Buzz on the Street: Twitter Leaves the Nest
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, November 4, 2013
Mo Better Blues!
It's a brand new week on Wall Street and the holiday cheer is self-evident. Last week, we touched on the scope and breadth of this year's stock market rally--92% of the S&P is positive, up 29% on average--and this morning, an article from Bloomberg suggests the rally will "pick up steam through year-end," if history is any guide.
Looking back since 1928, shares climbed in the final two months 82% of the time when the S&P gained double-digits through October. The mean increase for November and December is 6% which, if accomplished anew, would target S&P 1892 into year-end.
The momentum is there, of course, but past results never guarantee of future returns. A prominent director of investment strategy was quoted in the article saying, "Clients ask me, 'Why don't I take profit now?' My theory is you can sell a lot higher later." That may prove true; we just have to wonder how many others are waiting to sell alongside him.
While bears will point to sluggish growth, uninspiring labor markets and artificial stimuli that will presumably end one day, the bulls seem to increase alongside the year-to-date returns. Abby Joseph Cohen of Goldman Sachs (NYSE:GS) is pointing to how inexpensive the market was on a P/E basis to start the year--and still thinks it is "under-priced on a 12-18 month period."
The bulls have some gravitas after a 160% rally the last four years, just as the bears growled loud in 2008 and 2009 after a massive decline. It's the way of the world, particularly on Wall Street where you're only as good as your last trade and perception is reality. Hands over ears and eyes glued to our screens, we might actually arrive at the conclusion that all is well in the world.
The Federal Reserve may induce a state of financial nirvana if they can pull off Operation Rug Sweep, but that requires a matter of trust and leap of faith. That doesn't come easy for increasing majority that has suffered as a result of the policies but everything is funny when you're making money so nobody wants to hear about the other side of that trade right now.
With the market in 'no-man's land' through a technical lens, one would be wise to define risk, maintain perspective and remain lucid. History has rarely been kind to bandwagon investors who bought (or sold) because everyone else was doing it; this time could be different, for two months or longer, but we would be wise to see both sides.
Good luck today.
BlackBerry (NASDAQ:BBRY) was halted for news pending following a report from the Toronto Globe saying that the company would abandon its sale plan, raise $1 billion in convertibles, and replace its CEO. The stock was down 19% to $6.32 before being halted.
And now the company has confirmed the news. It is receiving a $1 billion investment from Fairfax Financial and other investors, and has named John Chen as Chairman and interim CEO. Fairfax' Prem Watsa will be lead director, current CEO Thorstein Heins and director David Kerr will resign, and the review of strategic alternatives has been concluded.
Fairfax and the other institutions are buying $1 billion in 6% unsecured subordinated convertible debentures, which are convertible into BlackBerry shares at $10.
We'll have to see what happens when the stock opens back up for trading, but it looks like my $9 December butterflies will be heading straight to zero. I may, however, just close out the short $9 calls in the position and leave the long $8 and $10 calls on as lottery tickets -- as in very low probability of success, but they're going to be worth next to nothing anyway.
Clear & Present Markets
1. I have to laugh at Google (NASDAQ:GOOG) Chairman Eric Schmidt's outrage over NSA Spying. This is a company who profits by tracking every move internet users make. If he thinks the government looking at this information is illegal, what does that say about the business model for Google, Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Yahoo (NASDAQ:YHOO), and the rest? Of course, foreign nations will be skeptical of companies gathering so much information on their citizens, especially after Google hired Regina Dugan, the former head of DARPA (Defense Advanced Research Projects Agency), last year. Technology has progressed and profited in the absence of regulation, but it is only a matter of time before regulators come down hard on this information gathering sector. Regulation can also create barriers to entry, which reduces competition and slows the innovation cycle.
2. I have been looking at the airlines recently, wondering if the business model is really "new", and whether profits can continue to grow in the sector. The major airlines are winning by eliminating flights, which reduces capacity and drives travelers to other flights resulting in full planes and higher ticket prices. It hardly seems like a novel idea to track bookings data and use it to find the optimal balance between service levels and profitability, but given the financial problems in the industry, perhaps it really is the first time the industry is tracking such data and using it to enhance profitability. Consolidation has reduced competition on certain routes, and allowed the majors to execute this strategy. In addition, the increased profitability allows the majors to cut prices where needed to compete with regional carriers trying to undercut them.
