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.
Following Up on Nominal GDP and Interest Rates
I received a lot of emails about my
on the relationship between Treasury yields and nominal GDP, so I
thought it would be helpful if I clarified my thoughts with a
My point is that when the 10-year Treasury yield increases "above"
the growth rate of nominal GDP YoY from "below," the US has always
gone into a recession. An example would be when the 10-year yield
increases to 3% from 2% with nominal GDP at 2.9%.
I've always viewed the Treasury curve as a proxy for the demand for
money, which means that either credit growth (loan demand, GDP)
will follow the recent rate increase higher, or growth will fall
because the cost of credit has risen too much, too fast. The second
half of the year should give a lot more clarity on that subject. I
am constructive that I am being too concerned because PCE
(consumption) growth has picked up in recent months. The July
consumption figure is due out on Friday morning.
Click to enlarge
Clear and Present Markets: 8/26/2013
With the interns departed and kids headed back to school, it is
time to delve back into the markets ahead of what I expect to be
homepage, this morning, tells a story of unsustainable spending. On
the left side, you have headlines about the US role in the Middle
East. On the right side, you have a story about transporting
It bears noting that as we prepare for a battle over the debt
ceiling and the budget, the President's 2014 Budget calls for a 98%
increase in income tax collections and a 25% increase in payroll
taxes by 2020. I don't see how you can take another $1.3 trillion
out of the consumers pocket without negatively impacting the
economy, unless there is a commensurate increase in wages. In
addition, since the individual will fund 80% of the government
revenue, the country will have to better define its investment and
spending priorities, and defense spending is a primary target.
Throughout history, taxes on global trade have supported military
expansion, and when military expansion outpaced the ability of
taxes to fund that expansion, the economic, political, and military
influence of the regime declined. This is why many nations are
challenging the US politically and why we are debating our
involvement in these actions. Our military is overextended, and we
can't continue supporting our military to the degree we have in the
Oil is another segment in which we see unsustainable spending. Low
interest rates have funded capital expenditures that exceed the
cash flows from those investments, and many exploration &
production companies have been forced to sell assets to fund
drilling programs. As interest rates increase and fewer mid-stream
assets are available to spin-off as MLPs, domestic oil production
has to decline because the cash to fund that production comes at a
higher cost. It is often overlooked how important low interest
rates have been to domestic oil production, and one impact of a 3%
yield on the 10-year Treasury is that capital intensive businesses
will experience negative operating leverage as the cost of capital
2. I have been expecting an increase in M&A activity, which has
not materialized. The news of
) brought this catalyst back on to my radar. Companies are at the
limit of driving earnings growth through financial engineering of
the balance sheet, and M&A provides another opportunity to
drive growth by leveraging the cash flows of an under-leveraged
competitor. Managers have been pretty disciplined, stating that
prices are not attractive, but as Todd often says, "buyers are
higher." As pressure builds on managers to deliver growth, M&A
funded with cheap debt is another way to engineer growth.
3. Last week, a colleague and I were contemplating the future of
the "big box" store, and the earnings of
) painted a stark difference in results and strategy. Dick's sales
are traditionally volatile and have become more dependent on
apparel recently. Dick's expects square footage growth to be the
primary driver of earnings growth, and the company thinks services
like return-to-store and ship-to-store will prevent
) from disrupting its business model. PetSmart had much stronger
results, which were driven by the growth in services like grooming,
kennel, and training. PetSmart's use of services to drive traffic
to the store ultimately helps them drive sales of items that might
otherwise be purchased on-line. Coupling services with the
traditional offering helps insulate the brick & mortar business
from the on-line threat. Dick's is not doing enough to
differentiate its experience. I would like to see Dick's take its
service offering a step further, moving beyond hiring a golf pro
and adding an ESPN Sports Science type experience, coupled with
coaching (in a variety of sports), that makes the store a
destination and drives both service revenue and other sales. There
is entirely too much retail square footage in this country, and how
it is utilized as on-line sales claim an increasing percentage of
sales will determine the winners and losers.
Gold Gains Momentums
Gold is approaching its record high from 2 years ago. The action in
miners such as
) exemplify the recent strength in the sector with Franco-Nevada
stabbing through its 200 DMA six months after violating it in
See FNV for 2013 below with 200 DMA.
Click to enlarge
Note Friday/today's strength was setup from a textbook backtest of
a Rule-of-4 Breakout (a breakout over triple tops).
