Buzz on the Street: Facebook Comes to Town and Fails to Save the Day for an Exhausted Market
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, May 14, 2012
Please do not bother corporate bond buyers with minutia like an entire continent on the verge of financial anarchy. As of this writing, a couple of issuers increased their offerings so that buyers could suck down $3.75b of new issuance. Another issue of $1.5b (upped from $1b) may price before things wrap up. While most other credit metrics continue to head the wrong way, buyers' appetite just won't quit.
Climbing Dollar's Potential Impact on Commodities
The most salient feature of our comparison chart between the US Dollar Index (DXY) and the Reuters/Jefferies CRB Commodities Index (CRB) is the recent climb in the DXY off of its May 1 low at 78.60 towards another test of a 2-year resistance plateau at 81.40/80.
If this plateau is hurdled, the DXY has the potential to trigger a very powerful advance into the 86 area initially and then towards 89-90. Such a powerful advance in the U.S. dollar could crush the commodity complex (CRB), which already is showing signs of stress as it breaks beneath its prior two significant pivot lows in the vicinity of 292-293 and is pointing next to 275-272.
Should such a scenario begin to accelerate in the upcoming hours/day, it will imbue investor psychology with intensifying deflationary perceptions -- despite all of the best efforts of the world's central bankers in general, and Chairman Bernanke in particular, who might be "forced" to unveil a fourth innovative way for the Fed to add liquidity to the markets in another attempt to create inflation.
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Yo B, Raise the Debt Ceiling
The US dollar is the reserve currency for 70% of world central banks. If they all dump the dollar, the repercussions to the US economy will be insurmountable. Ten years ago, foreigners owned 20% of US Treasuries. Today, they own between 40% and 50%.
If we go back through history, when we see past countries exposed to such dependence on foreign investment, the debtor nation (in this case the US) has eventually faced sovereign debt problems and high inflation.
My current take on gold: the price of gold has risen over 430% in less than 10 years and, during that 10-year period, it has failed to face a major correction in its price advance. The spectacular but steady rise in the price of gold bullion is a leading indicator of either a collapse in the value of the US dollar or rapid inflation, or both!
The Fed has been buying about 87% of the Treasuries issued by the government under Operation Twist. Who will buy these Treasuries if the Fed stops buying them? Scary thought. Our debt ceiling (the amount the US can legally borrow) will be coming back as a conversation piece shortly (October will be broke again).
Only nine years ago, the national debt was $6.0 trillion. In less than a decade, our national debt has gone up 140%. But the official national debt numbers we hear do not include entitlements to US citizens and unfunded liabilities. Include these and our total debt is in the $70.0-trillion to $100-trillion range. Since March 2009, bullish readings below 25% (last week AAII numbers) have marked major buying opportunities.
But the warning signs are flashing and they are bright.
Tuesday, May 15, 2012
Earlier, I noted that the spike by Amazon (AMZN) that tickled the 230 strike following an upgrade may have carved out a right shoulder.
Trade back below the 225 strike may put those who chase in piranha land.
France vs. Spain
Thanks to Minyan Alex for pointing out this trend. Below is a chart of the French CAC index vs the Spanish IBEX index over a 5-year period. As you can see, comparing the two shows that the CAC could fall in sympathy to the IBEX and the rest of Europe, however I'm not sure we can continue falling much further.
While France's economy is faltering and has a rather large debt load, their bonds aren't indicating any panic yet. It could fall a bit further, but I'd be wary of shorting into the hole here. I covered the short France portion of this trade and am still holding a long position in Spain to offset my short on Germany (EWG).
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JC Penny: Stock/Bond Crossfire
JC Penney (JCP) reports earnings after the closing bell today, and there's some interesting stuff going on.
Consensus estimates call for a loss of $0.10 per share on revenue of $3.48 billion. The crowdsourced estimates from Estimize.com indicate that the crowd is actually looking for a loss of $0.05 per share on $3.56 billion in revenue, which would be a decent-sized beat.
Wall Street is bracing itself for something big. Options traders are pricing in a 10% move, based on the at-the-money straddle expiring Friday.
Also, Fitch reported earlier today that CDS spreads on JCP bonds has widened by 35% over the past quarter, which represents enormous weakness vs. the industry average of 7%. I would attribute this as to uncertainty in the company's turnaround plan, which was engineered by ex-Apple (AAPL) retail honcho Ron Johnson.
