Buzz on the Street: Earnings Super Bowl Has Low Ratings
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:
Monday, January 27, 2014
The scenario presented in Vince Foster's article in July on how China could cause the perfect storm in the bond markets is likely about to play out now.
The Fed has now actually started tapering and could scale that further.
The ECB has also been withdrawing liquidity as banks return capital there.
The shadow banking system's threats are attracting increasing attention - at an estimated $5 trillion its 60% of GDP. The overall banking system itself at $23 trillion is almost 3x GDP.
Take a look at the CNYJPY cross as well. It's at a higher level than where it was in June of 2013 indicating that the Chinese exporters are also suffering more.
All of this could prompt a flight out of the Yuan, causing it to depreciate, which in turn could layout the scenario that Vince pointed out.
Precisely when the Fed and Japan are reducing their bond buying, the Chinese could be reducing theirs too.
The dollar will likely appreciates against the yuan, and commodities will likely stay subdued too, meaning inflation stays contained.
Hence, a bond market sell-off and consequent yield spike would be driven by real yields spiking.
End of year outlooks by major asset managers indicated overweights in European and Japanese equities and in equities in general. In credit, there was a preference for high yield in search of yield. All of these could potentially unwind if the above scenario plays out.
Tuesday, January 28, 2014
Apple Follow-Up: iPhone 5C a Problem
I wanted to follow up on my post yesterday on Apple (NASDAQ:AAPL) post-earnings.
I noted that unless supply constraints held down the iPhone unit number (which was 51 million vs. the 51 million consensus), it was really bad.
On the conference call, Tim Cook said that both the iPhone and the iPad (iPad did 26 million units vs. 25 million consensus) were supply constrained. Additionally, I suspect that the company seriously regrets the 5C. Tim cook admitted they weren't selling very well, and it's possible that 5C-related resources could have been allocated to the 5S.
So, let's say that Apple could have sold an extra 2 million iPhones and 1 million iPads. In that scenario, Apple would have done an additional $2.4 billion in revenues, based upon the $637 iPhone ASP and $440 iPad ASP.
And that has me scratching my head over the Fiscal Q2 (March quarter) guidance. Apple guided for $42-44 billion in revenues. At the high end, that would imply sub-1% year-over-year growth.
CFO Peter Oppenheimer attributed the weak growth due to a lack of channel inventory build relative to last year, lower iPod sales, a stronger dollar, and more Mac and iOS revenue deferrals due to free software and upgrade rights.
Supposedly, those four factors negatively impact the year-over-year revenue comparison by $2 billion, but I'm not sure that argument holds a lot of water.
As far as year-over-year comparisons go, in the comparable quarter last year, iPhone units grew just 7% year-over-year and overall company revenues grew just 11%. Given the alleged supply constraints on the 5S during Q1 (which have to be clearing up after 4+ months on the market), shouldn't the iPhone number be bouncing back? And I just don't get the statement about the iPod. It's not like anyone's expecting the iPod to grow, and it's a recurring business -- you can't just X it out. (though if Google (NASDAQ:GOOG) can pretend Motorola's financial collapse isn't happening, anything's possible).
On the plus side, Apple did very well pricing-wise. The iPhone ASP was $637, down less than 1% year-over-year, which is amazing when you consider how fast industry pricing is falling. And if it wasn't for the 5C, it would probably have been higher. In fact, if it wasn't for the 5C, I'd probably be writing a completely different post now.
The iPad unit number was also a nice bounce-back following two very lousy quarters.
I'm not ready to throw the towel in on Apple because their business model is the only one in hardware that's built for the long run. But I'd be lying if I said I wasn't worried about the company being bitten by the great smartphone bear that's been happily munching on the competition.
Wednesday, January 29, 2014
Turkey and the Fed
Initially, yesterday, we didn't understand the instant reaction to Turkey, and it looks like our lack of understanding was accurate. It is hard to tell how much of the resilience yesterday was in anticipation of something happening, but I think it is significant that we have given up all of the post rate hike gains.
I also think that not only is it unclear what benefits QE has conferred on us (other than P/E multiple expansion), but it is now also clear that emerging market countries believe QE is to blame for their problems. Whether that is true or not doesn't make a difference as it is becoming a global political topic, and I am far less certain where Janet stands on it compared to Ben (who initially had an academic explanation of how everyone benefited from QE, that eventually turned into something that seemed like an intellectually confusing way of saying "let them eat cake").
As far as the Fed goes, our expectation is that there will be some new twists and that the market won't like the statement.
Having said that, from a positioning standpoint, we had been a bit too short, and that handcuffed us yesterday from being able to add, so will have to cover some, probably ahead of the Fed.
