Buzz on the Street: Stocks Grind Through the European Abyss
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 21, 2012
I am psyched to be back in MVHQ following a few weeks of horrific scares. My instructions -- and yes, I will gladly listen to these guidelines -- is to limit my time at MVHQ to a few hours per day this week. My goal is to make it to lunch, head home and finish up the day from there. I can't very well ignore doctors -- or Jamie's -- orders given what they've done for me, nor do I have any intention to do so.
A few quickies---
Green futures have been a death knell for the market these last few weeks. I know, China this, China that (more on this soon) but expect a press, at the very least. S&P 1300 remains new-found resistance and active risk-managers can set their stops above those levels (note: this approach has now captured 100 S&P handles in two short weeks).
DAX 6500 remains overhead and as long as that's the case, the German index "works" to DAX 5800. Technical analysis is but one of four primary metrics but it is a terrific context with which to measure risk.
I bought some Facebook (FB) at $38.01 on Friday (leaning against the syndicate bid) and sold 40% at $40 and the remaining $60% at 41. IF this stock trades with a $20-handle at a point, I will likely put some away in my kids long-term portfolio. Watch Morgan Stanley (MS) as a peripheral play, as they are likely lugging a lot, but have (more likely than not) shorted QQQ or Zynga (ZNGA) against it (I know nothing; just hypothesizing here).
Spain is now trading at levels below the March 2009 lows. While it is by far the most oversold European proxy, the sharpest moves tend to occur from oversold (or overbought) levels.
I'll be back; let's hit em hard today and appreciate the journey!
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Think Carefully About Being Long Facebook
If you are long Facebook (FB) think about this. At the last moment FB shorted the lockup period for insiders or employees to sell their stock to 91 days. So, FB has several thousand young engineers and software programmers sitting on a couple of million dollars worth of stock. They go to any decent financial advisor who should tell them that the capital gains tax could double next year. At a $100 billion valuation, not selling this year would be crazy. This is the dumb insider money. What do you think the venture capital money will be doing? The supply avalanche of FB this fall will be huge. Think about that if you are long.
Excessive Money Printing and Negligible Bond Yields = Babe Ruth
Excessive fiat money printing + negligible bond yields = asset price inflation. Just weeks after the most expensive painting ever, The Scream, sold at auction for $120mm and 6 months after the most expensive comic, Superman #1, sold for $2.16mm, the most richly priced piece of sports memorabilia sold for $4.4mm over the weekend. It was a circa-1920 Babe Ruth original game jersey. The price exceeded the previous sports high in 2010 of the original rules of basketball written by James Naismith, and the $2.8mm paid for the T206 Honus Wagner 5 years back.
Whether it's gold, comic books, baseball cards, paintings or diamonds, the global debasement of paper money drives a more fervent demand for hard assets.
Tuesday, May 22, 2012
Heads Up Hoofy
As I continue watching the corporate bond market for signs of deeper troubles in equities, it is fair to say that things are not heading in the right direction.
For months, I highlighted the indiscriminate buying of new corporate bond issuance at any price. Then, I noted that sovereign credit derivatives overseas started acting up, but that corporate buyers were undeterred. Then last week, some deals that were prepping to come to market with much fanfare were downsized and priced down almost overnight.
And this morning, the daily letter "Axess" notes that Frontier Communication (FTR) had to pay 1% above its existing debt to issue $500M of paper, and that several deals were pulled. From the "lower left to the upper right" is not a good thing when it comes to junk yields, especially in the absence of a lot of supply, and particularly not at the recent rate of change.
Yesterday equities rallied, and this morning sovereign spreads are meaningfully tighter and the 2-year swaps are back below the 35bps area. That is a good thing, but if corporates remain shaky it won't be enough to give the all clear for the end of the equities pullback.
To read the headlines this morning all will be well in Europe when the Greek and Spanish banks get the capital they need.
But that mood was higher.
The problem that both Greek and Spanish banks have is that the risk depositors face is not capital sufficiency or even liquidity but conversion. Sticking around means not just the risk of default, but also the risk of ending up with a deposit denominated in some highly devalued post-euro exit currency.
I wish I could be more encouraging on this point, but once you introduce conversion risk, short of a material improvement in sovereign creditworthiness, there is little that can be done to slow the pace of capital flight.
Imagine what would happen if depositors in a financially-troubled state like California knew that California could leave the U.S. dollar.
Snap, Crackle, Pop
Ken Wolff & Shawn Wolff
It was nice to see the rubber band finally snap yesterday. I guess the big question today is whether we will see a straight continuation of that upward momentum, or is this going to be one of those choppy market reversals, marked by a lot of false alarms and narrowing ranges?
