Buzz on the Street: Oh, What a Feeling, We're Dancing on the Debt Ceiling
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Monday, September 30, 2013
I am ejecting my index buys from last week for about a 1.2% loss on the position. It's never fun, but I keep reminding myself that I am held to the "prudent man rule" when what we are dealing with at present is anything but prudent. This takes the portfolio back to just under 50% long. Stops are to be honored, even when insanity is ruling the markets. As a good friend of mine says, "You can always buy them back." I hate taking losses, but I gotta do what I gotta do.
Observations From the Front
The specter of a government shutdown is the only thing being discussed right now. It sounds pretty serious, but is it?
Considering 1) any shutdown would be short-lived (politicians want to get paid and ultimately re-elected) and 2) the numbers being bandied about (1.4% drag on Q4 GDP) are de minimis in the grand scheme of QE-finity, one has to wonder if this is truly the catalyst or a convenient excuse for a long-overdue 10% correction.
The one caveat I would offer on the historical perspective being trotted out on TV is that the S&P (INDEXSP:.INX) is up 150% since the March 2009 low and trading near an all-time high. Further, given the (cough) assistance from the Federal Reserve, one could argue there is a sizable disconnect between stock prices and the level of economic activity. I'm in that camp (did you know that?) but I respect the potential for performance anxiety into year-end.
Thus far, the retreat from the no-taper euphoria has been extremely orderly if not outright begrudging. That's either very bullish (in a self-fulfilling way) or massively bearish (from a denial standpoint); I'll tell you in 10%. In the meantime, S&P 1680 is the technical toggle into today's close, for those looking to take our journey one stair-step at a time; and yes, KBW Bank Index (INDEXDJX:BKX) 62 (August lows) is holding as well, at least for the time being.
I can't help but wonder what Kim Kardashian is doing...
Fare ye well into the bell and have a mindful night.
Senate Rejects House Spending Plan
To nobody's surprise, the Senate rejected the House's latest continuing resolution (CR) legislation.
CNBC's Washington DC reporter made a good point: The Senate's CR is already "compromise" legislation. Both the Senate and the House passed budgets months ago, but they haven't negotiated the differences. The CR is necessary because the negotiation hasn't happened.
The Senate compromised to write the CR to the sequester budget levels instead of the higher levels implied by the House/Senate budgets. House Speaker Boehner's minority coalition partner (the Tea Party) is asking for more, obviously. This isn't particularly actionable from an investment standpoint, but interesting to political geeks nonetheless.
I'm guessing the Tea Party believes a weekend's worth of media stories about the launch of PPACA ("Obamacare") exchanges will only strengthen their negotiating position. I'd put odds the shutdown will last into next week at about 50-50 -- higher odds than I would have given late last week.
The Death Star Is Fired, and Wonky Technicals
The Fed has been conducting fixed-rate reverse repo operations since last Monday. The operations are eligible to 139 tri-party reverse repo counterparties which include money market mutual funds, GSEs, banks, and the primary dealers. Last Friday, the maximum bid allowed was raised to $1b, theoretically meaning that $139b in overnight money could be sucked out per day at 1bps. On Friday, the day's total jumped to $16.6b and today it skyrocketed to $58.2b. Coincidentally, the Fed Funds rate dropped to 1bps from the 9bps average over the last 5 months. It's very possible the large takedown and big drop in the FF rate is due to quarter end, as that is very atypical activity.
Conspiracy theorists might say that this would directly effect other markets because the largest market makers -- primary dealers -- would have a lot less cash available. My honest answer? General collateral rates were up this morning to 10bps from 6bps, so I think the excess collateral is having the desired effect.
CRT Capital is said to be negotiating a merger with Pierpont Securities due to the large drop in fixed-income trading volumes, according to Bloomberg. The merger is very concerning because CRT has been voted #1 by institutional investors for interest-rate strategy for the last 7 years straight. This activity follows up on Jefferies' big miss due to falling fixed income volumes and warnings from Deutsche Bank (NYSE:DB), Citi (NYSE:C), and UBS (NYSE:UBS) that fixed-income revenue would be much lighter.
