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.
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.
Click to enlarge
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)
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