Here's a small sampling of the 120+ posts seen on the Buzz & Banter this week:
Monday, May 12, 2014
The equity market had a decent week, and it's kicking off Monday in similar fashion. Bonds had a weekly down (high above previous week, settled lower on week) but are impressive only in their somnambulist behavior.
The prevailing (bearish) wisdom has been that the duration buying is signaling impending equity market weakness and/or geopolitical risk. I've never agreed. The portfolio rebalancing out of momentum and back toward bogey has been my focus. The relatively stable low rate structure is buttressing, not impeding, the expansion. (It's hard to call it a recovery anymore.) I expect summer to be more interesting.
As the Federal Reserve now admits, its ability to exit the market is limited. Its focus is now on what shape it will remain in as the system's biggest, clumsiest player. The shape is the reverse repo facility (RRF), also known as the "Death Star," and recognizing its insignificance, now term deposit facilities (TDF). I had been hoping for change that would return to a market participant rates regime. This no longer seems possible. The Fed is the market and the only critical-mass counterparty. Federal Reserve Chair Janet Yellen will have to escape the bounds of simple economics and accurately calibrate both the quantity and the price of money in the biggest economy in the world. The pundits misdiagnosed this easier phase badly. I anticipate some great explanations later when things get more complicated.
Tuesday, May 13, 2014
With the S&P 500 (INDEXSP:.INX) breaking out to new all-time highs above 1900, I wanted to put in a couple of five-year weekly charts that show where markets are relative to each other.
In the first chart, I put the S&P up against the PHLX Europe Sector (INDEXNASDAQ:XEX) and the iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM).
Click to enlarge
As you can see, betting on the good old USA has paid off relative to much of the rest of the world, though emerging markets, most notably Brazil, have been on fire since February. On a 10-year basis, however, the picture looks different. Emerging markets have actually outperformed over a longer time horizon.
Interestingly enough, Europe and emerging market economic conditions have been concerns for US companies during this year's first-quarter earnings season [subscription required].
I'm a believer in the emerging markets catch-up story, with positions in Russia and Eastern Europe ETFs and closed-end funds. Those markets are trading at extremely low valuations and have tons of bad news baked in. Yahoo reported today that Jim Rogers is bullish on Russia as a "blood in the streets" play.
I would mention the specific names I own, but they're somewhat illiquid. If you're looking for exposure to those regions, there are plenty of resources on the Web.
On a semi-related note, I saw a tweet from FactSet today indicating that Russia accounts for 1.5% of S&P 500 revenues, which is a big reason Crimea hasn't impacted our markets. Just a piece of trivia that's good to know.
In the second chart, I plotted the S&P against biotech and utilities. The outperformance in biotech, even after the big slide off the February top, is just nuts
Utilities have been on fire this year (the Utilities SPDR ETF (NYSEARCA:XLU) is up 10.5%) courtesy of the lousy weather. That group has had a spectacular first-quarter earnings season.
In the past couple of weeks, XLU has pulled back while biotech has firmed. Watch that relationship. Ongoing rotation from the stodgy (utilities) to the aggressive (biotech) would be supportive of a pop higher.
Click to enlarge
Wednesday, May 14, 2014
Investor Positioning Signals Bullish Implications
• Bank of America's (NYSE:BAC) fund manager survey released yesterday had a number of bullish signals. Its domestic survey had fund managers' cash levels up to 5% in May -- above its 4.5% "buy" level -- although cash levels have been above 4.4% for the past 11 months. The chart below is from Bank of America Merrill Lynch. The one caveat: When cash levels were at this level two years ago, managers were underweight equities. They're now 38% overweight versus 45% overweight last month.
Click to enlarge
In addition to high cash levels, managers are also defensive in their positioning. The survey's question that asks "What level of risk do you think you're currently taking in your investment?" has now dropped to -22% from -11% and is at its lowest level since October 2012, which preceded a significant rally.
Their takeaway is that the path of least resistance is higher for both equities and credit. This also matches up with Todd Harrison's observations for the Smart Money Flow Index that the smart money has been selling and raising cash. However, the above and following evidence supports that this is a bullish machination rather than bearish.
• Pin risk heading into Friday's (May 16) double witching expiration, when monthly stock and index options expire.
Expiry Picture (courtesy Jefferies via Joe Digiammo): With two trading days remaining, the big gamma risk is upside 1900-1925 calls. Between the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the S&P 500, there's a net $40 billion notional in net calls open between the 1900 to 1925 levels, which could exacerbate a move higher (you can see this as the upside volatility players are holding their bids).
To the downside, I would bet index desks are now long way too much gamma as customers have been scrapping May puts to buy June puts ahead of expiration. Dealers being long May gamma in the 1850-1875 area would likely keep a seat belt on any sell-off.