This morning, the SPX stopped exactly at the 40 dma, which is acting as support. Usually, when the slope of the 40 dma is horizontal like this, when price breaks through like it did on July 7, it is usually a very strong move and lasting move. On September 10, we broke through the 40 dma from underneath.
I went back through the last 14 instances in the last 8 years when a break has occurred to determine how strong it is on a time basis. Of the 14 instances, the shortest time it remained below that price (on breaking it from above for example) was 2 weeks. The longest time (other than never) was 6 months. The average duration was 2.85 months. I removed the 3 instances from 2008 because prices didn't recover for years and distorted the set.
I offer the above info with the caveat that I'm still avoiding equities and have a "not bullish" view on the market.
Tuesday, October 1, 2013
Putting the Apple Pieces Together
Yesterday, we showed a Square of 9 and bar chart of Apple (NASDAQ:AAPL) tying two concepts together: a potential square-out combined with a Plus-One/Minus-Two setup.
See the Square of 9 Wheel and the AAPL bar chart below.
Specifically, 90 degrees in price down from the last pivot high at 496, which itself was a time/price square-out as 496 aligns with September 23.
In addition, a pullback to 474 put AAPL in the Plus-One/Minus-Two buy position.
Why? Because the 3-Day Chart is pointing up and yesterday AAPL satisfied the Minus-Two part of the strategy by carving out two consecutive lower daily lows.
This all played out as AAPL tested its 50 dma.
Putting the pieces together, a nice risk-to-reward buy setup.
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An Interesting Possible Sell Signal based Upon S&P Momentum
I just performed an analysis of S&P 500 total returns, looking at rolling averages of total returns over five and ten-year periods.
I discovered an interesting result.
Since 1934, In years when the five-year rolling average of S&P returns is below the ten-year rolling average, the market tends to do better the following year. .
In these 41 instances, the market averaged a return of 15.1% the next year.
In the 37 instances the 5-year average was above the 10-year average, the market returned just 8.7% on average.
Interestingly enough, with the S&P up 20.2% year-to-date, the 5-year is up to 16.0% (as calculated as the average of the year-to-date performance with the last four full years), while the 10-year has dropped to 8%.
That spread of 8% of in the range of recent market tops. In 2007, there was a 5.7% spread. In 1999, it was 9.7%.
However, this can't really be considered a rule as there have been instances where the 5-year was above the 10-year for extended periods of time (like late 70s to early 80s).
Mathematically, when a shorter-range moving average moves above a longer-term one, it's because the most recent numbers are large enough to skew the average high. And that makes sense with the S&P up 20.2% year-to-date after being up 16% last year, and as 2003's +26.7% moves out of the 10-year average.
NQ (NDX futures) leads the pack today, breaking above the 9/20 VAH of 3234 and now trading above the year's high of 3241.50. In a little over 24 hours, the index made an impressive trip from weekly S2 (to the tick) at 3178.25 to weekly R1 at 3243. The high so far is 3244; machines are truly in control throughout this entire process, setting the boundaries. Quite a run given the relatively modest internals of the broader market after yesterday's opening trashing. A close above 3241.50 would most likely cement a run for NASDAQ-100 (INDEXNASDAQ:NDX) to 3280, 61.8% of the 2000/2002 bear market.
Trouble would only start on a run back below 3234. The volume pattern is suggesting some exhaustion. Once we get past this noon bloom, we will get a better idea how the close shapes up. Yesterday's equity put-to-call climbed above 0.76, so a short squeeze was not very hard to trigger.
There are a few negative divergences, namely the Yen bid, oil and gold continued weakness and the fact that ZN has not cracked below the 126 level.
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Wednesday, October 2, 2013
Clear & Present Markets
1. I'm not dead, yet! The celebrated author with whom I share a name has passed away. My Fantasy Football Team, the Patriot Gamers, will honor his passing this weekend. I enjoyed his work but have no connection to the man.
2. Health care stocks have been solid performers, but partial readouts of hospital and physician office traffic imply weak utilization rates. This could be a "Red October" for more utilization focused names, and I am taking profits in Lab Corp (NYSE:LH).