The Risk of Staycation
While I'm "off" this week, I'm spending the time with my family at
our home--which means I'm only a few steps from my home office
systems. A blessing and a curse perhaps, but either way, here are a
few quick thoughts:
on a closing basis; if we push through there on the downside
and the 200-day at
come into play through a technical lens.
(NYSEARCA:GLD) has room to $1500 before it collides with the
downtrend (technical resistance).
The specter of geopolitical unrest in the Middle East -- aside from
an unfortunate evolution of social mood
-- is on the margin constructive for both gold and crude.
Deflation is the other side of that trade
, which makes both risky investments. See both sides.
I don't know
(JCP) intimately, but I would think that once the Ackman overage
works itself off, the stock has room to bounce.
Tapes that are weak all day (with breadth 2:1 negative or worse)
tend to end that way BUT given how thin this week is (and will be),
it won't take much to push an agenda (volatility is the opposite of
Trading smaller "lots" is one way to address this dynamic; and of
course, the ability not to trade is often as powerful as trading
ability. Keep loose grips on those handlebars. September looms
large on the horizon.
Click to enlarge
Click to enlarge
Chart of the Day -- Russell 2000 and 2% Down Days
For today's chart of the day, we took the
(INDEXRUSSELL:RUT) year-to-date and plotted 2% down days for the
index against it, marked by glowing red bars.
If you'll notice, every time the Russell 2000 fell 2% or more this
year, the market was within range of an interim low.
Today, the Russell is down 2.3%, marking the biggest decline since
June 20. Time will tell whether this signal holds again -- in the
meantime, be aware that it isn't perfect as the bottoms weren't
Either way, a failure to rebound could within the next few trading
days could indicate a change in character, especially if the
S&P 500 fails to get back up above its 50 DMA, which has marked
a key turning point numerous times this year.
Click to enlarge
The Square of 9 Called It Right on This Stock
Around two weeks ago, we flagged the potential
(AAPL) square-out at 512/513.
This was a big level since it was 540 degrees up from low. 540
degrees being a true square or cube (6 sides of 90 degrees = 540
The Square of 9 Wheel continues to prove its value -- especially on
those items that are widely watched, being part of the Street's '
Knowing the significance of 512 on AAPL not only would have
saved/created financial capital but also substantial emotional
capital, which is worth its weight in gold in this game.
, August 28, 2013
Everyone Is Staring at the Same Scenario
There's a rather staggering volatility skew in the
SPDR S&P 500
(NYSEARCA:SPY) October puts. With the stock at 164.10, the 155 puts
are trading at 18.4% implied volatility with a price of 1.45 vs.
theoretical value of 0.55. Now flip to the calls side and the
mirror image 173 calls are trading at 12% implied volatility and
the price is 0.35 vs. 0.45 theoretical value.
I wouldn't use this type of overloading on the put side as a
"contrarian" indicator, but there is little doubt that protecting
the downside by buying puts outright seems a low odds play, and
risk reversals look outright suicidal. Ratio or butterfly put
spreads look a lot more manageable.
Update on Short Interest
Short interest numbers for the NYSE are reported for the period of
settlement date August 15. Short interest numbers have increased to
13,749,200,005 from 13,692,475,466 shares (revised) for an increase
of 56,724,539 shares, or 0.41% with 1,598 advancers and 1,902
decliners. The NYSE has seen more advancers than decliners in 46 of
the last 92 initial reporting periods.
NYSE and NASDAQ had risen the last eight of fourteen reporting
periods and dropping across the board over the last three months.
During this period on a trade date basis (7/26 to 8/12) the S&P
fell by -0.13%. The conclusion is shorts capitulated their
positions with the recent strength. The next short interest
collection period covers from 8/12 to 8/27, which is today, and so
far, the S&P 500 has fallen by -1.93%. It will be interesting
to see how much shorting takes place.
Short interest numbers for NASDAQ are reported for the period of
settlement date August 15. Short interest numbers have decreased to
7,378,326,489 shares from 7,395,403,049 shares for a decrease of
17,076,560 shares or -0.23%. There were 1,089 increases and 1,402
decreases. In the last 92 reporting periods, NASDAQ has seen more
advancers than decliners in 48 of the 92 last reporting periods.
Dedicated short sellers lost -5.74% in July (YTD -17.38%), as
reported by www.hedgeindex.com and 2012 -15.99% while the index
made 7.32% in 2011. For 2010, this index was down -17.79%. For
2009, this style lost -14.62%. In 2008, short sellers lost -1.52%.
