Buzz on the Street: Battle of the Euro-Bulge
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, June 18, 2012
Emerging Markets (EEM) Technical Review & Likely Targets
Back in March, the iShares Emerging Markets (EEM) was hinting at trouble, trending lower in a grinding fashion... then came the trend line break and gap lower in May. Needless to say, the ETF was stung pretty good.
Now with a tradable bottom in place and rally mode "on," the etf is looking up again. Two logical magnets (targets) include the aforementioned gap lower and trend line break. See annotated chart below.
Click to enlarge
Option Activity: Greek Unwind
The big Greek news ended up being a bit of snooze and implied volatility based on the VIX is off over 8% at 19.40, its lowest level in over six weeks. Never underestimate the post-event premium crush PEPC whether it be earnings, economic data or an election… and sometimes even an FDA announcement. But it should be noted that just as the "crisis" has been kicked down the road, so have option premiums as VIX futures show a steepening of the skew in which later dated months are holding premiums better than the front.
So we have another set of "drop dead" dates to look forward to. Put/call reading are holding up on the protective side with the equity only running 0.75 and the p/c on index products a very healthy 1.75. But a small drilldown looking at the ISE call/put, which only measures opening or new transactions, is more neutral suggesting that a lot of the volume is closing or unwinding of positions post-Greek election which jibes with the decline in volatility.
In individual names, Cerner (CERN), an electronic health-care IT company, is popping nearly 4% to a new 52-week high of $86 on no apparent news. But the option action is following suit. The July $90 call has traded over 2,600 contracts, more than 4x the strike's prior open interest and some 2x the total daily option volume usually recorded in the name. This has been done mostly in small lots of 20 contracts or less with 75% occurring on the offer, suggesting new buying from retail customers. Smell like a recommendation from a newsletter or advisory service jumping on the breakout in share price. With a $14 billion market cap, it would be a major buyout, so I don't think that is what is occurring.
For the second day in row Level 3 Communication (LVLT) is seeing above-average volume in its July $22 calls. On Friday, over 3,200 contracts traded and nearly all of it translated into new open interest. Today, some 2,100 contracts have traded. But before taking this as a bullish sign, my feeling is this is simply a long overwriting, or creation of a covered call position. Shares of LVLT had been trending lower since April and finally got a pop Friday. The option trades have come in big blocks of 1,500 to 2,000 contract transactions suggesting an institution/hedge fund at work. And the trades have taken place at the bid, suggesting selling.
For example, today the bulk of the volume was a 1,932 block sold at $1.25, it was the first trade of the day, done nearly an hour after the opening just when shares were peeling of the opening highs, and was not offset by any stock or another option trade. I don't think someone would sell these naked so I think it's an overwrite to generate some income.
Spain = More Reflation
WIth the Greek elections now over, markets are turning their attention to Spain, which has experienced a sharp jump in yields, crossing the 7% level which sent risk sentiment into a tailspin when Italy underwent the same shift in early November last year.
However, note that so far the reaction in equities appears muted, and that bond yields (TLT) are NOT dropping in a way signaling panic. This is perplexing, unless one considers that the market may be anticipating further debt monetization.
The market may be at a point now where the worse it gets in Europe, the stronger the monetary response will be to force reflation back into the system. This alone may explain why the reaction in Treasuries is relatively minor so far today, and likely also explains why TIPS and nominal bonds are performing in-line in what would otherwise be considered a strong deflation pulse and a negative message from Spanish bond yields.
Our ATAC models flipped the switch out of bonds and into stocks at the end of last week, and we're looking towards further confirmation in the days ahead that inflation expectations have returned.
Looks like the "Spring Switch" got flipped just in time...
Tuesday, June 19, 2012
Un Momento Por Favor..
