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.
Good morning and welcome back to the flickering pack. Following a
to all-time highs and
a few bites of humble pie
, we power up our weekly pup to find stateside stocks mixed as we
power up a fresh five-session set. Some top-line vibes, in no
If you read one article on the
) programmer who was convicted of stealing code and sentenced to
eight years in federal prison,
this should be it.
Michael Lewis has always had a way with words.
If you haven't read
"both sides" of the FOMC-Treasury debate
-- with excellent input from Mark Dow -- I highly suggest you chew
through it this weekend. You always want to know what your
counter-party is thinking, if your counter-party happens to be
NYSE internals are 9:5 negative (not yet at tell status); the
financials are soft (ex Goldman, which is up a buck), as are the
metals. To that point, I dusted off the Gold vs. S&P chart
below for schnitz and giggles; if the past is a prologue, either
gold should rally or stocks should decline (or both).
I usually get asked to do TV gigs when the markets are in turmoil;
today, I was asked to do a segment on the floor of the NYSE around
3:15 with my ol' pal Liz Claman. I'll be there for the quick hit;
it remains to be see what type, if any, turmoil will precede the
I'm watching the
) of the world for clues to our forward fuse. If they get all
(NASDAQLJDSU)-like, circa 2000--particularly with year-end
performance anxiety edging closer -- we would be wise to pay
If the tape doesn't come in (for sale) in August, September or
October, we could see some pretty nutty ketchup (performance
anxiety) in November and December.
Lemme get this to you; as always I hope this finds you well.
Click to enlarge
Clear and Present Markets
1. The government wants oversight of
(APPL) iTunes and App Store. This is interesting in that the
government has not traditionally regulated technology, and it opens
up technology to the slippery slope of regulation by those that
infamously described the internet as "a series of tubes". One
ruling on digital books pricing is leading to overreach into every
digital item Apple sells. Apple's failure to settle this case, the
way Amazon and others did, could prove a critical failure of
leadership because it is eroding the core strength of the Apple
Part of the reason there is so much competition and price deflation
in technology is that it has not really been regulated. Regulations
create barriers to entry and allow for monopolistic pricing. If the
government starts regulating iTunes,
(AMZN) is next, and then
(NFLX). Hollywood is at the heart of this. They fear Apple, after
seeing what happened to the music industry, and spent millions to
bring Washington insider Chris Dodd in to run their lobbying group
after his "retirement" from the Senate. iTunes and the App Store
are a place to purchase inexpensive, safe content for our mobile
devices, and are the heart of Apple's long term strategy. Oversight
of the retail outlet will begin to dismantle the primary
differentiator between Apple and its competitors, precisely at the
time when video content is being disrupted by digital delivery
models. Apple pressed for lower price points to increase sales by
monetizing sales lost to theft, and the result of government
oversight is likely to be higher prices in the App Store and more
P2P file "sharing".
2. I found it interesting that
(JBLU) is repositioning itself as an "up market" carrier,
attempting to differentiate itself in a commoditized industry. As
prices have fallen and bankruptcy has tarnished the image of many
airlines, there is no "premium" provider to the mass market. Jet
Blue was the first "hipster" brand, using technology in every seat
and an all coach cabin to differentiate itself. Jet Blue runs the
risk of losing its core market as it courts "business class"
pricing, but it bears noting that most suits still ride in taxi
cabs. Jet Blue already has these customers, and with so much
competition I'm not convinced they will stay as the prices climb.
3. With corn prices continuing to fall, watch what happens in the
food space. The staples group has struggled with weak traffic and
cost inflation for years, and finally delivering margin expansion
could make the high PE multiples look more rational in hindsight.
However, this business is so competitive that companies often don't
match price increases, or get promotional to drive volume and gain
share. This has happened to
(KRFT) in the cheese and deli segments. I also recently took a
(DRI) as I expect lower food prices will allow them to lower menu
prices, and bring back some of the traffic they have lost to the
"fast casual" chains like
(PNRA). Consumer behavior has changed, and we will get a sense of
how durable the share gains of private label and fast casual
restaurants are as lower food prices enable more price competition.
I will also be watching
(SYY) as higher case volumes will be indicative of improving trends
in the restaurant sector.
