Buzz on the Street: Stocks Survive the Cyprus Shuffle
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, March 25, 2013
Speculative positions in copper futures, or "managed funds" in the case of metals reporting, are now at the most net short since last summer, before that the 2008/2009 lows. This is largely due to increased outright shorts, not a reduction in longs. Of course, this does not equal an immediate selloff in equities, but it is a negative for the market as copper has been weak since early February, consistent with weaker demand from China.
Two weeks ago, Treasuries had a large short and since then this appears to have moderated in its severity. Fridays' COT report showed increased longs in the belly of the curve, possibly a flattening trade or reducing duration positions. As well, we are lingering near the bottom of yield support for the fifth straight day, though we remain below much of February's range. With seasonals pointing towards higher yields, I am having my doubts on what kind of upside is left, so I am moving to the sidelines. When in doubt, sit it out.
Breadth on the big board is nearly 4:1 positive with the first 30 minutes out of the way.
Should we be watching the final round of the golf today or the NCAA tourney?
I'll be back in a bit with some updates on fund flows, commercial bank balance sheets, and primary dealer positions.
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Discovery Communications Mispricing
Friday I put on a spread trade between two classes of Discovery Communications shares. I shorted the higher priced voting shares of Discovery (NASDAQ:DISCA), and went long the lower priced non-voting Discovery (NASDAQ:DISCK) shares. I did this for a spread of about $9.10. DISCK is at about a 12% discount, the widest it has been since the company started aggressively buying back shares in 2011. I expect the spread to narrow by $4-5.
I believe the wider percentage spread comes from three factors. First, Discovery has been an active acquirer of assets in Europe. This could be creating fears the buyback will slow. The buyback has been focused on the lower priced DISCK. Second, a secondary of insider shares was just completed on DISCK. These shares could be distorting the spread temporarily. Third, with the market in a steady uptrend, ETFs could be having a factor. A quick scan of a couple of media focused ETFs shows DISCA being held but not DISCK. These ETFs could be adding to demand DISCA while DISCK does not participate equally.
I hope to close this trade sometime in 2013 but expect my holding period to be six months or more.
Italy 2012 Repeat?
Cyprus appears to be the "look at the birdie" distraction which everyone is focused on, just as Italy cracks hard. Take a look below at the price ratio of the iShares Italy ETF (NYSEARCA:EWI) relative to the S&P 500 (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWI is outperforming (up more/down less) the denominator/SPY. A falling ratio means the opposite.
Note that today, Italy is getting wrecked, and that the last two months of relative behavior look almost exactly as the April-May period did when the first mini-correction of 2012 took place. Could this be a harbinger of something worse to come despite a Cyprus bailout deal? Our ATAC models used for managing our mutual fund and separate accounts remain quite defensive. The deflation pulse is still beating.
Tuesday, March 26, 2013
S&P released the Case-Shiller home price data for January. From the release:
" Data through January 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed average home prices increased 7.3% for the 10-City Composite and 8.1% for the 20-City Composite in the 12 months ending in January 2013.
All 20 cities posted year-over-year gains with Phoenix leading the way with a gain of 23.2%. Nineteen of the twenty cities showed acceleration in their year-over-year returns. Despite posting a positive double-digit annual return, Detroit was the only city to show a deceleration. After 28 months of negative annual returns, New York came into positive territory in January. "
So year-over-year price changes look relatively strong. And with private equity investors like Blackstone (NYSE:BX) and others finding their inner Stanley Roper and becoming landlords, it's not surprising. The fact that real estate has been a beaten down asset class is indisputable. So at some point, there's bound to be some assets that have an appealing yield.
But the one thing I look at isn't the price index. It's another metric that looks at the number of sales transactions that Case-Shiller calls its sales pairs. And that metric tells a slightly different picture. It's not the rising, ebullient trend we saw leading up to the housing crash. It has been a more subdued, but stable, market where there are fewer houses being bought and sold. Frankly, I'm pleased with that.
I still long for the day where we can look at housing activity as a by-product of a sound, stable economy instead of as a headwind or tailwind.
S&P Rises on Cyprus Deal! No Wait, S&P FALLS on Cyprus Deal...
On Monday (Mar. 25) the rally in stocks fizzled out by mid-day. What happened?
"Stocks opened higher across-the-board today, with every U.S. index rallying from the start of trading. The nation's leading daily newspaper 'explained' why stocks were up, as shown by the headline. [See first image below]
"According to the article, investors, both here and in Asia, responded positively to the news of a bailout deal in Cyprus. The DJIA (INDEXDJX:.DJI) quickly shot to 14,563.70 after a half hour of trading, a new high.
"But something then happened: the market declined even more sharply than it initially rose. Here's the headline that came out shortly thereafter: [See second image below.]
"What changed? Not the terms of the Cypriot bailout, which were already known by market participants who read the news. What changed was the position of stocks within the Elliott wave structure.
"In truth, there are always 'reasons' why stocks go up and down according to the exogenous-cause crowd, those who believe outside events cause the market's trends.
"But [Monday] was a good example of the intellectual frailty of that view, as the same reason was cited as to why stocks were rallying at the open (Cypress bailout) and why stocks declined thereafter (Cyprus bailout).
"[Monday] morning the Dow completed an [Elliott wave] structure from late Friday, which meant a change of trend. It's that simple."
