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.
The Bull Case Is Strengthening Once Again
I added a position in the
Small Cap Growth
(NYSEARCA:IWO) at about a 15% position size. This is slightly
larger than normal, but I like the risk versus reward. This brings
the portfolio back up to 55% invested on the equities side with an
overall beta of around .70. If we close strong, I will add even
more exposure on the close, bringing it up toward 75-80% invested
and a beta of around 1.0. I continue to see laggard charts healing
and breaking out from lower level ranges. I also love how well
growth held in over value as indicated by IWO only riding the
50-day moving average higher rather than breaking it and fully
breaking down. Was that the dip? I don't know, but I am anxious to
put capital back to work to lock in alpha created from selling
Banks held in well, and many Europeans held their 50-day moving
average. Down cycles usually have a life span of about 20 or so
trading days, so this one has fit many of the parameters necessary
for me to feel OK scaling back in.
Once we cross the 50-day moving average on a closing basis, I plan
to be fully invested once again.
Click to enlarge
1987 and Chemical Weapons
It's morbid trivia, but aside from some chart similarities (if
August highs hold), we also had a chemical attack in 1987 -- June
28 to be precise.
Given that the crash occurred 27 trading days after the August 25
high (chart), the same timeline would put us around Wednesday this
week. This is just a random thought, but given the complacency this
market has exhibited no matter what circumstances, comeuppance is
coming one of these days. Crash bets are always very low odds, but
one should always maintain a certain degree of awareness.
Click to enlarge
At the risk of stating the obvious, we should see this bond
weakness continue into tomorrow before we find out what's what at
the auction. Below is a brief chart of the two coupon auction weeks
from August. The last week of 3, 10, and 30-year auctions saw
weakness going into the 3-year auction (tomorrow) and strength
coming out. Coincidentally, after a strong ADP and weaker NFP,
August was also the first time we saw direct bidders return to
auctions after shunning them for two months.
The unadjusted figures from the July consumer credit report showed
continued growth in auto loans and student loans, but zero growth
in revolving consumer loans (taking on additional credit card debt
or new consumer based loans). So there is no reason to think that
higher rates is harming auto loans. But still, there's a lack of
Click to enlarge
Turnaround Tuesday Arrives on Cue
You almost have to smile.
Last night, I attended the New York premiere of
Money for Nothing: Inside the Federal Reserve.
This project has been in the works for many moons and it was well
worth the wait.
The cast is a venerable who's who in the financial marketplace,
including current and former Fed officials (Paul Volcker, Janet
Yellen, Alan Blinder, Peter Fisher, Dick Fisher, Thomas Hoenig,
Jeffrey Lacker, Charles Plosser, William Poole, Marvin Goodfriend),
economists and historians (Michael Bordo, Dave Colander, Jim Grant,
Martin Mayer, Allan Meltzer, Raghuram Rajan, Richard Sylla, Bill
White) as well as traders and investors (Peter Atwater, Tony
Boeckh, Jeremy Grantham, John Mauldin, Barry Ritholtz, Gary
Shilling, John Succo and yours truly).
The story is a familiar one, albeit a deeper dive into the
personalities and mechanics behind the U.S Central Bank. The
history is rich with power and intrigue, leaving the audience with
enough information to make an educated decision about the
motivations and agendas of those pulling the fiscal and monetary
puppet strings. Perhaps most refreshing is the candid look at the
perpetual cycles of booms and busts, how they have manifested in
size and scope and the current attempt to
change the natural ebb and flow of the business
There is the requisite hubris (Greenspan) and academic philosophies
(Bernanke) culminating the current crescendo of cumulative
imbalances that dwarf historical precedent. The dot.com bubble was
replaced by the housing bubble which was replaced by the government
bubble, replete with many of the unintended consequences that
we've attempted to map here in Minyanville.
The common thread, of course, is that conventional wisdom, along
with price action in the marketplace, sounded the all-clear at the
time when caution was most warranted, over and over and over again.