3. Does Lululemon (NASDAQ:LULU) have room to grow? Yes. However, the next leg will be much more turbulent than the previous one. More competition and greater segmentation of the product line (away from the core yoga wear) means less differentiation and more pricing pressure. Whomever the company hires to give the "Executive Orders" for its merchandising effort faces a tremendous challenge migrating a loyal customer base into new categories without compromising the brand.
4. I am kicking the tires today on a swap of my Ford (NYSE:F) for General Motors (NYSE:GM). The argument is that GM is just beginning to refresh its product line, is a better capital deployment story because of lower leverage, and has room for margin expansion. The sales figures released this week were unimpressive, but it is early in the product refresh. In the short term, I am most interested in capital deployment. GM could borrow some money to buy a chunk of the stock that remains with governments and labor unions and effectively convert the liquidity event hanging over the stock into a reduced share count and higher EPS. From an operational standpoint, margins are 400 bp below Ford, and while I will not be "Without Remorse" selling a company that has executed so well, I just don't see much upside in Ford. I see the catalyst in pace at GM; I just don't know that I trust its ability to execute.
Fill Me Up
Interesting note just out from Morgan Stanley on WTI crude: They now think that the Transcanada XL pipeline (not the Keystone) will be complete and filled by the end of November. Even at fill rates of 1/2 of capacity, it will likely drain Cushing for several months and cause WTI to rise sharply relative to Brent, perhaps even to a premium. Could be yet another tailwind for US based E&P producers.
Meanwhile, a trading contact in Houston reports hearing more and more chatter about a coming wave of M&A activity for small and mid-cap assets beginning next year. I've been seriously thinking about a Jan '15 butterfly spread (70/85/95's ?) on the SPDR S&P Oil & Gas Explor. & Prod. (NYSEARCA:XOP) ETF, which is a great proxy for those names.
Acutely Weak Dollar Providing Support & Tailwind for Gold?
One fascinating aspect to the Gold/US Dollar relationship is that since early July, when the US Dollar peaked at 84.75, it has declined to 79.85, or nearly 6%.
That's a big move for the greenback, yet Gold remains very subdued, and in fact totally unresponsive to the Septemberdecline in the Dollar.
Add to the "broken inverse relationship" the fact that on Sept 18, the Fed recoiled from its intention to taper and reiterated the need for continued QE.
We really get the sense that Gold is a lost market amidst historically strong tailwinds.
That said, unless and until SPDR Gold Shares (NYSEARCA:GLD) breaks its Aug and June lows, we can't rule out a potentially strong latent positive response amidst a vertically diving US Dollar (NYSEARCA:DXY).
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Thursday, October 3, 2013
Tesla Media Storm
I wanted to follow up on the Tesla (NASDAQ:TSLA) Model S fire story from yesterday.
The company has said that the fire was caused by a large metallic object directly hitting one of the battery pack modules, which then went on fire. According to public records, the flames actually reignited after the initial extinguishing.
Thankfully no one was injured -- but we're about to see how strong Tesla's PR chops are.
Remember, not long ago, the Model S was named the safest car ever tested, and was Consumer Reports' highest-rated car of all-time. Plus, along with the ascent of Tesla's stock price, CEO Elon Musk turned into a media darling, complete with comparisons to Tony Stark (a.k.a. Iron Man).
So even if this was indeed a freak accident unlikely to happen again, the media could jump at the chance to start hurling innuendo and accusations.
It's entirely possible that the Model S is still the safest car on Earth -- but perception is reality.
Do you remember Toyota's (NYSE:TM) "sudden acceleration" crisis?
The company took a massive beating in the press, and the stock got smashed.
Yet, after the NHTSA and NASA performed an extensive analysis, they found that in 74 of 75 cases, human error was the problem.
But during the controversy, people assumed the worst.
And think about the timing of this event -- October 2 -- the second day of the fourth quarter. Could forward estimates be at risk?
We're about to find out.
Treasury and Buffett Comments Slightly Lowers Debt Deal Odds
In the soap opera that is Congress, word leaked out that an unidentified House Republican said Speaker Boehner would not allow the US to default. This has lifted stocks off their lows. I'd point readers to the 5th paragraph in that story where it quotes Speaker Boehner's staff spokesman Michael Steel:
"The speaker has always been clear that a default would be disastrous for our economy," Mr. Steel said. "He's also been clear that a 'clean' debt hike cannot pass the House. That's why the president and Senate Democrats should drop their 'no negotiations' stance, and work with us on a plan to raise the debt limit in a responsible way, with spending cuts and reforms to get our economy moving again and create jobs."
