Buzz on the Street: Investors Hold Breath Ahead of Next Week's FOMC Meeting
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
1987 and Now
As I wrote Monday, the similarities with 1987 are getting a little bit creepy if the August high holds and we fail at these levels. Today would mark 27 trading days after the August high, almost the same length as in 1987 (28 trading days). So instead of an October event, this would be a September event. The S&P 500 1685 area is key. ES tapped 1684 yesterday right when Obama started his speech, and it has come down modestly. However, one cannot say the same for NQ (NASDAQ-100 (INDEXNASDAQ:NDX) futures), which is taking some heat. That NQ lag started yesterday and is normally a bearish sign. What is even more troubling is the equity put-to-call ratio the past few days.
Here are the readings for the past 6 days in a row:
0.54, 0.54, 0.52, 0.5, 0.45, 0.48.
Never mind the polls. These are extremes in bullish sentiment. Big upside bets are being put on by the smaller speculative crowd. Add NYSE margin debt exceeding what we saw in 2000 (chart courtesy of Doug Short) and the potential cycle mentioned above, and the recipe for a strong bearish event is present.
As mentioned Monday, these bets are low odds, but this does not mean that a crash can't happen or that one should not remain vigilant. I would avoid buying stocks up here and would seriously consider lightening up or buying protection.
In terms of futures, I would pay close attention to NQ (September contract, we will move to December tomorrow). The line in the sand would be 3148.75, the scene of Monday's breakout and Friday's VAH (value area high, chart 2). NDX (INDEXNASDAQ:NDX) would be the same since the September contract, which expires next week, is lined up with cash now.
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Bond Market Intelligence
The word this morning is that the Verizon (NYSE:VZ) deal is already trading 35bps TIGHTER in the grey market as European accounts scrambled for exposure after the European roadshow was postponed this morning.
It's gotten so bad that there's no bid for agency MBS because everyone wants a piece of the Verizon deal! Additionally, the EUR tranche of issuance should be cut in half from the previous $10b that was thought to be issued.
It'll be a guessing game all day to figure out when the rate-locks are unwound. It's been a 50/50 split between the next hour or after the 10-year auction from those whom I've talked to (see yesterday's post auction activity). Lots of false starts trying to front-run that trade.
And on a different note: I'm offering a friendly Minyan reminder that the Baltic Dry Index was up another 5.6% overnight to 1628, now up 43.6% since August 30.
That was my sentiment as I watched Apple trade below $465 this morning (down over $40 from Monday).
Many are calling it a 'sell the news' reaction, but since when can you have that when the stock didn’t rally into the event? Apple traded above $500 on Carl Icahn’s announcement that he was in the stock.
Also, this morning we see the lemmings on Wall Street downgrade the name as if it were overpriced and not about to add 15% to its top line over the next few years while trading with a 10% cash position. Let’s keep in mind that very few have been able to grow their top line these days.
I’m reminded of a phrase I heard when I started in this business almost 20 years ago: The stock market is the only place people run from a sale. Today is apt evidence of that.
Thursday, September 12, 2013
Clear & Present Markets: 09/12/2013
1. The demand for Verizon’s record bond deal is likely to trigger more M&A activity. Share repurchases should have a diminished impact on EPS growth in 2014, and GDP growth remains sluggish, so the next best way to manufacture earnings growth is through acquisitions. The insatiable demand for corporate debt should encourage more companies to enter the M&A fray, especially in the cash-rich tech sector, where Microsoft (NASDAQ:MSFT) could be seen a vulnerable as it digests the $7.5 billion acquisition of Nokia (NYSE:NOK) and searches for a new CEO. Health care is another sector that should see more M&A as companies gain better clarity on the implementation of the Affordable Care Act (ACA). This should be good for the investment banks as we head into 2014.
2. Some additional comments I heard yesterday at the Morgan Stanley health care conference that were notable: HealthNet (NYSE:HNT) said the implementation of health exchanges will be bumpy from October to January, but there is still time to make it work. HCA (NYSE:HCA) commented that it is unclear how payers are positioned to handle ACA implementation, and it will likely take 2 to 4 years to ramp as education is critical to implementation.
3. Also in health care, Bristol-Myers (NYSE:BMY) reported data from a phase 3 trial of its cancer drug Yervoy in advanced prostate cancer, which failed to meet its primary endpoint of survival (by a very small amount). BMY is widely regarded as having the strongest pipeline in the pharma sector, but it has had several setbacks this year as it attempts to bring those drugs to market. The Yervoy news is not a huge financial impact (revenue estimates were around $150 million for this indication), but 2013 was supposed to be the trough year for BMY earnings, and the loss of incremental revenue makes those 2014 expectations more difficult to achieve.
