Buzz on the Street: Congress Acquires Basic Social Skills, Bulls Buy the News
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, October 14, 2013
And We Wait...
I thought Congress would figure out a deal over the weekend, but the length of the deal has been the sticking point that caused the negotiations between the White House and the House of Representatives to break down. House Republicans were willing to extend the debt ceiling into January but wanted to hold a Continuing Resolution (CR) for only six weeks. President Obama didn't want to have either deal term less than January for sure, and he may have been holding out for a year-long deal.
So now, it is in the hands of the Senate. The Senate is working on a variant of a proposal by Maine Republican Senator Susan Collins in which there is a deal for both the debt ceiling and the CR extended out six months, some sort of a committee to work on budget issues, and a repeal of the medical device tax component of the Affordable Care Act ("Obamacare"). I've heard from some that House Republicans offered Collins' proposal to the President, and he turned it down, but I don't think that happened. Everything I've heard is the proposal from Speaker Boehner extended nothing beyond January.
So what now? Senate leaders continue to say there will be a deal. If there is strong bipartisan support for the deal, it could get done by October 17. If there is not, I'd look towards next weekend as there are tons of procedural hurdles in both chambers that will have to be navigated to get across the finish line. I still believe it will be, at a minimum, a 3-month deal with a committee. I don't think the medical device tax will be in the initial deal, but I think that tax does go away in 2014 (not because I think it should but because there is too much money flowing to make it go away).
I still think there is a 30% chance we go beyond October 17, partially because everyone now believes it is a couple of weeks until we really default on payments. My guess is the selling volume gains in bigger-cap names if we get to the October 17 deadline without a passed deal. The wild-card here is some new set of polling that shows the GOP gaining ground and the Democrats losing ground -- though I think at this point both parties will lose ground every day this drags on.
Will Amazon Test Its 200 DMA?
Amazon (NASDAQ:AMZN) is a leading name that exemplifies the position of many strongly trending stocks.
Amazon tested its overhead 20 DMA on Friday for a possible Holy Grail short setup.
In addition, Amazon went into the Minus-One/Plus-Two sell position on Friday.
The patterns define what may be a possible right shoulder of a Head & Shoulders top.
The end of October should be pivotal for Amazon since October 26 will be 90 degrees from the square-out high we identified in late July as well as 60 degrees from the late August low.
The authoritative stab down through the July highs last week suggests that last week's late rebound in Amazon is a bearish reflex bounce. However; convincingly regaining the level of the July highs would seem to put Amazon in a strong position.
Snapping last weeks lows, suggests a test of the 200 DMA is probably forthcoming.
Below, see a daily Amazon chart with its 20, 50, and 200 DMAs from July.
Click to enlarge
Answering Yahoo Questions in No Particular Order
I've been getting Yahoo (NASDAQ:YHOO) questions lately as we head into its coming earnings report. Below, see my somewhat randomized thoughts on YHOO, its coming earnings report, and my reasons for not owning the stock.
First, I don't see Yahoo! as a great bet ahead for the coming quarters. The stock has already put in a huge move. That said, EPS and revenues are not the driver here as it's clearly the Alibaba IPO.
Now, if I see Yahoo! become an "earning acceleration" story, I will feel compelled to put at least a minimal position on the sheets. In fact, I'd rather invest in Yahoo! as an earnings acceleration story than as a proxy for Alibaba. And until the Alibaba deal is priced, there would be an underlying bid.
I'd rather play the name as a trade like I did last quarter. At that time, I bought the post-report weakness for a trade and would do so again, i.e., the setup is that Yahoo! doesn't deliver enough upside to "thrill" the late buyers. As a result, selling ensues, and the stock drops 4-6% or more.
That said, my projection is that Yahoo! beats slightly on both fronts. Further, M&A should start to provide an increasing revenue ramp after the current quarter.