In 2007, short sellers made 4.14%.
The Day After
So here I sit with the highest cash levels in my portfolio since
2011. I feel kinda naked, but I know the market is really in a
tenuous spot and without a washout low, there is still significant
downside risk. I have cut to the bone now and prefer to manage
market exposure via hedges at this point rather than selling
positions. I have a handful of long-term stocks on the books that I
still believe in, many of which I have buzzed about. This market is
exceedingly weak, and the downtrend is becoming well established.
We broke the November trendline, and I don't see much support below
us until the 200-day moving average that sits around 1560. Attached
is an updated chart that we looked at a couple days ago.
I am currently holding about 60% cash, 15% bonds (the bulk being my
iShares Barclays 20+ Year Treasury Bond
(NYSEARCA:TLT) buy from last week) and 25% core individual stocks.
As I have mentioned before, my stylistic approach is maximize
trends and systematically reduce risk and protect the portfolio
when trends fail. I rarely go net short as you must be very quick
to close those positions.
My expectations for the next couple of days are a drift up to the
breakdown point of 1639 in the S&P 500, which would be a
quality location to start layering into some shorts if that is your
game. I will likely add hedges in that area.
Good luck my friends.
Click to enlarge
Thursday, August 29
X-Raying the Markets
The stock market has taken a few sick days recently, but the
question now is whether or not it is suffering from a true illness
or if it just pushed itself too hard for too long and needed a
break. Indeed, the S&P 500 (SPX/1634.96) asserted its vigor
with a powerful up-move from the June 24th low to the August 2nd
high, but since then it appears to be out of breath and has
struggled to convalesce to its erstwhile form. Given the recent
pattern of lower lows and lower highs, it may be time for a
check-up to help diagnose just what is ailing the market. Only then
can a reasonable attempt at a prognosis be made. So just as a
doctor will put a sick patient through a battery of tests,
technicians will look to the charts to assess the internal health
of the current investment landscape.
One diagnostic test that can be used is to attempt to identify
where we are in the traditional business cycle by looking at the
intermarket relationship between bonds, stocks, and commodities.
Historically, these asset classes tend to rise and fall in
sequence, with bond prices topping out before stocks, which, in
turn, top before commodities. So far it looks like this pattern may
be developing in its textbook manner. Bond prices, for the most
part, topped in July 2012 and have declined ever since, while
stocks went on to make new highs before this recent patch of
weakness. It may be too early to call an equities top in this
business cycle, but commodities have picked up recently, as
measured by the S&P Goldman Sachs Commodity Index. Commodities
tend to lead toward the end of business cycles, so their recent
relative strength is something to keep an eye on.
To utilize another tool, we can examine the equity markets more
closely by studying the price action within the S&P 500
individual sectors. Not surprisingly, the
SPDRs Select Sector Energy ETF
(NYSEARCA:XLE/$82.46) has been the best performer among the nine
SPDRs Sector Funds over the past month, reiterating the
aforementioned theme of outperformance by commodities. However, it
is the breakdown of the Financials that most intrigues us at the
moment. Since the major low in March 2009, the Financials have
appeared very comfortably in the driver's seat as they consistently
led the equity market higher. But recent trading sessions have
jeopardized this trend as the
SPDRs Select Sector Financial ETF
(NYSEARCA:XLF/$19.49) has just broken its rising wedge pattern and
is currently positioned for lower prices in the near term (see
chart). The stock market might not yet be terminal at this point,
but without support from the Financials, it may be hard for the
broad market to make its miraculous recovery. For now, it's chicken
soup and plenty of fluids until it can once more get on its feet.
Click to enlarge
The S&P 500's Reaction to US Adventures in the Middle
The list below contains the dates of direct, US military
interventions in Middle Eastern countries and the S&P 500's
subsequent reaction. While traders and investors are understandably
concerned about a military strike on Syria, military conflict
doesn't always lead to a lower market. The reactions of the S&P
to previous events hold no clear pattern. A spike in the price of
oil is probably the biggest concern for investors if the US attacks
- besides the unlikely event of a larger conflict erupting between
the bigger players.
August 19, 1953
- At the request of the British M16, the CIA secretly organized and
led a coup that overthrew Iranian Mohammad Mosaddeq. Both nations
viewed Mosaddeq as a threat because he nationalized the Iranian oil
industry, which which the British had controlled through the
Anglo-Persian Oil Company.