Of course, we awoke this morning to higher equity prices around the
world, due in large part to the specter of a diplomatic resolution
to the Syrian stand-off. At the same time, equity bulls are
attempting to push stocks through layered resistance in the
(INDEXSP:.INX) per the chart below, almost daring the bears to get
in their way. As time and price is the ultimate arbiter of variant
financial views, this must be respected, if and when.
As Jim Bruce and his team remind us in his excellent documentary,
however, the financial fabric remains a tangled web of debt,
derivatives and leverage, a cornucopia of tinder looking for a
match. Syria, much like Lehman Brothers, is a symptom, not a cause,
and seeds of discontent continue to percolate under a seemingly
calm financial surface. That might not be today's business but if
we've learned anything through our years together, it's that
history doesn't always repeat but it often rhymes.
Good luck today.
Click to enlarge
Credit Check: Party On
The bond party continued yesterday even if with some wrinkles. The
CDS of large US financials were generally tighter, broad index
high-yield CDS were much tighter, and the US CDS printed a new
5-year low at 18.5bps. 2-year swaps were as low as 14bps yesterday
morning but closed in the mid 15s. High yield rates were slightly
And then there is the issuance story: $5.95 billion of new bonds
were sold, including an upsized $1.9 billion issue by Whiting
Petroleum, a BB credit that paid a 5.75% for $800MM of 7.5-year
bonds. Think about that. In addition, buyers took $2.42 billion of
) bonds off the FDIC's hands; this money didn't go to C, but it
nonetheless shows the avid demand for bonds.
And lastly, one could argue that corporate issuance would have been
even larger yesterday if it weren't that Russia and South Africa
sold an aggregate of $8 billion worth of bonds. The wave of CDS
tightening is continuing this morning with the addition that Spain
and Italy CDS are joining in.
The party in fixed income keeps going and as I've been harping on
for months now, it will be very difficult for bears to do serious
damage to equities, let alone start a new bear market, as long as
companies continue to be handed money for nothing.
) is now 3 weeks from the 512/513 square-out noted in this space.
See Apple's 512/513 square-out chart below.
Despite today's rollout, Apple is threatening to snap its
well-tested 20 DMA.
Filling yesterday's gap and offsetting Friday's tail looks like a
bearish sign, implying a lower high has been installed.
See daily Apple chart from the end of June with its 20 DMA below
Click to enlarge
Click to enlarge
, September 11, 2013
1987 and Now
As I wrote Monday, the similarities with 1987 are getting a little
bit creepy if the August high holds and we fail at these levels.
Today would mark 27 trading days after the August high, almost the
same length as in 1987 (28 trading days). So instead of an October
event, this would be a September event. The S&P 500 1685 area
tapped 1684 yesterday right when Obama started his speech, and it
has come down modestly. However, one cannot say the same for
(INDEXNASDAQ:NDX) futures), which is taking some heat. That NQ lag
started yesterday and is normally a bearish sign. What is even more
troubling is the equity put-to-call ratio the past few days.
Here are the readings for the past 6 days in a row:
0.54, 0.54, 0.52, 0.5, 0.45, 0.48.
Never mind the polls. These are extremes in bullish sentiment. Big
upside bets are being put on by the smaller speculative crowd. Add
NYSE margin debt exceeding what we saw in 2000 (chart courtesy of
Doug Short) and the potential cycle mentioned above, and the recipe
for a strong bearish event is present.
As mentioned Monday, these bets are low odds, but this does not
mean that a crash can't happen or that one should not remain
vigilant. I would avoid buying stocks up here and would seriously
consider lightening up or buying protection.
In terms of futures, I would pay close attention to
(September contract, we will move to December tomorrow). The line
in the sand would be 3148.75, the scene of Monday's breakout and
Friday's VAH (value area high, chart 2).
(INDEXNASDAQ:NDX) would be the same since the September contract,
which expires next week, is lined up with cash now.
Click to enlarge
Click to enlarge
Bond Market Intelligence
The word this morning is that the
) deal is already trading 35bps TIGHTER in the grey market as
European accounts scrambled for exposure after the European
roadshow was postponed this morning.
It's gotten so bad that there's no bid for agency MBS because
everyone wants a piece of the Verizon deal! Additionally, the EUR
tranche of issuance should be cut in half from the previous $10b
that was thought to be issued.
