Buzz on the Street: This Market Is Tougher Than Leather
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 21, 2013
Bullish on Apple
Recently, we walked through the technical bull case in Apple (NASDAQ:AAPL).
AAPL turned its Monthly Swing Chart down in September on trade below the August low. The turn down defined a low almost immediately -- bullish behavior.
AAPL turned its monthlies back up on trade above its September high of 507.92 on Friday. Importantly, AAPL closed above 507.92 on the Friday weekly closing basis and is following through with authority.
The action signals higher prices, especially with the 513 pivot high from mid-August being convincingly eclipsed today. Remember that 513 was 540 degrees up from this years low -- 540 degrees being 90 degrees times 6 for a 6-sided cube.
So today's action in AAPL looks very meaningful.
Below, see a daily AAPL chart from June 28 to the present with its 200 DMA.
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And the Winner Is...
JPMorgan (NYSE:JPM) is in the news today as its expected $13 billion penalty is digested. A few top-line thoughts, in no particular order:
- Only seven companies in the Dow Jones Industrial Average (INDEXDJX:.DJI) earned more than $13 billion last year.
- $9 billion would be fines with $4 billion earmarked for consumer relief.
- This is only the civil probe; the criminal probe is a separate issue for the bank.
- Two-thirds of the alleged abuses are from Bear Stearns and Washington Mutual before Jamie Dimon got involved. (I guess they weren't such bargains after all?)
- JPMorgan legal costs are upwards of $23 billion.
- Following the financial crisis, JP Morgan enjoyed three straight years of record profits and the shares are up 72% since the end of 2008 (vs. a 48% rise in the KBW Bank Index (INDEXCME:BKX).
- $50 remains major support for the stock.
- Over on the grassy knoll, some posit that the reason Obama focused on healthcare into his first term was so that banks could reflate their balance sheet to the point where the government could exact its pound of flesh. Whether or not that's true, I don't know; what's clear, however, is that banks were not in a position to pay these fines five years ago.
Bond, Badget Bond
While the US equity market celebrated the prospect of a debt deal yet again last week, we saw an important reversal in long duration bonds. At the same time, inflation expectations appear to be taking another leg lower. The correlation between long duration bonds and inflation expectations has been abnormally high this year. Typically, the correlation is negative as falling inflation expectations are deflationary and bullish for bonds. The correlation appears to be rolling over from our studies, which should mean a reconnect to the historical relationship and higher bond prices is coming.
Bond, Badger Bond. Shaken, not tapered.
Tuesday, October 22, 2013
Medivation Exceeds Mark in PREVAIL Prostate Cancer Trial
Earlier this morning, Medivation (NASDAQ:MDVN) reported data from its pivotal "PREVAIL" trial of Xtandi in men with advanced prostate cancer (CRPC) who had not yet received chemotherapy. The key data point is the "hazard ratio", which measures the performance between all men who took Xtandi and all men who took placebo. In this measure, Xtandi showed a hazard ratio of HR=0.70, which means (roughly) men had a 30% better chance of being alive by taking the drug than by taking placebo.
This figure is significantly better than seen with Zytiga, Johnson & Johnson's (NYSE:JNJ) competing drug. Since Medivation's Xtandi doesn't have to be dosed with steroids, a major concern for prescribing urologists, these data should secure Xtandi's position as the top drug in the space.
Traders often focus instead on median overall survival, which at 2.2 months for Xtandi is providing some drama to today's otherwise stellar release. But doctors who control treatment guidelines and, most importantly, insurers will not make this common rookie mistake. Xtandi will be the drug of choice in prostate cancer because of its clearly superior efficacy.
The S&P 500 (INDEXSP:.INX) just broke out to a new all-time high above 1751, despite (or maybe because of) the lousy jobs report.
At some this has gotta end, right? Sooner or later, the economy's going to have to catch up the market, or the market's got to slow down to let the economy catch up.
But either way, this is some frustrating action, unless you've been long and strong on the QE express, which would make you the smart money.