The main reason that I stay on the sidelines with Yahoo! is very simple. There are just other names I prefer from a risk-to-reward standpoint -- on growth, value, and catalyst fronts. On the value side, Apple (NASDAQ:AAPL) is a perfect example, though there are plenty of others.
For the last year, on the "catalyst" angle, I vastly preferred Facebook (NASDAQ:FB) over Yahoo!. And in the last year, Facebook is up over 150%. So, even while Yahoo! has been a great performer, Facebook has outperformed it by 40% plus.
On the growth side and moving forward from current price levels, I much prefer Twitter (NYSE:TWTR), my networking thesis names, and possibly new IPOs like FireEye (NASDAQ:FEYE).
Lastly, on a long-term and on a pure-comp basis, I still prefer Google (NASDAQ:GOOG) by a huge margin.
So for me, it's not that I don't or haven't seen the "Yahoo! upside story." Heck, I've written about it and pretty well nailed the current valuation. It's simply because better companies are also competiting for my investment dollars, and for me, Yahoo! hasn't won.
Tuesday, October 15, 2013
Fracking Play #2
In a follow-up to FlowTek (NYSE:FTK), which I discussed last week, here is another fracking gem: C&J Energy Services (NYSE:CJES). The company is a little more involved in fracking equipment and has some fracking liquid products as well, in addition to tubing and well intervention services.
The Fundamentals – They Look good for the long-term, but what the heck happened in the last two quarters? C&J miss timed some receivables, accelerated some depreciation, and expensed some Property, Plant and Equipment. Did the company kitchen sink last quarter? No, but it did sneak some other losses in there since the receivables issue was already going to make a miss.
Now let's consider what went right last quarter:
1) Best retained earnings quarter in years.
2) Accelerated expenses (now this wasn't good for last quarter, but this quarter should be stellar!).
3) Increases in assets and shareholder equity.
The Technicals – You have to be careful here as this stock has huge intraday travel ranges, so when looking at the technicals, you really have to have a wide lens and easy view. From a simple perspective, it has had a nice uptrend since last quarter. It now has a 50-day moving average back above the 200-day, and the stock just closed above both yesterday. This is generally a good entry point, and I plan to put on a full position today.
Also, take a look at the MACD; this is a better way to view choppy stocks like this one. It appears that momentum is building for a push higher, and I wouldn't be surprised to see it hit new highs by the end of the year.
Click to enlarge
The Really Long Term. I like the industry, and I love the way that management isn't afraid to sacrifice near-term results to create long-term value. This is setting up for a multi-year (probably 5+) stock for me, and I will likely just throw it in a coffee can in the back yard to be dug up down the road.
Treasury Cross Defaults
I just learned something new that I think will be very helpful for everyone. I did not know this, but due to the way Treasuries are setup and issued, there is no cross-default clause. What does that mean? It means that if the Treasury failed to make a coupon payment of the 7-year issued in June 2013 or principal payment on any short-term bills, it would only affect that specific debt tranche and not Treasuries as a whole. In the case of normal companies, if they missed a payment then all of their debt would be in default.
This explains why only short-term bills and notes that are near-to-maturity have been dislocated while longer-term Treasuries have not.
The takeaway is that if the market thought the Treasury would not be able to make coupon payments then the notes would begin trading ex-coupon - essentially like a zero coupon note - or potentially on an accrued basis. That one I'm a little unsure of because it's purely hypothetical what if's.
Hat tip to Scott Skyrm.
BlackBerry Takeover Talk Resumes, Options Strategy Reassessment
BlackBerry (NASDAQ:BBRY) just got a bit of a pop intraday on a news report from Canadian business channel BNN that Cerberus has started looking at the company's books.
A rumor regarding Cerberus' interest in the company was floated on October 2, and of course, let's not forget that co-founders Michael Lazaridis and Douglas Regin are also interested in the company, in addition to the $9/share bid from Fairfax that is actually on the table.