Airlines like Frontier (Republic Airways Holdins (NASDAQ:RJET)), Allegiant (NASDAQ:ALGT), and Spirit (NASDAQ:SAVE) are executing a similar strategy by targeting the personal traveler and flying only occasionally. The majors have to fly multiple flights every day to multiple destinations to satisfy the business traveler. These smaller carriers are only flying a couple of times a week during the most profitable times and giving personal travelers a cheap flight with disaggregated costs (baggage fees, purchased food, pay for preferred seating, etc…) provided they change their schedule to accommodate the cheaper flight times. This strategy has proven highly profitable, but it is not yet having a material impact on the profitability of the majors.
I am narrowing my focus on 2 airlines with catalysts in the near future that should increase profitability. Delta (NYSE:DAL) is in the process of winding down its Tokyo hub and moving that traffic to Seattle's Sea-Tac Airport, which will give Delta a west coast hub with flights to every major Asian destination. This move should have a broader impact on Seattle's economy, but it should specifically benefit Alaska Air (NYSE:ALK), which brings as much traffic into Sea-Tac as United (NYSE:UAL) does into San Francisco (its Asian departure point). The industry is using data to make better business decisions, and it is both profitable and growing, even with oil at $100/bl. There are still risks and vulnerabilities to investments in the sector, but I am warming to the ability of the airlines to deliver profit growth for another couple years, as long as oil process don't spike.
3. Merck (NYSE:MRK) released positive data this weekend on its Phase 2 Hepatitis C drug, and analysts expect the Merck drug to reach the market about 18 months after the treatments by Gilead (NASDAQ:GILD) and Abbvie (NYSE:ABBV). It will be interesting to see how this market shakes out as these treatments are not chronic therapies, they actually cure HCV. There is an estimated 200 million people worldwide infected with HCV, so investors should expect a rapid ramp in sales for these drugs, but the big question is how long will sales grow before enough people are cured and sales begin to decline. These drugs have to be modeled differently than the chronic therapies pharmaceutical companies typically churn out, but competition and pricing strategy will play a bigger role in the market share and profitability of these vaccines. None of these treatments are approved yet, but the Phase 2 trials are showing efficacy rates in the range of 90%-100%, with minimal side effects compared to current treatments.
Tuesday, November 5, 2013
Is Larry Ellison going to Dreamforce ?
The third quarter always provides opportunities to buy companies on the cheap, mostly due to the proclivity of earnings misses that occur. This third quarter caught a lot of companies off guard due to spending disruptions from China, Europe, and our Federal government. It's not uncommon for a company who missed on third-quarter earnings to spend the rest of the fourth quarter trying to rebuild the trust that was just lost. This is done in the form of conferences, roadshows, or conference calls. All you need is a glimpse or murmur of increased confidence or the mention of a "push out" closed, and you have the makings of a great fourth-quarter-to-first-quarter long idea.
These communications intensify this week as conference season begins and we wind down earnings. Name a bank, and there is a good chance that they are hosting a conference or an event in the next two weeks. Red Hat (NYSE:RHT), Citrix Systems (NASDAQ:CTXS), Qlik Technologies (NASDAQ:QLIK), Symantec Corporation (NASDAQ:SYMC), Akami Technologies (NASDAQ:AKAM), Broadcom (NASDAQ:BRCM), EMC Corporation (NYSE:EMC), IBM (NYSE:IBM), and Juniper Networks (NYSE:JNPR) are some of the names that are worth paying most attention to as they all have been stricken with the overused legacy, broken, old, and secularly-challenged labels. Citrix Systems, Red Hat, and Qlik Technologies are interesting contrarian longs at this point.
Besides Fusion's private company event on November 18 in San Francisco, the conference expected to generate a lot of buzz in two weeks (Nov 18-21) is Salesforce's (NYSE:CRM) Dreamforce, with 120,000 attendees expected. Hopefully, Salesforce delivers solid numbers beforehand. Larry Ellison was invited to present, and there is speculation that he will be there to talk about big data analytics, talk about Exadata, and update on the Salesforce-Oracle (NYSE:ORCL) partnership that was announced in June. There have been questions about of whether or not this "bromance" still exists, so his attendance will confirm that it does. The reality is they are still on a collision course in many areas, so it feels like a lot of marketing fluff.
Don't miss our amazing line up of private companies on November 18 at the First Fusion Private Company Summit in San Francisco. Confirmed to speak include the likes of Corel CEO Tom Berquist, Sumologic CTO & Co-Founder Christian Beedgen, Hummer-Winblad Managing Director Lars Leckie, Nimble CEO Jon Ferrara, Echo CEO & Co-Founder Khris Loux, Impermium CEO & Co-Founder Mark Risher, Saasmax (OTCMKTS:SAAX) CEO Dina Moskowitz CEO, Paymentwall VP Bus Development Jon Wintermeyer.