For the next step, I would pay close attention to the Apple iPad event today. As of late, its products have been more-or-less been perfectly leaked to/predicted by the press. In the event Apple shocks industry observers with a major new product offering, it could most certainly yank the indices up.
But at the end of the day, I think the 90-year old man smoking three packs a day analogy holds true for this market. If someone like that makes it to 90, don't bet against 95 or 100.
And it's the same with this market. If we could hobble up to 1754 with this economy, why isn't 1800 or 1900 or 2000 possible? Even if you think it's impossible (I certainly have my doubts) -- consider it.
Conventional sentiment measures read bullish, but it seems that even ardent bulls have some kind of caveat -- that it's all Fed-induced, it's all going to die one day very badly, the real economy is dysfunctional.
There doesn't seem to be many true believers, where as in times like 1999 or 2006, people did assume the good times would last forever.
Can sentiment really be super-bullish when everyone's waiting for the other shoe to drop?
Earnings and Announcements
A couple of my core individual stocks are having some interesting results today, so I may be remiss if I didn't cover them a little bit.
Gentex (NASDAQ:GNTX) – These guys make auto tinting glass and are getting all kinds of contracts to have it installed as a new "safety feature" in cars. (See my post from July 8.) It's really starting to take off and their report shows it. Then to top off the beat, the company gave us the +1 in raising guidance. GNTX expects 20-25% growth in sales next year, and it beat by putting up $0.38 per share versus the $0.32 expected. I will continue to own this one as I expect it to continue for a while. However, if you are a short-term trader, it is pretty exhausted here and needs to rest. RSI is through the roof at 80+. I expect sideways action for at least a couple of weeks here.
Organovo Holdings (NASDAQ:ONVO) – Both Duncan Parker and I have mentioned this one recently, and I love the path they are on. This is the next logical extension of the 3D printing. This one is for medical use. The company announced today that it has successfully shown that its printed liver tissues have viability of upwards of 40 days and have responsiveness to liver toxins and medicines. This has all types of research applications, and the hope is that eventually we may be able to print organs instead of depending on donors. I love the long-term story here and so does the market. These types of wins and announcements allow for additional funding at lower costs and should continue to build shareholder value, regardless of expected dilution.
Both of these stocks are buried in a coffee can in my back yard along with my fracking plays, and I don't plan to sell them any time soon.
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Wednesday, October 23, 2013
I think the up move in Treasuries is done for now, 2.47-2.475% in the 10-year was a logical stopping point and we kissed it today. In addition, we're working a downward channel from the September peak in yields. I think a move back to or near the top of the channel at 2.62%-2.65% is healthy now that positioning has become much longer as the reallocation catch up game is back. .
This is as much a directional call as it is a risk management one as I have leveraged exposure in munis (closed end fund). I'm bidding for put spreads in iShares Barclays 20+ Year Treasury Bond (NYSEARCA:TLT). The area most vulnerable for a selloff is the 7-year, if you'd like specifics, because I think the curve should flatten from here (the 30-year should underperform) and my other exposure is between 7-10 years, I'm taking a bit of an overweight position in the put spreads on a relative basis.
Worst case scenario, we remain overbought and hug the bottom edge of the channel and my put spreads expire worthless, which would be a net scratch or a very minor loss for me. I think this scenario is unlikely given the economic outlook and the premium that is being factored in for fiscal-related economic slowdowns.
See an hourly chart of the 10-year future below with RSI and a daily chart of the 10-year yield channel below. I have a longer Buzz that I'm working on with more specific intermediate-term thoughts, so keep an eye out.
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The UUP Is Pressing Into Key Intermediate-Term Support
As we speak, the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) decline from its July 2013 high at 22.98 to today's low at 21.33 is slightly longer than the decline from the July 2012 high at 23.14 to either the Sept 2012 low at 21.5 or the Feb 2013 low at 21.53.
In any case, equidistant downlegs have been achieved right as the UUP RSI is registering a glaring momentum divergence.
This is a warning signal that the UUP decline likely is nearing completion in the vicinity of 21.30 to 21.00 in the upcoming hours.