A Measured Move Could Set Nikkei Price Target at 11,500
While US Equity Markets continue to make new all-time highs,
European and Japanese equity markets are hovering just below their
May highs. As much as this divergence is a sign of strength for US
equities, it is also a sign that Europe and Japan are still
correcting and navigating through time and price. Of the two, I
find the Japanese
(INDEXNIKKEI:NI225) to be the most fascinating, as much of the
early year euphoria has been replaced by a wide-ranging, volatile
pullback that is entangled in politics and monetary policy
questions. That said, I want to focus on some key support and
resistance levels, as well as a potential Nikkei price target,
should the index continue its correction through price.
After an historic 7-month run from October to May (tracking nearing
90% gains, no less), the Nikkei 225 gave way to parabolic
pressures, falling nearly 9% from intraday high to low on May 23
alone. This started a stealth bear market that the index has
recently been crawling back from since the mid-June lows. Let's
take a quick look at the chart and try to highlight a current
corrective pattern, as well as a scenario that would disrupt this
pattern (and likely see the bulls dancing again).
See the chart below.
First and foremost, note that the chart below is an EOD chart, and
has not pulled in last night's session (which was down roughly 200
points - currently at 14,258.04). That said, the open gaps have
served as magnets for the recent daily rally, as the Nikkei tests
the "lower" highs made in July. Note that those highs also coincide
with the big "B" on the chart. This is important because the
bearish corrective path could setup an A-B-C measured move. This
would mean that the highs recorded in July would need to hold as
resistance and the subsequent downturn would need to equal the
initial drop from the May highs to the June lows ("A"). This would
yield a Nikkei price target of roughly 11,500, give or take a
couple hundred points. This area is just below the 200-day moving
average, and just above the 0.618 Fibonacci retracement of the
Oct-May bull-run at roughly 11,400.
As mentioned above, this A-B-C measured move pattern would be
offset by a move in price above the July highs. So, the lower highs
at point "B" will be important to watch over the near-term. Note
that I mention this pattern more as an observation. I do not have a
position in the Nikkei, but the divergence with US equities is
interesting and bears watching.
Click to enlarge
Out of Nintendo
I took today's pop to toss
(OTCMKTS:NTDOY) out of my portfolio for a modest gain.
Given that Wii U sales are somehow even more horrendous than
estimates, and that reported 3DS sales didn't quite hold up to the
hooplah, I think the stock's due for a breather.
I'll look to get back in at a lower price because people still seem
to undervalue, if not outright hate, the Nintendo franchise.
Large Call Volume in VIX
There was very large call option volume in the
(INDEXCBOE:VIX) this morning. The featured trade is in the August
$18 and September $17 calls as each traded some 125,000 contracts
shortly after 11:00 EDT. This appears to have done as a spread with
a sale of the August and purchase of the September for a $0.76 net
debit. As the August strike had sufficient open interest to cover
the volume and the September does not, it's safe to assume someone
is simply rolling down a long volatility position as a form of
portfolio protection. On face value, some might have taken the
surge in call activity as signal that a spike in volatility was
imminent. But this trade reflects basic hedging and is therefore a
somewhat positive market signal. This illustrates the value of
the headlines of unusual option activity
. That surge in call activity was enough to drop the overall
put/call ratio from about 1.13 down to 0.71 during that 30-minute
span. The ratio is slowly creeping higher.
Meanwhile, over in
(NYSEARCA:VXX) , a trader seems to have a much more sanguine view
of near-term volatility and is taking a decidedly different
approach of rolling down a short put position as several large
block trades of 500-1000 contracts were registered in the August
$14 put that expires this week and the also in the August $13 puts
that expire next week. This also appears to a roll down and would
be a bet that volatility remains muted and that structural downward
bias caused by the daily roll and rebalance of the VXXi to keep it
reflecting a 30 day option will push that index to new lows next
Hanging in There
The market continues to do what it needs to do to hold on to the
bullish case. Now, I do think it is probable that we top in August,
but I want to let the market tell me that rather than just
guessing. That means I will sell after the turn, not before.
As for today, the market broke below the breakout range this
morning and re-captured it. Also, it is holding on to the trendline
after briefly breaking it. Contextually, these are signs of a
weakening trend, but just because the trend is weakening, doesn't
mean it is over. I would not be surprised to see one more push
higher before this thing is finally done. In the meantime, our old
friend NYMO (McClellan Oscillator) got down around -40 today,
refueling the market for a push higher, should it want to.
