Buzz on the Street: May Ends on a Sour Note
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, May 27 , 2013
Markets closed in observance of Memorial Day.
Tuesday, May 28, 2013
Buzz Op-Ed: A Question for Mr. Bernanke
Author is Anonymous
How can this market disregard what is happening in Japan?
Besides the Nikkei (INDEXNIKKEI:NI225), how about the yield on the Japanese Government Bonds? With debt to GDP over 250%, how high can the yield go on their bonds before bankrupting the entire nation? And what would Japan do with the $1.7 trillion in US bonds they hold if that happens?
When one member of Congress mentioned to Bernanke last week that his policy is behind the run up in stocks, Bernanke hurried to interject that it is the fundamentals and profits that may be driving the markets. As long as the P/E of stocks is within historical levels, I guess the Fed is okay with everything, even if the 35% gains in profits that companies have experienced are the result of lower interest rates.
It looks like companies are having trouble growing their top line, so maybe they will lay more people off to make the bottom line. Our government is punishing people who like to save money; punishing our elderly population so that home prices can be driven higher by the investment community due to cheap money.
Like Todd often says, "it doesn't matter until it matters." Bernanke was asked about this by a Congresswoman from California and he didn't seem to understand the question. He responded by saying that housing is still down 30% from the highs. Well Mr. Bernanke, the Fed encouraged and helped drive the housing bubble with their policies (housing should have never became so expensive) and if the REAL market price housing was a small fraction of the height of the bubble, than that would be the real price because the real market should determine prices.
Sometimes, I feel the Fed will scale back purchases (especially because the percentage of the treasury and MBS purchases they are making will be growing dramatically, because of the fact the government will be selling less bonds and home refinancing will slow) but why would Bernanke do that when he can leave at the end of his term and watch the disaster he created on TV while he writes a book about how smart he is and how his successor is doing everything wrong?
Most of the bulls are focused squarely on the Fed in judging when they believe this rally will end. As a self-professed bear, I am convinced it will be something else that ends this party. It is too simple for the Fed to cause this bull market (which I still believe is within the confines of a larger financial shift/change in the world economy as we know it) to end.
Thank you for your time. This has been my therapy for the week.
The Retest Fail
One of my all-time favorite risk-reward entries is happening. The market opened up with a nice gap, ran straight in to the old trend line, and has been falling ever since. The trade goes like this:
1) Short against the old trend line.
2) Stops at old highs.
3) Target next trend line or 50-day moving average.
That being said, I added more SPDR S&P 500 ETF (NYSEARCA:SPY) puts to my existing hedge I added back on Friday. I plan to take off a good portion of what I put on today by the end of the day to keep the hedge size in my comfort zone.
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Correction Catalyst? Rates
The bond market continues to sell off as the yield curve steepens, helping push stocks higher at the margin. Following the freakout in Japan over JGBs last week, it does seem that for now, the honey badger stock market is alive and well. The stock market does like rising interest rates IF it's indicative of demand for money. Sharp increases, however, would be very negative for risk assets, and the risk is growing for such a scenario in the summer.
The complacency is not in the stock market, but rather in the speed of the bond market's movement. In the near-term, behavior remains bullish, as our ATAC models used for managing our mutual fund and separate accounts favor small-cap stocks. However, the global cyclical trade/emerging markets fat pitch remains quite muted.
Great rotation? Perhaps Summer 180.
Wednesday, May 29, 2013
Don't Get Comfortable
Credit and credit derivatives are all over the place this morning. Italy and Spain are notably worse, while large US financials CDS are flat to slightly worse, and the US CDS is better. As I tweeted yesterday, the 2-year swaps spread has been the best precursor of equity weakness for every one of the most recent -- albeit shallow -- pullbacks. Yesterday, the spread traded above 17 bps (my advertised level to watch is 15bps) and overnight it briefly spiked above 19 bps before pulling back to the 16.5 range. Sure enough, after yesterday's early jump, equities have been trading down since.
To make matters even more confusing, the corporate bond market remain white hot, with $8.3b of new issues yesterday, with HY and IG rates keeping steady.
The potential convexity risk driven by the re-hedging of MBS is growing after the 10-year and 30-year bonds (US1) were crushed yesterday. Bonds are oversold and the very important 139-30 level on the 30-year. is not far away. Throw in the fact that the Fed can't be happy that Treasuries traders are thumbing their nose at the almighty POMO, and 2-way risk is getting amped up.
P.S. Just as I was typing this, the 2-year swaps have dropped back below 16 bps, and the equity futures are coming off the lows. Buckle up!
Another Short Squeeze on Tap?
Just when markets were starting to become reasonable, another potentially bullish setup has emerged in the Russell 2000 (INDEXRUSSELL:RUT) targeting another 3%+ move above current levels to 1036. Possible catalysts: window dressing (for funds on November to May fiscal half-year ) and 401K deposit seasonality.
