Buzz on the Street: JPMorgan Gets a Big Fat 'F' in Risk Management
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Note: Some links may require Buzz subscriptions.
Monday, May 7, 2012
The Double-Secret Contrarian Anti-Austerity Setup
Blue Horse Shoe may not love austerity, but it clearly dislikes the choices made Sunday in the French and Greek elections. However anticipated their outcomes may have been, the tide may next sweep up Italian and Spanish politicians. So much for the bailouts.
In other words... after "selling the rumor" (socialist victories), "buying the news" (election outcomes) may be blind-sided by another rumor that it launches (new socialistic leanings sweeping Europe). Any level-three card-carrying contrarian would tell you the same thing.
Today's resolution will tell us whether those fears of anti-austerity contagion are discounted already, or whether bigger news has yet to come.
Keep in mind that last week's sizable stock market sell-off accomplished nothing new, and the overnight drop accomplished little more. A retracement from the months-long trading range's upper-end has tested -- and now also probed -- the range's lower-end. Developing so quickly can be terrifying, but it can also fully expend selling pressure at the low.
It's still possible for the cash session to reject the overnight action, and then to retrace much of last week's decline. Any such hope depends greatly upon opening the cash session flat-to-higher from Friday's close.
But opening the cash session under Friday's lows would all but confirm that Europe's price action has broken the risk appetite. Launching a post-open bounce from negative territory could be absorbed more easily. Then, whether today or tomorrow, resuming last week's decline would extend under overnight lows, and put much lower targets in play.
The Morning After
Midday Friday, after my plane touched down in Austin for the Tom Petty anniversary weekend with my betrothed, the first thing I did was pull up market information on my smartphone. That's the thing about carrying risk when you're not at your turret; when you're not thinking about it, you should be.
While we were still in the air -- eyeing the averages on the in-air televisions, but dangerously close to when the flight attendant instructed us to turn off all electronic devices -- frantically typed into my phone and hit the send button. I knew that as soon as we were within reach of a signal, it would shoot over to our crack Buzz & Banter editorial squad.
The Buzz went something like this:
If it's possible that I understated my concerns yesterday (Thursday) morning, please let me make something perfectly clear: I am extremely bearish here. I've built a sizable short in the S&P (with some Deutsche Bank (DB) puts for additional shnitz and giggles) and set my stop above recent highs (at S&P 1420; nobody is smarter than the market; particularly me).
I'm not prone to hyperbole and the above missive offered a full take on what I saw and perhaps more importantly, felt (again, this was Thursday). While we strive to remove emotion from the trading process, we're human beings at the end of the day-but me no likee the stock market at these levels, not one bit.
The thought process that dovetailed into positioning that market exposure was as follows: I spied a (negative) Head & Shoulders pattern in Deutsche Bank (DB) -- which "works" to DB $30 in a pure technical vacuum--and assumed our longstanding Minyanville mantra, "As go the piggies, so goes the poke" applies to Deutschland as well.
That brought me to the German DAX, which also has some pretty pronounced dandruff in play. If the German market broke DAX 6500, according to this pure technical lens, it "worked" to DAX 5810, or 11.5% below where it closed on Friday. We've seen false technical signals before, of course, so I looked across the horizon for a catalyst and sure enough, the French and Greek elections were three days away.
The level of stateside lore into the close (this was written on Friday) is S&P 1370, which will be defended by the bulls as they know that large sell-stop orders reside directly below. IF and when we break that all important technical toggle, we could see another whoosh lower -- and then S&P 1370 would morph into near-term resistance (note: the next support level below that zone is S&P 1340, so if and when that broke, the next stair-step lens with which to measure risk will be S&P 1340-1370; Mr. Valentine has set the price.
Technical Analysis 101 dictates that the time to initiate risk is when a big level is broken and then subsequently retested. We're seeing that in Germany now -- it traded overnight to DAX 6411 and rallied directly back to 6500, where it's "doing work" now-and we've seen similar action in the S&P futures, which were down 15 handles when they opened last night and are currently trading down a finski (5 points). It would not surprise me one bit to see the market trader higher today, consistent with the path of maximum frustration; it just can't trade higher the S&P 1370 if the bears are to take the Con.