Email email@example.com for more information about the conference.
GT Advanced Technologies Deal Has Interesting Apple Implications
Folks, this GT Advanced Technologies (NASDAQ:GTAT) deal (to secure sapphire production) for Apple (NASDAQ:AAPL) supply components is very interesting, intriguing, and illuminating.
"Apple signs $578M sapphire deal with GT Advanced Technology" (Apple Insider)
My first thought is more of a question. Did Apple just effectively lockout the rest of world from pursuing its TouchID security tech? There is more to this point. Apple has unfortunately learned how ineffective having "rock solid" patents are in preventing others from stealing your designs and IP.
Yes, the company will probably eventually win some more lawsuits and money from a few iPhone-clone makers. But that pales in comparison to the 10s of billions in lost sales.
So now, Apple is using it's vast cash stockpile smartly and strategically by locking in supply for what is likely an already constrained component material as well as what is likely a proprietary technology developed by GT Advanced Technologies.
Looking back, Apple now probably wishes it had used some similar negotiation points in its dealings with Samsung (KRX:005930) as Apple has secured exclusivity and likely a slew of protective terms under the GT Advanced Technology contract.
Bottom Line: If patents can't protect your designs and IP, exclusive secure deals with key suppliers just might! Moreover, on the innovation front this TouchID, sapphire and potentially new screen materials and designs show that Apple still drives much if not most of the innovation in the smartphone and tablet segments.
About the Unemployment Threshold Being Lowered to 6% From 6.5%...
A big theme today has been the note by Goldman economist Jon Hatzius that the Fed will lower its unemployment threshold to 6% from 6.5%. I've discussed this likelihood at length on the Buzz for the last 4 months, but I don't deserve special credit for that as I am not alone by any stretch - and in my eyes the Fed already implicitly lowered the threshold at the September meeting, which is THE prime reason behind the recent decline in yields (as we had discussed before the meeting).
In addition, the Evan's rule, which is the name of the 6.5% unemployment and 2.5% inflation thresholds, has all but been abandoned since the September meeting (see posts here and here) by its namesake. The reason is because unemployment does not totally reflect economic activity anymore due to the structural problems in our economy.
Anyway, so what does that fundamentally mean for the market? By lowering the threshold, the Fed is - for lack of a better word - synthetically lowering the Fed Funds rate by 100 basis points. This is because rather than the first rate hike coming in the 4Q 2014 - when the Fed expects unemployment to be 6.5% - it is being pushed out to 4Q 2015, when the Fed expects unemployment to reach 6% (see SEP from Sept here). So, for example, a 5-year note issued tomorrow would effectively reflect 1% less interest for the life of the note because the rate in year four would be 1% lower than previously assumed, and so on.
More importantly, the structural shift that I expected is occurring on in the Treasury market. As recently as two months ago, interest rate futures had been pricing in a perfectly linear 112.5bps of hikes per year. Now, this has been reduced to a more conservative 94bps-106bps per year. I say perfectly linear because the current path expects zero problems within financial markets or economic activity, which is not realistic.
Lastly, let me be clear on the current state of the Fed's forward guidance and the markets. The Treasury market is already pricing in the reduction in the thresholds - implicitly or explicitly - so it is not a new development. The Fed could move around the goalpost or whatever, but the market is already pricing off lower unemployment targets and, in my honest opinion, GDP targets.
Wednesday, November 6, 2013
Nervous Investors Afraid of Missing Out on Upside
At approximately 11:44 a.m. yesterday, there was some large call buying activity in S&P 500 (INDEXSP:.INX) options. An investor bought 17,800 March $1925, 4300 March $1850, and 8700 Jan $1920, creating $500 million deltas to buy. At 12:20ish, we began to see the gap higher on the S&P 500. Secondly, at approximately 12:50, we saw a fairly big call buyer in the iShares MSCI Emerging Markets (NYSEARCA:EEM), buying 135,000 Mar 47 calls and 35,000 Mar 45 calls, which created 3 million EEMs to buy. This was in conjunction with commentary from the legendary distressed player Oaktree, who has been buying Chinese equities and selling the U.S. on a relative value play.
Our take is that this could be either a stock replacement with options or a $10 billion fund spending 10 basis points of NAV sounds reasonable if you are concerned about weaker prices or melt up on multiple expansion theme. In layman's terms: "Let's essentially take money off the table because we may be concerned about market valuation, but maintain the ability to capture further as retail may be in the process of driving a near term top into year-end..?"
Climarex Energy (NYSE:XEC) was a short trade idea from last night's report. The setup based on several distribution days and what looked like a test failure of the reversal bar from October 21 did not play out as expected.
