win. For example, there was absolutely no buying-power pressure recorded by my models but rather marginal selling pressure. Moreover, I continue to have mixed signals from most of my short-term indicators, and the advance/decline is not confirming the upside. Yet, all of my longer-term indicators remain exceedingly bullish. One event that went largely unreported yesterday, which should have helped the US markets but didn't, was the People's Bank of China's decision to inject liquidity into the economy to alleviate the current money market's cash crunch. Speaking of China, I have long believed China was not going to implode. It does have $2 trillion of US dollars, but my hunch is it will use $1 trillion of that money to "plug" the holes in its banks' balance sheets. That leaves $1 trillion to drive China's economy forward, which is definitely enough cash. Sure growth is going to slow in China, but its 5% - 7% GDP growth path is simple and sustainable.
While the media was replete with "oohhs" and "aahhs" about the magnitude of the Dow's Wednesday point gain, the really important chart of the past few sessions is the 10-year T-note chart, whose yield has risen to 2.95% on an intraday basis, while the five-year T-note is faring even worse (see chart). I had this discussion with Pioneer's iconic bond fund manager Ken Taubes yesterday. Ken thinks the real interest rates problems will come from the "front end" of the curve (read: five-year T-notes and shorter). Unsurprisingly, given the attempted pullback since the November 29 high, the stock market's internal energy, at least by my models, has a full charge of energy, implying there is the potential for another upside equity burst leading to the fabled Santa rally.
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