Buzz on the Street: Tesla Is No Longer On Fire
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, November 19, 2013
On the Wheels of a Dream - 10:49 a.m.
This morning Jonathan Weil has a piece on Bloomberg challenging Tesla (NASDAQ:TSLA) accounting. Over in the Wall Street Journal there are reports of increased regulatory review of Tesla cars as well.
As I joked on Twitter earlier this morning: Accounting issues? Regulatory scrutiny? For a moment I thought someone was talking about the banks in 2008.
More seriously, I think Tesla is a great real-time example of what happens when confidence falls post-bubble. Suddenly non-GAAP accounting measures which were not just accepted by investors but taken as "why this time really is different" substantiation for extraordinary valuations quickly come under siege. And as confidence falls, regulation naturally increases. For post-peak confidence companies, suddenly they are being attacked across multiple fronts. Where just months ago, everyone from investors to suppliers to consumers to regulators all adhered to a "Don't Ask, Don't Tell" operating model, suddenly everyone seems to be out with a microscope. And as we saw with the banks in 2008, incremental disclosure, rather than bringing an end to the questions, only raises more and more.
While I should probably stop here, I would also offer another real-time example of confidence-driven decision making in action and that is Bitcoin. I couldn't help but smile when I read this headline on Dealbook this morning:
"Regulators See Value in Bitcoin, and Investors Hasten to Agree"
Of course they do. Confidence is a social phenomenon and just like Washington deregulated the banks in 2009 at the top of the market, it makes perfect sense that regulators would be positive on Bitcoin with its price a record $1,000.
While Bitcoin may certainly go higher -- much like howTesla took on a rocket-like trajectory honoring its founder Elon Musk at its peak in confidence -- I would remind readers that high regulatory confidence is a bearish, not bullish, indicator. And to these eyes, there seems to be now be a saturating self-assured certainty to the future of virtual currencies.
Clear & Present Markets - 3:26 p.m.
1. The currency wars are taking shape. What we have seen to this point has not been a "war" but rather coordinated devaluations among developed economies. I think it is prudent to use the term "war" in the context of the PBOC actions because emerging market economies have borne the brunt of these policies in the form of inflation and less competitive currencies. The intention of the PBOC to end intervention in the currency market and broaden the yuan's daily trading limit, in addition to implementing market based interest rates, means China is taking meaningful steps to develop competitive capital markets. We have been headed down the road of liberalization for a while, but it seems recent changes empower Chinese officials to accelerate this process, bringing outside capital into China. Replacing a reserve currency is a process, not an event, and this is another of several signs that the dollar is losing its status as the world's reserve currency. Accelerating yuan convertibility and interest rate liberalization are major steps to creating a competitive alternative. A stronger yuan would benefit the Chinese consumer, who would have increased purchasing power, but exports would be less attractive to global consumers. I am long the Asia Ex-Japan ETF (NASDAQ:AAXJ) as a long-term way to play the long awaited, but yet to materialize, rise of the Chinese consumer.
2. I have been looking at some data recently that is helping me make sense of the disconnect between financial market price performance and economic fundamentals. While the Fed has stated that QE is aimed at using asset prices as a policy to drive economic activity through the behavioral impact of a "wealth effect," there does not appear to be a correlation between the financial interventions and fundamentals in the "real" economy. Housing is the one area where I would concede a correlation, but we are seeing asset price inflation across markets, not just housing. In short, while the Fed is causing asset prices to become overvalued, it is doing little to support the fundamentals that support those elevated valuations. What we are left with is declining household income, higher taxes, over indebtedness, and asset valuations that are disconnected from economic realities. If you put all of this together, you will see that it is essentially austerity, using another mechanism. As we heard in comments from Urban Outfitters (NASDAQ:URBN), Wal-Mart (NYSE:WMT), and Best Buy (NYSE:BBY), the consumer is tapped out and price competition is what will drive sales this holiday season. ZIRP is aimed at pulling demand forward, and after 5 years, we may be reaching the point in which we have pulled most of that demand forward and must deal with declining demand. The price competition and deflation we are seeing may be a manifestation of that.
3. Finally, the bombing of the Iranian Embassy in Beirut is a tragedy and a sign of the destabilization in the Middle East. Pay attention to the shifting geo-political landscape there. The Saudis are upset over the US non-action in Syria and then opening a diplomatic dialogue with Iran. Stratfor has been pointing out for years that the US needs to align itself more with Iran and less with Iran's mortal enemy Saudi Arabia, and we are beginning to see the shift emerge. The Saudis seem to be countering this by getting friendly with Egypt and to some extent Israel, but we should be aware that the proxy wars in Iraq and Syria appear to be spreading to other regions.
Wednesday, November 20, 2013
The Hump Day Cometh! - 9:54 a.m.
We've reached the half-way point of this freaky week as global indices "back and fill" recent gains. You know the drill; with mainstay indices up smartly this year--the Dow Jones Industrial Average is up 22%, the S&P is ahead 25% and the NASDAQ is sporting a 30% return--fund managers are 'on edge' with 28 sessions left until the year-end letters are penned.
In recent sessions, we've paid homage to the technical landscape--initial support resides at S&P (INDEXSP:.INX) 1775, with more meaningful supports down at S&P 1730 and NDX (INDEXNASDAQ:NDX) 3255--as we continue to respect the performance anxiety-driven "long squeeze," with the buyers higher and the sellers lower into year-end. Perception is reality in the marketplace and the masses are making the bet that current perception continues to manifest into January.