Stocks have enjoyed a nice move higher in price today. However, the volume numbers are very light and the major indices are running into / testing resistance. I noted yesterday that I felt the current up move was corrective in nature – nothing today has changed my opinion (yet). The reasons given for today's rally include optimism over what the FOMC may unleash with tomorrow's announcement as well as hope / optimism over more potential European solutions. Caveat emptor!
Key resistance levels (max upside targets for this move based on my read of the technicals):
Dow Jones 12,930
Russell 2000 783.56
Currencies finally joined in the fun today as the euro and the Aussie Dollar saw some nice gains versus the U.S. Dollar and Japanese Yen. In other words, the risk trade was "on" even in the currency markets. The Aussie Dollar crosses are facing resistance right at current (3pm Tuesday) levels – so pay attention for possible breakouts or reversals there.
In commodity land, everything is flying higher today –except gold and silver. That is counterintuitive since the euro is having such a good day and the US Dollar index is lower today. There is talk that the FOMC may be raising their inflation target – hence the lift in inflation-linked commodities (like food components, etc.). If the Fed disappoints "the mob", then all the pretty green numbers will be pretty red numbers tomorrow.
Bond yields also are sending better messages today as they are higher when they're supposed to be. However, they are by no means exploding higher. Junk bond prices are higher by 1% today – which is a nice confirmation for the risk bulls.
The last minutes of trading today will be pretty important. If the volume was higher in the equity space, I would place even more importance on today's close. The fact of the matter is that big money is only partially participating in the fun today. That pool of money is clearly on Fed watch and will keep some powder dry until after the announcement tomorrow afternoon.
Through a Pure Technical Lens
Through a pure technical lens, the recent rally is in many ways comparable to the June 2011 rally. In the face of the news events, it's important to keep perspective. Markets do not rise or fall based on election results or any other kind of news event. Nor do they move because of the actions or potential actions of monetary and fiscal authorities. Any of these can have only a short to intermediate term influence on market prices. Ultimately market prices move based on supply and demand.
Like June 2011, there can be a short-term rally, but when the supply/demand equation is heavily tilted to the supply side, such rallies are selling opportunities. Yes, under these circumstances intervention and news can create volatility that would not otherwise have occurred. Global asset markets have been in a major bear phase since the first quarter of 2011. The higher 2012 highs in Dow and S&P 500 were unconfirmed by any other market. At this time, many global markets are far closer to taking out their 2011 lows than they are to making new 2012 highs, with some within reach of 2009 lows.
While there is overwhelming evidence that risk assets are 16 months into a bear market, there is virtually no recognition of this. Instead, broad market psychology assumes that the Fed and global monetary authorities will "reflate" asset prices in much the same way as was seen in 2010 and 2011. The gap between the reality that the markets are in a qualitatively different condition at this time and the ability of monetary magic to affect the situation is a classic setup for a significant market failure. RSI, MACD, Stochastics and ADX are perhaps the most commonly used indicators. All of them made weekly highs at the February 2011 SPX top and subsequently diverged from market price at the May and July 2011 market highs as well as at the 2012 top.
It's quite interesting or even alarming that unanimous confirmation of the most common of technical signals given by the most commonly used indicators has gone completely unrecognized. I guess we were all too busy waiting for Greece election results to notice. This current leg higher will most likely be our last and I'm bullish for a trade. The duration and distance of the move will be near impossible to peg. New 2012 highs carry high probability. The ensuing decline that I foresee (6-8 months out) sets up an opportunity for investors to play Warren Buffet, as Todd Harrison and Paul Tudor Jones have previously shared, and walk away from their terminals to enjoy a multi year rally. Value is already being established in numerous large cap issues. I stated in mid April that the coming weeks would be the most important for the market since the March 2009 bottom and the market collapsed shortly there after. We are now at a juncture of working off oversold conditions in what is termed a B wave rally. The top of this juncture will start the final C wave low, this will be a very painful experience for the investment community. Prior to this down draft commencing my target for the SPX is 1440 and if broken a final move towards 1586.
