Buzz on the Street: Cloudy With a Chance of Shutdown
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights, and analysis in real-time on Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, September 23, 2013
Signs of a Coming Fall?
An interesting chart posted on StockTwits by Chris Kimble made the rounds this weekend. It shows that over past decade, many of the major market turns, including the two cyclical bear market bottoms, commenced within 10 days of the of the autumnal and vernal equinox.
As we know, fall began this past weekend. Kimble also points out that Thursday's thrust higher followed by Friday's sell-off leaves a big bearish wick on a candle chart. He also notes that last week saw the largest inflows into equities funds so far this year.
Oh, and just to throw an extra dash of tenuous cyclicality into the pot, this past weekend was a harvest moon. I'm typically not big on seasonal trading patterns, but the visual on this chart is fairly arresting and something to keep in mind as we head into the typically volatile October period.
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Portfolio Review and Mental Updates
If you recall my current positioning, you know I drastically reduced my long exposure from 92.5% long down to 47.5% long mid-to-late last week. Having this much cash on hand always makes me nervous, anxious and I feel like I want to deploy it back into the markets rather quickly. The banks were lagging which was our major tell with regards to the market not holding this breakout (first mentioned on 9/12). The markets ran and the banks got rejected by the 50 day moving average from above. The banks in combination with the Island Reversal exhaustion (mentioned on 9/16) and full measured move right into heavy overbought conditions, seasonality and historical analogs (Deep dive on 9/19), led us to think that this market got ahead of itself. I always find it important to review "what was" to look for clues of "what will be". So what now?
Per my style, I wait. We are burning off the overbought conditions nicely as we have taken NYMO down from +85 down to +33. From Friday when I posted this (What if?), it is clear that option 1 is off the table as we didn't flag to move higher. Option 2 and three are still very possible, with option 2 more likely at this stage. The gap around 169 should remain a magnet and should at least get visited, if not filled. I will likely take a shot at deploying the cash into US Large cap indexes again around that gap, most likely in two separate buys. Should we break down further, a close below the 50 day moving average would cause me to lighten up further.
It is still worth noting that the Small Cap Growth (NYSEARCA:IWO) and Brazil (NYSEARCA:EWZ) ETFs continue to show strength versus the rest of the fray. These need to be watched very closely. If they can continue to hold higher while the large caps fill the gap, we are likely setting up for another leg higher and simply putting in the "higher low." Should that happen, I will go back to 90%+ long with a beta over 1.0 with trend rules back in place. It is worth noting that while we are not technically in a "trend rules" market, we aren't exactly in a "trading rules" market either. It really is an odd situation here.
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ES (S&P mini futures) opened Sunday night by tagging the weekly pivot at 1706.25, and staying weak for the most part after that. Today's pit session open immediately sold right under 1703.75, the prior all time high. The pre-FOMC announcement VAH was 1698.50, which ES has now lost. Downside risk is the NVPOC at 1680.50, should we lose weekly S1 at 1685.50. Anything below that is real trouble.
Goldman (NYSE:GS) was down 2% at the open, giving some clues as to this weakness. Interestingly enough, the NQ (NASDAQ-100 (INDEXNASDAQ:NDX) futures) spike on the Apple (NASDAQ:AAPL) iPhone sales news barely moved the needle for everyone else. Bulls get control back above ES 1703.75.
Equities correcting from excess speculation (highest margin debt since 2007) and bonds moving up could be the perfect scenario for Bernanke.
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Tuesday, September 24, 2013
Déjà Vu All Over Again
The "Doom-du-jour" front in the minds of traders and investors everywhere is anything other than unfamiliar. We've been through the Debt Ceiling/Fiscal Cliff rodeo once or twice before these last few years. The showdown this time around could see the same sort of drama that sparked the 20% sell off in 2011. Thus far, the analog of the Dow Jones Industrial Average (INDEXDJX:.DJI) (based upon the DIA ETF) from the 2011 peak against current price action is stacking up a little too well in my opinion.