I'll let you judge for yourself whether that represents Speaker Boehner moderating his position, noting only that Mr. Steel said nothing about "Obamacare" in his statement. The NYT article is actually a pretty good one, providing some background on the "Hastert Rule" that may illuminate some things for those who spend more time with their heads in company fundamentals than the sausage-grinder in Washington DC.
The "new thing" in today's drama is the idea -- put forward by Warren Buffett and implied during a press briefing for a Treasury Department report -- that going a few days over the debt ceiling cliff might not be catastrophic. The concept here is there are not really any critical checks that need to be written until early November when Treasury has to send out Social Security benefit checks. Warren Buffett implied a day or two beyond October 17 might not cause economic collapse. When pressed, Treasury officials wouldn't completely disagree.
I had folks call and email me that this was a good thing, and I cannot disagree from a rational perspective. If we get to October 17 without a deal, not having the world fall apart on the 18th is a good thing. From a DC perspective, though, it means the Tea Party might be emboldened to let the default happen on the 17th and see what shakes out over the next week or two. Maybe they get "lucky" and can force some movement on the Affordable Care Act or one of their other pet projects. If not, they can demonstrate the world didn't end (assuming Mr. Buffett is right) when the government really shuts down for a couple of days and still get everything solved the following weekend without preventing seniors from getting their Social Security checks.
I think odds are that if we get to October 18 with no deal (or maybe even on the 17th with no deal imminent), the market takes a huge dive. This spurs Speaker Boehner to do the reasonable thing and allow a vote on the clean Senate bill -- avoiding a default. I think those odds are not 100%, but they are very high. They're just a little bit lower today after Mr. Buffett's comments and what we heard from Treasury.
U.S. Treasury Debt WILL Be PAID
There will NOT be a default on U.S. Treasury debt. It won't happen because it has the potential to spin out of control. Even something that is "technical" and "temporary" could have ramifications for the market that no one will be willing to risk.
U.S. Treasury default is an interesting story for the media because it is different. It is interesting for some pundits who know nothing about bonds because it is a great time to do some government bashing and pretend to know something about the bond market. Finally, it is apparently a good subject for politicians and even Treasury Secretaries because it has such a good "doom" element that it catches people's attention and attracts some fame.
In the end, it won't happen, and betting that it will, or even might, is not the right strategy.
Ability to Pay versus Willingness to Pay
Before I run through our analysis on why there won't be a default, I want to talk about "willingness to pay". As a trainee at Bankers Trust, one of the first things we were talk about credit analysis by Joe Manganello was that investors too often overlooked "willingness" to pay. That was harder to analyze than ability to pay. You could scour balance sheets, crunch some numbers, run some scenario analysis and fairly easily determine how easy it would be for someone to pay you back, assuming they were willing to. "Willingness" is subjective. You have to go with your gut to some extent. That is what makes it difficult to analyze. At the time he was primarily talking about Bankers Trust's experience with Texaco with a little bit of Donald Trump thrown into the mix.
That is now one big question investors and NRSRO's (Nationally Recognized Statistical Rating Organizations) have to ask themselves. If the debt ceiling is real, and not something that Congress will move easily to ensure we pay what we have promised to pay, then the U.S. Treasury bond is mis-rated and mis-priced. How can you be a reserve currency if you are willing to suspend payments? I don't think we are willing to do that, but I do think the NRSRO's should downgrade us to AA or even A on the back of the rhetoric coming out of D.C. When even the Treasury Secretary seems happy to hint at being unable to pay we don't deserve to be AAA or the reserve currency. We still have the ability to pay (which has also declined) but it is becoming increasingly unclear that we have the willingness to pay.
Delaying the Date
The Treasury department is already taking steps to delay the day of reckoning. October 17th is the "current" date given when the Treasury will run out of room to maneuver. I suspect that date will be extended.