Interestingly, this is the first down day that we see all three of
my key sectors leading down. Retailers, banks, and transports are
all more red than the markets overall. This is another sign of
growing internal weakness. Staying long up here may be running on
borrowed time, but I am in the business of maximizing trend
returns, so I remain long above 1692, with additional stops below
at 1685, 1672, and then the 50-day moving average.
Click to enlarge
, August 7, 2013
Step Right Up
Attempting to pick a top to this crazy, up-trending market has felt
very similar to playing one of those games at a carnival or fair -
somehow you just know the odds are against you, and yet, you try
anyway. Contrarians continue to be obstinate victims of Ben
Bernanke's QEInfinity-lubricated ring toss game, while the Federal
Reserve's recent comments about its future plans appear to have
been interpreted by the market as "no definitive news is good
news." Investors realize that the Fed's asset purchase program will
end at some point and the target interest rate will eventually
rise, but for now they continue to make hay while the sun shines.
How powerful has this recent running of the bulls been? Well,
between the intermediate low in the
(INDEXSP:.INX) on June 24 and the hitherto high on August 2, the
index rose about 9.6%. This is impressive enough, but when you also
consider that during this run it never retraced more than 1.5%, you
have a bona fide market melt-up. It is tough to buy the dips when
there are no dips.
So what is an investor to do? If you have stayed with positions
through the recent uptrend, you likely have some gains that you
want to protect and not give back to Mr. Market when the inevitable
correction happens. Will the past two days' weakness beget more
downside risk? While no one knows for sure, internally, equities do
appear to be losing strength when gauged by the NYSE
Advance/Decline Line, an indicator that measures the change over
time of the difference between the number of advancing and
declining issues (see chart). When the indexes are making new
highs, technical analysts also want to see the Advance/Decline Line
making new highs to show robust breadth across the overall market
and not just a few issues leading the way. Not only did the A/D
Line not confirm the recent highs in the S&P 500, it has broken
down to new short-term lows, signaling that fewer stocks are taking
part in the move. While this by itself is not an immediate reason
to sell, it is a divergence from the pattern seen year-to-date and
does not augur well.
Once again, it may be foolish to try to call a top in this
juiced-up market, but investing/trading is all about evaluating
potential rewards against the risk and making sure the former's
probability and magnitude are sufficient enough to justify the
latter. Right now, if we postulate that we may finally see some
weakness in the coming sessions, it may be better to wait until
support is found and holds before initiating any new long
positions. In the short term, probable support in the S&P 500
is most likely to occur around the following levels based on past
support/ resistance, Fibonacci retracements, and volume-at-price
readings: 1675, 1650, 1620, 1600, and 1560.
Click to enlarge
China vs. the Taper
(UBS) economist George Magnus wrote an important op-ed in today's
. Whereas a lot of the talk has been about the Fed and if/when the
tapering of bond purchases would begin and what that means for
markets, Magnus puts that discussion in the context of what that
means versus China. The analysis should give many folks a moment of
Magnus contends, and I agree, that many investors and analysts
still think this is a cyclical slowdown coming in China. I
certainly don't as I've been discussing here on the Buzz now for
nearly the past two months. China needs to be monitored. Sure,
there are questions about the data and what a real "boots on the
ground" view would look like over there, but the fact is, China is
getting ready to undergo some serious changes.
First, they're not the source for cheap labor anymore. Second, if
they're not "making stuff" then their imports of raw materials and
commodities will probably see some tapering of their own. Third,
it's becoming clear their economic growth has been roid-raging on a
lot of credit. When levered, illiquid assets can't command the
values they used to. This has implications far beyond that asset
class as the banks that financed that growth face exposure to
credit, liquidity, and for some, solvency risks. Like Lord
Voldemort coming back to take over the wizarding world, a systemic
banking issue in China would bring back the Dark Lord of Deflation.
But enough hyperbole. Why bring this up now? Simple. China's GDP
deflator has slumped to a 0.5% annual rate. Two years ago, this was
at 7%. In an emerging market economy where inflation usually runs
in the mid-single digits and real growth adds 2-3% of real growth
on top of that, this is a huge change. I don't know for sure, but
it seems clear to me that questions about destruction of aggregate
demand, like the ones we've been hearing for the past 4 years,
should be on the table for any discussion about China.