Between August 19 and September 14, the S&P declined 6.58% from
24.31 to 22.71. The S&P had already been in a downtrend though.
Afterwards, it started a bull run lasting until August 2, 1956 to
49.64 for a 118.58% gain.
July 15, 1958
- President Dwight D. Eisenhower authorized Operation Blue Bat,
which involved about 14,000 men. Lebanese President Camille Chamoun
asked the US for military aid after the Iraqi revolution that
occurred a day earlier. The Christian and pro-Western Chamoun
feared the Lebanese Muslims would gain control of the country and
join the recently formed United Arab Republic, formed by Egypt and
Syria. The US withdrew its forces on October 25, 1958.
From July 11 to July 15 the S&P dropped from 45.72 to 45.11 for
a 1.33% decline.
Despite the small drop, the S&P would continue its uptrend from
45.11 to 50.81 on October 24, 1958 for a 12.64% gain. The market
continued to gain despite the Soviet Union's threat to use nuclear
weapons if the US intervened in Lebanon.
April 24, 1980
- President Jimmy Carter orders Operation Eagle Claw. US soldiers
attempted to rescue 52 Americans held captive at the US embassy in
Tehran. The helicopters encountered technical issues, causing
commanders to abort the mission.
The S&P had declined from February through March before
entering another uptrend. From April 24, the S&P would increase
from 104.40 to 140.52 on November 28, the highest point of 1980,
for a 34.60% gain.
August 25, 1982
- President Ronald Reagan sends marines to Beirut, Lebanon as part
of a three-nation Multinational Force, which also included French
and Italian troops, to try and help stabilize the country. The US
military would remain active in the area until February 26, 1984.
By August 25, the S&P had reversed a downtrend. Beginning at
117.58 on that day, the S&P would reach 157.51 by February of
1984 for a 33.96% gain.
Between August 25, 1982 and February 26, 1984, attacks on the
Multinational Force occurred.
During the week after the suicide bombing of the US Marine and
French paratrooper barracks in Beirut on October 23, 1983, the
S&P fell from 165.99 to 163.37 for a 1.58% decline. The S&P
had reached a top on October 10 of that year, and it would not
resume an uptrend until August of 1984.
When US Air Forces targeted Syrian anti-aircraft batteries on
December 4, the S&P barely moved. However, the USS New Jersey
battleship fired on Lebanon on December 14 and 15, and the S&P
fell from 163.33 to 161.66 over the two days for a 1.02% decline.
When the Multinational Force began withdrawing on February 20, the
S&P increased from 154.64 the following day to 159.30 by the
time the US Marines had withdrawn for a 3.01% gain.
August 2, 1990
- When Iraqi troops invaded Kuwait starting the First Gulf War, the
S&P stood at 351.48 and would drop to 295.46 by October 11 for
a 15.94% decline.
The S&P regained some ground, rising to 331.75 before falling
again by 5.67%, two weeks before the US military launched Operation
Desert Storm on January 16, 1991. By this time, the S&P had
regained its losses, and when the ceasefire occurred on February
28, 1991, the S&P reached 367.07 and would continue its
August 20, 1998
- The US military launched cruise missile attacks on terrorist
bases in Afghanistan and a pharmaceutical factory in Sudan.
President Clinton authorized the attacks in retaliation to the US
embassy bombings that occurred on August 7, 1998 in Dar es Salaam,
Tanzania and Nairobi, Kenya.
The S&P remained little changed between these dates. The
strikes occurred just days before the S&P fell 11.7%.
October 7, 2001
- President Bush launched Operation Enduring Freedom in response to
the terrorist attacks on September 11. When the market opened on
October 8 after that weekend, the S&P dropped from 1071.38 to
1062.44 for a 0.83% decline. But no major moves occurred on the
index at the beginning of military operations. The S&P had
rebounded from the sell-off that occurred after September 11, and
it would continue its longer downtrend until it bottomed at 776.76
on October 9, 2002.
March 19, 2003
- When the Second Gulf War began, the S&P had not technically
reversed its downtrend. Even by May 1, when President George Bush
gave his "Mission Accomplished" speech, the S&P had not
technically created an uptrend. During the conflict, the S&P
gained 4.84%, moving from 874.02 to 916.30.
May 2, 2011
- When the US Navy SEAL team killed Osama Bin Laden, the S&P
had little reaction.
Times are tense out in... the entire world?
1. Fast food workers, who are at the absolute bottom of the income
distribution curve, are protesting to get their pay bumped up.