The Treasury is already engaged in their primary method to extend the deadline. They have the ability to give certain funds (the Civil Service Retirement and Disability Fund for example) IOU's of treasuries rather than treasuries. Yes, a treasury bond is already an IOU, so this is a bit circular, but it is actually part of the law. It strikes me as almost amazing that it is part of the law, but it is. The Treasury can give some Federal funds the promise to give them treasuries in the future and the fund doesn't care but it doesn't count against the debt. That is the primary step that the Treasury Department takes.
So we are in the delaying tactic mode.
We are also typically able to "roll" the debt since no new debt is created. As debt comes due they can issue "new" debt on that day or after and it would not increase the total debt on a net basis. While up against the debt ceiling limit, it is difficult to match debt issuance with debt maturities, but it can be done. In any case, it isn't rolling the existing debt that is the problem, it is the fact that we continue to run a deficit that causes us to create new NET debt.
The government employee furlough's actually have a small potential to delay the date. Government expenditures should decrease. It isn't much, but might buy another day or two on the schedule.
So those are the tools that they have at their disposal to easily defer the date.
I also wonder whether the Federal Reserve could make a payment to treasury. The Fed paid the Treasury about $100 billion last year in profits. I have to admit I do not know whether they pay it quarterly or annually (I think annually) and whether it is calendar or fiscal year (I think fiscal) but there might be some ability for the Fed to pay out some of their profits on a more timely basis to further delay the deadline. The Fed's interest income has never been higher after almost a year of relentless treasury and mortgage purchases. We are looking into this option in more detail, but it seems that the Fed could be a wildcard that helps drag this process on.
Why the Debt WILL Be Paid
What the exact date will be, we don't know. It shouldn't be tied to the maturity of a particular bond or T-Bill as the Treasury department should be able to manage around that.
Based on data as of early September, the Treasury has to make interest payments of about $2.2 billion on October 15th and $11.8 billion on October 31st. Since Lew has already said he thinks it will be the 17th, it seems to me that the 31st is a harder target to beat. The Fed receives very little in the way of interest on its holdings on the 15th, but it does $2.6 billion of the interest due on the 31st (it seems like that is quirk of how the Treasury issues debt. Most of the high coupon bonds that the Fed owns, have a different cycle). On November 15th the Treasury owes $62 billion of interest, and in spite of the fact that $25 billion of that payment goes to the Fed, that would seem to be a difficult hurdle to get past no matter what.
So at some point we will get to the point that the Treasury cannot repay debt as it matures (because they created a schedule that doesn't work, or they need the money for other payments) or they won't be able to pay interest on debt already issued.
In other words, they would have a "Failure to Pay" situation. Without a debt ceiling increase or some ability to override the debt ceiling we would have a Failure to Pay. For now let's ignore the possibility that someone would determine that existing obligations need to be paid, somewhat negating the debt ceiling. I believe that is a real possibility, but let's ignore it and look at how the scenario would play out if Congress doesn't act, and there is no way around that.
What we've got here is a failure to communicate
Even Cool Hand Luke couldn't win the situation that plays out once we go into a "Failure to Pay".
There are a few things that should happen virtually simultaneously if we fail to pay a maturing bond or miss an interest payment.
· The first thing will be a mad scramble to determine whether a CDS Credit Event has occurred. With just under $3.4 billion of NET CDS and $23 billion of GROSS CDS, it is a serious question. Given the hype surrounding CDS, it will gather even more headlines than it deserves. I haven't yet determined whether coupon payments have any standard Grace Period (I haven't been able to determine that yet). Similarly there may be a mandatory 3 day Grace Period on the maturing debt for ISDA CDS purposes, which I need to confirm. In any case, there will be a lot of talk about CDS but it is relatively unimportant.
· The next thing will be comments and actions from the NRSRO's. I think they will be obligated to downgrade the U.S. debt. Any bond that has its maturity payment missed would have to be given a Default rating or Selective Default Rating (something I think they made up for Greece). For bonds that had the coupon payment missed, they might be more lenient but think they would have to shift to Selective Default. What would they do for other bonds that remain "current"? Maybe they could create some new rating category. It can be AAA ICGIAT (if Congress Gets Its Act Together). I am only partially joking. The rating here can be crucial. Many investors, structured vehicles, collateral agreements, ISDA Master Agreements, etc., have ratings based rules. If the treasury loses its AAA in a meaningful way, that could trigger forced selling. If it is rated as default (which would not seem unreasonable, once they stop paying) it could cause even more forced selling.
