Buzz on the Street: Dear Brother, Can You Spare a Big Fat Greek Pun for This Weekend's Elections?
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, June 11, 2012
Watch the Piggies
Below is a technical chart for the Financials (XLF), highlighting support/resistance levels to keep an eye on. Until the upper and lower levels break, we're rangebound between 13.80-14.25.
Click to enlarge
Another Schizo Day in Bond Land
Another day, another notch higher in bond traders' schizophrenia. While the sovereign bond and derivatives markets put in one of the worst days in recent memory (and that's saying something), corporate bond buyers could not care less. Following up on last Thursday's issuance of more than $8 billion in new bonds, today, another $7+ billion went out the door with some deals upsized and spreads looking pretty silly from a risk/reward perspective.
If we use the 2-year swaps as a tie-breaker, corporates are probably in the cat-bird seat, since swaps have not budged despite the bloodletting in sovereign. The better question is perhaps "does it matter?" As long as this pattern continues equities carry a built-in debt-financed buy-back bid, which just won't quit.
Tied to corporates, I've been keeping an eye on the 11.875% 2nd lien bonds of ATP Oil & Gas (ATPG), now trading sub-$0.50 with a yield of 48%. All sorts of problems with this name, but as an equity substitute with secured status on some large assets, it's becoming intriguing. One thing is certain: if the bonds are not worth $0.50 on the dollar, the equity is a tad overpriced at $5/share, if you catch my drift.
On the Radar
Remember the TED Spread in 2008? Key indicators emerge in every market decline (or rally). I find that they give us getter guidance about the market's short term direction than individual stocks.
The tells of the latest move have been TLT, and banks such as DB, STD and BBVA.
On 5/31, I noted the extreme action in the yields and noted that a tag of the 3rd BB followed by an immediate reversal is usually a contrarian indicator, indicating extreme levels of negative sentiment (and the possibility of a relief rally) in the short term. (Pls see note 5/31)
The next day, that offered us a tradable market low and a nice bounce. Looking at the same chart, updated after the recent market move, it seems that the yields have been unable to break above the 20-day MA.
Needless to say, it's on my radar as caution.
Tuesday, June 12, 2012
With the equity markets headed on their merry way up today on the backs of happy headlines from the ECB, the credit markets aren't buying it. IG18, the CDS index of investment-grade companies is wider by 1.25bps today while the high-yield index is +4. The underlying cash bond market is also moving in step with the selloff in Treasuries, which is +4bps in the 10-year yield as I type.
With everyone focusing on every tick of the Spanish 10-year yield, who is right?
Swimming up a Waterfall!
We often say the destination we arrive at pales in comparison to the path we take to get there; I've been reminded of that a lot lately as the bipolar stroller continues.
Last week we had too many bears -- and we rallied sharply. Sunday night, we had too many bulls -- and they took it in the teeth. And now, as the ursine uglies growl anew, the tape is attempting to put on a brave face.
And you wanted to be a trader...
What I can say is that I don't envy the 'big gorillas' who are trading size; moving that amount of merchandise in this environment is like trying to turn a cruise ship in a canal. I've been there and done that (the Asian Contagion and tech bubble) and it's not an easy way to make a living, although it can be quite lucrative. I prefer to view obstacles as opportunities. I'm not mandated to trade big risk or multiple positions, I've manage my profile accordingly.
I'm still "mid-leg" after unwinding my Google (GOOG) short down $8 (-$25ish from where it was initiated last week). I'm still there with my Apple (AAPL) long with a stop below $570 but that's admittedly tight, even by my standards. Suffice to say that I respect the potential volatility surrounding the Greek elections on Sunday and while the markets could resolve to the upside (there is big headline risk), I'm not in the business of flipping coins.
Here and now, while I can manage risk, I'll note the traction in the financials (JPMorgan (JPM) is at session highs) as the BKX edges back toward a date with destiny (BKX 44). The general tenor is constructive -- and the put/call is elevated, which is on-the-margin-bullish-and while my exposure is right-sized, I'm net long for a trade with defined risk. I'm all about the singles and doubles and happy to let others swing for the fences (although I wouldn't recommend it).
One step at a time as we together find our way.
Monday's Daily Market Report showed the following weekly chart of Google (GOOG), which suggested a Rule of 4 Break was ahead (a break of triple bottoms).
GOOG is following through to the downside from Monday's LROD or Lightning Rod (large range outside down day).
Rule of 4's often see accelerated momentum.
In this case, it looks like there may be an air pocket to the low 500's.
Click to enlarge
Wednesday, June 13, 2012
Markets continue to show resiliency, as bond yields seem to be unable to fall in a meaningful way. More and more evidence is building that scared money in bonds is getting scared that it's wrong. This despite continued fear building in Spain and Italy's sovereign debt. What might explain this? We may be at a moment where the worse it gets in Europe, the more likely global shock and awe by monetary and fiscal authorities becomes. This means more and more reflation, which as I have stated time and time again is a bullish environment for risk assets. I suspect we are about to see a more meaningful period of outperformance in Financials to come as the yield curve begins to more aggressively steepen. When it comes to banks, we likely are going from "buy the rumor, sell the news" to "short the rumor, cover the news."