It'll be a guessing game all day to figure out when the rate-locks
are unwound. It's been a 50/50 split between the next hour or after
the 10-year auction from those whom I've talked to (see yesterday's
post auction activity). Lots of false starts trying to front-run
And on a different note: I'm offering a friendly Minyan reminder
that the Baltic Dry Index was up another 5.6% overnight to 1628,
now up 43.6% since August 30.
That was my sentiment as I watched Apple trade below $465 this
morning (down over $40 from Monday).
Many are calling it a 'sell the news' reaction, but since when can
you have that when the stock didn't rally into the event? Apple
traded above $500 on Carl Icahn's announcement that he was in the
Also, this morning we see the lemmings on Wall Street downgrade the
name as if it were overpriced and not about to add 15% to its top
line over the next few years while trading with a 10% cash
position. Let's keep in mind that very few have been able to grow
their top line these days.
I'm reminded of a phrase I heard when I started in this business
almost 20 years ago: The stock market is the only place people run
from a sale. Today is apt evidence of that.
Thursday, September 1
Clear & Present Markets: 09/12/2013
1. The demand for Verizon's record bond deal is likely to trigger
more M&A activity. Share repurchases should have a diminished
impact on EPS growth in 2014, and GDP growth remains sluggish, so
the next best way to manufacture earnings growth is through
acquisitions. The insatiable demand for corporate debt should
encourage more companies to enter the M&A fray, especially in
the cash-rich tech sector, where
) could be seen a vulnerable as it digests the $7.5 billion
) and searches for a new CEO. Health care is another sector that
should see more M&A as companies gain better clarity on the
implementation of the Affordable Care Act (ACA). This should be
good for the investment banks as we head into 2014.
2. Some additional comments I heard yesterday at the Morgan Stanley
health care conference that were notable:
(HNT) said the implementation of health exchanges will be bumpy
from October to January, but there is still time to make it work.
(HCA) commented that it is unclear how payers are positioned to
handle ACA implementation, and it will likely take 2 to 4 years to
ramp as education is critical to implementation.
3. Also in health care,
(BMY) reported data from a phase 3 trial of its cancer drug Yervoy
in advanced prostate cancer, which failed to meet its primary
endpoint of survival (by a very small amount). BMY is widely
regarded as having the strongest pipeline in the pharma sector, but
it has had several setbacks this year as it attempts to bring those
drugs to market. The Yervoy news is not a huge financial impact
(revenue estimates were around $150 million for this indication),
but 2013 was supposed to be the trough year for BMY earnings, and
the loss of incremental revenue makes those 2014 expectations more
difficult to achieve.
4. There are an infinite number of outcomes for the health care as
the Affordable Care Act (ACA) is rolled out, but the more I think
about it, the more I see implementation being a disaster. Managed
Care companies are pulling out of certain exchanges because they
can only profit in those areas where they control the network. So,
they will stay in regional footprints. When it comes to the
national exchanges, few have the scale to control costs on a
national level, which makes this an unattractive segment in which
to compete for business. So, it looks like the companies that
compete on the national exchange will lose money for a few years,
forcing them to withdraw from that market in future years, leaving
the broad population with few options and diminished support from
Implementation will be great for corporate earnings in 2014, from a
cost savings perspective, but consumers are going to get squeezed
resulting in less disposable income. The implementation of ACA in
2014 will be health care 2.0 and will quickly need revision;
however, employers who already cut those benefits are unlikely to
reintroduce them and add additional costs. In the end, I think we
end up with a national health care plan that resembles an
Accountable Care Organization (ACO), by the end of the decade, but
getting from here to there will be messy. Restructuring 20% of the
world's largest economy isn't easy, and doing so in a disjointed
manner could be even more problematic. Fortunes are made from
investing amid uncertainty, but I don't have enough information to
commit capital at current valuations. Though, companies that make
life saving products, generic drugs, and over the counter
alternatives used by consumers attempting to treat themselves
should do just fine through the transition. While I don't
necessarily recommend them at current prices, I am playing the
product side with positions in
Teva Pharmaceutical Industries
5. Finally, I am taking note of the recent strength in Europe
heading into the German elections. The
is nearing year-to-date highs, which seems to indicate a victory
for the status quo. In general though, international markets have
been strengthening in September. While I still expect a massive
unwinding of the risk-on QE trades, I think the Fed's approach to
ending QE through tapering will mitigate an exaggerated end to
T-Report: Can You Hear Me Now?