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Wednesday, March 27, 2013
A Mixed Bag
In recent weeks, the stock market has embraced favorable economic news and downplayed weaker data. The bond market sees more of a mixed bag, with risks still weighted to the downside.
A recent survey showed that most workers were unaware that payroll taxes rose in January (from 4.2% to 6.2%). They were also unaware that the payroll tax had been cut two years ago. It wasn't well advertised and, let's face it, the typical American doesn't read newspapers anymore. Workers will notice the drop in take-home pay over time (note that many workers have direct deposit and never actually see a paycheck, and others are paid in cash). Recall that for workers making $60,000 per year, the payroll tax increase leaves them with $100 less in take-home pay per month.
For those in the top 20% of income earners, the payroll tax increase and the rise in gasoline prices are unlikely to have much of an impact on their spending. In contrast, increases in stock market and housing wealth should have positive effects. Consumers tend to have a low propensity to spend out of wealth, but a large change in wealth can have a significant impact on spending (the Case-Shiller Home Price Index rose 8.1% over the 12 months ending in January). For the other 80%, the impact of the payroll tax increase and higher gasoline prices should arrive with a lag. None of this suggests a recession, but we should see a somewhat slower pace of consumer spending growth in March and April. Note also that the pulling forward of dividend income and bonus payments into 2012 should lead to higher tax payments this April.
Still, job growth is expected to remain moderately strong in the near term and employment gains will help support aggregate consumer spending growth. At this point, we'd be looking for much stronger GDP growth in 2013, something like 3.5% to 4.0%, as many of the economy's headwinds fade. However, tighter fiscal policy (the payroll tax increase and the sequester) is likely to shave 1.5 percentage points, pushing growth back to the 2.0% to 2.5% range.
Traders Scratching Their Heads
Markets closed on their highs yesterday and we are seeing some weakness in our futures this morning. Europe turned red on a weak Italian auction and there is also some concern on the chaos that can be caused when Cyprus opens its banks either today or tomorrow ( I’m sure there will be plenty of coverage).
Markets have done a pretty good job “holding higher” during this recent bout of volatility as 1538-1545 has been key support. During the past six sessions though it’s been one day up, one day down, and it’s been a bit hard to find follow through.
I’ve been trying to stay involved and it hasn’t been the “easiest environment” to find good ideas. As the markets were making new highs yesterday the banks were still in retracement mode, and I didn’t see many groups that “traders” gravitate towards breaking out. To me the "heartbeat" of this move isn’t beating strong.
Support stands at 1555ish then 1551, below this and the new high talk will slow down and would frustrate some traders. The key support level would then be 1538-1545. Resistance stands at 1563-1565.
There will be no updates from me today and I’m out tomorrow, heading out to the West Coast for a special interview (a bit out of the box) that will be aired in next week’s Morning Call.
Tranny Making Me Nervous
The Transportation Index (INDEXDJX:DJT) is making me nervous today as it edges ever closer to the point of no return in validating the head & shoulders top formation noted previously. Keep an eye on 6100 today as this area is trend-line support (neckline). The 50 Day MA is around 5970 and is my best guess as to where support could matriculate. Heads up trading today for sure, good luck everyone.
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Thursday, March 28, 2013
The Human Condition
To me, the most interesting news story of the day is the lack of a breakdown in Cyprus.
I think the world's collective imagination was bracing itself for a full-scale whompin' and a stompin' at the Cypriot banks.
We live in a weird time. I get the sense that perhaps unconsciously, a lot of people almost want some kind of disaster in the market to verify that there's some logic to the fears in their head.
Over the past decade, there seems to have been a major devolution in social mood as people's hopes for the future become darker and darker, and I think the mood extrapolates itself in the form of fear that there's a boogie man in the closet ready to wreck everything.
Some of the boogie man's names included:
-PIIGS debt crisis
To me, this means that whatever takes this market down is something we will not see coming, or maybe just the passage of time and cycles. Maybe we'll just crash when it's time.
The human condition has gotten so miserable that we automatically expect things to go to hell, we sort of have a hedge against big messes caused by specific events like the aforementioned five bad guys.
Maybe I'm thinking too much. Whatever. I'm going to see G.I. Joe this weekend!
Quarter End, Fishing and, What If?
Quarter-end, time to unwind a little, sit back and enjoy a weekend before ramping things back up. Some people go golfing, others hit up Vegas, Peter Prudden bench presses bull dozers, I go fishing.
I usually take this time to reflect on what went well in the quarter and what went poorly and what are some real possibilities for the future. I put this chart together (long term inverse head and shoulders) in mid-February and have not been able to shake it since. A break of 1600 on the S&P 500 (INDEXSP:.INX) would pretty much nullify this from being a possibility. Secular bear markets are brutal beasts filled with years of heartbreak and euphoria. This chart, courtesy of Peter Prudden, shows the last several Secular Bear markets. There always seemed to be a mid-point low (2009), then quite often it failed at previous highs. And they all lasted at least 15 years but more often 20. So here we sit 13 years into a secular bear market, hitting “all-time highs”, and by many sentiment gauges getting euphoric. Massive divergences in traditional risk assets as overseas markets are down for the year as US equities are up 10%ish. So what if?
As for me, I have a long weekend of fishing and family time ahead of me. Fishing in the morning hoping to pull down another one of these (see fish below), then roasting marshmallows and making s'mores with the kids in the evening. Never forget to unwind and take time to fill up your tank.
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Friday, March 29, 2013
MARKETS CLOSED FOR GOOD FRIDAY
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