Climarex gapped up on earnings. However, stabbing back below the prior reversal from October 30 at 111.27 triggered an Oops sell signal on a trading basis.
Now, Climarex Energy has carved out 3 Topping Tails in close proximity for a potentially bigger picture Charlie's Angels sell pattern.
Below, see a daily Climarex chart from June and a 10-min Climarex chart for 2 days.
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The VIX Drip
After that brief spike heading into the debt ceiling the VIX (INDEXCBOE:VIX) is now back near multi-year lows as the market has resumes its steady bullish march to new highs. This level may seem low in absolute terms but keep in mind that the 20 day realized volatility is now down to 9.85 so the current 12.90 reading is actually a decent premium especially in the context that external events, both big and small, from geopolitical to earnings season recede into the background and we can now expect benign environment for the next few weeks.
The term structure, which briefly went into backwardation, is now in a normalized cantango and about as flat as it has been nearly two years. VIX futures are now running about a 6%-11% premium month to month; ie December futures are $14.80 while January is 16.40. And this is the steepest part as traders are pricing in that the next budget deadlines begin rolling in after the new year. This has taken its toll on VIX related exchange trade products (ETPs) such as the iPath S&P Short Term Volatility (VXX) which is now hitting a new all time low. Remember, these future measures must converge towards cash as they approach expiration. Given the natural contango that means they have a downward drift even if volatility remains flat. Highlighting this inexorable lumbering towards zero the VXX will have a 1-4 reverse split effective tomorrow. This will be the third time since its launch in 2009. So the original price on an adjusted basis is now $6,400. As a long term hedge that has not worked out so well.
Which leads to the notion that catching spikes in volatility is often short lived and very hard to time. That may be the reason the Chicago Board of Options Exchange (NASDAQ:CBOE) recently launched the Short-Term Volatility Index (INDEXCBOE:VXST) which a 9-day volatility measure. I'm sure that futures, options and ETPs will follow in coming weeks. This will help traders align short-term hedges with known upcoming events.
Overall, the option measures such as the VIX and put/call ratio, combined with other sentiment readings such as bull/bear reports, are creeping towards complacent levels far from extremes meaning it can persist for longer than expected. For now having a moderate amount of insurance, rather than expecting a huge correction, seems the prudent approach.
Thursday, November 7, 2013
I had dinner the other night with Claus. It was one of many dinners I have shared with this brilliant stock market strategist. Like me, he is bullish, even though there may be a near-term minor pullback in the equity markets.
The drivers of a new secular bull market remain, at least in my opinion, the election of smarter policy makers (and therefore smarter policies), the American Industrial Renaissance, and the Energy Independence theme driven by fracking and horizontal drilling. Those themes are profoundly bullish if you consider the implications of their impacts.
Indeed, in 2008, the Eagles Ford oil production resource was producing 352 barrels of oil a day; now it is producing 536,000+ barrels per day, which is coming close to eclipsing the Bakkan production that is slated to exceed 1,000,000 barrels per day by the end of this year! This energy independence theme is exceptionally bullish given that if we can end our dependence on Mideast oil, it could add 2 to 3 multiple points to our P/E stock market ratios.
If so, it implies a trading target for the S&P 500 (SPX/1770.49) of above 2000. That said, I do indeed have a negative timing point in the short-term for the S&P 500 with the implication that the S&P "tops" between 1775 and 1825.
Longer term, I think the S&P goes substantially higher, but in the near-term, I think we are making another short-term "trading top." Interestingly, yesterday's trading action tends to confirm that despite the Dow's (INDEXDJX:.DJI) Delight (+128). Indeed, yesterday was a fairly strange session with the Dow better by 128 points, while the Dow Transports (INDEXDJX:DJT), the Nasdaq Composite (INDEXNASDAQ:.IXIC), and the Russell 2000 (INDEXRUSSELL:RUT) were all down on the session. Moreover, there was a big rotation out of the biggest winning stocks of the year. To be sure, in Wednesday's session the three biggest losing sectors were Transports (-0.71%), Healthcare (-0.33%) and Consumer Discretionary (-0.24%), while Utilities (+1.32%) and Consumer Staples (+1.10%) were the biggest winners. Verily, the 50 S&P 500 stocks that have been up the most this year were down an average of 1.02% yesterday as can be seen in the attendant chart.
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The bottom line is that the new bull market high achieved yesterday was not accompanied by all of the metrics I would like to have seen. Thus, yesterday's move appears to be questionable. The Selling Pressure Index actual rose one point yesterday, while the Short-Term Trading Index fell. That is not the kind of action one wants to see when the Dow is better by triple digits. Accordingly, I am again going to respect the timing models, which are looking for a short-term trading peak beginning next week.