Verizon priced $51 billion worth of bonds at $49 billion.
Technically they sold $49 billion of bonds at $49 billion that then
traded to be worth $51 billion. That is a lot of profit to those
who got good allocations. That is positive for the market. Some
"free money" goes a long way towards building confidence. It has
been a choppy couple of months. Long only funds have struggled to
show good returns. This should help their performance. Hedge funds
will benefit from this as well. All in all, this shows how much
"cash on the sidelines" there is. This deal had a very large
concession, but got done easily and traded well.
This deal provided a great opportunity for active managers to
outperform passive funds.
It also seemed to help the treasury market. Allegedly, Verizon had
a very large rate lock and unwinding that helped treasuries. It
looks like Verizon should have spent less time worrying about rates
and more time worrying about how cheap their deal was getting
The size of the deal also gave confidence to treasury traders that
there is a deep bid for bonds "at a price". That the sell-off isn't
a panic trade, it is just a reflection on Fed policy and economic
The strong 10-year auction also helped (though, I suspect it isn't
a co-incidence that the Verizon deal priced on the same day as the
10-year, especially if they had a large rate lock).
Investors Weren't Selling Other Bonds to Buy
It is hard to tell, but there was no noticeable increase in TRACE
volumes ahead of the Verizon deal. If investors had needed to sell
other bonds to buy Verizon we should have seen an uptick in
volumes. There was nothing to indicate that the bulk of the deal
was purchased on swap (selling other bonds to buy this). That is
A Spread Disconnect
Having said all these positive things about the deal and what it
did for the market we are left with a disconnect in spreads.
Verizon looks cheap. Verizon spreads blew out on the back of this
deal and remain elevated.
Some part of that increased spread is simply that you have a much
more leveraged company. That spread increase should remain, but
even with that, it seems to me that this deal is pricing cheaply.
Spreads will tend to converge. So one of two things will happen
over the next week or so.
1. Verizon bonds will grind tighter and "normalize" so that they
don't seem particularly cheap
2. Verizon bonds will struggle here, more new issuance will come,
and secondary market prices for other bonds will look expensive and
you will see selling pressure there.
Today, at this moment in time, option 1 seems the most likely, but
realistically it is probably 50/50 in terms of scenario 2 playing
out. Cash positions, by definition, have to have been reduced to
purchase Verizon, and other companies will be tempted to tap the
market. Every capital markets person is on the phone with their
best bond issuers whispering sweet nothings about the great
execution they can get based on strong demand for paper in the
It isn't unheard of for a big bond deal to mark a temporary peak in
Economic data has been okay, but is possibly slowing, and companies
are leveraging up. That is not good from a creditor perspective.
Growth is still good enough that it isn't a major concern, but the
trend isn't particularly creditor friendly.
The Return of the Floater
The floating rate bonds are interesting. The five year came at
LIBOR + 175. They traded up not because of interest rates but
solely because the 5 year spread was too cheap. It has been a long
time since we saw a floater trade up like that. It is interesting
and could help some of the floating rate funds attract more money
as they can start sourcing some bonds where they benefit from
credit spread tightening and not just the hope that the Fed will
230 companies in the S&P 500 have smaller market caps than the
Verizon long bond. It would seem that the obvious solution to the
liquidity issue in stocks is to have 20 to 40 traders at different
firms send around Bloomberg messages with price. Clients would get
those prices and hope to execute. The dealers would also use inter
dealer brokers who only cover dealers to ensure that dealers have
liquidity that clients can't access directly (except for those
clients that do).
This seems like a good opportunity for some alternative bond
trading platforms to grow as the system currently in place for bond
trading seems poorly designed for an issue that should be as big
and liquid as the Verizon issues.