Treasuries are intriguing here. I think the 10-year looks interesting from a long standpoint. We are seeing a "flight to safety" element creep into the market and a growing realization that inflation and growth probably aren't going to be enough to push rates much higher. There is still a deep short base, many of whom wouldn't know a ProShares UltraShort Lehman 20+ Year ETF (NYSEARCA:TBT) from a long bond if it hit them in the face. (This sounds angry, but the point is that there are a lot of "tourist" shorts in the Treasury market.) In any case, check out the shares outstanding on TBT -- the growth is exponential and that usually ends badly.
The 2s and 10s flattener continues to perform well (we left money on the table on that trade). It does make us want to revisit shorting the 2-year or some Eurodollar futures ahead of the Fed. At some point, we keep hoping someone at the Fed will push for real short-term rates of at least 0% and that would cause some nice selling of Eurodollar futures (we would look to Dec 14 or Mar 15 for the best bang for the buck).
Thursday, January 30, 2014
Rally Phase From 3-Week Chart Turndown
A 2-day 10-min S&P 500 (INDEXSP:.INX) shows a little descending wedge to the key 1770 level. Why it is key is that the 1770 level is 90 degrees square this week, just like October 9 was square 1655, the low close.
Below, see a chart from this morning's Daily Market Report.
Descending wedges often define lows. However, this is a very short-term pattern. The bigger-picture pattern is a 4-year, monthly ascending wedge on the S&P.
This week's violent down-up-down-up alternation is giving trends a bad name. I can't help but wonder whether a trend-day today will inspire players to hold positions overnight in front of Friday, which if the chop fest continues should greet another gap... down.
That said, the important 3-Week Chart turned down on the S&P, which has defined a low on each occasion since the November 2012 low. A rally phase followed by a break of what looks like a "circled" 3-Day Chart low this week will issue a Time-Trend-Turn-Weekly Sell signal.
Friday, January 31, 2014
Foreign FX Reserves Drop-Off Worse Than Taper Scare
Vince Foster has been keeping a close eye on the on the evolution of FX reserves as this is a very big problem and becoming bigger by the day. Check out the chart below. The blue line is the securities held in custody at the Fed for reserve managers (central banks exclusively) and the yellow is securities held by foreign officials. For reserve managers, its exclusively Treasuries. For foreign officials, it may be agency MBS as well. The blue line is nearly directly correlated to FX reserves. For example, if a central bank is selling dollars or another major currency to defend its currency, then it will need to sell dollar based assets as well. Additionally, if it is getting cross border currency redemptions, then it also has to sell dollars (they are the reserve currency). For officials, if they are seeing capital outflows from the country, then they'll also be selling dollar assets.
If you are wondering why the market has been selling off and emerging markets are having so much trouble, this is the only chart you need to see. The drop-off in the past month is actually worse than when the taper chatter reached a fervor back in June of last year.
Some additional information from Goldman Sachs (NYSE:GS) on which country is most vulnerable to continued FX depreciation. I'm looking at Mexico as the next center of weakness. Their central bank meets at 10 a.m. ETD today.
We first provide a snapshot of reserves relative to GDP, based on the latest available data. We include information on central banks' forward books where available and do not count Brazil's FX swaps in this measure (since they are settled in local currency). The rankings in terms of reserves in percentage of GDP among the 17 EMs we look at are as follows: Singapore (118%), Hong Kong (107%), Taiwan (86%), Thailand (45%), China (43%), Malaysia (40%), Korea (32%), Philippines (28%), Russia (21%), Brazil (16%), India (15%), Chile (14%), South Africa (13%), Mexico (13%), Indonesia (10%), Argentina (6%) and Turkey (4%, where this number is for the net international assets of the CBRT). In an environment of rising US rates and possible spill-overs to EMs, countries with low reserve cover are relatively more vulnerable and may have to resort to traditional tightening measures such as rate hikes more quickly if they want to stabilize their currencies.
We next look at FX appreciation / depreciation pressure on EM currencies since the start of the tapering discussion (May 2013). We define appreciation pressure as the sum of currency performance against the USD and our estimate for intervention (scaled by GDP). We estimate intervention unless these data are published in a timely manner. In descending order, we find that FX appreciation (+) pressure from May 2013 has been largest for China (+5.6%), followed by Korea (+4.2%), Hong Kong (-1.0%), Taiwan (-1.0%), Philippines (-8.8%), Mexico (-9.3%), Singapore (-11.6%), Russia (-12.5%), Malaysia (-13.5%), India (-13.6%), Chile (-14.3%), Thailand (-15.3%), South Africa (19.1%), Turkey (-22.2%), Brazil (-22.9%), Indonesia (-23.0%) and Argentina (-36.6%). In most cases, spot FX moves dominate the role that central bank action played by a large margin. That said, central banks played an important role in buffering their currencies in Singapore (a reflection of the exchange rate regime), Brazil, Malaysia, Thailand, Indonesia, and Argentina.
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