There are a few caveats as the bulls count their Benjamins. For one, the Investor's Intelligence Weekly Advisor Sentiment finds 53.6% bulls and only 15.5% bears, which is near the prior peak of 55.2% bulls two weeks ago. That dovetails into the VXO chart below, which shows that "fear" is a kitten's whisker away from 25-year support. If the past is a prologue to the future, option hedges and/or stock replacements is emerging as a smart strategy.
Another flag, for those who care of such things, is the price action in high-beta. Tesla, which was king of the world at $190, is suddenly the poster child of ambition gone awry, while other fliers, such as LinkedIn (NYSE:LNKD), Yelp (NYSE:YELP), Chipolte (NYSE:CMG), Netflix (NASDAQ:NFLX) and Facebook (NASDAQ:FB) have been sudden battlegrounds. These names remain a terrific proxy for the aforementioned performance anxiety as they provide the best bang for the buck for those trailing their benchmarks.
On the news front, we'll get the FOMC minutes this afternoon at 2PM ET, which will be dissected in kind. Keep an eye out for any tangible shift in perception; while Mrs. Yellen's Fed prides itself on wearing white feathers (read: remaining dovish), any dissension in the ranks could rattle psychology in kind.
Good luck today; be the ball.
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Swap Spreads and IOER - 1:06 p.m.
Yesterday I commented on the collapsing interest rate swap spreads. I've had the conversation with a few more people today and at this point have a pretty good handle on what's going on.
Realized volatility in the Treasury space is collapsing back to a multi-year low again. This is essentially because the market is embracing forward guidance, lower for longer, and allowing the Fed to tell them where rates should and will be. Complacency. So there has been a lot of short covering and new longs added in 2016 or longer Eurodollars, which drives swap spreads tighter. This also explains why the MOVE Index of interest rate volatility is back to the May lows.
I do like the fact that the market is becoming more rational, but I think we passed rational on our way to overtly complacent and that worries me. If and when interest rate vol picks back up, it might not be a pretty sight again.
The leak about the ECB deposit rate cut into the negative is adding more flames to the fire about an IOER cut. In his interview earlier this morning, St. Louis Fed President Bullard mentioned that the cut to the IOER rate has been discussed by the FOMC in the past. To my knowledge, when looking at the cut in early 2012, they found that the costs outweighed the benefits. So let's set sail on the SS Theoretical to analyze some things and how it may affect domestic banks.
I'll give a rundown of what the Interest on Excess Reserves (IOER) rate is. The rate, currently at 25bps, is paid to banks on excess reserves they hold from the Fed. To my understanding, total reserves are calculated as the monetary base minus the value of Federal Reserve notes, and excess takes into account required reserves. As of last June 26, there are $2.04trln of total reserves ($2.5trln as of Nov 13, but I do not have excess for that date), of which $1.92trln are considered "excess". Basically, only 6% of the money the Fed has "printed" is actually being used.
I imagine there is a structural limit to how many of these reserves can be used. For example, to my understanding, the only primary dealer eligible to receive reserves in exchange for Treasuries are those that are commercial banks. So these reserves are going to the likes of Citigroup (NYSE:C), Goldman (NYSE:GS), JPMorgan (NYSE:JPM), etc. These banks can only lend out a certain amount, it's not free money, and affects their leverage ratio. The asset (reserve) is essentially a deposit and must be matched against a liability before being taken onto the balance sheet. Next, you have banks being pressured by all sorts of new regulation to limit their size, so regardless of an IOER cut, they aren't incentivized to take on more loans.
Practically, the IOER rate acts as a ceiling for overnight rates. So if the rate was lowered to 0, that would cause widespread dysfunction in money markets and repo markets. If a money market fund is leveraging bank assets at 0%, they have ZERO incentive to take on that risk. My guess is that they are thinking about lowering it to 10bps because the 5bps rate from the Fixed Rate Reverse Repo Facility acts as the floor. It would then enforce a band of 5bps to 10bps for overnight rates and the Fed Funds rate.
Friday, November 22, 2013
Things Are Looking Better in Biotech - 10:31 a.m.
There are a million crosscurrents out there in the Market. Uber-Minyan Jeff Saut, who in the nearly 10 years (!) I've been writing for Minyanville has been right an astoundingly large portion of the time, is warning of weakness next week. Smaller biotech has been gingerly in risk-on mode for most of this week -- to the point where we relaxed our short exposure on the names in which we had nice gains. In my experience, that's usually a coal-mine canary for outperformance by the broader market.
This is a buyer-driven market. When buyers take a vacation -- figuratively or, like next week, literally -- the market drops. There haven't really been many sellers. For the other portfolio managers out there, when was the last time a colleague asked you "So what do you like on the short side?" People simply aren't all that interested in selling. They're cranky when they have to sell.
That sentiment is an incredible tailwind for stocks, for however long it might last.
For those interested in my home sector (biotech), do yourself a favor and pull up separate yearly charts of the NASDAQ Biotech Index (INDEXNASDAQ:NBI) for 2010, 2011, 2012, and 2013. Print them out and line them up one atop the other (I have this hanging on my wall over my desk). You'll see we're pretty much beyond the point of the traditional Fall drop in biotech. Seasonality is less of a headwind. We have the big American Society of Hematology meeting in early December and then all the specialists in my space start positioning their portfolios trying to anticipate which companies will have positive gains heading in and out of our sector's Super Bowl -- The JP Morgan Healthcare Conference in San Francisco January 13-16. That creates buying pressure, macro issues being equal.
I wouldn't be surprised to see a little weakness next week per Mr. Saut's tells, but I think we're on the edge of another upswing in biotech. As Toddo says, we're rapidly closing in on year-end, and I suspect the hot performance in the biotech sector are going to cause portfolio managers at generalist funds to add biotech exposure so they can talk about that in their year-end letters.
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