The Tone of the Markets Today
The markets have needed a rest. Today appears to be providing the
much needed cool down period. We have been running in the
goldilocks bullish zone of the McClellan oscillator (NYMO), not too
hot, not too cool, and not negative (it closed yesterday at +54,
remember +70 is overbought). This is usually how it reacts when in
a nice bullish uptrend, as I mentioned on September 9 when I took
the portfolio back to 90% long. On September 10, we talked about
treating this as a trend, which is still the plan. Now we must
continue to look forward. At some point we will have the first leg
of this run cool off and give us our first higher low. If it
happens before all-time highs, you will hear calls of "A lower
High!!" If it is at all-time highs, we will hear people scream
"double top!", or afterwards, we will hear "false breakout!". I
have no idea if any of those statements will be true or not. I
generally try to shy away from hearing too many other people's
opinions as it can get in my head. For now, all I can do is control
my actions and my portfolio.
When in a zone like this, I like to measure the action of the
industries that led us out of the pull back. At this point, the
leading stocks in the leading industries should be resting, and we
should see the laggards of those same sectors playing catchup.
Let's check in at the sector level.
1) The Transports led us down, and now they are stalling just below
all-time highs. I read this as a good thing. They are still ahead
of the S&P 500. Keep them on your radar.
Click to enlarge
(NYSEARCA:XLE) has really ignited from the pull in and is way ahead
of the markets. I like to see cyclical sectors lead, so this is a
great bullish sign. I know many people argue that high oil will be
a tax and be negative for the economy. I agree, but that truly
isn't my concern currently, as I am mainly just trying to follow a
stock market trend, not an economic trend. A little digestion above
the breakout over recent highs would be very good. The same can be
(NYSEARCA:XLB) as the chart is very similar.
(NYSEARCA:XLI) look the same too. Please note that these are all
cyclicals, and they should be leading.
Click to enlarge
(NYSEARCA:XLU) - Lagging bad and actually under their 200 day
moving average. In a rising interest rate environment after many
had invested in them as a reach for yield, I want to shy away from
Click to enlarge
(NYSEARCA:XLP) - lagging but coming off of the bottom nicely. If
you really feel like you want to own stocks for income, this is
where I would look as opposed to utilities. (that is not my game,
as I am trying to appreciate capital).
The Question Mark:
(NYSEARCA:KBE) - They are lagging the markets on this move higher
and are under the 50-day moving average. That is a bit concerning,
so keep it on your radar. It is not enough to tilt me bearish, but
I would like to see them catch up soon.
Click to enlarge
So by my read, the things that are leading should be leading, and
the laggards are appropriate. A couple of days of digestion to get
the NYMO down into +20 or so would give us a nice set up for
further extension away from the Island Reversal mentioned a couple
of days ago. We need to keep the gap intact, so I would prefer to
see the S&P 500 stay above 1679, or at least not fill the gap.
Friday, September 13, 2013
Yesterday after the close, Twitter filed its S-1 to go public.
However, with less than $1 billion in revenues, under the JOBS Act,
the company was eligible to file confidentially.
Now lots of small companies file their S-1's normally. But I
suspect Twitter wants to avoid the
(FB) got before its own IPO. A simple natural deceleration of
revenue growth is all it takes to make a big bear case for Twitter
(or any company), and the company probably wants to avoid all the
associated PR headaches.
Once those numbers are out, the spotlight changes in a big way, so
we can't blame the company for now rushing these numbers out.
And no shocker --
(MS), which led the Facebook IPO, lost out to
(GS) for the lead underwriter slot this time around.
Note, there was at least one big connection between Twitter and
Twitter's head of corporate development, Cynthia Gaylor, was a
managing director at Morgan Stanley., where she worked on IPOs and
deals for the following companies, among others: Facebook,
Palo Alto Networks
"To everything, churn, churn, churn. There is a reason, churn,
churn, churn. A time to win, a time to lose, a time to stand around
and be confused."