I find it hard to trust buyer stamina when there is still no real resolution to the European situation and the threat of further bad news is hanging over our heads. My philosophy however is to follow my nose and assume a trend will continue until I see solid evidence to the contrary. As long as I'm seeing higher highs, I assume we are still moving up.
Both QQQ and SPY have broken above yesterday's highs in premarket trading, as well as some of the stronger climbers from yesterday like AAPL and CAT, so I don't have reason to believe the tide is turning just yet. Presuming a general upward bias then, we will be looking for light early profit-taking and longs off the first pullback. For long candidates I am watching some of the better oversold rebounders from yesterday like MOS, HON, and LVS. My skepticism is keeping me on guard for any unexpectedly sharp selling though, and dragging my upside targets down. I can imagine a narrower, drifty uptrend today.
Wednesday, May 23, 2012
Credit Spread Breakdown
Michael A. Gayed
I have continued to sound the alarm on the dramatic breakdown in credit spreads last week, warning that unless a recovery happens soon, a waterfall decline in stocks could ensue. While I remain optimistic on the 2012 reflation theme, we remain at a very critical juncture given the event risk that seems to now be priced in through the weakness in Junk Debt (JNK) and Emerging Market Debt (EMB) relative to the soaring Treasury (IEF) market.
With Germany's 2-year notes now yielding nothing, the fear is now at a fever pitch, and should credit spreads continue to widen as they are doing currently, it is entirely possible for a collapse from oversold levels in stocks to occur.
While this is not my base-case scenario, the odds of the move are now directly tied to the behavior of Junk and Emerging Market debt, which magnitude and speed-wise are essentially scared of a coming crisis (Greece may indeed be it).
The dilemma is that there is no way of knowing if spreads will narrow or blow out further, because right now that is the stock market's leading indicator. Our ATAC (Accelerated Time And Capital) models used for managing client accounts remain in defense mode, sensing a deeper decline may yet come for equities.
Amazing how one week changes everything, doesn't it?
S&P 500 Update
After yesterday's close things didn't yet look so ugly for the S&P 500, and the high probability trader needed to give more upside (before downside continuation) a chance.
The EUR/USD, however, is cascading lower today and the dollar index is holding above 82... and that likely changes the picture here for the immediate term. I am pointing this out at the risk of getting too bearish too low in the immediate term.
Measured from the top of the last consolidation zone at 1365 down to last Friday's lows, we retraced 50% of that move at yesterday's highs. As I like to use 23.6% Fibonacci extensions for my price targets, I will point out that the 23.6% extension target of that move is near 1275. See the 60 minute chart. The 200 day simple moving average currently comes in near 1280.
On the daily chart, things are quickly looking worse as well. Should we close with a nasty red bar today following yesterday's doji, that would also point us toward 1280 at the very least.
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More On Oversold Conditions
McClellan Summation index is a level commensurate with `historical oversold levels'. Its current intraday reading is -2950. This reading is at an extreme oversold level in a relative sense, since its slide from +4000 to -3000 is the largest in 3 months per the 25 year history of this indicator that I have access to.
The market remains extremely oversold across many spectrums. If the market finds a catalyst, such technical conditions will help with ignition. Till then, fuel can only wait under the wings.
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European Currency Conversion Insurance
Yesterday, there was chatter that Merkel or the EU was developing a deposit insurance scheme that caused markets to surge into the close. It was not clear if it was raising the limit, because there is already a deposit guarantee scheme in place (see here) that guarantees 100k of European deposits on a country-by-country basis.
Professors Atwater and Rife both suggested that the chatter could have involved a plan to create a currency conversion insurance, which would fit directly into the vein of the ECB and EU's plans to mitigate the danger of a Greek exit from the Eurozone that was discussed yesterday morning. This could also have played into the scare this morning that the Swiss were raising the deposit fee on accounts (a currency conversion insurance, if you will) due to Swiss banks being looked at as a safety country.
Here's how it would work, to my knowledge:
Say you have 100 million euros in the bank in Greece, but Greece leaves the Euro and reverts back to the Drachma. Drachmas are now worth about 50 cents on the dollar, but because there is insurance for the swap, you are made whole at your full value of your deposits (up to a certain point, possibly), essentially getting 200 million Drachmas. The big question here is who would pony up the backstop, the ECB, EIB, EU? And would implementing these plans slow a deposit flight?