So who's right? Stock traders or the fixed-income guys? We'll find out in a few hours.
Either way, a big move's likely coming.
Wednesday, May 16, 2012
Something Weird is Going on With CDX
An intraday chart of the two main US CDX indices (a index of 100 different investment grade or high yield CDS) shows some weird movements today. IG18, the most recent investment grade index gapped 2bps wider this morning, only to scream tighter to now 1.5bp on the day. The story is very much of the same in HY18, the high yield CDX index. These are pretty big moves for these indices.
Is this a forecast for volatility today?
Note that these trade in blocks of $250m each, so only the big players trade these.
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Highs Odds We Are Putting in a Trading Low
Quick note: There is very high odds we put in a trading low. EUR/USD found strong support at 1.2680, which is the closing low for January. ES (SPX futures) also moved sharply off weekly S2 and February 2nd gap (continuous contract, 1323, low was 1320.75). The move definitely looked capitulative overnight. Seller fatigue has set in.
ZN (ten year note futures) confirmed the lows in both cases by not making a new high. I would not longer be shorting, but instead be a dip buyer.
T Report: Credit Markets - Transformers vs. Decepticons
In the movies there are these great battles fought out between the transformers and decepticons. As cool as the battles are, there must be some innocent bystanders wondering what the heck is going on amid all the destruction. That to me is how the credit markets are trading right now.
None of the core stories have changed. Europe is a mess and has gotten weaker. The U.S. economy is doing okay, and ZIRP is here to stay even if QE3 isn't imminent. Into that already complex world we have thrown the JPM trade into the mix. There seems to be a battle between JPM and those against JPM. That battle is causing carnage across the credit markets. We are seeing big and weird moves on a regular basis. IG gaps out while stocks do nothing. MAIN goes wider while XOVER is tighter, only to go back to moving in lock-step. JNK saw its single biggest share redemption. Both HYG and JNK chug along all day only to have big fades late into the day. MUB has a steep drop only to bounce right back. Whatever battle between the big guys is going on drags everyone else into it. Stop losses are being hit. The price move is causing concern that this is just like 2011 again.
It isn't like 2011 right now for a couple of key reasons. The transformers and decepticons aren't battling over the fundamentals, they are battling over positioning. That is real and has consequences, but once that battle is over, the market will look at the fundamentals. So that is one key difference, that in addition to the usual fight between the bulls and the bears, this massive unwind, or potentially fake unwind, or unwind of the hedge of the alleged unwind, or something, is adding to the volatility and making the fixed income market seem more scary than it is.
LTRO is the other big difference. For all the talk about LTRO being a "carry" game to buy sovereign debt, LTRO at its core was designed to ensure that banks have enough money. While the debate rages about what Greece will do, and how bad the situation in Spain and Italy is, there is virtually no talk about banks not being able to fund themselves. People can look at 2 year swap spreads for signs of stress, and they are there, but be careful not to over-react. LTRO is there so that we don't see a "run" on the banks. I doubt another LTRO would be created merely to try and support sovereign debt, but if there is a need to get money to banks, the ECB will do that. The ECB, without a doubt, is lender of last resort to banks, and is happy and able to fulfill that functions, so that is a big difference between now and 2011.
Greece leaving the Euro would be a big deal because of what it would do for all the corporate loans that have been made. That is yet another reason that leaving the Euro will take more time than people want to think. Even if it was easy at the sovereign level, which it isn't, and the corporate level it has the potential to cause immense confusion. All of this can be addressed over time, but real plans need to be put in place and solutions to problems thought out, and some resources set aside to deal with unexpected problems. While that preparation is going on, look for the ECB, and the Troika to soften their tone as they decide that they cannot easily deal with the losses they would face on their own Greek exposure.
So, I would be looking to add exposure to credit, particularly U.S. high yield, and possibly in IG, as I think the market has been driven around too much by noise of this alleged unwind (I still think there is a real possibility that prior to the press conference JPM prepared themselves well for the obvious market reaction and is benefitting greatly from the widening and the volatility).
The fact that we tried to rally and then failed yesterday is a sign of how tenuous the overall market is, but right now I can't help but think the same stories will have less of an effect, and that we are close to the point where Europe manages to take some steps that at least seem to help the problems, if not resolve them.
