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
Here is a small sampling of this week's activity in the Buzz.
And We Wait...
I thought Congress would figure out a deal over the weekend, but
the length of the deal has been the sticking point that caused the
negotiations between the White House and the House of
Representatives to break down. House Republicans were willing to
extend the debt ceiling into January but wanted to hold a
Continuing Resolution (CR) for only six weeks. President Obama
didn't want to have either deal term less than January for sure,
and he may have been holding out for a year-long deal.
So now, it is in the hands of the Senate. The Senate is working on
a variant of a proposal by Maine Republican Senator Susan Collins
in which there is a deal for both the debt ceiling and the CR
extended out six months, some sort of a committee to work on budget
issues, and a repeal of the medical device tax component of the
Affordable Care Act ("Obamacare"). I've heard from some that House
Republicans offered Collins' proposal to the President, and he
turned it down, but I don't think that happened. Everything I've
heard is the proposal from Speaker Boehner extended nothing beyond
So what now? Senate leaders continue to say there will be a deal.
If there is strong bipartisan support for the deal, it could get
done by October 17. If there is not, I'd look towards next weekend
as there are tons of procedural hurdles in both chambers that will
have to be navigated to get across the finish line. I still believe
it will be, at a minimum, a 3-month deal with a committee. I don't
think the medical device tax will be in the initial deal, but I
think that tax does go away in 2014 (not because I think it should
but because there is too much money flowing to make it go away).
I still think there is a 30% chance we
go beyond October 17
, partially because everyone now believes it is a couple of weeks
until we really default on payments. My guess is the selling volume
gains in bigger-cap names if we get to the October 17 deadline
without a passed deal. The wild-card here is some new set of
polling that shows the GOP gaining ground and the Democrats losing
ground -- though I think at this point both parties will lose
ground every day this drags on.
Will Amazon Test Its 200 DMA?
) is a leading name that exemplifies the position of many strongly
Amazon tested its overhead 20 DMA on Friday for a possible Holy
Grail short setup.
In addition, Amazon went into the Minus-One/Plus-Two sell position
The patterns define what may be a possible right shoulder of a Head
& Shoulders top.
The end of October should be pivotal for Amazon since October 26
will be 90 degrees from the square-out high we identified in late
July as well as 60 degrees from the late August low.
The authoritative stab down through the July highs last week
suggests that last week's late rebound in Amazon is a bearish
reflex bounce. However; convincingly regaining the level of the
July highs would seem to put Amazon in a strong position.
Snapping last weeks lows, suggests a test of the 200 DMA is
Below, see a daily Amazon chart with its 20, 50, and 200 DMAs from
Click to enlarge
Answering Yahoo Questions in No Particular Order
I've been getting
) questions lately as we head into its coming earnings report.
Below, see my somewhat randomized thoughts on YHOO, its coming
earnings report, and my reasons for not owning the stock.
First, I don't see Yahoo! as a great bet ahead for the coming
quarters. The stock has already put in a huge move. That said, EPS
and revenues are not the driver here as it's clearly the Alibaba
Now, if I see Yahoo! become an "earning acceleration" story, I will
feel compelled to put at least a minimal position on the sheets. In
fact, I'd rather invest in Yahoo! as an earnings acceleration story
than as a proxy for Alibaba. And until the Alibaba deal is priced,
there would be an underlying bid.
I'd rather play the name as a trade like I did last quarter. At
that time, I bought the post-report weakness for a trade and would
do so again, i.e., the setup is that Yahoo! doesn't deliver enough
upside to "thrill" the late buyers. As a result, selling ensues,
and the stock drops 4-6% or more.
That said, my projection is that Yahoo! beats slightly on both
fronts. Further, M&A should start to provide an increasing
revenue ramp after the current quarter.
The main reason that I stay on the sidelines with Yahoo! is very
simple. There are just other names I prefer from a risk-to-reward
standpoint -- on growth, value, and catalyst fronts. On the value
) is a perfect example, though there are plenty of others.
For the last year, on the "catalyst" angle, I vastly preferred
) over Yahoo!. And in the last year, Facebook is up over 150%. So,
even while Yahoo! has been a great performer, Facebook has
outperformed it by 40% plus.
On the growth side and moving forward from current price levels, I
), my networking thesis names, and possibly new IPOs like
Lastly, on a long-term and on a pure-comp basis, I still prefer
(GOOG) by a huge margin.
So for me, it's not that I don't or haven't seen the "Yahoo! upside
story." Heck, I've written about it and pretty well nailed the
current valuation. It's simply because better companies are also
competiting for my investment dollars, and for me, Yahoo! hasn't
Fracking Play #2
In a follow-up to
which I discussed last week
, here is another fracking gem:
C&J Energy Services
(CJES). The company is a little more involved in fracking equipment
and has some fracking liquid products as well, in addition to
tubing and well intervention services.