From the German Perspective
Ken Wolff & Shawn Wolff
Being a long-time resident of Germany, I get a lot of questions about how the German people perceive the EU crisis. How do they feel about the sometimes-quite-nasty pressure from all sides, to take on the debt of their less-productive and less-fiscally-responsible neighbors? Are they outraged? Are they resentful?
It's interesting because I'm usually reading the news in German while most of you are still sleeping. I hear about the day's events and latest developments, and come away thinking that this is a very complicated problem that will take a lot of time, discussion, and compromises to get through, but it will all work out. It's really only when I turn on the US news, that I start to panic about the EU. My impression is that the Americans are more freaked out about what is going on over here, than the people over here. And I have to ask myself, why is that?
Why aren't the Germans freaking out? Clearly, it's the German taxpayers who will be footing the bill while their neighbors keep piling on debt, spending more money, asking for bailouts to prop up their systems and keep up their standards of living, despite the fact that they really aren't producing much. In the midst of this crisis, France recently lowered their retirement age to 60, while the hard-working thrifty Germans increased theirs to 67. Why aren't I hearing more complaints? Why is there no sense of urgency or panic here?
After giving it a lot of thought, here are the five reasons I came up with:
1. A Resignation That Bailouts Are Better In The Long Run
The German people do have a sense of what the costs would be if the euro falls apart. I have seen estimations of the costs of bailouts vs. the costs of going back to the D-Mark several times in German newspapers. They always tally the bailouts as the cheaper option by far, and most German people seem to accept that as the lesser of two evils.
They also have an understanding that by attaching themselves to the weaker countries, it brings the value of the EUR down below where a Deutsche Mark alone would stand. As the second largest export nation in the world, they are benefitting greatly from a weaker euro, and they know it. So saving the euro is generally perceived as being in their best interest.
2. The Media
There's a big difference in the way the media works here. News in the US is a product, meant to sell advertising. There's a financial investment in making it exciting enough to draw in viewers, and there's a lot of competition for those consumers. We also have an information overload in our modern society, and people are overwhelmed. To make the product more enticing and easier to digest, the US media seems to have gotten away from just reporting the information, and gotten more into interpreting and opining about the information.
The way that news is presented in Germany is much different. On private broadcasting stations the news is very short, interspersed with a few entertainment stories. There are no political campaign commercials. Almost all political or economic discussion and talk shows, and most of the news, comes from public broadcasting channels. Each household here is required by law to pay 54 EUR every three months to public broadcasting. So those stations, who are reporting the bulk of the news, have a guaranteed income, no commercials, and no financial interest in selling anything.
As a result, the news is really dry and objective, and political and economic discussions are balanced, because they invite a variety of people from both sides. There is no financial interest in creating controversy or hysteria. You just get the facts. It's terribly boring. So there's no one really fanning the flames of discontentment.
3. Inherited Shame
Generations of Germans have grown up with a cloud of shame hanging over their heads since WW2 and the Holocaust. Even though it was decades ago, and had nothing to do with the current generation, they have grown up very sensitized to that, with a weight of responsibility. They have a deep need to prove themselves to be anti-violent, tolerant, and helpful to their neighbors.
They also do not feel that they have the right to be at all nationalistic. When the World Cup was hosted here a few years ago, it was the first time I had ever seen Germans raise flags or dare any sense of open national pride. And their pride was more about showing the world that they could be good hosts. They do not sing the national anthem at every soccer game here, nor do they have flags up in their schools that they pledge allegiance to. This naturally extends to their politics. While becoming an economic giant, they have tried to remain neutral and inconspicuous in the political arena – up until now, when their economic strength has forced them into a leadership role. They are not entirely comfortable in that role though, and it makes them far more loyal to the EU.
4. Slow Bureaucracy
Angela Merkel is getting a lot of attention lately, even hailed as the unofficial prime minister of Europe. She has a calm, methodical demeanour and a doctorate in quantum chemistry, so one might assume that's the reason she seems to do the bare minimum to correct things in a painfully slow, careful manner. But this slow, methodical, cautious, bureaucratic way of doing things is not just an Angela Merkel thing - it's a German thing.
