Buzz on the Street: The Bears Love Them Some Facebook!
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, August 13, 2012
T Report: Fuzzy Wuzzy Was a Bear
I was sitting inside on a rainy day in Maine this weekend with limited computer access, so I had some time to catch up on reading.
I read report after report that pointed out the Bear Case. The Demise of Europe, Hard Landing in China, and Fiscal Cliff dominated the analysis, roughly in that order.
I agree with a lot of the Bear case. I can see it. I can argue it, heck, since much of it is focused on the bond market, I think I could argue it better than most. The problem with the bear case isn't that it isn't compelling, just that it hasn't worked.
So what is wrong with the Bear Case?
For one, the bear case, in many instances is done with as much "fluff" as cheerleading bull arguments.
If Spain rolls 1 billion of debt, no new debt was created. Sometimes, the "debt on debt" argument is devolving into a rant. If a country can replace 4% average coupon debt with 2% average coupon, that is useful. It decreases current deficit. It reduces how much money has to be borrowed to pay interest. I'm not convinced this will happen, and I am concerned that the focus is on the short end, but average coupon does matter, access to cheap debt to roll old debt does matter. So this is one area where the bears are potentially too pessimistic.
Underestimating the impact of a Eurozone break-up. The fear of re-denomination risk impacting Europe. The economies are slowing, on top of everything else, but because the uncertainty is huge. This isn't uncertainty about an incredibly complex healthcare bill, or whether some percent of the population will have to pay some higher percentage of tax on a percentage of their income. This is, OMG, what am I going to do with Pasetas uncertainty! Or, wow, how the heck do I break this contract with Germany now that they have moved to the Deutschemark.
While it was common to underestimate the impact of a break-up, I think many overestimate how hard it is to see some return to growth. This is where it gets more interesting for the bulls. If Europe can spur growth, through stimulus and cheap money, then China and the U.S. will benefit as well. Europe is a big reason for Chinese weakness. A return to growth in Europe would filter to the rest of the world. Again, this isn't easy, but it is not impossible either,
Which leads me to the last question. Suddenly it is common knowledge that QE doesn't work. That it has diminishing returns. In many ways I agree, but in some ways I don't.
I don't think QE does much for the economy. The economy already has low rates and I see no evidence that QE boosts final demand, which is what is really needed. On the other hand, QE does cause asset inflation. Not all the money sits in t-bills, some moves out the curve, eventually finding its way into corporate bond risk or even equities.
QE2 was far less successful than QE1 in terms of boosting the markets and impacting the economy. That has lead to the conclusion that there are diminishing returns from QE. That ignores the fact that QE1 was far more aggressive than QE2. It is like comparing the NFL to the CFL - in theory the same sport, but not that similar. Also, many of the reports look at the percentage returns during QE. Percentage returns are misleading. The "wealth effect" to the extent it exists isn't based on percentages, but actual wealth. The key is to look at change in market value during the period. QE2, in market value change, was less disappointing than when looked at on a percentage change, and don't forget to take into account that QE2 wasn't as aggressive a program as QE1.
Operation Twist is a joke to me. Economists can talk about it, but the way we get asset inflation is new money pumping into the system - particularly at these rates. I never expected much from Operation Twist, so arguing that OT is another example of diminishing returns from Fed action is a waste of time. In fact, I would argue that LTRO, which occurred during OT, explains far more of stock price action that Operation Twist, but that is a level of complexity that is as hard to prove as it is easy to ignore in an attempt to diminish the impact of QE on the markets.
Which leads me to the final question of the bear case, where is Europe in terms of QE? While we may be contemplating QE3, it looks like Europe is heading to their version of QE1. LTRO was close to QE and that had a major impact. What impact would a true European QE and stimulus have? Europe may only be on QE1, so in spite of being jaded about the possible impact of further Fed QE, the same rationale may not apply.
I continue to fluctuate between being 50% and 25% long. I continue to look at S&P September 1,350 puts as a potential hedge, or outright short. I think that Europe, Banks, and CDS can outperform U.S., Industrials, and Bonds as too much "disconnection" has been priced in, and the areas that receive direct benefit have the most room to outperform.
I cut risk into the weekend, but will continue to buy when we sell off on headlines that to me are "expected' and part of the "process" and don't change anything. I have a 1,425 target on S&P that i think is absolute max for now. I will continue to look for signs that the market is too complacent (getting there but feels about balanced). I am constantly questioning my weak bull theory (I'm only 25%-50% long), but more often than not, the questioning has lead me to add risk rather than sell, or even get short.
A lot is going on. Europe has a tendency to disappoint. So many other reasons to be bearish, but for now I continue to think people are estimating what can be done, and will get back to figuring out what to do on a rainy day in Maine.
Volatility May Be on the Way
For the third consecutive day, there was a small change in the McClellan Oscillator.
Combined with an N/R 7 Week (the narrowest range in 7 weeks), this contraction in both the oscillator and the weekly range indicates an expansion.
Most assume that this consolidation will see price pop out to the upside of this consolidation, thereby ending the slithery summer sawtooth ascending channel and ushering in a change of the trendless market to something less whippy.