I have a position in the December $9 butterfly, which would pay off big in the event that the stock goes to $9 at the December expiration, but now I'm wondering if a purchase of call spreads would have been wiser.
Because of the structure of butterflies, they only really go into the money at expiration, and in this case, let's say someone floats in and says they'll pay $10/share for BlackBerry. In this case, the butterflies would be worthless, while the call spreads will increase in value instantaneously rather than at expiration, as is the case with the butterflies.
Live and learn! In this case, I can actually get out of the butterflies for a modest gain (actually a tiny gain after commissions as with 4 contracts per lot in a butterfly, they add up) and roll over into bull call spreads, but I'll stand pat for now.
Wednesday, October 16, 2013
Clear & Present Markets
Here are a few thoughts:
1. It looks to me like Intel (NASDAQ:INTC) is manipulating its earnings (within the rules of GAAP) in order to hold gross margins. Specifically, it reclassified process engineering expenses for its manufacturing operations as an R&D expense, which takes it out of gross margins. Investors watch gross margins very closely as it measures Intel's pricing power and brand equity. The problem Intel is facing is that the size and performance of "last generation" chips is sufficient to meet the needs of most users. In addition, it has segmented the market so much that its new chips are replacing demand for recently launched products in adjacent markets that are still ramping. Since Intel knows investors will look at gross margins to measure the strength of the business, it changed how it accounts for certain expenses to make this number appear better. While the datacenter business is fine, Intel's margins in the PC, tablet, smartphone businesses are rapidly deteriorating.
2. Bank lending growth is happening in autos and credit cards. Housing is a disaster. I also learned that Bank of America (NYSE:BAC) is booking revenues from its mortgage business when rates are locked, not when the mortgage is written. Again, this is an example of aggressive accounting because Bank of America is recognizing revenue before it earns it. As analysts are rolling their bank earnings forecasts forward, I am surprised that many are expecting a rate increase in 2015. I know that the Fed has guided the market to that time period, but GDP is struggling to grow by 2% with $1 trillion in monetization and 0% interest rates (ZIRP). ZIRP leads to capital misalloocation because initiatives that are not viable in the long term are profitable as long as interest rates are 0%. The same can be said for the tremendous excess capacity in the system that is only utilized because ZIRP is pulling demand that will not be there at higher rates. The only justification I can see for higher rates in 2015 is that inflation starts taking hold. Just some food for thought as we head into year end.
3. Abbott Labs (NYSE:ABT) had excellent numbers this morning, primarily because its diagnostics business was unexpectedly very strong. The most important thing I took away from the call though was an explanation of why the company decided to increase its dividend by ~60%. Abbot's CEO said that it underestimated how important the income part of the growth and income proposition is to its investors. Money has been flowing into stock buybacks, but I wonder if we will begin to see more of that cash flows allocated to dividends in the future, which could challenge EPS growth as stock yields increase.
Congressional Gesticulation May Finally Be Over
A deal is supposed to be on the table for today with the House. It would mirror the Senate's plan to reopen the government (thru Jan 15) and raise the debt ceiling (to Feb 7). In addition, the deal would allow the Treasury to employ extraordinary measures should the government not raise the debt ceiling before the Feb 7 date, something that had been potentially left out of the House bill. That would allow the Treasury to at best extend its cash to July.
The GBPUSD (cable) is working an outside down bar on its daily chart, for those who are interested. Fundamentally, not sure what's going on there, but I do know the dollar side is seeing an obvious tailwind. It would need to settle in the bottom third of the day's range to confirm it.
Bonds are seeing solid follow through after the news that all is well in the government. Not the reason I had been looking for, but I'll take it. Perhaps there were a few shorts set for a meltdown? Perhaps. I'm also hearing that this rally is led by foreign buyers who had recently sold down their Treasury holdings. Very, very constructive to see the 10yr hold the 40dma at 2.76%.