-Jeffrey Saut, back in the 1970s
The aforementioned quote is a clever "twist" on the Bible's book of
Ecclesiastes 3:1, whose verse was lionized by the singing group The
Byrds back in 1965 in the song
"Turn! Turn! Turn! (To Everything There is a
see it here. And, that was the song the equity markets danced to
yesterday as they churned, churned, churned through the session
ending the day marginally lower. Indeed, the S&P 500
(SPX/1683.42) closed back below my long-standing "pivot point" of
1684, fostering questions like this from our financial advisors:
"Hey Jeff, how does a reversal below your pivot point portend for
your expected decline? I believe I remember you, and several
technical analysts, telling me that a quick recapture of a level is
kinda like it did not happen? Please explain."
My response was, "Yes, it is true the indices have a tendency to
marginally violate well-advertised 'pivot points' just enough to
fake out the majority just in time to trap them in a 'wrong way'
For example, recall the trading pattern of July - October 2011 (see
chart). Back then, I likened that chart pattern to those of October
1978 and 1979 in that prices declined into an "emotional low," and
subsequently went through an up/down bottoming process. Then, right
before a significant rally was about to commence, the S&P 500
broke below the "emotional low" just enough to get everyone bearish
before climbing significantly. Plainly, that could be the same case
here, except on the upside. Next week should provide the answer
given the week's news events. Unfortunately, I will not be around
to see those events as I travel to the West Coast to see portfolio
managers and present at events for our financial advisors.
Click to enlarge
As for the here and now, in my verbal strategy comments yesterday I
half-heartedly suggested recommitting some of the cash raised in
June to equities, even though something about the current market
does not feel right to me. One of my vehicles of choice was
Mary Lisanti's AH SmallCap Growth Fund
(MUTF:ASCGX/$18.74). Other vehicles would be Tom O'Halloran's
Lord Abbett Growth Leaders Fund
(MUTF:LGLAX/$20.63); I did a conference call with Tom a few weeks
ago. Another would be Troy Shaver's fund, the
Goldman Sachs Rising Dividend Growth Fund
(MUTF:GSRAX/$17.54), as well as
Day Hagan's fund
(MUTF:DHAAX/$11.23). I know all of these portfolio managers, and I
own their funds. Moreover, if you listened to their recent
conference calls, you heard a lot of individual stock ideas that
are followed by Raymond James' research department. Those ideas are
also worth your consideration. While I still have mixed signals on
the equity markets, yesterday's action continued to show there are
no erstwhile sellers with only 69% of total volume traded coming in
on the downside. We need to see demand pick up in the days ahead if
this rally is for real.
The Gold Scold: Part Deux
Two years ago this week,
I penned The Gold Scold
as the yellow metal tickled $1900; it was in response to a column I
wrote a day earlier, which asked the question whether
the Gold Bubble was about to pop.
The widespread response from the investing universe was venomous as
the gold-bugs believed their beloved metal could do no wrong.
Fast forward to this morning; Gold has lost one-third of it's total
value yet the battleground remains ripe with emotional fervor. The
bulls believe this commodity is the last-gasp store of value in a
world of fiat currencies while the bears maintain that, well, it's
This column isn't about the absolute levels of gold as much as the
relationship between that asset class and stocks. Given the insane
amount of liquidity being pumped into the system formerly known as
capitalism, the rising tide should be lifting all boats. That's
been the case for a mighty long time and the divergence is
something we should respect, if nothing else.
Take a look at the chart below, which tracks gold vs. the S&P
since the beginning of 2009 when
The Grand Experiment
began to take root.
Click to enlarge
You will note the correlation between Gold and the S&P, with
the latter matter leading the way higher. A funny thing happened
earlier this year; Gold lost it's luster, not only on an absolute
basis but perhaps more concerting, on a relative basis. Indeed, if
the past is a prologue to the future, this is about as loud of a
warning siren as we could ask for, absent tomorrow's newspaper
To be sure, these are historic times with unprecedented measures
and policy has made beggars out of bears over and over and over
again. The ursine frustration is well-documented and capitulation
seems to be the word of the day; we saw massive short-covering this
week on the heels of the perceived Syrian resolution. This story
remains untold, however; while no one measure or indicator is
absolute, we would be wise to expect the unexpected as we turn our
attention to the FOMC next week.
Good luck today.