If we do go higher, it would also signify a change in character of the 3-Day Chart, the turn-downs and turn-ups of which have done a great job defining the highs and lows this summer.
However, it is just as likely that the contraction in range and the small change in the McClellan will resolve in a move to the downside. This is because last week saw time and price 'meet' or square out: August 7/8 aligns with 1407.
With this year's April highs 1 or 2 nice rally days away, the normal expectation would be for price to catapult there for a possible double-top.
However, I think the takeaway is if the S&P offsets last week's perfected square-out with authority, it could mean solidly higher prices than the early April 1422 peak.
A daily S&P shows that Friday was a little outside-up day.
The normal expectation would also be for upside continuation to start the week.
See the chart from this morning's Daily Market Report below.
However, trade below Friday's low will issue a little Reversal of a Reversal ( a Kaiser Soze).
Such a signal suggests a test of around 1380.
Click to enlarge
GameStop's Used Gadget Business Is Getting Very Interesting
Video-game retailer GameStop (GME) has fallen on hard times due to the industry slowdown and shift to digital, but watch out -- they are embarking upon a really interesting electronics strategy.
GameStop has been making a big move into a reseller of used gadgets, notably from Apple (AAPL), and it could pay off in a big way.
GameStop already has a successful used games business. If you walk into GameStop with games or hardware to sell, they offer you a lower price than you could otherwise get on, say eBay (EBAY) or Craig's List.
The result is huge margins -- over the past three years, GameStop has averaged a 46.6% gross margin in used game products.
If GameStop can get the same kind of margins in other electronics categories, it will find itself with a hugely-profitable business. Remember, Best Buy's (BBY) are in the low $20's.
However, there is one concern: while many people may be willing to forgo $15-$20 by selling a game to GameStop instead of using eBay/CL, that may not be true when it comes to something like an iPad, where the consumer would be giving up a lot more money by selling to GameStop.
All Hail the Bond King!!
Ok so Bill Gross may not have gotten them all right of late, but since he can still "be the market" (at least in some cases) it's at least worth knowing what he is saying. For example, he just tweeted the following: "The Fed is where bad bonds go to die. Today it was 10-years. Tomorrow 30-years. Stay short my friends." He probably means stay short duration, but DeMark indicators would also argue for shorting the 10's and 30's. On the 30yr continuous contract (US1) last Thursday's low was 147-10. The daily DeMark chart is on count 1 of a TDST Buy Setup and the only support is the target of a broken DeMark trend-line at 144-26. The weekly chart is on count 3 of a TDST Buy Setup.
With new corporate issuers finding buyers for tens of billions of bonds on a daily basis, big financials CDS collapsing tighter, Spanish and Italian bonds and CDS all for the better, and the 2yr swaps having set up camp at 20bps, it's not hard to envision a run to S&P 500 (SPX) 1422. If SPX 1422 gives way, the siren song of 2% interest for 30 yrs versus 0.25% of interest for a few months, can quickly morph into a complete shipwreck.ZN Levels and NQ Resistance
ZN (ten year futures) held onto WS1 at 133'025, not quite able to push down to 132'290 before lunch, although it could still happen if equities make news highs after lunch. But the gig could be up now, with a 200k contract flush first hour for ZN. If we get a bid now (watch 133'050), it validates the NQ (NDX futures) high at 2743 right under LVN.
ES (SPX futures) also posted the highest 1st hour volume since 8/3. Is this a breakout from recent range or pros getting out of the 8 day straight up? We need another hour to figure that out, as we head into contra lunch. ZN resistance is now at 133'125 and 133'145.
Key support level for the markets is NQ 2730, the June channel breakout.
Are the TBT's Sending Us a Message?
In a stealth sort of way, the ProShares UltraShort 20+ Year Treasury (TBT) climbed to a marginal new high today at 15.89 (so far) off of the July 25 all-time low at 14.08, which represented a 1.38% low print in 10-Year US Treasury YIELD!
Why exactly has the TBT been climbing lately? Put another way, why NOW might the longer end of the US Treasury bond market iShares Barclays 20+ Year Treasury Bond (TLT) be making a TOP?
Yes, we are all aware that the treasury market is a very crowded, dangerous trade, filled with parked funds from overseas investors, and stuffed with former stock-market participants who have given up on equities.
But these sentiment gauges, and the miniscule return, have not, and probably are not, the reason why the long end of the curve could be forming a top.
My "guess," IS that EITHER the US economy is getting stronger (huh?), OR just the opposite-- the economy is getting MUCH WEAKER, which will require another round of QE in the form of mortgage buying, NOT TREASURY PURCHASES.
Could it be that at these levels of prices and yield, that there is NO OTHER DEMAND for Treasuries-Other than the Fed? If there is a grain of truth to my supposition, then increasingly, the Fed will focus on the mortgage-housing market relationship going forward, while allowing longer-term interest rates to climb, thereby "helping" the banking sector, savers, et al.
Whatever the case, the TBT's MUST hurdle and sustain above 16.15/25 to initiate some serious upside traction.