Magnus goes on to estimate that the reduced income and wealth
effects could affect up to 35-40% of China's economy as they look
to unwind the massive amounts of real estate investment that have
accumulated there. If he's even half right, the problems from Fed
tapering will be a rounding error.
Long Bond Breaks Downtrend
long bond future
(USU3) broke out of its downtrend on the daily chart this afternoon
following the decent 10-year auction. The downtrend started on May
9th and has held ever since. For the very short-term, 30-and-60-min
RSI is in the upper band so we need to see a bit of chop overnight
to work it off, if not a small dip tomorrow. One concern for me has
been the general lack of volume of the rally over the last few
days. I am currently short an OTM August
iShares Barclays 20+ Year Treasury Bond
(NYSEARCA:TLT) monthly put spread that I may roll to September by
the end of the week.
Note that on
30-year Treasury Yields
(INDEXCBOE:TYX) (the CBOE's 30-year yield index) the uptrend (for
yield) has been broken, but not on the generic 30-year yield chart
on Bloomberg, if we want to get technical.
Last, but not least, the bid-cover ratio for today's 10-year
auction was the lowest since March 2009, which pre-empted a massive
spike in yields, for whatever that is worth.
As a side note, I just rolled up my August
Russell 2000 ETF
(NYSEARCA:IWM) put spread as barring a significant down move the
risk/reward wasn't favorable anymore. I'll be looking to redeploy
that tomorrow or Friday into something longer dated. Note today was
the 3rd down day in a row for the SPX, if we should close in the
Click to enlarge
Thursday, August 8
Rule-of-4 Sell: DXJ
WisdomTree Japan Hedged Equity
(NYSEARCA:DXJ), which is an ETF for the Nikkei with a currency
kicker hedge, is flirting with a Rule-of-4 sell on a break of a
rising 3-point trendline.
Click to enlarge
If the signal is generated, it implies a test of the 200 DMA.
Remember when the Japanese market fell out of bed in May? It sent
shock waves across global markets.
So, any further decline and test of the 200 needs to be watched
carefully as this divergence between the US and the Nikkei should
be resolved sooner rather than later with the Nikkei turning back
up after an A-B-C-bullish correction or a sell-off in the US.
Gold Breaks Out
After holding key support above $1,270/65 yesterday, spot gold
prices have rocketed to $1,315.
In so doing, it has hurdled its nearest-term resistance line at
$1,302 in what looks like the conclusion of the handle portion of a
May-Aug cup-and-handle pattern.
If today's gains are sustained, my work will argue that gold -- and
SPDR Gold Shares
(NYSEARCA:GLD) -- has started a new upleg that projects toward a
retest of the July high in spot gold at $1,349.31.
Click to enlarge
T-Report: Rolling Stones vs Lead Zeppelin (or QE & the
Does QE Help the Economy?
In the short run, it doesn't matter. All that matters is that next
injection of Fed money, which boosts asset prices. The fact that
the asset class that benefits most, stocks, is rich, and the asset
class they are actually buying, treasuries, isn't responding to
further purchases is a bit counterintuitive but par for the course.
Yesterday, we went through our analysis on tapering and our view
that Fed "easing" is overly priced into the market and is set to
disappoint. Today, we want to take a closer look at the impact QE
has on the economy and what that can mean for stocks and QE going
The "Rolling Stone" View
The bull case is pretty simple. QE has helped the economy and
continues to help the economy. Both indirectly via asset price
inflation and the wealth effect and somewhat directly through
interest rates. The help to the economy will be enough to create a
virtuous circle of growth so that not only will QE no longer be
needed, but the economy will also grow without it.
It is compelling to believe because it is a very optimistic view.
It makes you feel good to think that after 5 years the economy is
finally getting ready to stand on its own two feet. There seem to
be several issues with this.
For at least a year, we have been told that lower rates are good.
Low mortgage rates are good. Low yields on corporate bonds are
good. The low cost of debt is good and helps the economy. That
largely makes sense (now is not the time to rail against the
negative real short term rates this Fed likes).