I'm going to write more about this later, so stay tuned for future Buzzes on this topic. Head's up!!!
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Will Snapper Last Through Contra-Hour?
I return from physical therapy -- I think I've discovered the Fountain of Youth, as I was 40 years younger than anyone else at the joint -- to find the bulls enjoying a Snapper higher. The banks (flagged earlier as trading dry) and semis are leading the upside speed, although breadth on the big board remains 4:1 negative.
S&P (INDEXSP:.INX) 1650 -- past support, current resistance -- should offer a road-map as we turn into contra-hour, while S&P 1635 is a half-step support on the way to S&P 1600, if and when, per the chart below.
And yes, I see the nuttiness that is Fannie Mae (OTCBB:FNMA) -- either that, or I'm having a vivid, and somewhat disturbing flashback!
Somewhere, some table has a ton of money on it, right where I left it with the rest of my $70-line puts that expired worthless.
As always, I hope this finds you well.
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Thursday, May 30, 2013
News from the Front
Japanese large investors sold $11.06b in foreign bonds last week and also sold $1.04b in foreign stocks. This marks the second straight week of selling with $8b of foreign bonds sold the week prior. Japanese investors have been net sellers of foreign bonds the majority of this year.
With regards to the Japanese pension fund, it's not exactly news that it's mulling a shift into equities. They also shifted into gold late last year and leaked stories of shifting into equities this February and March. This shift would occur at the "end of the next fiscal year" - I could not find when their fiscal year is. It is not insane to think of yields repricing to new growth and inflation points.
All things considered, if you are bearish on the overall picture and positive on Treasuries, this is one of the better case scenarios for the day. Treasuries basically flat with equities getting off oversold levels. I'm still concerned that I don't think the Treasury market or any bond market could mount any serious rally between now and the June 18 FOMC meeting.
Dividend stocks doing pretty good today, outperforming the broader market at the open, but have now settled down. MLP's still getting the smackdown. REIT's mustered a shot into positive territory at the open, but have since gone into the red.
If this scenario of real (TIP) yields continues to drive the whole Treasury complex to higher rates and a flatter curve due to monetary tightening, then TIPS should be avoided at all costs. If anything, a pairs trade of TIP vs IEF (same duration) could be employed. Is it possible that the 10-year breakeven spread could compress to 1.5% from its current 2.2% and peak of 2.6%? Considering where the path of inflation is (down) I would say that alone it could be completed by a pure selloff in TIPS.
Dr. Copper has long been hailed as the ultimate economist. But what about Dr. Lumber? Yesterday's email read like this, "Let's see, Home Depot (NYSE:HD) (HD/$79.49/Market Perform) sales are strong, home prices are firm, new home inventories are tight, new home sales are decent, home building stocks are soaring; and yet mortgage rates are rising and lumber prices have collapsed (see chart). So what the heck is going on with lumber if housing is sooooo strong?" Well, a couple of thoughts on this: 1) weather conditions in the East have delayed some construction projects; 2) end-user inventories started to rise at the end of 1Q13; and 3) Chinese buyers have temporary slowed their buying activity. Moreover, some of the spike toward the end of 1Q13 was due to limited rail car availability that constrained availability (an issue that has since been resolved). Looking back over time, lumber pKeep Your Motor Runningrices typically follow a seasonal trend. A pullback this time of year is not out of the ordinary. I agree that this drop in lumber prices may support the argument that the growth rate in new construction activity isn't surging (homebuilders are pushing prices over pace), but too many external factors are at play to use lumber prices as a read through for new construction starts over the last few months according to my analyst, Collin Mings. Another thought is that charts like the lumber chart make them feel better that their "WAY" below consensus projection for total housing starts this year is more accurate than not.
And yesterday, the stock market seemed to reflect on that "glass is half empty" point of view, leaving the S&P 500 within a point of where it closed last Friday before Tuesday's Triumph. As stated in yesterday's Tack, "The SPX ran right back to the stubborn energy level of 1675 Tuesday before halving its early gains into the closing bell. The good news is the SPX stayed above the often mentioned other energy level of 1660. The bad news is that yesterday's attempt at new all-time highs used up more of the market's daily internal energy, implying we could churn for another session or two." Obviously, Wednesday's "print low" of 1640.05 was more than a "churn," but there was still no major damage to my 1700 thesis. While some pundits note that Tuesday's early upside failure came on light volume, suggesting a failed low volume test of the May21st/22nd highs, I am not one of them; at least not yet. I think the SPX's daily energy gets recharged, leading to a bottom today/tomorrow followed by a resumption of the rally since the McClellan Oscillator is again VERY oversold on a short-term basis.