There's no reason to have conviction enough to trade the current action based on what we saw two years ago, but with the sneaking suspicion that a bullish ramp could encounter resistance via a miniature double top around the area of the post Fed announcement last Wednesday, it's worth noting a bull trap is possible. Should you like to monitor how this formation plays out real time (and play with the analog), you can do so here.
Good luck out there!
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mREITs Hanging in Alongside Agency Rampage
mREITs have been seeing positive performance the last two days on the positive performance in rates. Last Friday, they all lowered their quarterly dividends rather significantly. Thus far, they have not repriced to a much lower dividend yield, which is representative of one of these possibilities:
- Investors are OK accepting a lower yield as the trusts have delevered their balance sheets.
- The market is betting that these trusts will be able to raise their dividend in the coming quarter(s).
Am I annoyed that I missed out on potential profits by selling early? Most definitely. Am I angry for selling last Friday? Nope. Your first sale is always your best sale and my thesis had shown some weakness, so I cut bait. Full disclosure: I did reallocate that capital into another, more conservative mortgage fund, and some into munis. The muni investment is purely from an income basis, not capital appreciation (though it would be nice).
Further on the mortgage space, the color I've received from the mortgage market over the last two days would be typified as a buying rampage. Literally, I was told that dealers are having a hard time sourcing inventory FOR SALE. That makes me nervous and happy. When 1-800-GET-ME-IN is lit up like that, you have to pick up the phone and sell some. I'm happy because those who "sold first and asked questions later" earlier this summer are recommitting capital.
Either way, the lower coupon (3.5-4 for 30yr), seasoned MBS remains the best place I can come up with in terms of a defensive play on rates, and it could even bear fruit in a rate rally. You're essentially hiding out in a zero credit risk instrument with reduced extension risk and earning some income. Not the sexiest of trades, but it beats losing. Prepay speeds have essentially gone to nothing and paydowns are dropping like a rock.
So with investor uncertainty in committing long-term capital in the current environment, the reinvestment actually works out in your favor as hopefully the policy uncertainty goes away a year from now and there will be more clarity for other credit investments.
Understanding the Dynamic in Congress
Yesterday afternoon, CNBC debuted poll results I found fascinating. It highlighted how nobody but those voters who self-identify with the Tea Party want to hold the debt ceiling hostage to defunding the PPACA (aka 'Obamacare'). Other data from the same poll suggest only 36% of self-identified Republicans who despise the Tea Party want to defund the PPACA. That's slightly less than "all adults", which comes in at 38%.
There is a three-party system in Congress at the moment -- Democrats, Republicans, and the Tea Party. Speaker Boehner has put together a majority coalition in the House between the GOP and the Tea Party. He's allowing the minority party in that coalition (the Tea Party) to dictate policy for the coalition on this issue.
Most Wall Street types would amend that to, "dictate policy for the coalition for now." I'm not sure I agree. Examining the Tea Party as a separate entity, I don't see much room inside their platform and ideology for compromise. They hate government and seeing it shut down would be considered a success for them. Since the GOP allows Tea Party candidates to run under the GOP banner, mainstream GOP leaders are terrified of the Tea Party minority -- largely based on the threat of primary challenges.
It may be Speaker Boehner and his fellow Republicans decide to break with their minority coalition partner, but I don't think that break will come quickly. And certainly not quickly enough for the debt ceiling vote, which is where the risk to the equity markets comes in.
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Wednesday, September 25, 2013
Waiting to Exhale
I'm sitting in the Delta terminal awaiting my flight to Chicago--a quick meeting, dinner and a 630AM flight home tomorrow--so please excuse the brevity of this post and my absence today.
Since tagging an all-time high on the heels of the decision not to taper last week, the tape has been lower four consecutive sessions. It's been about as shallow a pullback as one could see, all things considered, but four days is four days, and the bulls are hoping it ends there. Performance anxiety is good and thick, we know, which lends itself to a "buyers are higher and sellers are lower" mindset.
The banks have been the best tell of late, in part due to their (highest) weighting in the S&P 500 (INDEXSP:.INX) and in part a function of their encapsulation of macro influences (rates, smoke, yield). They remain on our radar, particularly in and around KBW Bank Index (INDEXDJX:BKX) 62, which is the August low (the 200-day is down near 59).