To Action There Is an Opposite and Equal Reaction
Despite articles in the paper this morning that an ECB cut was expected, the markets are reacting to the news with surprise. Markets are neither rational nor irrational. They are rationalized. Even certainty can be rationalized into uncertainty with the expected morphing into surprise.
Still, no one should have been surprised by the ECB actions. Pull up a chart of the Euro and you will see a major peak at the end of October. If you were a central banking looking at a chart at the end of October, you would have felt that the euro was way too high, especially coupled with weak inflation. (And I suspect you would have been receiving a few phone calls from national European leaders emphasizing just that too.) But please notice how the ECB acted this morning AFTER the turn. The shift in sentiment had already occurred.
Yet again, a central bank has reacted to mood late. The net result is the equivalent of throwing more gas on a fire that has already begun to burn. It is how you get $0.02 moves in the euro. (And to those who need another recent example, take a look at India. The same kind of central bank action with the same after the turn in sentiment timing with the same "whoosh" effect.)
All that said, while the markets are rationalizing what the ECB's actions now mean to equity and bond prices, I'd offer that the timing of its action is very late in this bullish equity cycle. Lowering interest rates with equities at record highs is not normal by any stretch of the imagination.
If I had to offer an analogy, it feels a lot like what we saw in Japan earlier this year.
Twitter Gets Downgraded
I joked earlier about analysts downgrading Twitter on account of the huge spike above the $26 IPO price, but as it turns out, we've actually gotten one!
Pivotal Research downgraded the stock to sell from buy, though it added $1 to its target price, taking it to $30, which is 35% below the current price of $46.
This is a tough situation, even if you believe in the company longer-term, because we've got a $30+ billion market cap vs. $1.1 billion in expected sales next year.
Remember, Facebook got spanked when it disappointed in its first earnings report as a public company. If you recall, Facebook actually met EPS estimates and beat revenue expectations. But investors took a look at the usage and growth metrics and said "this aint good enough."
Going into that report, Facebook had already lost a third of its value, and fell another 12% after earnings.
So what's gonna happen if Twitter actually misses following a huge rally in the stock?
The bottom line is, expectations are running quite high with Twitter. That's not necessarily a bad thing, but at these lofty levels, Twitter's going to have to put up some mighty numbers when it reports. (likely January)
Friday, November 8, 2013
Quick Clarification on NFP Results
I just received a few questions on NFP so I figured I'd help clarify with what I know about this payroll report.
The household survey, which reflected a decline of 735,000 jobs, is due to the government removing the furloughed federal workers from that survey (there was +/- 800K federal workers furloughed during the shutdown). My understanding heading into the report was that the government would not deduct the federal workers from the NFP report because they received back pay. However, given the 0.4% drop in the participation rate to 62.8% - which has to be the largest one month drop on record - it appears that the BLS just removed them from the workforce.
TNX (INDEXCBOE:TNX) is at a key retrace, 2.728%, which is 50% September/October. Note the steady climb since the FOMC day in October. Treasury bulls need to defend this area, or we could see some yield acceleration into year end.
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As for the futures, ZN makes an incredible swing from weekly R1 to weekly S1 in less than 1 minute. Resistance will be 126'130, the 11/5 VAL.
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We have tested every system under the sun and, amazingly, we have found one that actually works very well. It is a very good system… (under the realm of) trend following. The basic premise of the system is that the markets move sharply when they move. If there is a sudden range expansion in the market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.
-Paul Tudor Jones
I don't normally put up 2-hour charts as it isn't my timeframe, but you can see this on the daily charts as well. Yesterday, we had a range expansion day that broke below the old breakout level. Now, we will see if we can consolidate under and fall, or regain and say "Just kidding!" Personally, I am concerned and have been highlighting my concerns for the last several weeks. The internals have been indecisive at best, but certainly giving warnings. The chart burned off all of the overbought on the NYMO, and then it didn't fire upward. We had a bit of a push through failure yesterday then we engulfed the whole last 2 weeks' range. This was a massive range expansion day. A day that should get your attention. From a trend following perspective, we just broke my close-below-the-prior-2-days rule. This is a rather ominous sign, and to me, it says that perhaps it is time to go hit the 50-day moving average below (about 1710ish). We still have not tested the 200-day moving average at all this year, so that is always a possibility, but it is too far out for me to gauge. Right now, NYMO closed at -43, so we really don't have much immediate downside potential; however, we could rest here and then fall quickly after a couple of days. Keep an open mind these days; yesterday was an important day.
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