• Neil Azous of Rareview Macro highlights in his morning note the increased short interest for retail traders in the S&P 500.
The FXCM Speculative Sentiment Index (SSI) is a retail tool that gauges trader positioning and sentiment in the foreign exchange market. Yesterday, SSI expert David Rodriguez said, "Retail short interest in the SPX 500, which tracks the fair value of the S&P 500 E-mini futures contract (i.e., tracks the cash index), is far away its largest on record. Usual caveats about calling the sentiment and the price extreme apply. It remains a contrarian buy."
Thursday, May 15, 2014
Clear & Present Markets
1. Prepare for falling gas prices! The drillers apparently haven't gotten the memo that first-quarter GDP was almost zero, and they ramped oil and gas production from the lower 48 states to a record level (7.9 million barrels) last week. Inventories of crude and refined products are flush, and the industry seems to be doing all it can to push petroleum prices lower, easing pressure on the consumer. Since the end of the first quarter, weekly production has increased about 2%, and the drillers are likely getting good realizations on this production; however, monitor prices, as those margins could deteriorate quickly. Exploration and production companies are known for lacking capital discipline, ramping production in advantageous pricing environments, which quickly erodes favorable pricing -- this time appears to be no different.
2. In April, Treasury Secretary Lew announced that he was making Ukraine an agency of the US government, enabling them to issue $1 billion in bonds, on which the US government would guarantee principal and interest payments against default. I point this out because the US is so far out on the slippery slope with bailouts, backstops, and budget shenanigans that there's no turning back.
If unelected officials of the government can guarantee that US tax dollars will be used to backstop payments from Ukraine to Gazprom (MCX:GAZP), how can it say "no" to any US company, municipality, or constituent in need? The dollar is stronger this week against most major currencies, but the economic tools being used to fight the soft conflicts around the world are eroding the foundation of the dollar's status as a reserve currency. Financial analysts will tell you that it's rarely what is on the balance sheet that triggers default. It's the continent (off-balance sheet) liabilities that sink the ship. There isn't enough money to pay all of the obligations of the US government. As such, the job of elected officials over the next decade will be deciding which promises are defaulted on and how those promises are restructured. There's no catalyst to bring this to a head at the moment, but those eventualities are rarely evident when such promises are made.
3. Is Wal-Mart (NYSE:WMT) the next Sears (NASDAQ:SHLD)? Wal-Mart missed earnings by a nickel, but more important is that even where the company thinks it's executing well (e-commerce), it's failing. The store is trying to be all things to all people, and it's lacking on all accounts. I visited a store this weekend, and it was a horrible experience. The store smelled like old rotisserie chicken or gym socks (the smell is similar). It was also disorganized, dirty, and bursting at the seams with inventory that will never move. Amid all of the junk in the store, the item I was looking for was not in stock, so I ordered it online, paid a few extra bucks for quick shipping, and it arrived damaged and had to be returned.
The point is that higher e-commerce sales may be indicative of poor inventory and stocking decisions at the store level, and poor execution on all levels is pushing consumers to competitors. When I compare this experience with my typical Amazon (NASDAQ:AMZN) "trip," it falls short on every count (website, packing, execution, and lower desire to spend money at the store in the future). Peter Atwater of Financial Insyghts pointed out in his recent TEDx Talk that the consumer is in a "me, here, now" mindset, seeking individual connections over mass indistinctiveness. The message Wal-Mart sent when the item was not in stock was that it doesn't understand the customer. What it told me when it shipped damaged goods is that it doesn't care. The problems at Wal-Mart are about relevance with customers more than weather, and let us not forget that a lack of differentiation and relevance pushed Sears into bankruptcy a little more than a decade ago.
Friday, May 16, 2014
You're Going the Wrong Way!
This morning, Wunderlich Securities raised Twitter (NYSE:TWTR) to a "hold" from a "sell" rating, while trimming the price target to $35 from $38.
As it stands, the Wall Street analyst community breaks down on Twitter as follows: eight buys (23.5%), 18 holds (52.9%) and eight sells (23.5%).
One of my favorite tells is to look at the aggregate "mood" on a particular stock. In this case, over 76% of Wall Street analysts surveyed view Twitter as a "hold" or "sell," which I view as bullish because more upgrades than downgrades are in the future.
I remember back in 2005, at Minyans in the Mountains in Ojai, I noted in my keynote that looking at the entire S&P, only 7% of all recommendations were skewed to the sell side. It was clear that a lot of folks were sitting on the same side of the table.
Twitter isn't as compelling in here -- there are mixed opinions -- but the same basic premise applies. Sell hope, buy fear, and trade in between.
Good luck today.
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