You need a license to get a license to blow your nose over here. Nothing happens fast. The German people save their money, buy quality, don't like credit, pay in cash most of the time, are very thrifty, very conservative and hard-working. They are a bit dry and serious, and do things carefully. And they love rules. Some clichés really do hold true.
Angela Merkel's actions are really very typical German and she is part of a coalition government that does things slowly, forced into cooperation through a lot of discussion. Even if she loses power in the next election, the two remaining largest parties, SPD and Greens, while leaning a bit further left, have very similar basic mentalities. They both agree with her about austerity measures, they simply want growth plans added, to be funded by a European financial transation tax. Nothing much would change, because that is the German mentality.
The US and financial markets seem to see this as a crisis of confidence that can be fixed with a wave of Angela's wand, but that is not the way the German mind works. They believe in small careful steps. They believe that quality will always win out in the end, and that it is worth the sacrifice of a lot of hard work and frugality. They just conquered the task of reuniting two countries, overcoming enormous obstacles, so this EU crisis doesn't seem insurmountable to them.
6. No Immediate Crisis Here
Last but certainly not least, the German people are not yet freaking out because everything is still ok here. Unemployment is low, exports are high, and there is still no pressing problem here for most German people. The crisis hasn't become part of our everyday existence and as long as something is not affecting you personally, it seems very far away. The point when that will surely change is when the issues start to hit the German people in the pocketbook, and by then it might be too late. I don't know when that will happen, but I will certainly keep you posted.
Wednesday, June 20, 2012
Another Day Debating What the Fed Will Do
While I wish for the day when the millions of market participants set the price of money based on the natural supply of it and demand for it, instead of relying on the chief arbiter of economic growth, employment, inflation and asset prices -- the Federal Reserve -- here we are on yet another day debating what the Fed will do. Putting aside what they should do, what they will do is 'something' because the last thing they did is expiring.
Operation smother the yield curve, as I call it, will likely shift to the MBS market to close the spread between it and treasuries. Twisting the curve is not free, though as the Fed further floods their balance sheet with more interest rate sensitive, longer term securities, a noose if they need to reverse policy in the next few years. If twisting is all we get, if at all, stocks are a sell on the news because I believe the only thing keeping this rally alive are the hopes and wishes for bailout/easing help. It is certainly not on the outlook for global economic growth.
Unimpressive Recovery in Oil
All of the action off of the June 4 low at 81.21 in nearby NYMEX Oil futures has carved out a sideways congestion or coil-type formation. This is located in the lowest 20% of the entire decline from the $110.55 high back on March 1.
The fact that nearby oil has been unable to recover more than 20% of its decline during a three-week period not only is remarkable, it is also a sign of acute weakness from a commodity that just might be suffering from both overproduction and slackening demand.
Unless and until nearby NYMEX Oil claws its way above 87.00, my work argues for a breakdown that presses prices to new bear phase lows projected into the 79.00-77.00 area next.
ETF traders may want to watch the U.S. Oil Fund ETF (USO).
Click to enlarge
I had originally suspected that the Fed may adjust the percentage of purchases, these remain unchanged.
- 32% in the 6-8 year maturity
- 32% in the 8-10 year maturity
- 4% in the 10-20 year maturity
- 29% in the 20-30 year maturity
Previously, the monthly purchases totaled 44.44b (400b over 9 months). The new purchases would equate to 44.5b (267b over 6 months). So the 'flow' of purchases is the same. The last FOMC meeting of the year is December 11-12, this would be the time to "reload the bazooka", persay.
The Treasury market was obviously expecting more Twist or purchases than we got. Yields in the long-end are taking off as I type.
We also have another headline out from Germany that is helping the green action across the board. German Chancellor Merkel has said that bond buying in the European bailout funds is a possibility. This was somewhat expected, but positive nonetheless.