- They Look good for the long-term, but what the heck happened in
the last two quarters? C&J miss timed some receivables,
accelerated some depreciation, and expensed some Property, Plant
and Equipment. Did the company kitchen sink last quarter? No, but
it did sneak some other losses in there since the receivables issue
was already going to make a miss.
Now let's consider what went right last quarter:
1) Best retained earnings quarter in years.
2) Accelerated expenses (now this wasn't good for last quarter, but
this quarter should be stellar!).
3) Increases in assets and shareholder equity.
- You have to be careful here as this stock has huge intraday
travel ranges, so when looking at the technicals, you really have
to have a wide lens and easy view. From a simple perspective, it
has had a nice uptrend since last quarter. It now has a 50-day
moving average back above the 200-day, and the stock just closed
above both yesterday. This is generally a good entry point, and I
plan to put on a full position today.
Also, take a look at the MACD; this is a better way to view choppy
stocks like this one. It appears that momentum is building for a
push higher, and I wouldn't be surprised to see it hit new highs by
the end of the year.
Click to enlarge
The Really Long Term
. I like the industry, and I love the way that management isn't
afraid to sacrifice near-term results to create long-term value.
This is setting up for a multi-year (probably 5+) stock for me, and
I will likely just throw it in a coffee can in the back yard to be
dug up down the road.
Treasury Cross Defaults
I just learned something new that I think will be very helpful for
everyone. I did not know this, but due to the way Treasuries are
setup and issued, there is no cross-default clause. What does that
mean? It means that if the Treasury failed to make a coupon payment
of the 7-year issued in June 2013 or principal payment on any
short-term bills, it would only affect that specific debt tranche
and not Treasuries as a whole. In the case of normal companies, if
they missed a payment then all of their debt would be in default.
This explains why only short-term bills and notes that are
near-to-maturity have been dislocated while longer-term Treasuries
The takeaway is that if the market thought the Treasury would not
be able to make coupon payments then the notes would begin trading
ex-coupon - essentially like a zero coupon note - or potentially on
an accrued basis. That one I'm a little unsure of because it's
purely hypothetical what if's.
Hat tip to Scott Skyrm.
BlackBerry Takeover Talk Resumes, Options Strategy
(BBRY) just got a bit of a pop intraday on a news report from
Canadian business channel BNN that Cerberus has started looking at
the company's books.
A rumor regarding Cerberus' interest in the company was floated
on October 2
, and of course, let's not forget that co-founders Michael
Lazaridis and Douglas Regin
are also interested
in the company, in addition to the $9/share bid from Fairfax that
is actually on the table.
I have a position in
the December $9 butterfly
, which would pay off big in the event that the stock goes to $9 at
the December expiration, but now I'm wondering if a purchase of
call spreads would have been wiser.
Because of the structure of butterflies, they only really go into
the money at expiration, and in this case, let's say someone floats
in and says they'll pay $10/share for BlackBerry. In this case, the
butterflies would be worthless, while the call spreads will
increase in value instantaneously rather than at expiration, as is
the case with the butterflies.
Live and learn! In this case, I can actually get out of the
butterflies for a modest gain (actually a tiny gain after
commissions as with 4 contracts per lot in a butterfly, they add
up) and roll over into bull call spreads, but I'll stand pat for
Clear & Present Markets
Here are a few thoughts:
1. It looks to me like
(INTC) is manipulating its earnings (within the rules of GAAP) in
order to hold gross margins. Specifically, it reclassified process
engineering expenses for its manufacturing operations as an R&D
expense, which takes it out of gross margins. Investors watch gross
margins very closely as it measures Intel's pricing power and brand
equity. The problem Intel is facing is that the size and
performance of "last generation" chips is sufficient to meet the
needs of most users. In addition, it has segmented the market so
much that its new chips are replacing demand for recently launched
products in adjacent markets that are still ramping. Since Intel
knows investors will look at gross margins to measure the strength
of the business, it changed how it accounts for certain expenses to
make this number appear better. While the datacenter business is
fine, Intel's margins in the PC, tablet, smartphone businesses are
2. Bank lending growth is happening in autos and credit cards.
Housing is a disaster. I also learned that
Bank of America
(BAC) is booking revenues from its mortgage business when rates are
locked, not when the mortgage is written. Again, this is an example
of aggressive accounting because Bank of America is recognizing
revenue before it earns it. As analysts are rolling their bank
earnings forecasts forward, I am surprised that many are expecting
a rate increase in 2015. I know that the Fed has guided the market
to that time period, but GDP is struggling to grow by 2% with $1
trillion in monetization and 0% interest rates (ZIRP). ZIRP leads
to capital misalloocation because initiatives that are not viable
in the long term are profitable as long as interest rates are 0%.
