Buzz on the Street: Mr. Market Walks Into a Bar With QE3, iPhone 5, Mark Zuckerberg, and a Geopolitical Powder Keg
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. Below are some excerpts from this week's Buzz. Click here for a 14 day free trial.
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Monday, September 10, 2012
Look for IG18/HY18 Eclipse to be Tested
I think this time it holds, unlike prior eclipses, but am looking for credit to weaken, just a touch coming into ESM ruling in Germany, continued silence out of Rajoy/Spain, and concerns that what the Fed delivers as QE on Thursday doesn't match what the market expects as QE.
The HY ETF's (JNK, HYG) seem to be particularly vulnerable. Not so much that they have more downside than CDS, but because they have too many bonds with rate risk that have limited upside and too many yield-to-call bonds. Also, I don't get a sense that retail is rushing to put more into HY at this stage of the game.
The markets appear to be weak with quite a bit of red on the screen, but the magnitude of weakness just is not there as of this Buzz. After strongly outperforming last week, small-caps (IWM) and emerging markets (EEM) really aren't giving up a lot of gains. This is encouraging since it suggests money is getting stickier in more volatile areas of the stock market. Furthermore, certain European stocks are performing quite strongly, as the National Bank of Greece (NBG) gets a strong bid.
I suspect markets will be quiet for the most part until the Fed's decision, but expectations are clearly building for monetary action. Treasury Inflation Protected Securities (TIP) are outperforming nominal bonds (IEF), and I just don't see any kind of meaningful defensiveness under way to suggest a turnaround is likely in the near-term. Bulls are holding on, and might be able to climb to the next rung of the upward ladder.
Where to Now?
From a pure technical standpoint, the market on the surface looks set for continuation. Under the hood we have a number of issues that suggest a top could come this week. SPX 1440 represents a battle zone that like last April, puts the market in one of the most pivotal moments since the March 2009 bottom. Below is a weekly chart of the SPX displaying its importance.
Looking at the RUT, everyone loves to comment how small caps have lagged the market. Well that was then and this is now. The Russell 2000 index is the closest broader market index to its all time high. I've shown the breakout that occurred last week in the IWM. Now look below and as you can see there is a pattern shaping up that could push the RUT to 900. You can sit on your hands and hate the market. It's a crowded room. Fear is justifiable. But you must understand that institutions only fear losing out on a market rally. They will sit in cash until they can't afford to.
I sat down with a Big Ten university endowment fund last week. They were frantically raising cash in equities because from a valuation standpoint, nothing looked attractive. I asked this man how much of his fund he moved into cash in October 2007 and again in July of 2008. There was no answer.
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Keep an Eye on the Russell 2000
The market has been caught in several crosscurrents in recent months. The Russell 2000 has been in the spotlight, first as a laggard, and more recently as an outperformer. Currently it's at 843, and remains a tad lower than its 12 month (March 2012) high of 846.
As the index approaches its March highs, it can face some selling. Technically speaking, a minor low-volume retreat bodes well for base building. But the real news in play is its proximity to its all-time highs (high on Russell 2000 is 865, achieved in April 2011). The longer and stronger the base, the greater is the chance of a breakout.
This is the key index on my radar, as its action may determine the eventual trajectory of the entire market.
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Facebook (FB) is getting some follow-through, but it needs to hold. A close above 19.30, and even 19.26 sets up a run to the 8/15 gap at 21.17. Downside risk is the naked VPOC of 9/4 at 17.72 (see chart).
Bears had a chance yesterday when it looked like a head and shoulder was forming on the hourly, but bulls fought back and negated it. This has got to be the most hated stock in the world right now, trading as if it had the future of a Research In Motion (RIMM), which is absurd. The line in the sand is 18.45 in terms of absolute must hold for bulls.
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Cheniere Energy (LNG) is making another challenge of its higher-low neckline, +4.77%. See our initial trade recommendation yesterday here.
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Wednesday, September 12, 2012
Running to Stand Still...
As the world readies to exhale (as Apple (AAPL) paints the tape, I've had second thoughts about my entry level in Facebook (FB). It's not really my style to buy a stock up 6% (on what may not be real news) and my inclination is to unwind this risk so I can hit tomorrow with a clean book and a fresh head.
The stock is up slightly vs. where I slapped this on but for purposes of this column, we'll call it a push.
I want to get back to hitting to quit it (quick trades) vs. holding stocks for extended periods. That is the style that propelled my YTD performance and while it's slipped of late, it's the style I plan to employ into year-end.
Two-sided, very tight and patient. Yeah, that's the ticket.
As always, I hope this finds you well.
The Zuck Hits It Out of the Park Yesterday
The Zuck hits it out of the part yesterday (in the TechCrunch interview). For those that haven't seen this I would encourage a quick viewing.
I have summed up my Facebook (FB) thoughts well of late and a couple times, I also expressed that I was taking the stock into my top 5 holdings. So, I'm going to post a rerun of commentary a few days back as I think it captures the "why of the move today" and what will happen in the business and the stock going forward.