· But what is most important will be what constitutes an "Event of Default". This is what can cascade through the market. Regardless of what rating agencies say or do, all treasuries might be deemed to have experienced an Event of Default. That would typically allow for acceleration of payment claims. So far we haven't been able to find that language either. But that would only impact the Treasury. The far bigger risk is that in bilateral trades the counterparties have more flexibility to trigger "Event of Default" clauses. Can repo agreements be closed out? Can additional collateral be required for any collateral arrangement? If counterparties are able to demand more collateral or break trades because the Treasury fails to pay, then we get the real systemic risk.
· Would the Fed or some other large public entity be forced to change its accounting post default in such a way that they trigger their own "insolvency" requiring action? I don't know, but I'm not sure anyone knows.
Just like with Lehman, I suspect the real risk will be in the relatively simple, but incredibly intertwined and crucial repo market. So much secured lending and collateral is based on the premise that treasuries (particularly t-bills) are risk free that the system would not be prepared for a chain reaction of margin calls or broken trades based on an Event of Default on Treasuries. The Fed and Treasury could call every big bank and beg them not to execute what they think are their rights for the "best interests of the system". They could do the same for insurance companies and the largest hedge funds. Maybe they could coerce the NRSRO's into keeping ratings unchanged.
Maybe, but you would be sitting on a powder keg hoping that no one else exercises their rights. All it takes is one entity to exercise their rights and the potential daisy chain is started. What is worse, is that there is likely to be a first mover advantage.
I don't see how any rational politician can risk setting off this sequence of events.
The potential to throw the entire system into upheaval by not paying what you owe is a real risk. The system is not designed to handle it. Whether you believe ratings should be a part of any investment manager's mandate is a question that is irrelevant here, because it is a feature that is incorporated into many rules. It cannot be helped. Should a "technical default" trigger CDS or Event of Default actions throughout the system? Why not, who is to tell what is "technical"? Why take the risk that it will be normalized quickly when taking the proper actions under your legal contracts mitigates that risk?
Too Risky to Happen
No matter what, we will pay our debts. Whether Congress rolls it weekly for a period of time, or we get a bigger solution, or the Treasury finds a way to pay people what is owed, the debt will be paid.
The potential consequences of not paying it are too great. It isn't simple and at some point the majority of politicians will listen to people like Bill Gross and understand that the dangers of not paying are just too stupid to take. The system is too complex and at its heart is the understanding that treasuries are highly rated and always pay. Breaking that taboo opens too many possible scenarios for no good reason. This is after all debt and payment obligations that we have encumbered ourselves with through law, and should be paid.
I would never bet against the incompetence of Congress, but I am willing to bet against them being completely idiotic and acting with gross negligence, which is what it would take to trigger default on Treasury bonds.
After this is all said and done, we should all take a close look at the fear-mongers inside and outside of Washington as their actions seem to constitute a public nuisance at the very least, if not worse.
Friday, October 4, 2013
Down the Rabbit Hole
And things are getting curiouser and curiouser here in the D.C. beltway as more and more political types are feeling like they have fallen down the "rabbit hole." The hole in question is the governmental shutdown quickly to be followed by the debt ceiling "hole." Accordingly, the stock market fell down the rabbit-hole early yesterday, on the no budgetary compromise news, as the S&P 500 (SPX/1678.66) declined to 1670.36 into the noon hour. In the process, the SPX traveled below it 50-day moving average (DMA) at 1679.82. From there, stocks stabilized and attempted to rally as Speaker John Boehner stated the Republicans would not let the government default on October 17 when the debt ceiling is reached. That rally attempt, however, was snuffed out by the White House gate ramming and subsequent shootings at the Capital. Nevertheless, Boehner's statement likely means the Republicans will "cave in" on many of their demands while the Continuing Resolution, and the Debt Ceiling, issues are tied together with a great big bow. In talking to one D.C. insider, it was suggested there could be a delay in the individual mandate to buy insurance, much like the president's delay in the business mandate. I doubt this idea gets much traction. Another way out of the rabbit-hole would be to repeal the medical device tax that levies a 2.3% tax on medical device makers' revenues. This idea has decent non-partisan support, as does not exempting Congress, unions, and 1100 other companies/organizations from Obamacare. Whatever the solution, "Alice" WILL find her way out of the rabbit-hole.