Keep Your Motor Running
Today's 10-min Telsa (NASDAQ:TSLA) is a good example of an ORB reversal, or put another way, an undercut of the morning range/morning low (an algo hunt for stops?) followed by a stab right back up through the morning low -- the sharper the stab the better the odds for upside follow through.
See 10-min chart for Tesla today below.
So, from the knife back up through the morning low around 104, the presumption is a test of the morning high.
After a little +1/-2 pullback on the 10-min, Tesla gets on its heels again triggering a Rule of 4 Breakout on the 10 min on trade through 108. The breakout was shortlived however and back below the breakout line is the stop.
Especially as today's highs show a possible test of yesterday's large range signal reversal bar.
Tesla now shows what may be a Pivot High Reversal a signal bar reversal high surrounded by two lower highs.
Importantly - potentially - yesterday's large range reversal on Tesla was the second such large range reversal in 2 weeks. Second mouse gets the cheese?
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Friday, May 31, 2013
The decline in Disney (NYSE:DIS) accelerated yesterday. The stock has been down since CFO comments at the Nomura conference. I did not hear anything really new so I just listened again to the replay. The first question was a softball to the CFO. He said "instead of answering it I want to clarify a few things I said on the last CC about the current Q." He also mentioned that he thought analyst estimates might not be accurate. By that, he means too high. Sounds bad but when he went over the items, they were all things mentioned on the call including: 1) Iron Man 3 vs. Avengers comp costs studio $150 million in op income despite massive success of IM3; 2). ESPN revenue deferrals; and, 3) lapping opening a year ago of a new cruise ship. I can see traders selling this news but it is noise if you own Disney for more than a few days or weeks. Never good to talk estimates down, even if it is not really new news.
Media stocks have been lagging the last few weeks and again yesterday after trying to bounce back early in the session from very weak action yesterday. I think fundamental are good, particularly as it relates to advertising. The group is up huge over the last year and several years, so I suspect you have some profit taking as sector rotation mentioned by other professors occurs. I am long a lot of media stocks (Liberty Media (NASDAQ:LMCA), CBS Corporation (NYSE:CBS), Comcast Corporation (NASDAQ:CMCSK), Disney, Discovery Communications (NASDAQ:DISCK), Liberty Global (NASDAQ:LBTYK), Starz (NASDAQ:STRZA), Entravision Communications Corporation (NYSE:EVC), Nextstar (NASDAQ:NXST), The E. W. Scripps Company (NYSE:SSP), Dreamworks Animation SKG (NASDAQ:DWA), Carmike Cinemas (NASDAQ:CKEC) and Lions Gate (NYSE:LGF), which reported yesterday) as usual but have not added any new positions in the sector recently. In case you are wondering. Yes, the last couple of weeks have been frustrating.
Hot Enough for Ya?
Good morning and welcome to THE HOTTEST DARN PLACE ON THE EAST COAST! With temperatures expected to tickle triple-digits today you can't blame traders for feeling the heat, particularly after the longest short week in recent history. Drink alotta agua and stay hydrated; in seven or so hours, it'll be time to unplug.
Yesterday we discussed the "dollars vs. dimes" bull-bear debate, noting that the third "lower high" came into play in and around S&P 1662, which happened to be the high tick yesterday. One overnight futures session does not a market make, of course, but we would be wise to keep half and eye on our stair-step levels, which include S&P 1650 (below there now), S&P 1635 (neckline of the dandruff that potentially "works" to S&P 1595-1600). Seeing both sides, S&P 1660-ish, 1675 and 1690 are tranched resistance if the bulls again find their groove.
I continue to trade around a short bias in the S&P which doesn't make it right, but it's where some of my chips are stacked. Perhaps I'm being a bit stubborn--a bubble in complacency can last longer than out-month paper--but I've got some levels to lean against in an effort to tighten my outstanding risk. As always, we'll take our journey one step at a time and play the hand we've been dealt.
Stay cool, and good luck today!
Lions Gate Rips
Old favorite Lions Gate is popping about 3% this morning on better-than-expected Q4 results. EPS came in at $0.66, beating by a whopping $0.21. Revenues were $786 million, surpassing the $747 million consensus.
I suspect the stock's going to be a momentum monster heading into the major November release slate (Hunger Games 2, Ender's Game), so I'll definitely be looking to add to this position as we work our way through the summer.
I'm still finding that most mainstream investors haven't heard of Ender's Game or Divergent, (though the analysts are fully on board) -- they still think the stock's all about Hunger Games. To be honest, I get the feeling that the hype machine for the second Hunger Games may disappoint relative to the first, though that may change in the coming months.
That said -- the key to stocks like this is monitoring the hype. The actual results are secondary because the money is made before the news.
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