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Option Gauges Neutral, Corning Unusual
Option gauges such as the put-to-call ratio and the VIX (INDEXCBOE:VIX) are running mostly neutral this morning. This comes after both reached levels that could be considered indicative of extreme complacency. Last Friday, the VIX dipped to 12.50, and its most active trading vehicle hit 12.60, which was a new contract low. The two measures of volatility had declined some 35% since peaking near 20 on October 9. This morning, the put-to-call ratio is 0.75, but on Friday, it was 0.46 -- the first time it fell below 0.50 since an interim top was reached on May 22. Past is not necessarily prologue, but the market then proceeded to decline some 7% over the next six weeks, the only real correction the year.
Shares of Corning (NYSEARCA:GLW) were up as much as 25% this morning. Now, it's up 12%, after news broke after yesterday's close regarding a deal with Samsung (KRX:005930). Whenever these unexpected new events drive an outsized move, I always look to see whether the options showed unusual activity in which someone had a prescient "hunch." There was in fact some very unusual activity in GLW options yesterday, but surprisingly, it was all on the put side. Average daily options volume in the front 3 months is about 11,000 total contracts. Yesterday, over 19,000 puts traded versus just 6,000 calls. The most active were the October $15, the November 1 $15.50, the Nov 8 $14.50, and the November 16 $16 strikes. As a side note, I have no idea why this name has weekly options going out to the end of November when more active names sometimes don't even get them listed for earnings week.
These were all opening transactions as the volume, with the largest being 10,000 of the $16 strike, easily swamped the existing open interest. Also surprising and somewhat telling is that these puts were all in-the-money yesterday, which suggests someone was selling.
If it was for downside protection, one typically uses lower cost out-of-the-money strikes. Maybe some smart bunny figures were trying to throw regulators off the trail as they will always look for unusual call activity prior to a big jump in price.
Thursday, October 24, 2013
May You Live in Interesting Times
Some curious developments seem to be unfolding in the Chinese banking system. First, China's five largest banks tripled their loan write-offs. According to Bloomberg, China's five largest banks wrote off 22.1 billion yuan ($3.65 billion) of loans during the first half of this year. This is 3 times more than the 7.65 billion yuan the banks wrote off in the first half of last year. Also, non-performing loans for the 5 biggest banks rose 6.8% to 349.9 billion yuan during the first half of the year. On an annualized basis, NPLs are growing twice as fast as GDP. Chinese banks have usually been slow in addressing problem loans in the past, and some metrics like loan-loss ratios aren't always reported. So, you really have no idea how bad those loan books are.
However, I also read that Chong Hing Bank Ltd. (HKG:1111), a Hong Kong based bank, is being acquired by Yue Xiu. Yue Xiu is a trading arm of the Guangzhou city government. And at the same time, Singapore's Overseas-Chinese Banking Corp. (SGX:O39) is looking to buy Wing Hang Bank Ltd. (HKG:0302). Not to be outdone, Agricultural Bank of China, Ltd. (HKG:1288) may be looking to buy another Hong Kong lender, Wing Hang Bank Ltd. In Yue Xiu's bid to purchase Chong Hing, we see the local government (Guangzhou is very close to Hong Kong) making a play to expand into lending as a compliment to its trading activities. Meanwhile, OCBC is looking to gain entry into China.
Regardless of who's doing the bidding and why, valuations being talked about look really high. Wing Hang has a price-to-book multiple of 1.72 while Chong Hing is trading around a 2.18 price-to-book. Such high multiples put a company under tremendous pressure to generate returns. For a long time, those returns were being generated by lending to mainland Chinese firms. In fact, Hong Kong retail lenders' loans to China grew 11% from the end of last year, according to the Hong Kong Monetary Authority. That's 22% on an annual basis and about 3 times higher than Chinese GDP.
Over the top valuations for banks, explosive loan growth and rising problem assets, and questions about loan loss accounting are a bad mix. So while some folks scoff at the idea that there may be problems in China because nothing has happened yet, I wonder how much longer they can stay so smug. And I also wonder whether or not China will need to sell their Treasury holdings to stabilize their financial system.