For those playing with options, remember that the Fed meeting is on October 30. I don't expect the FOMC will do anything until they see a solid amount of preliminary fourth quarter economic data to ascertain whether or not the government shutdown had an actual economic effect. So the December 18 meeting is a possibility.
Click to enlarge
Picked Up Some Irrational Exhuberance Insurance
As a portfolio management measure, I bought some upside SPDR S&P 500 ETF Trust (NYSEARCA:SPY) exposure by picking up the $173.50/$174 call spread expiring Friday for $0.07.
It's basically a play on the possibility that Mr. Market rolls his eyes at the idea that the market will sell off once we hit a debt ceiling resolution, and thrusts stocks higher to further tick off frustrated bears.
The position isn't sized big, so downside risk to my overall portfolio is kept in check. However, if we do get a surprise surge into Friday, I will get a decent boost because the payoff on the spreads is so big (about 7:1).
Thursday, October 17, 2013
Michael A. Gayed
We could be looking at a turning point here for Gold. We're seeing strong outperformance today in the junior miners (NYSEARCA:GDXJ) relative to the metal (NYSEARCA:GLD). Strength in this ratio is typically bullish for gold. We're also seeing this strength occur at the same time gold is making a higher low above the June low with weakening downside momentum (higher low in RSI). Additional factors favoring a turning point include sentiment (traders still very bearish on the metal) and COT positioning (net exposure to gold remains low relative to recent years). A move higher in gold here would surprise many market participants.
Credit Check and Sandisk Earnings Review
Good morning Minyans - Credit derivatives are quiet this morning, as all the action happened late yesterday. It can be summed up by the move in the CDS of large US financial institutions, which improved 20bps (from 410 to 390). The new issue market didn't wait for the government deal as another $7.1B of new bonds were sold.
My eyes today are on Sandisk (NASDAQ:SNDK), which reported stellar results and still can't get any serious "love". As I tweeted last night, forget the huge beat on the EPS front, which was in part helped by share buybacks: operating income came in at $371MM vs. estimates of $322MM. That folks is NOT financial engineering. The key driver for SNDK business and for how the Street will treat the stock, is gross margins, which continue to expand at a remarkable rate and are now close to 50%. There are many tailwinds behind that improvement and some will no doubt abate over time; but what will continue changing for the better is that SNDK is slowly morphing into a storage solution company a-la EMC Corp. (NYSE:EMC), where software will be as, or more important, than hardware, and NAND chips will just be the medium for those solutions. It's a process that will last a few years and will have its ups and downs, but to those who believe that the company is a commodity chip producer that has achieved gross peak cycle profitability, I will counter that by the time SSD's make up 50% of SNDK revenues - probably by 2015 - analysts will be asking when SNDK can achieve 65% EMC-like gross margins, as opposed to worrying when profitability will slip back to the 30's, where it was just a few quarters ago.
Ten-Year Vs. Crude
The comparison chart of ZN (ten-year note futures) and CL (crude oil futures) is posing some serious questions. As you can see, the top in oil corresponds perfectly with the low in treasuries and the trend is clearly down for oil and up for treasuries. This could be pointing to a much slower economy than many realize, most likely exacerbated by the government shutdown. I would not be surprised to see oil trading under 100 and yields on the ten year testing 2.5% in the very near future.
Click to enlarge
Friday, October 18 2013
Sell on the Trumpets?