Clearly, the stock market is trying to find its way out of the rabbit-hole by clawing its way back from yesterday's intraday "print low" (1670.36) and managed to close back above its 50-DMA. Once again, it is amazing to me how powerful the "attractor level" of 1684 is/has been this week as the SPX has unsuccessfully attempted to pull away from the 1684 attractor/repeller level both on the upside and the downside. The result is that ALL of the indicators I monitor are in an indecisive mode; which leaves me neutrally configured on a short-term trading basis. This morning, however, the preopening futures are higher given the President has canceled his Asian trip as hopes rise about a compromise on a budget. While I believe a deal will be worked out, I still remain cautious into late next week's October 10-11 timing point, which is where the stock market's downside energy should be sated.
Hitting the Track with Eddie Mush
It's a Freaky Friday, if only for the message that came across my economic screen this morning:
MOST GOVERNMENT DATA RELEASES DELAYED DUE TO PARTIAL SHUTDOWN
Of course, there's a difference between a "non-essential" government shutdown and the big bad wolf that is blowing in the distance--all the way out on October 17. That is the line in the sand on a debt default, although smart money is saying to pay it no mind. Just yesterday, Bill Gross and Larry Fink assigned a "zero percent probability" that the US will default on it's debt.
As a 23-year veteran of the derivatives market, I've been schooled to believe that there is no such thing as a guarantee. Still, the fallout from a US debt default would be unfathomable; to borrow a passage from Michael Sedacca:
While the ramifications would be unprecedented and thus unknown, the fallout would indeed be catastrophic and one would have to think--or at the very least hope--that Mr. Gross and Mr. Fink have the types of golden Rolodexes that would steer the unthinkable outcome toward calmer heads, if in fact such heads are capable of rational thought.
That's the sliver of doubt that is currently being priced into the marketplace. To use a crude example, if there is a 1% chance at default and the result would be, say, a 50% loss in the market, it stands to reason that the market would discount the event by falling 5% (we're currently 3% off all-time highs in the S&P). Those numbers are pure guesswork but you get the gist; the market is navigating a period of price discovery.
I will note that the three percent correction the last two weeks has been decidedly orderly, almost as if some players are trying to front the reflex rally that would presumably occur upon bipartisan resolution. Given the short covering we saw after the decision not to taper--and the posturing into this pullback--we're left to wonder if that optimism will again reward the bulls or if it is paving the path of denial.
Time--and price--will tell the tale; S&P 1680, 1665 and 1595 are support below, while 1700, 1710 and 1730 (rough justice) are levels of lore if the tide should turn.
Good luck today.
The Twitter IPO
I have an in-depth article coming up on the Twitter (TWTR) IPO, but I wanted to post some excerpts for Buzz readers:
Twitter Learned a Lot From the Facebook Mess
Twitter's IPO will be lead-managed by Goldman Sachs (NYSE:GS), presumably at least partially as a result of criticism of Morgan Stanley's (NYSE:MS) handling of the Facebook (NASDAQ:FB) deal, though many are also giving credit to star Goldman banker Anthony Noto for this victory.
Twitter Will Benefit From Facebook's Phoenix-Like Rise in Mobile Advertising
Courtesy of lousy earnings results and post-IPO bitterness, Facebook eventually sank from its $38 IPO price to $17.55 on September 4, 2012.
However, Facebook's mobile presence quickly went from being an earnings hindrance to a catalyst for outperformance, and following a monster Q2 that saw mobile ad revenues skykrocket, Facebook is hovering around $50.
Twitter is growing revenues at a huge rate, and while it isn't profitable, I doubt it's going to matter to anyone.
Mobile advertising is hot, and Twitter's S-1 effectively markets the company as a mobile powerhouse, which is the truth!
Remember what happened with Facebook last quarter -- investors went absolutely gaga as mobile advertising hits 41% of revenues. Twitter's at 65%.
You can see charts showing revenue and user growth trends below.
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