S&P 1729, 1709, 1700 and 1665 remain levels of lore through a broader lens, for those who are looking to stair-step risk.
The looming unknown continues to be nestled along the political front, which will overhand the tape for the remainder of the week. The market has climbed a wall of worry all year -- four years actually -- so keep that in the back of your crowded keppe, as it will work until it doesn't (which is why we must manage risk rather than chase reward).
Good luck today, and think positive. Profitability begins within.
Garden Variety Pullback?
Lots of folks are fretting about the fact that we finished down four days in a row, and may be making it five today.
However, remember that before the slide, the S&P 500 was up 11 out of 12 days, which saw us hit an all-time high of 1729.44 on 9/18.
I took a look at recent four+ day slides, and if this short history is any indication, the bulls should be just about ready to make a stand.
1) 8/14/2013 - 8/19/2013 (4 days)
We were higher three out of the next four days, including 8/20.
2) 12/21/2012 - 12/28/2012 (5 days)
The market was up 4.3% in the next two days, down the third day, and up again the fourth day.
3) 10/5/2012 - 10/10/2012 (4 days)
The market was up four out of the next five days.
4) 9/20/2012 - 9/26/2012 (5 days)
The market was up five out of the next six days.
5) 7/30/2012 - 8/2/2012 (4 days)
The market went up six days in a row.
6) 7/20/2012 - 7/25/2012 (4 days)
The market rose two days in a row afterwards.
7) 7/5/2012 - 7/12/2012 (6 days)
The market then rose four out of the next five days.
8) 5/11/2012 - 5/18/2012 (6 days)
The market went up four days in a row.
Why Now May Be a Good Time to Lock in Your Natural
Elliott Wave International
To borrow a line from The Game of Thrones, "Winter is Coming" -- but there may also be another reason to ask your natural gas provider if they have a low fixed rate.
Below there's a chart of the NYMEX natural gas November contract. Here's its Elliott Wave message: Nat gas is ready to surge higher.
The wave pattern since early September has the look of an expanded flat correction, an a-b-c move where wave b retraces more than 100% of wave a. It's an important pattern to recognize. In this case, the wave b rally made it look like price was breaking out to the upside -- when, in fact, it was about to roll over to a new low for the move in wave c.
That wave c looks almost complete -- and with it, the one-larger-degree wave (ii). From here, nat gas should rally. Trade above 3.694 (3.617 from a continuation perspective -- i.e., basis the expiring October contract) would strengthen the case.
If my big-picture count is on target, the market doesn't have any business trading below the 3.281 early August low.
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Thursday, September 26, 2013
Blending DM Interest Rate and EM Credit Risk: Foreign Currency Deposits in Emerging Markets
Please see this article on the mechanics of foreign currency retail deposits being raised by global banks into India (the FCNR-B accounts).
The risk involved is here is that the initial customer deposit is levered multiple times to open several deposits -- a practice reminiscent of the equity line of credit on housing during the go-go days.
I presume similar lending practices would likely be happening in various emerging markets given the currency re-calibrations in many countries.
The bulge bracket banks are in effect multiplying the interest rate risk already embedded in their lending books (courtesy of the bulk of credit growth in developed markets being directed to adding low coupon bonds on the balance sheets post 2008).
To this they are adding the credit risk embedded in EMs courtesy of the dovish monetary policies and yield chase of the past few years.
In my opinion, real yields in the UST market (or a credit event in EMs) remain a key tell and HSBC, given its geographically distributed book, is the key stock to play this interest rate/credit risk double play on the downside (if and when...).
As the market searches for it's next leg, there has been plenty of movement in individual names. BlackBerry (NASDAQ:BBRY) and JC Penny (NYSE:JCP) stand out on the downside, while Facebook (NASDAQ:FB) and LinkedIn (NASDAQ:LNKD) -- which is trying to break out through $260 -- trade like they could do no wrong.
While the tape has climbed a wall of worry for some time, it remains to be seen if it can lift into the weekend with a government shutdown looming. The bulls will argue that it's a matter of time before we see a "Syria-type" ramp upon resolution but the timing of said resolution is unknown.