I'll just add that to me the most "provocative" statement from "the Zuck" was "search". I'm sure that many are now going to get carried away and start talking about the demise of Google (GOOG) search if FB enters the fray. I'll save my criticism of that statement for the future. But I would go so far to say that I think the only company that could be a strong number two to GOOG and merge it into a compelling business from a growth and gross margin standpoint is FB.
I think the stock is likely headed to the $24.50 area before meeting substantial resistance and I still stand by my $45 target for now.
iPhone 5 is Here!
Okay, so Apple (AAPL) has announced the iPhone 5, and it's pretty much in-line with expectations.
Here's a quick wrap-up with the major specs and talking poitns.
-4" high-res screen
-4G/LTE data access
-18% thinner, 20% lighter
-8 megapixel camera with new enhancements like panorama mode
-New connector called 'Lightning' (yes, exciting)
-Full-screen Safari mode
Overall, not many surprises here, or at least nothing that's a reason for the stock to go up right now.
The spec-obsessed tech blogosphere doesn't have much to get excited about, but I suspect this phone will be a big hit.
Remember, the general public is concerned with just a few things - design, ease-of-use, and how the phone works with all their other stuff. Apple checked all the boxes here, though it would have been nice to have an attention grabbing new feature like Siri last year or the Retina display the year before that.
Now if by some chance Apple also announces an iPad Mini at this event (very unlikely in my view), I'll be looking to buy more Apple even though it's by far and away my biggest position already.
Thursday, September 13, 2012
Waiting on SuperBen
I know, I know. Everyone is waiting for the Fed to announce another round of QE, blah blah blah. There are two questions at hand when it comes to the Fed, which Matt Miller of Bloomberg asked me last night on Rewind. The first is "will the Fed act?"
I have maintained for some time that globalization not only makes stocks correlate closer to one, but also increases the coordination of central bank policies. The ECB fired the first shot, and it looks like the Fed and People's Bank of China will be next. The second and more important question is "will it matter?" The answer to me is probably not. QE3 already happened through the fear trade - QE3 was you and me sending yields to all time lows in the face of no Lehman event having taken place to justify that panic.
It is likely a meaningless exercise for the Fed to act now when the reality is that rising markets are more stimulative than money printing at this point. The one thing I think today will provide is some removal of the "air of uncertainty" over domestic policy. Beyond that, this bull market is being driven by its own merits and the Great Realization that the negative narrative was ultimately a work of fiction after all.
FOMC Rate Decision
The Fed will purchase $40 billion in MBS monthly, continuing "Operation Twist" and it will continue to be "open ended". They intend to keep policy stimulative "for a considerable time. Guidance is kept low through mid-2015. They intend to increase their longer-term holdings by about $85 billion per month.
These purchases will begin tomorrow.
By my last recollections, the Fed was buying $25b in MBS per month to reinvest prepayments on MBS, so if I'm reading this right, that makes this about $15b in new purchases.
More QE As Should Have Been Expected
Bernanke followed through with his Jackson Hole speech and didn't pull the football away from Charlie Brown. More QE he brings totaling $40b per month in MBS with no specific timetable on when it will end, thus considering it 'open ended.' The Fed also extended its desire to keep the Fed Funds rate "exceptionally low" thru mid 2015 from "at least thru late 2014." The Fed "is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook."
Bottom line, Bernanke gave us what many should have expected after his Jackson Hole speech where he defended previous QE and gave his 'grave' concerns with the labor market comment. This policy will do nothing for economic growth, raise commodity prices, will further clog their balance sheet with longer term securities and will make the process of an eventual and inevitable exit highly disruptive and messy. The Fed did little to convince me that the benefits of this new policy comes anywhere near the costs. Also, the Fed again is showing no faith in the regenerative powers of American capitalism where growth naturally happens as long as markets remain free.
Friday, September 14, 2012
T Report: The Carrot and The Carrot
Two Carrots Don't Make a Stick
I've always assumed the adage about a carrot and a stick had something to do with donkeys specifically, but was a great way of summarizing reward and punishment. The "carrot" was the reward. You dangle the carrot as a reward for good behavior. The stick was there to punish failure. In many ways, the Fed removed the stick yesterday. We now live in a carrot and carrot world. I know a few places I would like to stick a stick right now, but I can't help but think this change is going to have negative repercussions in the longer term.
Two Wrongs Don't Make a Right
I was wrong yesterday. I didn't think the Fed would do it. I also thought the initial muted reaction was a sign that it was priced in. I was wrong, but I've been right for the most part for awhile, so I can live with yesterday's mistakes. It bothers me, but not immensely.
What concerns me more is that I was wrong in September 2010. I underestimated the impact of QE2. That is what is bothering me now. Is this a replay of the fall of 2010 where we are at the start of a long relentless march higher, or is that so priced in, that it doesn't happen again? That is the real question. Will the open ended QE spark another spurt higher, or is it different and too much priced in? I'm trying to get my hands around that, and being wrong in 2010 is clouding my judgment.