I am beyond excited by the way to be a part of today's live "Fireside Chat" which is going to start at 4:15 PM EST. Looking forward to fielding questions, and hope to spur some good debate!
The T Report: Greek Election is Irrelevant but FROB Isn't
The market still wants to believe that the Greek elections are an important catalyst for the market. If one side wins, the Greeks stick to the original plan and continue to destroy their country, but make the markets happy. If the other side wins, conventional wisdom, is that there will be a Grexit causing problems for the world's markets.
They are both wrong. The market is choosing to ignore more and more politicians who say that the deal will get renegotiated in any case. The EU and Greece have both finally done some analysis of what a Grexit could be and they are scared. The EU isn't scared for Greece's sake, it is scared because it and the ECB have lent so much money to Greece that any exit is horribly messy for the EU, and the instant spillover into Spain and Italy is too much to handle.
No matter who wins the Greek elections, the deal will be renegotiated with the latest deal in Spain as a template. Greece will not leave the Euro yet, and the renegotiated deal will give some hope to the people that the plan has a chance of succeeding. The ECB could make one simple decision that costs them virtually nothing, yet would have a huge impact on Greece and the market as a whole. They could convert their remaining GGB holdings into PSI bonds at cost.
Will the markets see this before the weekend? Probably not. The market is likely to thrash about based on election predictions and then the results, but it seems far more likely that the election results won't have a material difference on the outcome.
There are still virtually no details on the deal struck last Saturday, but what little we have should actually be very encouraging to the market, and so far it hasn't been. The chatter out there is that the loans to FROB will have final maturities of 15 years and will be zero coupon for 5 years before going to cash pay at 3%. Here is what we should be thinking about:
1. FROB was used rather than the sovereign as a way to retain and control what the money is used for -- the purchase of common equity and CoCos in Spanish banks. This isn't a general bailout to Spain, this is specific, asset based lending and represents a shift in mentality.
2. While you cannot solve a debt crisis with more debt, you can help by replacing short maturity high coupon debt, with long maturity low coupon debt. Low coupons relieve the immediate budget problems, and longer maturity gives time for plans to work out. A fifteen year loan is appropriate for the purposes of taking equity stakes in banks and giving time to sell the stakes and repay the loans. Again the low coupon and long maturity represent a very big shift in EU attitude.
In the end, maybe the details won't match what little positive has leaked out so need to be cautious, but be careful about underestimating what this program is trying to do. It may become a model throughout Europe. It would not be surprising to find out that they institute a similar program in Greece post election in an effort to separate the bank bailout from the overall bailout.
There is a lot of confusion about who is lending to who, how it is unsustainable, or how it is massively subordinating existing holders, etc. The lack of details isn't helping, but neither is ignoring some details.
Here are the yields on 10 year EFSF bonds. 3% for 15 years does seem aggressive given the recent move, but at 2.74%, EFSF continues to trade and borrow at reasonable rates. It just issued €1.5 billion of 25 year debt at about 3.375% yesterday.
EFSF is convoluted like everything else in Europe, but as a quick reminder, the EFSF has €726 billion of committed guarantees. It uses those guarantees to get a rating and to issue bonds to the market. No country actually provides money up front to the EFSF. The EFSF has effectively committed to capping issuance at €440 billion which is less than the combined guarantees provided by Germany, France, the Netherlands, Austria, Finland and Luxembourg. It is this over guarantee that creates confusion. The total amount of guarantees that the EFSF has to play with to secure funding is much higher than the amount of funding it is allowed to access. In the end it relies on the guarantees of the 6 best countries.
So is Spain lending to Spain? Again, the answer is not really. Spain's guarantee is largely irrelevant since no one buying EFSF bonds is relying on it. The other issue, is that the EFSF would be lending to FROB which although it has a Kingdom of Spain guarantee is an issuer in its own right, with its own assets that will be used to pay back the loans (in theory).
The ESM is more confusing as it has some "paid-in" capital. We have been laughing at the paid-in capital concept since the day it was announced. Visions of some fully funded vehicle are just wrong. The ESM actually looks a lot like the EFSF.
The ESM is supposed to maintain a leverage ratio of 6.67:1. So for every €1 Euro of paid-in capital, it can borrow €6.67. If the entire €100 billion was coming from ESM, then ESM would need €15 billion of paid-in capital. Italy is about 18% of the paid-in capital, so Italy would have to come up with about €2.7 billion of money. So, Italy would have to borrow €2.7 billion at 6% for example. Italy would then receive net "profits" on about €18 billion of loans to FROB. With that amount of leverage it takes only a small margin above cost for Italy to break even.