But if it is true, we have seen rates rise across the board
dramatically in the past few months.
Rates have spiked since May 2, and rates are higher than at any
time in the past 2 years. We saw an improvement of growth with
lower rates. That wasn't the sole driver, but it is an important
From any project "NPV" standpoint, where a company analyzes a
project, there are really two key components. The expected revenue
(or revenue scenarios) and the financing costs. Financing costs for
any potential project have shot up. For companies to want to
expand, then 1 of 2 things need to have happened. Either their
revenue projections shot up fast enough to offset the increased
funding costs or their range of scenarios improved enough that the
project makes sense.
I find it hard to believe any company became so excited about the
"growth" of the past 2 months that they are betting on much higher
revenue. It just seems that the data hasn't been good enough to
warrant that kind of optimism.
I am willing to believe that some companies will reduce their
downside risk in the analysis as stability seems far more likely
than any renewed weakness. That could be enough to keep some
projects moving forward. If QE has finally convinced company
management teams that the renewed recession scenario is off the
table, it could spur growth, in spite of higher rates. I am dubious
about that scenario as it is unclear what QE has really done, but
it is plausible enough that I am not willing to bet against it.
In any case, we now have higher rates in spite of ongoing QE and
that increase has been so quick that I expect it to be a drag on
the economy in the coming months. Remember; the "don't fight the
Fed" gang always says it takes about 6 months for rate cuts to work
their way into the real economy. The same should be expected from a
The Wealth Effect
The wealth effect really comes down to housing. The wealth effect
of stocks seems limited to a select group of individuals and to
pension funds. It is great that pension funds are digging out of
their hole, but that doesn't seem to be a big boost to the economy
in the short term. Lately, the stock wealth effect seems to have
encouraged private equity firms to IPO as much as they can. Hardly
a help for the average American and somewhat reminiscent of the
(BX) IPO just ahead of the last time we hit a wall.
The increase in housing prices is real. That helps virtually
everyone. The problem is that we are only in the "breathing a sigh
of relief" stage. Everyone is relieved that the worst is over, but
few are "up" on their purchases, and even fewer are comfortable
spending based on their house value going up. Being upside down
less on the mortgage is a good thing, but the benefit really
accrues to the bank. I am not downbeat on housing, I am just
careful about getting too far ahead of the actual impact.
So I don't think the wealth effect of QE is big at this stage for
the real economy, though it has been big for the stock market.
What if Tapering Doesn't Impact the Economy?
Let's assume the Fed tapers and the economic data remains on track.
What then? I would argue faster tapering. There are many that
question how useful QE is. If the Fed tapers and the economy
responds with a shrug of the shoulders, that should increase the
rate of tapering. Ben is under pressure to consider tapering, and
in an ideal world, would love to leave his term as chairman having
"saved" the economy and ended all "alternative" measures. That
would be a best case.
So if tapering doesn't hurt the economy, expect an accelerated
program, which should hurt stocks more than bonds. Bonds have a
reasonable rate of inflation and growth priced in. Stocks have an
accelerated growth path priced in.
What if Tapering Does Impact the Economy?
What if we taper and get a steep decline in economic activity? Do
we just "untaper" and buy more? Probably, but will the market buy
In this topsy turvy world that we have created, it is possible,
maybe even likely that we taper, see worse data and untaper, and
markets rally as QE forever becomes the new norm.
The "Lead Zeppelin" Scenario
While the Rolling Stone scenario is appealing, the Led Zeppelin
(apologies to the band) scenario is scary, probably as unlikely,
but a real possibility. I assume a lead zeppelin doesn't fly, and
in this scenario, the economy and markets won't fly either.
We start with some tapering. The combination of tapering and higher
rates slows the economy down. Then for whatever reason, probably
politically motivated, the Fed stays the course. The Fed doesn't
immediately re-introduce more QE. With the Fed chairmanship up for
grabs, that scenario is less far-fetched than it seemed a month ago
when most of us thought Yellen was a lock.
In that case, the weaker data, no obvious way to return to better
data, and far less Fed money than the market has priced in and
demands will cause a sell-off. It shouldn't be a big sell-off, but
given positioning and the lack of liquidity, it will be bigger than
it should (10% or more).