Thursday, June 21, 2012
Old Country Randoms
Good morning Minyans. I have just spent a glorious week on the "important stuff" with family and friends in Italy, but I always kept half an eye and two ears on what might be relevant to the financial world. Here are some very random thoughts:
The business atmosphere did not feel nearly as dire as I had heard. Deep discounts are pervasive but non-touristy restaurants on a weeknight had a steady stream of customers.
Chatting about the economic mood of the country there was a very consistent theme: folks are very worried about the financial shape of the government, but feel fine about their own financial condition. With vacation planning in full swing (Italians start late) "stay-cations" are not being broadly considered.
Out of left field at least for me - and perhaps somewhat biased by the fact that many of my friends work in fairly high levels of the armed forces - there is EXTREME concern about the situation in Syria. Drawing on their knowledge of military history, more than once these guys made coherent arguments on how a miscalculation in Syria might quickly mushroom into a conflict involving major powers.
In Italy you can buy and fill up a natgas powered car (many are gasoline-natgas hybrids with two distinct tanks) just easily as you can service a gasoline fueled vehicle. Can the US really be so sclerotic about this obvious technology?
From the more open minded types, the concept of a culturally integrated European Union gets the same respect as a Rodney Dangerfield joke. Others are outright hostile about the idea. To a unison no one wants a collapse of the Euro currency, but many suggest it was a horrible idea at the start. If I had to reconcile these contradictions in one sentence I'd say Italy feels trapped in the EU.
There is general admiration for Monti's willingness to take on a thankless task, but both the left and the right are getting restless over not being able to feed at the trough. Internally, the old guard of the major political parties - the PdL and the Pd - is under assault by the fringes of their respective ends, under the leadership of young non-politicians. Uuhmm, where have I seen that movie before? Should make for an interesting election season early next year, and a difficult evolution of financial policies, particularly if anarchists attempt to step into the developing political vacuum.
I already miss the food.
When Italians make jokes about France's proposed "tax the rich" plan you know Hollande has gone flying over the deep end. Small consolation however for the 80% of Italians who own real property and who made the first payment under the new property tax scheme, which pretty much doubled the rate overnight.
If Italy wins the European soccer championship, the collapse of the world financial system won't make the 4th page of the newspaper for weeks, especially if we get to beat France in the process.
Walking on the same cobble stones where centurions tracked more than 2000 years ago still gives me the goosebumps. Too bad around 400 A.D. some emperor decided he could forge wealth by substituting gold coins with gold-plated copper ones. The rest truly became history for arguably the greatest empire ever. That obviously could never happen to the US because as we all know "this time is different".
Looking to go long in size: stracciatella di bufala (the stage in the making of mozzarella just after it changes from being "burrata" but before it becomes mozzarella), with sweet red tomatoes, olive oil and basil, followed by a plate of "pasta a la Norma", a tomato sauce with sautéed zucchine and eggplant, fresh sardines, and salty ricotta cheese.
Europe Takes Out the Three P's
Interesting stuff -- in the span of less than a day, three major consumer products companies, all of whom have names starting with the letter 'P' (coincidence?), Procter & Gamble (PG), Phillip Morris (PM), and Pepsi (PEP) all reported earnings drags from the weak euro -- a topic we've covered in the Buzz.
As we head into earnings season next month, it makes sense to factor the double-euro whammy (weakened business conditions in Europe, and the currency-translation issue) into your trading/investing outlook.
Check out the chart below. (Bars are SPX, Blue Line is EUR/USD)
While the politicians publicly rally support for a strong dollar policy, it's obvious that what's good for the Euro is good for U.S. stocks. This makes sense as a weaker dollar makes our goods more attractive to buyers in Europe.
Note, this year's been something of a divergence as the Euro's down 3% while the S&P 500 has risen by 8%.