The same can be said for the tremendous excess capacity in the
system that is only utilized because ZIRP is pulling demand that
will not be there at higher rates. The only justification I can see
for higher rates in 2015 is that inflation starts taking hold. Just
some food for thought as we head into year end.
(ABT) had excellent numbers this morning, primarily because its
diagnostics business was unexpectedly very strong. The most
important thing I took away from the call though was an explanation
of why the company decided to increase its dividend by ~60%.
Abbot's CEO said that it underestimated how important the income
part of the growth and income proposition is to its investors.
Money has been flowing into stock buybacks, but I wonder if we will
begin to see more of that cash flows allocated to dividends in the
future, which could challenge EPS growth as stock yields increase.
Congressional Gesticulation May Finally Be Over
A deal is supposed to be on the table for today with the House. It
would mirror the Senate's plan to reopen the government (thru Jan
15) and raise the debt ceiling (to Feb 7). In addition, the deal
would allow the Treasury to employ extraordinary measures should
the government not raise the debt ceiling before the Feb 7 date,
something that had been potentially left out of the House bill.
That would allow the Treasury to at best extend its cash to July.
The GBPUSD (cable) is working an outside down bar on its daily
chart, for those who are interested. Fundamentally, not sure what's
going on there, but I do know the dollar side is seeing an obvious
tailwind. It would need to settle in the bottom third of the day's
range to confirm it.
Bonds are seeing solid follow through after the news that all is
well in the government. Not the reason I had been looking for, but
I'll take it. Perhaps there were a few shorts set for a meltdown?
Perhaps. I'm also hearing that this rally is led by foreign buyers
who had recently sold down their Treasury holdings. Very, very
constructive to see the 10yr hold the 40dma at 2.76%.
For those playing with options, remember that the Fed meeting is on
October 30. I don't expect the FOMC will do anything until they see
a solid amount of preliminary fourth quarter economic data to
ascertain whether or not the government shutdown had an actual
economic effect. So the December 18 meeting is a possibility.
Click to enlarge
Picked Up Some Irrational Exhuberance Insurance
As a portfolio management measure, I bought some upside
SPDR S&P 500 ETF Trust
(NYSEARCA:SPY) exposure by picking up the $173.50/$174 call spread
expiring Friday for $0.07.
It's basically a play on the possibility that Mr. Market rolls his
eyes at the idea that the market will sell off once we hit a debt
ceiling resolution, and thrusts stocks higher to further tick off
The position isn't sized big, so downside risk to my overall
portfolio is kept in check. However, if we do get a surprise surge
into Friday, I will get a decent boost because the payoff on the
spreads is so big (about 7:1).
Thursday, October 17
Michael A. Gayed
We could be looking at a turning point here for Gold. We're seeing
strong outperformance today in the
(NYSEARCA:GDXJ) relative to the
(NYSEARCA:GLD). Strength in this ratio is typically bullish for
gold. We're also seeing this strength occur at the same time gold
is making a higher low above the June low with weakening downside
momentum (higher low in RSI). Additional factors favoring a turning
point include sentiment (traders still very bearish on the metal)
and COT positioning (net exposure to gold remains low relative to
recent years). A move higher in gold here would surprise many
Credit Check and Sandisk Earnings Review
Good morning Minyans - Credit derivatives are quiet this morning,
as all the action happened late yesterday. It can be summed up by
the move in the CDS of large US financial institutions, which
improved 20bps (from 410 to 390). The new issue market didn't wait
for the government deal as another $7.1B of new bonds were sold.
My eyes today are on
(SNDK), which reported stellar results and still can't get any
serious "love". As I tweeted last night, forget the huge beat on
the EPS front, which was in part helped by share buybacks:
operating income came in at $371MM vs. estimates of $322MM. That
folks is NOT financial engineering. The key driver for SNDK
business and for how the Street will treat the stock, is gross
margins, which continue to expand at a remarkable rate and are now
close to 50%. There are many tailwinds behind that improvement and
some will no doubt abate over time; but what will continue changing
for the better is that SNDK is slowly morphing into a storage
solution company a-la
(EMC), where software will be as, or more important, than hardware,
and NAND chips will just be the medium for those solutions. It's a
process that will last a few years and will have its ups and downs,
but to those who believe that the company is a commodity chip
producer that has achieved gross peak cycle profitability, I will
counter that by the time SSD's make up 50% of SNDK revenues -
probably by 2015 - analysts will be asking when SNDK can achieve
65% EMC-like gross margins, as opposed to worrying when
profitability will slip back to the 30's, where it was just a few
Ten-Year Vs. Crude
The comparison chart of
(ten-year note futures) and
(crude oil futures) is posing some serious questions. As you can
see, the top in oil corresponds perfectly with the low in
treasuries and the trend is clearly down for oil and up for
treasuries. This could be pointing to a much slower economy than
many realize, most likely exacerbated by the government shutdown. I
would not be surprised to see oil trading under 100 and yields on
the ten year testing 2.5% in the very near future.