2. There is a
over where it's time to attack Syria.
3. People who voluntarily give all their personal information to
(FB) and Twitter are going crazy over government surveillance
It makes for a toxic mix in the air perhaps not seen since Occupy
Wall Street, which saw a market pullback before a moonshot higher.
The S&P was at 1216 on September 16, 2011, before hitting a
closing low of 1099 on October 3, 2011. From there, the rally was
on, and the index hit 1419 on April 2, 2012 -- a full 29% off the
Are we seeing a parallel pullback now that the news is so lousy?
Friday, August 30, 2013
India and Brazil were trying to restart the game of "he said, she
said" that we saw predominantly during the Euro crises. This
morning at 8:35, it was reported that India's principal economic
adviser Dasgupta said, "India and other emerging markets are
seeking a coordinated FX intervention that could happen in days
rather than weeks. Brazil and India can start the move." Twenty
minutes later the head of the Brazilian central bank said "there is
no initiative of that sort." Now, Dasgupta is saying it's "hard to
say if emerging markets are planning an FX move." Ugh. Will there
be clowns at this circus?
With regards to the emerging markets situation, I would have to
think that the rupee is pricing in a heckuva lot now of economic
slowdown, which has me backing away from the EM short some. One
thing I've learned/was taught is that once something moves in an
extreme (record) in one direction, there is a high probability that
the next move is not in the same direction. Still marinating on
those thoughts, but thought I'd share.
The income data we saw this morning was the worst we had seen all
year and is a bad trend to kick off the 3Q. Additionally, the
spending data we saw matches up with the negative skew on guidance
from consumer related stocks in the 2Q. Already, I've seen
(BCS) taking down its 3Q GDP estimate to 1.6% from 1.9%
(annualized) and Goldman to 1.5% from 1.7%.
Treasuries are dealing with a month-end index extension by 0.11
years due, which is the obvious reason for outperformance in the
long end. Nothing new I can add today, the trend is still looking
up but admittedly fragile. I will most likely wait until Tuesday to
add to a long position, however.
Volumes looking light in
(SP futures) and
(10-year futures) thus far. ES has only traded 420K contracts vs 15
DMA of 1.587 million and TY at 493K vs 1.275 million 15 DMA. NYSE
all securities breadth is just ticking 2:1 negative after the first
I know this is a bit overdue... below is a picture from my trip to
Montana at Hidden Lake up in Logan's Pass, Glacier National Park.
Photo credit goes to Brandon Perry.
Click to enlarge
Nuance Communications Getting More Icahn Love
There has been a lot written about Carl Icahn's latest moves
(NUAN). The two key items are these: He's in talks with Nuance
about adding a board seat or seats, and he's still increasing his
position in the name.
At this point, he's up to a 16.9% stake in the company. That's a
big darn stake.
I'll remind readers that Icahn is not impervious, and I took a
beating on one other Icahn activist action in the past. But in
general I think he has a sound strategy with Nuance, and the
company also has enough of a moat with its current set of
technology as well as customer partnerships for a strong
probability of value creation.
The key for Icahn is whether he can get Nuance sold, which is what
I believe he wants. And the rub for any sale to a couple key tech
(MSFT) is that Apple is such a key customer that it take those two
out of play. This also creates a bit of an issue as Apple then
becomes a logical buyer, but it has shown little interest.
Then lastly, given that Nuance's market cap isn't small (nearly
$6B), it makes the company a bit too large for an easy deal as
there are not many software names that can easily gobble a company
of this size up. Taking Google, Microsoft, and Apple out, the list
is pretty well left with just
(VMW), and maybe
(CTSH). My view is the data storage/cloud players would not be
: When one looks at all this, it does become pretty clear why
Nuance hasn't seen a corporate takeover yet. If it isn't Appleor
private equity, the rest don't shake out very well. That doesn't
mean that taking a shot at Nuance here doesn't make sense. I think
it does as the stock has simply gotten very beaten up again. But
this is a patience trade, and I'm one of the few people in the
world left who can tolerate patience trades.
The reaction to Kerry's speech feels almost Fed-like (lots of
bouncing around). For the meantime, the market appears comforted by
his assertion that any action will be short-lived and not involve
boots on the ground, which is aimed at soothing worries that Syria
could be another Iraq orAfghanistan. This was supposed to be one of
the most boring days of the year, but I wouldn't be surprised to
see more volatility this afternoon.