4. There are an infinite number of outcomes for the health care as the Affordable Care Act (ACA) is rolled out, but the more I think about it, the more I see implementation being a disaster. Managed Care companies are pulling out of certain exchanges because they can only profit in those areas where they control the network. So, they will stay in regional footprints. When it comes to the national exchanges, few have the scale to control costs on a national level, which makes this an unattractive segment in which to compete for business. So, it looks like the companies that compete on the national exchange will lose money for a few years, forcing them to withdraw from that market in future years, leaving the broad population with few options and diminished support from employers.
Implementation will be great for corporate earnings in 2014, from a cost savings perspective, but consumers are going to get squeezed resulting in less disposable income. The implementation of ACA in 2014 will be health care 2.0 and will quickly need revision; however, employers who already cut those benefits are unlikely to reintroduce them and add additional costs. In the end, I think we end up with a national health care plan that resembles an Accountable Care Organization (ACO), by the end of the decade, but getting from here to there will be messy. Restructuring 20% of the world’s largest economy isn’t easy, and doing so in a disjointed manner could be even more problematic. Fortunes are made from investing amid uncertainty, but I don’t have enough information to commit capital at current valuations. Though, companies that make life saving products, generic drugs, and over the counter alternatives used by consumers attempting to treat themselves should do just fine through the transition. While I don’t necessarily recommend them at current prices, I am playing the product side with positions in Pfizer (NYSE:PFE), Medtronic (NYSE:MDT), Hospira (NYSE:HSP), Perrigo (NYSE:PRGO), and Teva Pharmaceutical Industries (NYSE:TEVA).
5. Finally, I am taking note of the recent strength in Europe heading into the German elections. The DAX is nearing year-to-date highs, which seems to indicate a victory for the status quo. In general though, international markets have been strengthening in September. While I still expect a massive unwinding of the risk-on QE trades, I think the Fed’s approach to ending QE through tapering will mitigate an exaggerated end to those trades.
T-Report: Can You Hear Me Now?
Verizon priced $51 billion worth of bonds at $49 billion.
Technically they sold $49 billion of bonds at $49 billion that then traded to be worth $51 billion. That is a lot of profit to those who got good allocations. That is positive for the market. Some “free money” goes a long way towards building confidence. It has been a choppy couple of months. Long only funds have struggled to show good returns. This should help their performance. Hedge funds will benefit from this as well. All in all, this shows how much “cash on the sidelines” there is. This deal had a very large concession, but got done easily and traded well.
This deal provided a great opportunity for active managers to outperform passive funds.
It also seemed to help the treasury market. Allegedly, Verizon had a very large rate lock and unwinding that helped treasuries. It looks like Verizon should have spent less time worrying about rates and more time worrying about how cheap their deal was getting priced at.
The size of the deal also gave confidence to treasury traders that there is a deep bid for bonds “at a price”. That the sell-off isn’t a panic trade, it is just a reflection on Fed policy and economic conditions.
The strong 10-year auction also helped (though, I suspect it isn’t a co-incidence that the Verizon deal priced on the same day as the 10-year, especially if they had a large rate lock).
Investors Weren’t Selling Other Bonds to Buy Verizon
It is hard to tell, but there was no noticeable increase in TRACE volumes ahead of the Verizon deal. If investors had needed to sell other bonds to buy Verizon we should have seen an uptick in volumes. There was nothing to indicate that the bulk of the deal was purchased on swap (selling other bonds to buy this). That is encouraging.
A Spread Disconnect
Having said all these positive things about the deal and what it did for the market we are left with a disconnect in spreads. Verizon looks cheap. Verizon spreads blew out on the back of this deal and remain elevated.
Some part of that increased spread is simply that you have a much more leveraged company. That spread increase should remain, but even with that, it seems to me that this deal is pricing cheaply.
Spreads will tend to converge. So one of two things will happen over the next week or so.
1. Verizon bonds will grind tighter and “normalize” so that they don’t seem particularly cheap
2. Verizon bonds will struggle here, more new issuance will come, and secondary market prices for other bonds will look expensive and you will see selling pressure there.
Today, at this moment in time, option 1 seems the most likely, but realistically it is probably 50/50 in terms of scenario 2 playing out. Cash positions, by definition, have to have been reduced to purchase Verizon, and other companies will be tempted to tap the market. Every capital markets person is on the phone with their best bond issuers whispering sweet nothings about the great execution they can get based on strong demand for paper in the market.
It isn’t unheard of for a big bond deal to mark a temporary peak in the market.