Two Mortgage Providers Don't Make a Fed
If Fannie and Freddie announced that they were going to underwrite more mortgages yesterday, would we have rallied so much? While Fannie and Freddie cannot print, they are as much a part of the U.S. government as the Fed (technical accounting issues aside).
In fact, Fannie and Freddie are shrinking. The government wants their balance sheet reduced. The Fed has stepped in to pick up the slack. Why are we so much more excited about the Fed buying mortgages than Fannie and Freddie? Yes, I can see the printing argument, but the reality is that at least a part of yesterday's announcement is picking up the slack rather than creating new additional demand.
I am not sure how that plays out, but it is a question we need to ask ourselves. Why does the Fed buying something count more than Fannie and Freddie buying something?
Fed Buying Mortgages Doesn't Create Final Demand
While the Fed ignited a ramp up in risk assets and commodities, did they do anything for final demand? I spoke to some friends who are senior in real companies (those that manufacture something as opposed to financial services) and they quickly confirmed that nothing had changed on their end. Their stock options were worth more, they had now exceeded their stock price targets for the year, but they weren't about to change plans. They need to see final demand increase before they change their business plans so nothing about more Fed buying affects businesses immediately.
On the home front, with a bias to people located in overpriced NYC related housing, most people hope this means that their property goes up in value. I haven't run into anyone looking to buy now because of this. Across the country will this help? Maybe, but rates have been low for awhile, so I'm not sure what benefit this will have in the real world.
Banks Win Big
Anyone long mortgages ahead of this is in good shape. U.S. banks will benefit. European banks looking to shrink will benefit as they now have a ready buyer of a part of their portfolio.
So banks should do well. Bank credit spreads should do well. One consistent theme we've had is that bank credit spreads, CDS in particular, have remained stubbornly high relative to their equity valuations. This may be the catalyst that drives them tighter. Any notion that this Fed will somehow let a big bank fail seems ludicrous. They just printed money that helps them at a time when stocks are already at multi-year highs and amid signs that housing has bottomed. If there is one trade where you are supposed to shut your eyes and ignore the volatility for 6 months, it is bank CDS. Hit a bid and walk away. As SEF's come on line, the last and final bid for bank CDS, the counterparty hedging, will go away.
Commodities and the New World Order
As I try and understand what the Fed did, I keep coming back to the idea that commodities will win. In the short term gold may do well, but the reality is that you need useful commodities. Gold may well have been a store of value, but you can't eat it, build shelter with it, or burn it for heat. Commodities that let you do that may well become the play.
As the Fed abandons any form of restraint in its efforts to keep rates low, debase the currency, and spur asset inflation, the mindset of investors, companies, and countries is likely to change. China is likely to be the leader in that. Stockpiling useful things, basic resources, seems like the trade.
The Fed isn't "pushing on a string" it is sitting on a water balloon. That balloon will burst and the consequences of that will be something we have never dealt with before, and quite frankly, aren't prepared to deal with. Maybe everything will work out, and for now it is hard to be bearish, so I will be neutral, but that doesn't mean the end game didn't get uglier.
Neutral, Confused, and Annoyed
I'm pretty much dead neutral in terms of positioning. Too much going on that is too confusing to form a solid opinion. At 1,460 on the S&P, at 118 on MAIN (no that isn't a typo), IG18, so recently at 102 is now at 82) and highs on so many other asset classes, it is hard to say there is a lot of upside. With the Fed printing money monthly, it is hard to say there is any downside, so I will go with neutral and confused.
I think I have separated my anger from my investment decision, but I am angry. Everything about this move strikes me as dangerous. The one thing that I think the Fed does a HORRIBLE job at, is understanding that human behavior changes. The economists don't seem to understand that the same inputs into the same model don't produce the same results because behavior changes over time.
I for one, miss the stick, and I don't even consider myself a masochist, just a believer in meritocracy and that failure is a necessary part of success.
Bullets Over Broadway
Minyan David asked the question yesterday, "Was the Fed's announcement of QE with no end date the last bullet that the Fed has? If so, do you think the euphoria will turn to panic when everyone realizes that the Fed is out of ammo?"
My short and sweet response was, "Ultimately, yes; the question is whether it's before or after the election and/or quarter or year-end" This is the dynamic we spoke about last summer--which was a reprise of a vibe first shared in 2007 as Central Banks began to mobilize.
It's important to understand that this is my thinking; my positioning, while net short per my buzz late yesterday, is entirely more defined and dare I say surgical. We often say to never let an opinion get in the way of making money; while that's easier said than done, it's paramount to successful trading in this environment.
Chicken or the Egg
While I have an enormous level of respect for those who choose public service and whose job it is to safeguard the safety of our nation everyday, I am afraid that the causality argument offered yesterday that more bond purchases by the Fed will reduce unemployment is akin to me saying that if I eat more spinach, I will grow a third arm.
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