What we know is that performance anxiety is particularly ripe; the lesser-known story is the recent rise in the discount rate has lowered pension fund liabilities, bringing them closer to being funded (reducing equity risk appetites on the aggregate). Maybe that matters, maybe it doesn't -- greed and fear are the drivers -- but we strive to see all sides, and now we do.
One step at a time as we continue to find our way.
SPY Value Lines: Unimpressive
Today's action is simply unimpressive. Why? Gap open that moved above resistance and failed by 11:00 a.m. EDT. We have moved below pivot and are back above it, for now. The one apparent thing: sellers are in control this week.
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Friday, September 27, 2013
As an update to my last BlackBerry post -- Jefferies analyst Peter Misek is out saying that while Fairfax Financial's bid for the company is legit and likely to go through, Fairfax could be short up to $1 billion in financing, and a lowering of the $9/share bid is on the table.
The market is reflecting a great deal of uncertainty regarding this deal, as the stock is trading at about 10% below the offer price.
I like to say that merger arbitrage is a game best played levered to the hilt with other people's money, but I went long the December 8/9/10 butterfly spread on BlackBerry for $0.25, which pays off if the deal goes through.
Fairfax has until November 4 to perform due diligence, so I assume we'll know by December whether the transaction happens.
Downside risk is 100% of the price of the butterfly ($0.25) should Fairfax pull out, while theoretical max value of the spread is $1. Now I don't have total confidence that this deal gets done -- but I view the risk-reward as balanced enough to speculate on it.
If you're not familiar with butterflies, The structure for this spread for each lot is as follows:
-long 1 $8 call
-short 2 $9 calls
-long 1 $10 call
If you'll notice, this trade is comprised of a combination of a bull call spread (long $8 call and short $9 call) and a bear call spread (short $9 call and long $10 call)
The theoretical maximum value of the spread is $1 (the distance between the strikes) as at $9 at expiration, the $8 call would be worth $1, and the $9 and $10 calls would be worth zero.
Now normally, butterflies only profit very close to expiration when the premiums of the higher strikes get crushed.
But in this case -- a firm indication that the deal gets done at $9 should kill the value of the $9 and $10 options because of the removal of uncertainty, while the $8 call will be still worth around $1, giving a 3:1 return if the deal happens.
Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.
TBT Verges on Opening Range Breakout
ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) is verging on an Opening Range Breakout following gapfill this morning.
10-min TBT Chart for 2 Days:
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At the same time, the dailies look in a position to rally with the 10-year yields pulling back to gapfill from August 13.
Daily CBOE Interest Rate 10-year T-Note (INDEXCBOE:TNX) Chart with its 50 DMA:
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Even a backtest of the TBT's 50 DMA projects to 77/78.
Daily TBT with its 50 DMA:
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I was asked to update my observations from earlier this week on funky T-bill rates and US CDS. The US CDS curve has resteepened and is not reflecting a high risk of imminent problem like it was earlier this week. The 1yr CDS is still elevated at 30bps from its more recent 10bps, but that is down from 60bps+. Past that, the curve has held its normal steepness. Inverted CDS curves means that there is a high risk of default in the very near future.
For T-bills, the student body has moved to the other side of the boat... again! This morning the 6-mo bill due 12/05 traded at a negative rate (bills pay no coupon so price at a discount to par, ie the discount rate). The +4.5-6bps range we saw for near expiry bills has now declined to +1-2.5bps, which is getting a lot closer to normal. Bills out past that into 2014 are still stuck at 0, though.
There is also the effect from the Fed's Fixed Rate Reverse Repo Facility (the Death Star), which is driving down bill rates. Liquidity is tightening because cash is being pulled out in exchange for collateral, albeit small amounts. It's also pushing down LIBOR rates, which doesn't make sense in retrospect because it reduces the supply of cash in the system.
Anyway, the conclusion is that the interest rate market is not pricing in a large chance that we see a serious risk to a technical default at the current moment with a technical default being where maturities on T-bills or notes is delayed, missed, or the like.
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