Too much good news and hope is priced into equities. Remain
cautious here. The downside once again seems greater than the
upside. We continue to think high yield bonds offer value here.
Treasuries are okay. IG CDS is a good short.
In the medium term we are bullish on credit as we think treasury
yields are fairly priced or too high, and the economy will do well
enough to justify spreads. In fact we expect renewed interest in
structured credit products by the end of this year and early next,
but that is a story for another day.
Friday, August 9, 2013
Getting Short Facebook, but Defining Risk vs
), the social networking celebrity, recently had positive Q2
results, but certain analysts are remaining bearish on the stock
and cite that over-speculation might be in play for the company's
investors. The recent hubbub has been over the fact that the
company broke past its $38 IPO price for the first time since its
rocky start after going public over a year ago, but Facebook is
still having trouble competing in the mobile device market. The
switch from the traditional desktop platform to the mobile device
industry has been Facebook's biggest challenge, though the company
is making initiatives to extend its success like creating TV ads
and developing smartphone games. However, now analysts say the
company's excessive optimism over the past quarter's results are
transforming the company's stock from propitious holdings to
overweight shares. According to the number crunchers, Facebook
"still has a long way to go to justify its current stock price."
One marketing expert in particular calculated that in order for the
stock to be worthy of its current price trends and assuming a 15%
annual return rate, yearly revenue for Facebook would have to reach
$25.5 billion by 2017, giving the company a market cap of $149.8
billion. This revenue estimate is over four times the $6.1 billion
revenue brought in by the company over the past year, and
Facebook's current market cap is less than $90 billion. Given that
Facebook is in a precarious transition period from focusing on
computers users to smartphone customers, most other analysts remain
conservative on their estimations of the company's growth and are
only expecting $14.3 billion in revenue for 2016. Also, with FB's
beta level at 0.88, investors should not be expecting high
volatility from this company, which would be needed to encourage
fast growth and support the company's current stock prices.
: Buying the FB October-September 37 Call Calendar Spread for $.55
My Risk: $55 per 1 lot
My Reward: Unlimited. If the September 37 Calls expire worthless,
then I will be Long the October 37 Calls for $.55 and in theory
have Unlimited Reward
Greeks of this Trade
Waiting for a Price Flip in Procera Networks
I'm waiting for a price flip in
(PKT) and for my early turn technical analysis work to show me the
way. I can't find a good reason for the huge drop from the gap
higher. But remember; the selling window opens (for insiders), and
these small/mid cap's have no institutional sponsorship. Thus, in
the absence of a massively strong catalyst, these names get sold,
sometimes more sharperly than many anticipate.
Combine that with the fact that Procera Networks probably had a
good bit of pre-earnings buying following the strong reports from
so many peers, and you have the recipe for an algo-sell fest.
: I feel better about Procera Networks after the report than
before, especially as the name has now come in a good 10-15% plus.
But I'm also not going to step in front of the algo freight train
just yet. I'd rather pay $0.25-0.50 more off of whatever base forms
than try to exactly bottom tick this stock. Though, that being
said, if I see 12.50, I'll put in a buy tranche no matter how bad
the chart action looks. From that level, I'll likely get some
bounce, upgrade, or catalyst, which will let me sell it for
something in the low $14s.
Yen and Treasuries
The Yen versus dollar bid in place since the beginning of the month
is in line with the
(ten-year note futures) bid (see chart). This is a warning both on
carry and a weak economy, with rotation out of equities into
safety. Aside from a one-day scare, equities have been ignoring the
paradigm. But someone is wrong, and it rarely is the bond market.
It will be interesting to see how this plays out next week during
option expiration. But with the yield on the ten-year struggling at
2.6%, some might be looking back at 2.75% wishing they had parked
there until October after a 20% equity run year to date.
Click to enlarge
There is lots of talk about how low yields should foster higher
P/Es than where we are now. Allow me to use a historical precedent
to debunk that theory. The last strong era of 2.5% yields in the
early 1950's had a P/E ratio in the single digits to low teens. We
are currently above 19 P/E (lagging). If you remove the freak blow
up of recent years, this is a level that has marked resistance for
the better part of 100 years (see chart 2). Many pundits could be
falling victim to generational perception - one's lifetime
experience - as opposed to analyzing hard data on a longer-term
Click to enlarge