Software Contrarian Ideas for a Fourth-Quarter Recovery
Every year, enterprise related technology companies have difficulty meeting estimates during the third quarter, highlighted by dramatic misses and stocks reactions. Unpredictable spending into the federal fiscal year end, European sluggishness, and seasonal fourth-quarter push-outs are usually the reasons. Additionally, there also tends to be some kind of "drama" or external occurrence that muddies the waters.
This is when the consensus labeling occurs categorizing these companies as being legacy or secularly challenged. This has been exacerbated this year due to the strong YTD returns of SaaS and Internet related names.
Based upon my experience, taking advantage of this overly negative perception can create very profitable results. For example, last year when Informatica (NASDAQ:INFA) missed in October, there was widespread belief that they were done and that Hadoop was going to destroy them. By mid-December on a bus tour, INFA "sounded better" about business and the stock had a 25% rally into year end and has tacked on another 25% YTD. Hadoop is not even mentioned as a threat anymore. The point being made here is that the groupthink is often wrong and creates opportunities. Software companies by their nature exhibit lumpiness in results, especially those that haven't embraced the SaaS pricing model.
Below are a couple of names whose setups into year end look interesting because they are oversold and are now universally hated and thought of as consensus legacy/old bad companies. While I do not disagree with a lot of the challenges these companies face, the view here is that selective names may offer a strong rebound opportunity at this point into year end, especially if the message indicates that "things are a feeling a little better" at some point during this quarter at conferences and/or road shows. This list includes Red Hat (NYSE:RHT), Teradata (NYSE:TDC), SolarWinds (NYSE:SWI), and Citrix Systems (NASDAQ:CTXS).
US Equity Market Within Days of a Major Top
We are short several global equity indexes as of yesterday's close. This is why:
The CBOE's Skew (chart 1) closed yesterday (October 23) at 134.47, in the top 0.50% of the data distribution over the last 15 years.
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The last three readings above 134 were:
APRIL 20, 2010 three days and less than 1% from final top, and a 17% correction
FEBRUARY 18, 2011 the first of three tops that ultimately dropped the market by 20%
MARCH 12, 2012 two weeks and 2% from final top, and an 11% correction
The AAII Sentiment Survey came out today (October 24), showing a 21-Month High in Bulls over Bears.
The second chart below shows the previous July 11 sentiment peak was the first time since 2007 that an overbought Sentiment called the top very precisely (2 weeks and 2% later).
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Priors are marked in red circles below.
We believe this marks a regime shift – and the market's character is changing to a bearish trend.
Our U.S. Equity Risk Model has been diverging for two years. We used it to call the August and September tops in equities.
The blue horizontal line in the third chart below shows the recent seven-year history of high-probability terminal/failure rallies called by this model. We believe the current behavior falls perfectly within the parameters of those previous terminal/failed rallies.
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Friday, October 25, 2013
Twitter Prices IPO
Twitter has priced its IPO at $17-20, pegging its value at about $11 billion after the IPO, assuming the deal goes through at $20. Odds are it happens at a higher level than that.
The offering document says the company will get net $1.25 billion from the deal on the 70 million share offering, or $1.44 billion of the underwriters exercise options to buy 10.5 million more shares. That's $17.86-$17.89 per share, which seems based off the midpoint of $17-20, or $18.50, less IPO related costs of about 3.5%.
So let's assume the deal happens at $23. Twitter said every dollar increase in the IPO price adds $67.7 million in net proceeds. So at $23, the company nets an extra $305 million ($4.50 * $67.7), for a total of $1.744 billion.
I did the math the other way as well, and assuming IPO costs of 3.5%, the company nets $22.22 per share ($23 less 3.5%) times 80.5 million shares for a total of $1.788 billion.
Last quarter Twitter had cash of $321 million, so assuming some modest cash burn, the company should have around $2 billion in cash the next time it reports..
Note that Twitter has preferred stock and convertibles outstanding, but they will be converted into common stock with the offering.
So at a $23 price with 544.696 million shares outstanding, Twitter has a market cap of $12.5 billion. Factoring in $2 billion in cash, the enterprise value is $10.5 billion.