Option Action: Enthusiasm Begins to Fade
The market was initially able to extend some of the gains following yesterday's furious late-day rally bu itt is now turning back into the red. The initial enthusiasm was evident in not just the pullback in the VIX, but really highlighted by tremendous amount of call volume in the SPDR Trust (SPY). At the 11:00 ET mark, there were more than twice as many calls traded as puts, producing a put/call ratio of just 0.47. A typical reading for index or broad market ETF's is usually 1.25-1.75, and a reading above has occurred a third of the days over the past six months. To illustrate what an anomaly and how unusual this is, I can only find three occasions so far this year that the put/call on the SPX or SPY finished a day below 0.75. If this weakness continues today, it will not be the fourth as the SPX put/call has moved up to 0.85, and the SPY up to 0.72 at the noon reading.
Among the most bullish trades occurred in Pandora (P) after the online music firm posted a smaller-than-expected loss, and shares have popped 16% to $12. One trader established a bullish risk reversal through the purchase of 10,000 September $14 calls and the simultaneous sale of 10,000 of the September $9 puts for a net debit of 23 cents. This will carry through another earnings report and will allow the trader to see if P can deliver on its promise that it knows how to monetize mobile, which of course has become a hot topic.
Gold has bounced off its recent and December low of around 1490, or around $148.50 in the SPDR GOLD ETF (GLD), and today sees renewed optimism and maybe some bottom picking for the shiny metal. Overall option volume is running twice its daily volume and there have been 2 times as many calls traded as puts, with 65% of that volume occurring at the offer price and being reported as opening transactions by the ISE, indicating new call buying.
Making a cameo on the unusual activity list is Phillips 66 (PSX), which only came public at the beginning of May as a spin off from Conoco Phillips (COP), and had options listed a week later. Total option volume had been averaging just 450 contracts a day. Today more than 5x that amount has traded in a single strike as the August $34 saw the purchase of 2,500 contracts at $0.60. This is an opening purchase.
Friday, May 25, 2012
T Report: Attack of the Killer E's, Ease, & Eeze
My view from earlier this week remains intact and seems to be playing out. Project bonds are coming. The ECB (except for Weidmann) continues to say positive things and act as though there is more to do. The Fed has been quieter than I expected, but I still believe they will do something, bank credit spreads remain too wide for their comfort level, on top of what was definitely weak economic data across the globe. We have not really had a capitulation move up, so the squeeze remains a potential.
Risks remain that the policy responses are underwhelming, but I think they will do enough. Bankia is being fully nationalized by the looks of it. Some pressure on Spain, who will need money to do that, but may calm the markets.
Europe is planning for a Greek exit which is good in case it happens, but I remain convinced that as they plan, they will realize the magnitude of the issues and decide to come up with solutions that allow everyone to claim victory and have longer to prepare.
Finally, the anger at U.S. banks and JPM in particular seems to be diminishing. Fewer rants against them, and am noticing more comments that complain about the articles being too over the top negative. Still an issue, but as people question the drop in market cap versus what has really changed, the banks can be a catalyst for a strong move higher.
HYG has managed to not see outflows offering a sign that retail is not yet ready to end their love affair with credit – an important difference compared to last year.
It's also a long weekend, which generally seems to be bullish for markets. I'm not sure it will play out that way today, but it could. In a bizarre note, I'm happy that we already faded Europe's earlier rally. Needed to let doubts creep back in, but for now nothing has really changed my conviction that E's, Ease, and eeze are coming and not fully played out.
Oogling the Googler
Google (GOOG) has triggered a Rule of 4 sell on a break of triple bottoms and is stabbing below its 200 dma.
Is GOOG on the brink of a acceleration or just flushing the stops?
See daily GOOG here w/200 dma for 2012:
Vacation? What Vacation?
Michael A. Gayed
Money never sleeps, so even though markets are closed in the US on Monday, it is still worth seeing how traders are positioning for the weekend. I noted on Bloomberg's Taking Stock yesterday (which can be seen starting around the 3 minute 55 second mark via this link) that even though markets have bounced off of oversold levels, the problem is that the quality of the move this week has not been that high.
Money continues to flow into Treasuries (IEF) as bond yields fall, coinciding with Utilities (XLU) as the top performing sector of the day, following by Consumer Staples (XLP). Market internals are still clearly afraid of more weakness to come, and the whole world seems held hostage to Europe all over again. The big question remains, will reflation will return to markets?
I have stated before that Greece leaving Europe may with hindsight actually be a good thing, particularly if in response SuperBen and the League of Extraordinary Bankers ease aggressively in response. For now, caution I think still remains warranted.
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