Finally, I will remind ye faithful that discipline must always trump conviction so while I have a high degree of confidence that the market will trade lower, perhaps significantly, consistent with my Ten Themes for 2012, when I offered that we could see a tale of two tapes with S&P 1360 as a toggle (and yes, we overshot to the upside), I have rolled down my trading stops to ensure that this particular puppy will be profitable. In terms of my short-market exposure, I'm not operating with a stop above S&P 1375
and I've set my stop above $43.50 in Deutsche Bank.
Of course, I reserve the right to "pick" at my positions as a matter of course -- trading "in between" is often smart in tricky tapes-but you will NOT see post-rationalization should the above levels breach.
Good luck today!
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Forget Europe - Emerging Markets are KEY
Michael A. Gayed
Lot of movement happening following this weekend's elections in Europe. The initial reaction as futures opened last night was very negative, but it looks like European averages are cheering, with Spain (EWP) setting itself up for a V-like move. Reflation remains very real given the focus of the debate on growth instead of just crushing austerity. If you're skeptical, then you should watch Emerging Markets (EEM) to change your mind.
If Emerging Markets, which have lagged the U.S. for several months now, begin to stage a sustainable period of strength, it means investors are betting on renewed export growth to Europe and a recovery in the global growth story. The Spring Switch out of bonds and into stocks remains a high probability, particularly should the 3% level hold on 30-Year Treasuries. If markets can continue to behave so resiliently, why in the world can't we get the 40+%-like move in equities by the end of 2012 as I stated recently on CNBC?
Tuesday, May 8, 2012
T Report: What Do Nat Gas & Equities Have in Common
I have been reading more and more articles about how the bottom may have been put in for natural gas. Producers are slowly but surely figuring out ways to cut production in response to low prices. Demand is being created as U.S. industrial production picks up and more projects that take advantage of cheap gas come get approved and some even come on-line. LNG, while years off, is also starting to add support. All of this seems normal. Supply and Demand shift according to Price.
Then why does everyone expect that if the S&P can just push above 1,400 retail will buy stocks, but at 1,350 retail will sell? Why is conventional wisdom so convinced that higher stock prices increase inflows, when everything about normal supply and demand says the exact opposite? Maybe retail actually sells stocks as they go up, because they have profits they want to take off the table? The only people buying stock above 1,410 last Monday were capitulating shorts, underinvested perma-bulls, and fools who really believe retail doesn't understand something as basic as buy low, sell high.
I was wrong about London driving prices higher. Yesterday's late day fade was followed by more weakness in Europe. Greece is yet to form a government and there is real concern about what sort of government will be formed and what it will do with bonds maturing this week. In the end, I don't think the government will have the time, or guts to do anything drastic with bonds that are maturing in May. There is €450 million due to private holders on May 15th. It looks like there is €3.3 billion due to the ECB and EIB on the 18th. I don't think the Troika or Greece is really ready to unleash an "uncontrolled" default, so the new government will be convinced to borrow the money it needs to pay both bond maturities. If it was just the private bonds outstanding, I would be far more concerned that this issues reaches crisis stage next week, but with the ECB expecting to get paid in full on such a large block, the political pressure brought behind the scenes from the rest of Europe "to do the right thing" will be too much for the newly formed government. They will get some immediate concessions and promises of renewed talks to revise the plan. Ultimately Greece leaves the Euro, but it won't happen in a disorderly way in May.
Spanish banks are another area of contention. The market seems to bounce back and forth between excitement that they will get bailed out, and fear that they are such a mess. The likely outcome is some form of bailout that ultimately just makes everyone realize both the banks and the country are in deep trouble and will never pay back 100% of their debt while denominated in Euros. The choice will be restructure and/or currency reversion. Italy is in pretty much the same boat, with the bright side being that the boat is holed at the water line rather than below, but it is a much bigger boat.