Economic data has been okay, but is possibly slowing, and companies are leveraging up. That is not good from a creditor perspective. Growth is still good enough that it isn’t a major concern, but the trend isn’t particularly creditor friendly.
The Return of the Floater
The floating rate bonds are interesting. The five year came at LIBOR + 175. They traded up not because of interest rates but solely because the 5 year spread was too cheap. It has been a long time since we saw a floater trade up like that. It is interesting and could help some of the floating rate funds attract more money as they can start sourcing some bonds where they benefit from credit spread tightening and not just the hope that the Fed will hike rates.
230 companies in the S&P 500 have smaller market caps than the Verizon long bond. It would seem that the obvious solution to the liquidity issue in stocks is to have 20 to 40 traders at different firms send around Bloomberg messages with price. Clients would get those prices and hope to execute. The dealers would also use inter dealer brokers who only cover dealers to ensure that dealers have liquidity that clients can’t access directly (except for those clients that do).
This seems like a good opportunity for some alternative bond trading platforms to grow as the system currently in place for bond trading seems poorly designed for an issue that should be as big and liquid as the Verizon issues.
The Tone of the Markets Today
The markets have needed a rest. Today appears to be providing the much needed cool down period. We have been running in the goldilocks bullish zone of the McClellan oscillator (NYMO), not too hot, not too cool, and not negative (it closed yesterday at +54, remember +70 is overbought). This is usually how it reacts when in a nice bullish uptrend, as I mentioned on September 9 when I took the portfolio back to 90% long. On September 10, we talked about treating this as a trend, which is still the plan. Now we must continue to look forward. At some point we will have the first leg of this run cool off and give us our first higher low. If it happens before all-time highs, you will hear calls of “A lower High!!” If it is at all-time highs, we will hear people scream “double top!”, or afterwards, we will hear “false breakout!”. I have no idea if any of those statements will be true or not. I generally try to shy away from hearing too many other people’s opinions as it can get in my head. For now, all I can do is control my actions and my portfolio.
When in a zone like this, I like to measure the action of the industries that led us out of the pull back. At this point, the leading stocks in the leading industries should be resting, and we should see the laggards of those same sectors playing catchup. Let’s check in at the sector level.
1) The Transports led us down, and now they are stalling just below all-time highs. I read this as a good thing. They are still ahead of the S&P 500. Keep them on your radar.
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2) Energy (NYSEARCA:XLE) has really ignited from the pull in and is way ahead of the markets. I like to see cyclical sectors lead, so this is a great bullish sign. I know many people argue that high oil will be a tax and be negative for the economy. I agree, but that truly isn’t my concern currently, as I am mainly just trying to follow a stock market trend, not an economic trend. A little digestion above the breakout over recent highs would be very good. The same can be said for materials (NYSEARCA:XLB) as the chart is very similar. Industrials (NYSEARCA:XLI) look the same too. Please note that these are all cyclicals, and they should be leading.
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1) Utilities (NYSEARCA:XLU) – Lagging bad and actually under their 200 day moving average. In a rising interest rate environment after many had invested in them as a reach for yield, I want to shy away from these.
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2) Staples (NYSEARCA:XLP) – lagging but coming off of the bottom nicely. If you really feel like you want to own stocks for income, this is where I would look as opposed to utilities. (that is not my game, as I am trying to appreciate capital).
The Question Mark:
1) Banks (NYSEARCA:KBE) - They are lagging the markets on this move higher and are under the 50-day moving average. That is a bit concerning, so keep it on your radar. It is not enough to tilt me bearish, but I would like to see them catch up soon.
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So by my read, the things that are leading should be leading, and the laggards are appropriate. A couple of days of digestion to get the NYMO down into +20 or so would give us a nice set up for further extension away from the Island Reversal mentioned a couple of days ago. We need to keep the gap intact, so I would prefer to see the S&P 500 stay above 1679, or at least not fill the gap.
Friday, September 13, 2013
Yesterday after the close, Twitter filed its S-1 to go public.
However, with less than $1 billion in revenues, under the JOBS Act, the company was eligible to file confidentially.
Now lots of small companies file their S-1's normally. But I suspect Twitter wants to avoid the analytic shellacking Facebook (NASDAQ:FB) got before its own IPO. A simple natural deceleration of revenue growth is all it takes to make a big bear case for Twitter (or any company), and the company probably wants to avoid all the associated PR headaches.
Once those numbers are out, the spotlight changes in a big way, so we can't blame the company for now rushing these numbers out.
And no shocker -- Morgan Stanley (NYSE:MS), which led the Facebook IPO, lost out to Goldman Sachs (NYSE:GS) for the lead underwriter slot this time around.
Note, there was at least one big connection between Twitter and Morgan Stanley.