Could the weak euro be a predictor of a summer swoon? Interesting to see how the action plays out...
Click to enlarge
Prudent Traders Are Not Upset With Today's Action!
The markets tried to hang in there but got a 1-2 punch from the Philly Fed and then the Goldman (GS) "sell note", which were too much to absorb!
Some guys who sold into the SPX 1357-1363 area are very happy about this action. Some that also shorted that area after a 90-handle move off the lows got paid for using that area to short against.
You never know what happens after a strategy gets triggered, but if you follow a set of rules, time and time again you will book money and stay safe. Yes, you can leave money on the table, but you don't go poor or blow up that way.
Today we blew through the 25% Fibonacci retracement zone at SPY 133.98.
So far, we paused/ bounced off of the 38.2% zone which is 132.79. Short-term players should cover shorts or a portion of hedges.
I'm not sure, based on the speed we hit this zone and the pressure on commodities, if this is the "buyable zone".
I will wait!
The 50% Fibonacci zone is 131.72. The market can still resume if we hold here, but a lot slower.
The 62.8% is 130.69. Last line of defense and under this the test of 1266 lows becomes a magnet.
It's hard to get upside follow through on hopes of more stimulus and money printing. You actually need good news and growth.
The system needs a lot more time to fix and hard choices must be made.
Friday, June 22, 2012
An article on the Spanish Prime Minster, Rajoy's Blown Credibility Puts Spain at Risk of Bailout, caught my eye as the European crisis enters perhaps the most important week yet. On June 28, leaders of the 27 member countries of the European Union will meet for a two-day gathering.
As a trader, I'm less concerned with the destination than I am with the path I take to get there (although as a father, I'm plenty concerned with the destination as well) and I've flipped my stylistic approach-trading from the long side vs. the short side-a few times this year.
I traded with a bullish bent from December until S&P 1360 (and proceeded to get squeezed up to S&P 1420) until the tide turned and I rode the market lower through May (or, through most of May until a situation beyond my control dictated that I flatten risk).
Since that time, I've traded surgically-situation specific-with tight risk parameters and an open mind. I legged in and out of a long Apple (AAPL)-short Google (GOOG) pairs trade a few times and more recently, built a decent size long which caught an upside phase before paring risk into this week's FOMC meeting (I was openly wary of a "sell the news" reaction).
We'll continue to weigh the fray as they say, one step at a time. As it stands, the banks -- and the heels of the Johnny-come-lately Moody's downgrade -- are downgrading Moody's by their reaction. JP Morgan (JPM) -- which I didn't buy because I've been busy writing all morning -- is out-performing and that works higher (with a trailing stop) for those inclined.
For my part, I'm gonna watch for a bit longer and bide some time. Singles and doubles add up and I'm not mandated to take a cut until I see an advantageous entry risk-reward.
As always, I hope this finds you well.
Bear Claws For All
If we go red today, will bulls put keep their wallets in their hip pockets? And will we see accelerated momentum down to the inverse Right Shoulder near 1307, paving the way for 1292 as shown in the daily S&P chart from this morning's Daily Market Report? (see below)
What's 180 degrees down from this weeks high?
1291, which of course ties to the initial low which ties to the major swing high in late October 2011.
Click to enlarge
Greece vs. German Goes To a New Level
The conflict between Germany and Greece will go to an entirely new level today.
It won't happen when Merkel, Hollande, Monti, and Rajoy meet. It won't happen when Greece forms its government.
Instead, it will happen on the pitch when Greece and Germany face off in the Euro 2012 Championship.
In an interesting twist for investors, yesterday's victory by Portugal sets up the PIGS as the possible semifinalists. A Greece upset of Germany, followed by wins this weekend by Spain and Italy, would leave the four weak sisters of the continent vying for what is the second most important sporting Championship in Europe, trailing only the World Cup.
Perhaps, the PIGS soccer prowess can be used as collateral for sovereign debts?
Long Spain (the football team) to win it all.
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