Worth noting is that Spanish stocks are outperforming Germany and France again (the divergence between the economies was more than priced in). Spanish and Italian bonds, while weaker, are only marginally so. Spanish CDS is a lot wider though at 495 (+20) while Italian CDS is only 5 wider (445). So the primary outlier of the day is Spanish CDS.
U.S. 10 year trades 28 bps wide of German 10 year. This isn't anything new, yet somehow it has been catching my eye lately. We still trade tight of France and even the U.K., but it does seem a bit surprising that no one ever really mentions the spread of treasuries to bunds, though the FX complicates the matter. Not sure there is a point to pointing this out, but I can't help having this feeling that this is important.
The Euro is actually holding in okay. I think in this round of the crisis we will see relatively little correlation between the Euro and risk-on/risk-off assets. The Euro short crowd is too big, and there is growing concern that countries leaving may actually generate flows that strengthen the Euro. I'm not sure I would be long the Euro here, but I wouldn't be short, and I would look at it less than ever as a cue for the next leg in the risk-on, risk-off saga.
In spite of having being wrong since 3pm yesterday, I think we will see a bounce off these lows. The "growth" rally will gain some strength. There are already talks of a growth summit. It won't work, but it will sound good. Retail may actually allocate a bit of their hard earned cash to stocks, they might sell some winners in fixed income or take some money out of cash and buy stocks. We have had enough bad data, particularly in Europe, that it would only take one decent print to spark a bit of buying, even if the economic data turns out to be an outlier.
Bears are feeling free this morning as Hoofy hits the panic button. We have talked about being in the late innings of a bear market rally, one that was designed to lure investors back into the market convincing them the worst is behind them. Since early April there has been absolutely nothing attractive about this market from a valuation standpoint and capital is best kept in your back pocket. This was largely confirmed by complacency. Dippers are advised to sit this one out until we meet the 200 EMA, where there will be opportunity to play a bounce.
At that juncture (SPX $1295-1312) complacency will have been morphed into a nervous concern. Another sign of the topping tail is a term I introduced last summer, called growth gone bad. It is when momomentum stocks riding an escalator hit the pinnacle of the ride and the roller coaster begins. Tickers that might tip you in that direction are RAX, FOSL, and soon to be PCLN, AAPL, and CMG. Yes I said it AAPL, you know who you are. You bought the stock with a six handle thinking of infinity and behind. I received a sell side note this morning with the premise "we have had several stocks get crushed this earnings, some deserved to, other not so much."
Let me remind you, the bear knows no boundary.
Germany Going it Alone in the Eurozone
Two days in a row and we have better manufacturing data from Germany. On May 7th Factory Orders gained 2.2% from prior .6% and today May 8th Industrial Output gained 2.8% from prior .3%. At the heart of these gains were auto sales from Germany's top three carmakers and their suppliers responding to thriving demand in China, with first-quarter profits at Bayerische Motoren Werke AG, Volkswagen AG (VOW) and Daimler AG (DAI) all beating analyst estimates.
With Greece now threatening to stop repayments to the Troika (ECB, EMU & IMF) and Spain announcing bailouts of its domestic banks and the new French administration wanting a "do-over" of previous agreements, the durability of the 17 nation European Monetary Union is challenged. Germans may feel overwhelmed by their leadership responsibilities with their own citizenry more willing to abandon the entire arrangement. German Finance Minister Schaeuble stated immediately after the Greek murky election results: "They'll have to honor their agreements period."
Spain doesn't have the resources to bailout their banks without assistance from the troika either. To put it bluntly, buying time with printed money and fresh debt won't cut it anymore.
At the same time with elections dominating the developed world it's compelling for those in power to keep things going until all the votes are in. After all sick economies won't win you any votes even if printing money to buy is a fool's errand. The fallout will be borne by those next in power or those not eligible to run again.