Click to enlarge
Wednesday, August 15, 2012
The Losers' Game
So far in 2012, shorting is a loser's game. For July, shorts in the Dow Jones Credit Suiise Hedge Fund Index lost -0.44% while the S&P 500 gained 1.26%. YTD, shorts are now down -10.52%. With the exception of last week, we have found shorts are staying with short positions they are profiting in and refusing to cover.
Melt-up possibilities still remain strong with shorts sticking to their guns. Examples of stocks where shorts remain entrenched with profits include among others ISRG, GWW, CRM, CL, NKE and VMW.
Interesting that all are higher today, so could a squeeze in these names be in the offing?
Gold, Not Gutted, Can Glisten Again
...but it must at least close today in positive territory...
If you've been keeping up-to-date with my Daily Commodity comments, then you knew that Monday's pattern had projected a steep drop for today.
And you would have been surprised to see the drop already yesterday, an early $17-22 plunge.
Perhaps that meant the pattern intended to drop even more dramatically today. Or, it meant the selling had gotten ahead of itself. That latter scenario would have reflected impatient sellers. And an impending bottom.
Wednesday's portion of the drop is tracking the precise bottoming pattern that I described after yesterday's drop -- probe under Tuesday's low (1593.60 basis Dec), and then recover back above Tuesday's close (1601.90).
In fact, yesterday afternoon's 1606.30 high has been probed by more than $2.
Now that yesterday afternoon's high has been probed, closing above it would be more reliably bullish than only closing positive. And closing negative could serve as a sell signal, having fully expended buying pressure without gaining traction for the effort.
"LIKE" at $19
While I'm gonna be away from the fray tomorrow and Friday, I will be keeping an eye on Facebook (FB). While everyone is looking at $20 -- which is where I initiated a 1/2 position a few weeks ago before flipping out the shares in the $22+ range -- the real level of lore is $19, which is a 50% retracement of the entire public price cycle.
Should it get there, I will buy some and hold it for a trade (likely with a $2 stop). Just 'putting it out there' lest I'm in a volcano or on a glacier when when/if it happens to trade there.
Thursday, August 16, 2012
Today is quite the interesting day. The Russell 2000 (RUT) is lower, while the Dow (INDU), S&P 500 (SPX) and NDX are all higher. In FX, the EURUSD is higher, following along with the equity rally for a change, which has been the opposite of late.
Ya'll see the NASTY reversal in natty after the inventory report?
Treasury rates are lower and spreads are tightening along with it. However, protection is tightening as well (divergence) with IG18 at 0.5bps tighter and HY18 higher. We were weak before the open in rates, but the negative econ data pushed it back higher. It still seems that the momentum trade is for higher rates here.
Cisco (CSCO) is on a tear up 8% after the massive boost to its dividend last night, putting it at an indicated yield of 3% (at the current price).
Facebook Trading Volume
I just wanted to quickly chime in on Facebook (FB) trading volume -- as of 3:17 p.m., 141 million shares have traded. That makes today (lock-up expiration day) the third busiest day for Facebook shares behind its first two days of trading on May 18 and 21.
Thus, either insiders are chucking their shares onto the market -- or the market just perceives that to be the case. I've been thinking hard about getting long Facebook via short put spreads, but I'd like to see a decent close today and stabilization tomorrow before going that route.
Gold and Silver to Be Watched Closely
While I am working on a piece for the general population detailing the basis for the following analysis, I thought I'd give Buzz subscribers an earlier heads up. Last week we wrote that gold and silver would break a key (Not Final) resistance. We wrote 1630 gold and 28.30 silver, which turned out to be precisely where both metals failed. With today's gains, we are again within striking distance of those levels. Be on alert for a quick pop higher if we exceed those prices.
PLEASE BE ADVISED: Gold's major downtrend line from its August 2011 peak comes in around 1650-1658, which is also where the 300-day moving average sits. This level, not 1630 is the one that needs to be breached in order to begin thinking that this consolidation has finally ended. Silver's major resistance line from its peak of 49.80 is around 29.88-30.40. Both metals are expected to fill those gaps, likely quickly, if 1630/28.30 are surpassed.
Friday, August 17, 2012
What Lies Ahead for the S&P?
ES (SP futures) set a 52-week high yesterday, ahead of today's options expiration, and with Commercial traders short; this is a rare event, having occurred only seven times since the contract began trading. Of the 7 prior occurrences the contract traded down 6 times by an average of -2.1% over the next 6 trading days. A repeat decline will put the contract in the 1388 area by late next week. Here is an historical look at SP's performance 7-14 trading days after the contract recorded a 52-week high during the month of August, statistically bearish.
Click to enlarge
Beware the Late Summer Rally
I find Professor Dorn's last post very interesting.
While we may see a nominal new high over the 1422 April high in an echo of pattern in October 2007, persistent rallies into late August have marked major bull traps.
You can already hear the 'new post crisis closing high' cheers out there, but as a friend pointed out to me yesterday, we are a Gannish 180 weeks from the March '09 low.
Has the rally that has defied a Fiscal Cliff in the U.S. and promises over plans in Europe brought market sentiment full circle from March '09?
Is it clear sailing now, opposite and 180 degrees from those dire straits in '09?
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