Twitter's head of corporate development, Cynthia Gaylor, was a managing director at Morgan Stanley., where she worked on IPOs and deals for the following companies, among others: Facebook, Zynga (NASDAQ:ZNGA), Netflix (NASDAQ:NFLX), LinkedIn (NYSE:LNKD), Splunk (NASDAQ:SPLK), and Palo Alto Networks (NYSE:PANW).
"To everything, churn, churn, churn. There is a reason, churn, churn, churn. A time to win, a time to lose, a time to stand around and be confused."
-Jeffrey Saut, back in the 1970s
The aforementioned quote is a clever "twist" on the Bible's book of Ecclesiastes 3:1, whose verse was lionized by the singing group The Byrds back in 1965 in the song "Turn! Turn! Turn! (To Everything There is a Season);" see it here. And, that was the song the equity markets danced to yesterday as they churned, churned, churned through the session ending the day marginally lower. Indeed, the S&P 500 (SPX/1683.42) closed back below my long-standing "pivot point" of 1684, fostering questions like this from our financial advisors: "Hey Jeff, how does a reversal below your pivot point portend for your expected decline? I believe I remember you, and several technical analysts, telling me that a quick recapture of a level is kinda like it did not happen? Please explain."
My response was, "Yes, it is true the indices have a tendency to marginally violate well-advertised 'pivot points' just enough to fake out the majority just in time to trap them in a 'wrong way' trade."
For example, recall the trading pattern of July - October 2011 (see chart). Back then, I likened that chart pattern to those of October 1978 and 1979 in that prices declined into an "emotional low," and subsequently went through an up/down bottoming process. Then, right before a significant rally was about to commence, the S&P 500 broke below the "emotional low" just enough to get everyone bearish before climbing significantly. Plainly, that could be the same case here, except on the upside. Next week should provide the answer given the week's news events. Unfortunately, I will not be around to see those events as I travel to the West Coast to see portfolio managers and present at events for our financial advisors.
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As for the here and now, in my verbal strategy comments yesterday I half-heartedly suggested recommitting some of the cash raised in June to equities, even though something about the current market does not feel right to me. One of my vehicles of choice was Mary Lisanti's AH SmallCap Growth Fund (MUTF:ASCGX/$18.74). Other vehicles would be Tom O'Halloran's Lord Abbett Growth Leaders Fund (MUTF:LGLAX/$20.63); I did a conference call with Tom a few weeks ago. Another would be Troy Shaver's fund, the Goldman Sachs Rising Dividend Growth Fund (MUTF:GSRAX/$17.54), as well as Day Hagan's fund (MUTF:DHAAX/$11.23). I know all of these portfolio managers, and I own their funds. Moreover, if you listened to their recent conference calls, you heard a lot of individual stock ideas that are followed by Raymond James' research department. Those ideas are also worth your consideration. While I still have mixed signals on the equity markets, yesterday's action continued to show there are no erstwhile sellers with only 69% of total volume traded coming in on the downside. We need to see demand pick up in the days ahead if this rally is for real.
The Gold Scold: Part Deux
Two years ago this week, I penned The Gold Scold as the yellow metal tickled $1900; it was in response to a column I wrote a day earlier, which asked the question whether the Gold Bubble was about to pop. The widespread response from the investing universe was venomous as the gold-bugs believed their beloved metal could do no wrong.
Fast forward to this morning; Gold has lost one-third of it's total value yet the battleground remains ripe with emotional fervor. The bulls believe this commodity is the last-gasp store of value in a world of fiat currencies while the bears maintain that, well, it's a rock.
This column isn't about the absolute levels of gold as much as the relationship between that asset class and stocks. Given the insane amount of liquidity being pumped into the system formerly known as capitalism, the rising tide should be lifting all boats. That's been the case for a mighty long time and the divergence is something we should respect, if nothing else.
Take a look at the chart below, which tracks gold vs. the S&P since the beginning of 2009 when The Grand Experiment began to take root.
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You will note the correlation between Gold and the S&P, with the latter matter leading the way higher. A funny thing happened earlier this year; Gold lost it's luster, not only on an absolute basis but perhaps more concerting, on a relative basis. Indeed, if the past is a prologue to the future, this is about as loud of a warning siren as we could ask for, absent tomorrow's newspaper today.
To be sure, these are historic times with unprecedented measures and policy has made beggars out of bears over and over and over again. The ursine frustration is well-documented and capitulation seems to be the word of the day; we saw massive short-covering this week on the heels of the perceived Syrian resolution. This story remains untold, however; while no one measure or indicator is absolute, we would be wise to expect the unexpected as we turn our attention to the FOMC next week.
Good luck today.
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