With all that said we view a monthly chart of the iShares German Country ETF (EWG).
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Wednesday, May 9, 2012
Bond... My name is Bond
The finally tally of yesterday's new corporate issuance was $10.2 billion dollars. Fore reference, that's above the average even for "crazy issuance" months. The flip side of that coin is that Euro sovereigns are getting eviscerated this morning, even by their evisceration standards, with Spain leading the charge on both CDS' and bonds front. The 2 yr. Swap is now above 33bps, with 35bps being a bright yellow line.
Crosscurrents galore; hang on to what floats.
A Baker's Dozen
12 years after.
Is the DJIA tracing out the third high in a 12 year topping process?
This year, the DJIA broke out of a monthly declining trendline connecting the 2007 to the 2011 top.
Arguably a pullback to that breakout pivot could be a bullish backtest.
The current correction is playing out from a test of the low of the high bar month on the DJIA as well as a 50% retrace in the NDX of its 2000 to 2002 waterfall decline.
Theoretically, a correction from these technicals can be considered a normal expectation..
However, when you have a technical failure from a breakout often times you go the other direction faster and more furious.
If a technical signal does not work out and starts back the other way sometimes these are the stronger moves.
False signals are often more powerful than 'true' signals.
Back through 12,000 on the DJIA will constitute a failed backtest as well as a violation of a rising monthly trendline.
The implication of a break back below 12,000, 12 years into what may be topping process comprising three manias is a decline to below 10,000 which may only be theoretical support.
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With all of the Greece drama going on, I feel that it is necessary to point this out. To update everyone with what is going on: this morning at 8:48, the AFP stated that Greece would receive their EU5.2b loan tomorrow as scheduled. Now, as of about 30 minutes ago, that payment is on thin ice.
This is certainly causing a lot of uneasiness on whether or not Greece will leave the Euro or default if they don't get these funds, but the EU450m of outstanding floating rate bonds due May 15th are trading at basically par (99.93 to be exact). There is also the other EU3.3b of Troika debt out there due at the same time that has no pricing, but you have to imagine that's getting paid back also.
So the market is not expecting a Greek exit over the next two weeks. Rather, we're pricing in what might happen if Greece exits.
My guess is that if Greece were to leave the Euro anytime soon, the EUR would tank from here, but if it's in the coming months and the EUR is much lower, we could definitely see a bounce in the "weakest member out" theory. However, it is tough to use history as a guide here, this isn't something they teach in the history or economics books. I think we're making history here.
Thursday, May 10, 2012
What We're Seeing
Famous Philly Phil
-Bank-led rally: as Spain moves closer to "Bad-Bank" process, they have nationalized 45% of the Caja Bankia.
-Cyclicals joining in: Remember, Greece hasn't formed coalition a yet - radical Syriza party failed at such yesterday and Pasok's Venizelos is trying today.
-Some technical levels to watch, we're bumping against resistance here. We need a close above S&P 1362 for further upside.
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Markets gapped up to burn off some of the oversold readings, but haven't done much -- same way you couldn't short the last two down opens.
Today, if you bought in the first 40 minutes, you're probably a bit frustrated.
SPY inside range -- low is $136.41, high is 136.85. Some are short vs.136.85 and others long vs.136.41(that's what makes a market).
Tech is a bit weaker with CSCO.
I've already sold 75% of my overnight longs and will be flat if we break below 136.35.
You need to take what you can get in this market as we sort through numerous problems.
My gut still tells me the low of this corrective cycle will not be the recent 1343 pivot, more like 1300-1320
News I Hate To Share
Markets gapped up to burn off some of the oversold readings, but haven't done much.
Same way you couldn't short the last two down opens. Today if you bought in the first 40 minutes, you're probably a bit frustrated.
SPY inside range- Low is $136.41-high is 136.85-- some are short vs. 136.85 and others long vs. 136.41 ( that's what makes a market)
Tech is a bit weaker with CSCO.
I've already sold 75% of my overnight longs- and will be flat if we break below 136.35.