A Forward Lens
While the "easy" trade has seemingly passed on the short side, it's important that we sync our time horizon and risk profile. By now, many of the chants from the bear camp are loud and mainstream-Greece, Europe as a whole, faith in our financial system, confidence in policymakers, real state issues (California), structural labor deficiencies, tepid growth despite upward of $10 trillion in stimulus-and two-sided headline risk remains.
Make no mistake; nobody wants to see the Euro Zone splinter, with the exception of many Greeks themselves, so there will be efforts to marry "austerity" with "growth initiatives," at least in premise and through promises. I personally don't think it's a tenable situation, and haven't for a long time, but we must always try to capture the chasm between perception and reality. This will play out over years, not days, and that is what I mean by syncing your time horizon with your risk profile.
In terms of near-term news, the Facebook (FB) IPO is the hot topic of the day. While we'll likely see a retail-driven pop, I have no interest in chasing this puppy. I think Mark Zuckerberg did himself and his investors a disservice by showing up to the institutional road-show with a flippant attitude and "hoodie" attire and if I'm wrong, my greatest loss is one of opportunity. I'm entirely more inclined to wait for Twitter, which I feel will is revolutionizing advertising, or Linked-In (LNKD) at the right price.
Which brings me to our near-term roadmap; the current stair-step for risk management is S&P 1300-1340, and support/resistance will morph into each other with a significant breach either way. If you put a water pistol to my head, I would blurt out "S&P 1250!" as a realistic target but nobody is smarter than the market, least of all me. I will simply remind you that the sharpest moves tend to occur in an oversold environment just as blow-off rallies typically occur in an overbought market. And yes, DAX 6500 continues to matter, as it "works," in a technical vacuum, to DAX 5800.
Seeing "through" the sovereign sequel to the first phase of the financial crisis-and again, the length of this process is more important than the depth-I am a raging bull in waiting. I foresee a millennial generation that doesn't give a hoot about the difference between experience and skills, and a wave of human capital that will reinvigorate our markets, our society and our country from the inside out.
That is what truly excites me, and I know it won't come easy, and it's sorta why we do what we do in Minyanville; we believe in empowering generations, effecting positive change and doing business a better way in a world where many have seemingly lost their way. And I can tell you this with an extremely high degree of confidence: it's a tremendous time to be alive and the future is in our hands. Let's not squander the opportunity; let's make it count.
Every step of the way.
Philly Manufacturing Goes Negative
In stark contrast to a near tripling in the NY manufacturing survey, the May Philly manufacturing report went from +8.5 to -5.8, well below expectations of +10 and the weakest since Sept 2011. The components confirm the headline weakness (headline not a sum of its parts) as New Orders fell to -1.2 from +2.7, Backlogs fell to -9.4 from +3.2, and importantly, Employment fell to -1.3 from +17.9. The Average Workweek also dropped to -5.4 from -2.3. Inventories were down to 4.5 from 8.2. Prices Paid fell sharply to +5 from +22.5 to the lowest since July '09. Prices Received went negative to -4.5 from +9.4. The Business Activity 6 month outlook was also disappointing as it fell to +15 from +33.8, the lowest since Aug '11.
Bottom line, with the first two May industrial reports telling much different stories (NY maybe positively influenced by tech and Philly likely more impacted by old line manufacturing), we'll have to wait to see more regional survey's to get confirmation of direction but obvious to all is a European slowdown, Asia moderation and mediocre US growth that may start now being reflected in the upcoming economic data points.
The truth is that our finest moments are most likely to occur when we are feeling deeply uncomfortable, unhappy, or unfulfilled. For it is only in such moments, propelled by our discomfort, that we are likely to step out of our ruts and start searching for different ways or truer answers.
-Scott M. Peck
After a few days of decline, finally more indicators are getting into oversold territory. Current intraday reading McClellan Oscillator is an oversold -368. S&P Short Range Oscillator was at -6 at close yesterday.
Even though the market did not erode much, it seemed to have an eerie quiet yesterday, as many stars were slaughtered in the final hour of trading.
Today, if the market suffers a sharp drop into strong support AND makes a nice comeback during the second half of the day (classic key reversal) the above mentioned oversold readings can provide technical tailwinds.