Click to enlarge
Friday, October 18 2013
Sell on the Trumpets?
According to Wikipedia, "All the events and news that happen around
the world can have a great impact on the stock market. Very often,
if a war breaks out or political problems arise the stock market
will take a plunge. The saying of 'buy on the sound of cannons,
sell on the sound of trumpets' suggests that the start of, or the
continuance of, a war is a good time to invest in the stock market,
while the end of a war is a good time to sell." That phrase has
been adapted in the modern stock market era to buy on bad news and
sell on good news. In the current case that would mean buying on
October 7, 8, 9, when the S&P 500 (SPX/1733.15) was changing
hands around 1650 (the "cannons"), and selling on "trumpets" of a
debt ceiling deal yesterday. And, that is what "they" tried to do
on Thursday, but all to no avail. I think the reason for
yesterday's buoyance is simple. Now that the "crisis" is in the
rear view mirror, the equity markets should refocus on earnings,
economics and the Federal Reserve; and here the story is pretty
good. S&P's bottom up operating earnings estimate for the SPX
is currently $107.58 leaving the SPX's PE ratio at almost 16. Next
year's estimate is $121.66. If the SPX continues to trade at that
PE multiple, it renders a price target of 1946. As far as
economics, things appear to be getting better. In 2014 I believe
GDP growth will finally accelerate to 3% driven by a capital
expenditure cycle because companies like
(GM) are running their plants flat out 24/7 and the equipment is
wearing out. Finally, with Janet Yellen at the helm of the Fed, it
should be steady as you go. That implies no tapering and plenty of
liquidity. To the underinvested -- and underperforming -- investor,
this trifecta is a nightmare.
Of course, with the debt deal came the obligatory question, "If you
were confident of the outcome in DC, why didn't you go 'all in'
versus holding the 25% cash?" My response read, "Because I am a
risk manager and didn't want to take that risk. Charles Dow once
said, 'The successful investor needs to be able to ignore 2 out of
every 3 money making opportunities.' Nevertheless, I was adamant
there would be a deal worked out." As for the stock market, we are
about to find out if this is an upside fakeout with yesterday's new
all-time high for the SPX, or the start of a whole new leg to the
upside. I have to admit I am unsure, which doesn't happen to me
very often. The next few sessions should tell us.
I would take note of the reversal in the
(NYSEARCA:XLF) this morning. The sector did fairly well in recent
days despite mixed results from many of the big boys like
However -- the group is now actually selling off and is negative
(MS) relatively solid numbers.
Now if the financials stabilize and get back in the green, I wonder
if the S&P crosses through 1740 with authority.
On the other hand, if they continue to stink up the joint, the
broader markets could be looking to take a break following this
World Peace Breaks Out on Wall Street!
The Beltway bickering continued to the eleventh hour, shockingly
enough, before a budget compromise was reached and the debt ceiling
was raised, at least for the time being; the stock market
discounted that drama as the S&P rallied 2% for the week-and 5%
since October 9-and notching all-time highs.
There was a contingent on Wall Street-present company included-who
felt that traders would sell the news but that quickly gave way to
the performance anxiety sweeping the street into year-end. When
managing other people's money, it's OK to lose as long as others
lose more-but anathema to make money if others make more.
With 20% of the S&P reporting third quarter earnings, 55% beat
top-line revenue estimates and 71% beat EPS estimates. In the
financial sector, the common theme was weakness in fixed income
revenues, with Morgan Stanley, Goldman Sachs, and Citigroup seeing
a sharp drop-off in trading activity.
Sexy sirens continue to lure investors into equities with the
perception that the Bernanke Call replaced the Greenspan Put. While
we may not have "irrational exuberance," signs of excess litter the
landscape: Google and
(PCLN) trade at $1000, social media stocks are parabolic and the
S&P 2014 earnings estimate is $120 coming out of a technical
recession and on the back of a 160% rally since March 2009. The
phrase "caveat emptor" comes to mind.
The earnings avalanche continues next week, including
(MSFT) and Amazon.
) will release the next version of the iPad on Tuesday and the EU
Summit starts Thursday with hopes of strengthening their policy
coordination and increasing regulatory safeguards.