You need to take what you can get in this market as we sort through numerous problems.
My gut still tells me the low of this corrective cycle will not be the recent 1343 pivot;
More like 1300-1320
Air Pocketism Continues to Hit High-Flyers
Last week it was HLF and NUS, to name a couple.
Tuesday it was RL and FOSL. Yesterday it was MELI. Today it's PANL.
The Pivot Point Method can keep you out of trouble.
For example, let's take a look at the dailies in PANL.
On April 26 and 27, PANL had a 'follow-through breakout' above its 200 dma.
This was a continuation move following the breakout over a declining trendline on 4/17.
The pullback in PANL on 5/7 looked good and tasted great but proved to be less filling: it looked like a textbook backtest of the 50 dma leaving a Bottoming Tail.
However, PANL never gained any traction back above the breakout point around 40.90 (from 4/26).
When a stock trades back below a prior pivot point, it's often a sign of trouble and an indication that the stock is in a weak position.
That indication was borne out in by the today's action following PANL's earnings report
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Friday, May 11, 2012
Quick Thoughts On the JPM Mess
Credit doesn't matter, it is all about positioning. The credit markets, particularly CDS, are going to be driven primarily by positioning.
It is unclear exactly what JPM had on, what has been taken off, etc.
Best guess is they were short HY and long IG. It was primarily in tranches, curves, and tranche curves -- lots of off the run.
I would think that some high-beta names that drove the value in mezzanine tranches of HY tranches should perform very well and go a lot tighter. I think that some low-beta IG names will struggle a bit. The weakest names in IG9 could be under huge pressure.
There will be lots of hype out there, fingers pointed, but from a practical standpoint, that is likely outcome.
In Europe - MAIN is 3 bps wider. XOVER is only 6 wider. HY18 is unchanged, and IG is a bit wider.
I'm already annoyed beyond belief with half the stuff I'm hearing, so let's get this straight. Hedges are never perfect. Yes, this was a risk decision. No it didn't work. But every loan that JPM makes is a risk decision. Their entire balance sheet is a prop bet.
But, before i dig more into the whale....just look at this page below. BAC's. FVO 3.3 billion. DVA 1.5 billion. No one cared. No one even batted an eye.
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JNK ETF Sees Huge Outflows
The chart pretty much sums it up. The high yield bond ETF JNK saw outflows equal to about 6.5% of the fund yesterday. To be perfectly honest I don't know why, and I am trying to dig around some more to figure it out. Could this be something that was part of JPM's bet, or a bet against it?
If this data is correct, considering that JNK is up on the day, it could potentially be a short to arb off of.
It appears that once again someone's bunny had a good nose and they dug into the option patch to bring home a bunch of tasty carrots just in time for Mother's Day.
Who is the JP Morgan Options Whale? Someone's Bunny Had a Good Nose
Yesterday afternoon following the close, JPMorgan (JPM) held a surprise conference call to announce significant losses in structured-credit trading.
Before that, the JPMorgan May $41 put options -- the weeklies that expire today -- saw 13,843 contracts trade. Prior open interest was just 4,370 contracts, so this was nearly three times the prior open interest.
This morning, open interest in that strike came in at 7,100 contracts, nearly doubling. And according to ISE data, 65% of the transactions were done at the offer price, suggesting fresh buying.
The puts traded between $0.22 and $0.50 over the course of the day with the largest transaction being 500 at $0.35 per contract.
This morning, those puts were trading around $3.80 per contract.
Back-of-the-envelope math would indicate that if, for example, one trader accounted for 65% of that volume, the profit potential is somewhere in the $24 million range for that lucky fella.
Now I'm sure much of it was just normal trading ahead of today's weekly expiration, but it should be noted that above average volume that exceeded prior open interest also occurred in today's $41 puts, which jumped from $0.40 to around $2.90, as well as the $40 puts that expire next week.
I'm not saying anything untoward happened here, but this appears to be something more than simple hedging.
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