In the end, the initial capital call will be larger. I cannot figure out the latest (it will be adjusted based on the amount used up by EFSF), but haven't seen a figure bigger than €40 billion. On €40 billion, Italy would need to come up with about €7 billion, and Spain itself would need to come up with just over €4 billion, but the ESM would be allowed to lend €267 billion on that. For costs and ease of use, giving the ESM direct access to the ECB would be helpful.
In any case, it is all circular and relies on guarantees, but Germany and France bear most of the risk, and the ECB's involvement is key to whether it buys much time or not.
It is all a giant ponzi scheme, but with the ECB as the hub, their willingness to lend at low rates and print money can keep the ponzi going far longer than it should.
Thursday, June 14, 2012
That Was Fun
My dad once said "the only better technician than Greenspan for 'surprising' the market was Bernanke". While I don't think this is all Bernanke's doing, you'd have to admit the headlines over the past 40 minutes are a bit nuts:
From Reuters at 3:06: G20 said to indicate that Central banks are preparing for coordinated action to provide liquidity if necessary after the Greece elections.
From Reuters at 3:23: Eurozone finance ministers to hold an emergency conference call to discuss the outcome of the Greek election on Sunday evening.
From Reuters at 3:32: G-7 ministers may hold an emergency meeting on Monday or Tuesday in Mexico to discuss the outcome of the Greek elections.
And finally. from Bloomberg at 3:45: The U.K and Bank of England are prepared to increase the flow of credit into the financial system by activating an emergency plan to inject 5 billion pounds in return for assets.
Note, however, that this latest bit of news was somewhat expected.
All on the eve of options expiration no less...
Following Up on Michael's Comments on QCOM
In response to Michael Comeau's comments on Qualcomm (QCOM), I'd add that CLSA analyst Matt Evans was out early today with negative comments on Samsung smartphone shipments. Apparently, he noted a slowing in high-end models (mostly the Galaxy 2), and in low-end models within China. He spoke to Samsung Investor Relations, but also indicated no problems with the Galaxy 3.
I suspect that the Galaxy 2 weakness is not a big issue give the very high expectations for Galaxy 3. Then again, Apple's (AAPL) big numbers have been partly from its ability to keep prior generation models popular with price cuts. The low-end China weakness was contradicted by another analyst earlier this afternoon. I recall reading some reports on QCOM that are counting on low end China and tablets to carry the day until iPhone 5 comes and 28n supply constraints are solved.
I am long QCOM and getting smoked today. I lightened a little on Broadcom (BRCM) today as it is holding up. Lightening on BRCM just in case the smartphone weakness thesis (which Michael has nailed so far at least as smartphone-related stocks go) gains credence.
Breaking: Natgas Inventories
After eight straight weeks of NatGas inventories rising more than expectations, stockpiles came in at 67 BCF, missing expectations of 74 BCF.
NG futures just took a monster spike intraday on the release.
Click to enlarge
Friday, June 15, 2012
No More Tears
We've got a massive catalyst this weekend in the Greek elections and the agita is good and thick. Be that as it may, we would be wise to "see both sides" and through that lens, the S&P is tracing out a perfectly symmetrical reverse head & shoulders formation.
Should the S-Car-Go through 1335, it "works (through a pure technical lens) to S&P 1400. See it, even if you choose not to believe it, and remember that technicals take a back seat to the structural metric at present.
Click to enlarge
Yesterday, Herbalife (HLF) broke out of a rounding base.
It looks like HLF is set for continuation above 46, as shown in the chart below.
Click to enlarge
IDC Increases Tablet Market Forecast, Raises Apple Market Share Assumptions
IDC just increased its 2012 tablet forecast from 106.1 million to 107.4 million units. This is pretty impressive, given that IDC made a major increase to its forecast back on March 12, when it went from 87.7 million to that 106.1 million unit number.
IDC now expects Apple's (AAPL) share to 62.5% from 58.2% in 2011. 2012 Google (GOOG) Android market share is now expected to slip to 36.5% from 38.7% last year.
Incidentally, with a little backwards math, I concluded that IDC has actually cuts its Android tablet forecast from 46.9 million units to 39.2 million units -- a decrease of 7.7 million units, or 16%.
Its iPad forecast, however, has been increased from to 58 million units to 67.1 million units -- an increase of 9.1 million units, or 16%.
I would attribute the shift to the more-than-obvious strength of the new iPad, and a slowdown in the leading Android tablet -- the Amazon (AMZN) Kindle Fire.
You can read my thoughts on the Google Android tablet market here and here.
Ahead of Sunday's election in Greece, Central Bankers stand ready, again. With all the water they have expended out of their fire hoses over the past few years in their attempt to 'do something,' I can only think of magic candles -- those candles you blow out that only flare up again immediately after.
The western world is choking on excessive debt and a euro bond, banking union, broad deposit guarantees, enhanced lending programs, QE and various liquidity facilities which only further socialize risk and try to ram down the throat of economies that need to delever to go out and borrow more. Bondholders have been put on quite a pedestal as they are the only beneficiary of this ridiculous magic candle game. With respect to the Reuters story on central bank readiness ahead of the weekend, it is bank runs about which they seem most immediately concerned.
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