According to Wikipedia, "All the events and news that happen around the world can have a great impact on the stock market. Very often, if a war breaks out or political problems arise the stock market will take a plunge. The saying of 'buy on the sound of cannons, sell on the sound of trumpets' suggests that the start of, or the continuance of, a war is a good time to invest in the stock market, while the end of a war is a good time to sell." That phrase has been adapted in the modern stock market era to buy on bad news and sell on good news. In the current case that would mean buying on October 7, 8, 9, when the S&P 500 (SPX/1733.15) was changing hands around 1650 (the "cannons"), and selling on "trumpets" of a debt ceiling deal yesterday. And, that is what "they" tried to do on Thursday, but all to no avail. I think the reason for yesterday's buoyance is simple. Now that the "crisis" is in the rear view mirror, the equity markets should refocus on earnings, economics and the Federal Reserve; and here the story is pretty good. S&P's bottom up operating earnings estimate for the SPX is currently $107.58 leaving the SPX's PE ratio at almost 16. Next year's estimate is $121.66. If the SPX continues to trade at that PE multiple, it renders a price target of 1946. As far as economics, things appear to be getting better. In 2014 I believe GDP growth will finally accelerate to 3% driven by a capital expenditure cycle because companies like General Motors (NYSE:GM) are running their plants flat out 24/7 and the equipment is wearing out. Finally, with Janet Yellen at the helm of the Fed, it should be steady as you go. That implies no tapering and plenty of liquidity. To the underinvested -- and underperforming -- investor, this trifecta is a nightmare.
Of course, with the debt deal came the obligatory question, "If you were confident of the outcome in DC, why didn't you go 'all in' versus holding the 25% cash?" My response read, "Because I am a risk manager and didn't want to take that risk. Charles Dow once said, 'The successful investor needs to be able to ignore 2 out of every 3 money making opportunities.' Nevertheless, I was adamant there would be a deal worked out." As for the stock market, we are about to find out if this is an upside fakeout with yesterday's new all-time high for the SPX, or the start of a whole new leg to the upside. I have to admit I am unsure, which doesn't happen to me very often. The next few sessions should tell us.
I would take note of the reversal in the financials (NYSEARCA:XLF) this morning. The sector did fairly well in recent days despite mixed results from many of the big boys like JP Morgan (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Goldman Sachs (NYSE:GS).
However -- the group is now actually selling off and is negative despite Morgan Stanley's (NYSE:MS) relatively solid numbers.
Now if the financials stabilize and get back in the green, I wonder if the S&P crosses through 1740 with authority.
On the other hand, if they continue to stink up the joint, the broader markets could be looking to take a break following this impressive run.
World Peace Breaks Out on Wall Street!
The Beltway bickering continued to the eleventh hour, shockingly enough, before a budget compromise was reached and the debt ceiling was raised, at least for the time being; the stock market discounted that drama as the S&P rallied 2% for the week-and 5% since October 9-and notching all-time highs.
There was a contingent on Wall Street-present company included-who felt that traders would sell the news but that quickly gave way to the performance anxiety sweeping the street into year-end. When managing other people's money, it's OK to lose as long as others lose more-but anathema to make money if others make more.
With 20% of the S&P reporting third quarter earnings, 55% beat top-line revenue estimates and 71% beat EPS estimates. In the financial sector, the common theme was weakness in fixed income revenues, with Morgan Stanley, Goldman Sachs, and Citigroup seeing a sharp drop-off in trading activity.
Sexy sirens continue to lure investors into equities with the perception that the Bernanke Call replaced the Greenspan Put. While we may not have "irrational exuberance," signs of excess litter the landscape: Google and Priceline (NASDAQ:PCLN) trade at $1000, social media stocks are parabolic and the S&P 2014 earnings estimate is $120 coming out of a technical recession and on the back of a 160% rally since March 2009. The phrase "caveat emptor" comes to mind.
The earnings avalanche continues next week, including Netflix (NASDAQ:NFLX), McDonalds (NYSE:MCD), Coach (NYSE:COH), Boeing (NYSE:BA), Caterpillar (NYSE:CAT), AT&T (NYSE:T), Dow Chemical (NYSE:DOW), Ford (NYSE:F), Microsoft (NASDAQ:MSFT) and Amazon. Apple (NASDAQ:AAPL) will release the next version of the iPad on Tuesday and the EU Summit starts Thursday with hopes of strengthening their policy coordination and increasing regulatory safeguards.
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