For full disclosure, I have initiated a small long position. Given that that today is Thursday, I do want to keep my exposure light, and also have a time stop. If it were a normal market correction, it would be a different trade. However, there is so much talk about the `run on the banks' in Greece that many market participants might not want to hold much over the weekend, lest there is more such news and mob mentality rules. Any possible rally might be sharp and short.
TLT remains on my radar as a proxy of risk appetite.
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Friday, May 18, 2012
Green futures have not been bullish for end-of-day prices in recent weeks; that could change today, but not without an initial press lower IMHO.
S&P 1300-1340 is the range, consistent with our recent stair-step map. Should that level breach, the new range will be S&P 1278 (200-day moving average) and then S&P 1250 (my water pistol level)- S& 1300.
I'm hearing a lot of "nobody wants to be short into the weekend." Perhaps; once upon a time, Fridays were "higher" in bear markets and "lower" in bull markets. I guess that begs a much bigger question, eh?
I suppose the other question is, other than hope of policy bazooka and the fact that we're pretty oversold, why would one want to be long into the weekend?
And, the sharpest sell-offs always over in an oversold environment (but you know that).
The 10 Takes on the Facebook IPO from Investing Experts was excellent. Chris Dixon's take--that funds were likely selling other high-beta names like Apple (AAPL), Amazon (AMZN), and Google (GOOG) was particularly interesting.
Two weeks and 100 S&P handles ago, I was "scary bearish" on the Buzz. Now? Consistent with my stair-step stylistic approach--and knowing thyself--I would have likely covered a chunk of my short-side exposure into S&P 1300 late yesterday to see how they acted/reacted at that level, and then pressed if it was breached (with a stop set above S&P 1300).
If you can get some Facebook (FB) with a 3-handle, you can prolly flip it for a trade. The closer it gets to $50, the riskier it becomes. I know guys who were HOPING to get 5,000 shares and got an allocation of 4,000 shares. That, to me, is not a bullish sign but again, it's purely anecdotal.
DAX 6328; as long as it stays below DAX 6500, it has a date with destiny at DAX 5800.
One very stable step at a time as we continue to find our way. For me, that included Ruby's first birthday party last night--complete with a Dora smash cake--and I would be lying if I said the cake didn't taste a bit sweeter given the events of the last week (was that really a week ago?!)
Let's hit 'em hard and straight, and then leave it here for the weekend. We all have a lot more important things to do!
Will the Facebook (FB) offering suck face for hot IPO frenzy?
Is the delay due to Winklevii stealing the order book?
Turnaround fair play?
Note the sudden drop in LNKD shares as FB delayed.
Are more orders coming in or are orders being pulled?
Rumors of folks putting in for size and getting filled creating buyers remorse and cold feet?
Beware the Crash!
Michael A. Gayed
I have been addressing very recently the idea that markets seem to be sensing a credit event is here given that Junk Debt (JNK/HYG) relative to Treasuries (TLT) has performed very poorly, coinciding with a big spike up in the Yen (FXY) and drop in Emerging Market Debt (EMB). What concerns me is the speed of the move over the last 48 hours.
While there is some improvement today, I do not believe it is enough to signal that all is well. Markets may still be vulnerable to a pulse lower if credit spreads do not suddenly compress, just like how they suddenly widened. T
Treasuries keep getting bid up despite unbelievably low yields (care to lock your money up for 20 years at 2.8%?). Beware what happens here, and forget about Facebook (FB) or any other company you like to track. Credit spreads are now the key. Tune into Bloomberg TV today between 3:30 PM to 4:00 PM when I will be addressing this live on the segment "Chart Attack." You can also watch online here.
POMO Reaction - Be Careful if you are Short Bonds
Due to the craziness surrounding the Facebook (FB) IPO after it nearly broke its IPO price (we held our collective breaths here in MVHQ), I haven't been able to Buzz this until now.
Today's POMO in the 8 to 10-year basket saw the lowest coverage on record at 2.22. This was below the 6-purchase average of 2.96. The last time we saw "record" level difference in coverage from dealers was March 6 when dealers were offloading Treasuries to the Fed at a record pace, and two days later, 10-year yields exploded 45bps to 2.4%.
I've updated my chart below of Twist purchases since inception that had "abnormal" coverage readings. As you can see, it's not a perfect indicator, but it's been right more than it's been wrong. To me, it signals that an extension of Twist is highly likely.
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