That's 22 times trailing twelve month sales of $474.3 million.
For comparison's sake, LinkedIn (NYSE:LNKD) is trading at 22X TTM sales, while Facebook (NASDAQ:FB) is trading at 20X and Yelp (NYSE:YELP) is at $27X.
Now Twitter is unprofitable, but as I wrote a couple weeks back, it is growing a heck of a lot faster than its competitors.
I would consider Twitter to be extraordinarily high-risk, but to me, as long as the broader markets hold up, this deal is something I think investors will want to be part of. It's a momentum-begets-momentum situation, and I'm okay with that.
In fact, I'm attempting to put my money where my mouth is by applying for an allocation.
"There has been a lot of concern that stocks have gone too far lately without a 10% correction. The fear is that, if the market goes on too long without losing at least a tenth of its value off a high, any pullbacks to come in the future will be a lot more dramatic." . . Jon Markman, Markman Capital
I took the aforementioned quote from an article on Yahoo! Finance titled, "The Next 10% Correction Could Be 5 Years Away." Ut-oh, I thought, this is the kind of stuff you tend to see at trading tops. Of course, that fits hand and glove with something I heard here in Toronto on BNN (the CNBC of Canada) where one talking head stated, "Nothing can put the U.S. stock market down!" Ut-oh redux, because it is just such statements that cause me to look twice over my shoulder. However, my friends at Bespoke Investment Group released a study this week that examines the S&P 500 (SPX/1752.07) subsequent upside skeins without so much as a 10% pullback. To wit (written 10-21-13), "The S&P 500 has now rallied 58.6% over a period of 515 trading days since October 3, 2011 without declining 10% from a high. It's natural that the longer we go without a correction, the more we'll hear predictions that a correction is coming. But while 515 trading days without a 10% pullback is a long time, it's not without precedent. Below is a chart highlighting past rallies without a 10% correction since the index was created back in 1928. The current streak of 515 days is admirable, but we've actually seen two periods over the past twenty-five years that were more than twice as long (see chart)!"
So it is now 518 days, and counting, but it still doesn't feel like a 10% correction is in the cards. Indeed, the stock market's best shot at such a correction was in the mid-July through mid-August timeframe, but the Putin Syrian Solution arrested the decline at about 5%. Still, I will say that my timing models are suggesting another window of vulnerability coming in the mid-November into the early December timeframe. Said timing models worked pretty well last summer, even though we never got the 10% decline I envisioned, so I would honor it again going into mid-November. Yesterday, however, the markets were wooed by rumors of no Fed tapering . . . ever! To readers of these missives, that should come as no surprise because I was pretty adamant there would be no tapering at the September FOMC, and likely, no tapering this year. In light of the overbought reading, despite the Selling Pressure's Index new low reading yesterday, it implies prices may stall in the sessions ahead. Yet, while prices may stall/pull back, I think we are into a new secular "bull market," whose thesis is defined by my friend Ed Yardeni in the attendant article. This morning that trend is again confirmed with the preopening futures higher by about 6 points. Be optimistic my friends . . .be optimistic!
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It's a Gas, Gas, Gas
This morning, Elon Musk is taking a page out of Reed Hasting's book (see piece on Netflix (NASDAQ:NFLX) from Wednesday here).
See Musk comments from this morning here.
Perhaps Elon is as good a technician as he is a brilliant innovator and businessman.
This morning's Daily Market Report has a daily Tesla (NASDAQ:TSLA), which shows that the stock turned its 3-Day Chart down on Wednesday for the first time since its vertical phase began.
Yesterday, TSLA traded above Wednesday's high turning the dailies back up so that a second higher daily high today (which looks like what is playing out in pre-opening trade) will put TSLA in its first Minus-One/Plus-Two Sell position since its runaway move began.
This is occurring on a backtest of its overhead 20 DMA. At the same time, there is now a well defined 3-point trendline at around 160, which may be a Neckline with TSLA potentially carving out a right shoulder here.
Below, see a TSLA chart from the Daily Market Report.
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