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.
Mo Better Blues!
It's a brand new week on Wall Street and the holiday cheer is
self-evident. Last week, we touched on
the scope and breadth
of this year's stock market rally--92% of the S&P is positive,
up 29% on average--and this morning,
an article from Bloomberg
suggests the rally will "pick up steam through year-end," if
history is any guide.
Looking back since 1928, shares climbed in the final two months 82%
of the time when the S&P gained double-digits through October.
The mean increase for November and December is 6% which, if
accomplished anew, would target S&P 1892 into year-end.
The momentum is there, of course, but past results never guarantee
of future returns. A prominent director of investment strategy was
quoted in the article saying, "Clients ask me, 'Why don't I take
profit now?' My theory is you can sell a lot higher later." That
may prove true; we just have to wonder how many others are waiting
to sell alongside him.
While bears will point to sluggish growth, uninspiring labor
markets and artificial stimuli that will presumably end one day,
the bulls seem to increase alongside the year-to-date returns. Abby
Joseph Cohen of
) is pointing to how inexpensive the market was on a P/E basis to
start the year--and still thinks it is "under-priced on a 12-18
The bulls have some gravitas after a 160% rally the last four
years, just as the bears growled loud in 2008 and 2009 after a
massive decline. It's the way of the world, particularly on Wall
Street where you're only as good as your last trade and perception
is reality. Hands over ears and eyes glued to our screens, we might
actually arrive at the conclusion that all is well in the world.
The Federal Reserve may induce a state of financial nirvana
if they can pull off Operation Rug Sweep
, but that requires a matter of trust and leap of faith. That
doesn't come easy for increasing majority that has suffered as a
result of the policies but everything is funny when you're making
money so nobody wants to hear about the other side of
trade right now.
With the market in 'no-man's land' through a technical lens, one
would be wise to define risk, maintain perspective and remain
lucid. History has rarely been kind to bandwagon investors who
bought (or sold) because everyone else was doing it; this time
could be different, for two months or longer, but we would be wise
to see both sides.
Good luck today.
) was halted for news pending following a report from the Toronto
Globe saying that the company would abandon its sale plan, raise $1
billion in convertibles, and replace its CEO. The stock was down
19% to $6.32 before being halted.
And now the company has confirmed the news. It is receiving a $1
billion investment from Fairfax Financial and other investors, and
has named John Chen as Chairman and interim CEO. Fairfax' Prem
Watsa will be lead director, current CEO Thorstein Heins and
director David Kerr will resign, and the review of strategic
alternatives has been concluded.
Fairfax and the other institutions are buying $1 billion in 6%
unsecured subordinated convertible debentures, which are
convertible into BlackBerry shares at $10.
We'll have to see what happens when the stock opens back up for
trading, but it looks like my
$9 December butterflies
will be heading straight to zero. I may, however, just close out
the short $9 calls in the position and leave the long $8 and $10
calls on as lottery tickets -- as in very low probability of
success, but they're going to be worth next to nothing anyway.
Clear & Present Markets
1. I have to laugh at
) Chairman Eric Schmidt's outrage over NSA Spying. This is a
company who profits by tracking every move internet users make. If
he thinks the government looking at this information is illegal,
what does that say about the business model for Google,
), and the rest? Of course, foreign nations will be skeptical of
companies gathering so much information on their citizens,
especially after Google hired Regina Dugan, the former head of
DARPA (Defense Advanced Research Projects Agency), last year.
Technology has progressed and profited in the absence of
regulation, but it is only a matter of time before regulators come
down hard on this information gathering sector. Regulation can also
create barriers to entry, which reduces competition and slows the
2. I have been looking at the airlines recently, wondering if the
business model is really "new", and whether profits can continue to
grow in the sector. The major airlines are winning by eliminating
flights, which reduces capacity and drives travelers to other
flights resulting in full planes and higher ticket prices. It
hardly seems like a novel idea to track bookings data and use it to
find the optimal balance between service levels and profitability,
but given the financial problems in the industry, perhaps it really
is the first time the industry is tracking such data and using it
to enhance profitability. Consolidation has reduced competition on
certain routes, and allowed the majors to execute this strategy. In
addition, the increased profitability allows the majors to cut
prices where needed to compete with regional carriers trying to
Airlines like Frontier (
Republic Airways Holdins
(SAVE) are executing a similar strategy by targeting the personal
traveler and flying only occasionally. The majors have to fly
multiple flights every day to multiple destinations to satisfy the
business traveler. These smaller carriers are only flying a couple
of times a week during the most profitable times and giving
personal travelers a cheap flight with disaggregated costs (baggage
fees, purchased food, pay for preferred seating, etc…) provided
they change their schedule to accommodate the cheaper flight times.
This strategy has proven highly profitable, but it is not yet
having a material impact on the profitability of the majors.
I am narrowing my focus on 2 airlines with catalysts in the near
future that should increase profitability.
(DAL) is in the process of winding down its Tokyo hub and moving
that traffic to Seattle's Sea-Tac Airport, which will give Delta a
west coast hub with flights to every major Asian destination. This
move should have a broader impact on Seattle's economy, but it
should specifically benefit
(ALK), which brings as much traffic into Sea-Tac as
(UAL) does into San Francisco (its Asian departure point). The
industry is using data to make better business decisions, and it is
both profitable and growing, even with oil at $100/bl. There are
still risks and vulnerabilities to investments in the sector, but I
am warming to the ability of the airlines to deliver profit growth
for another couple years, as long as oil process don't spike.
(MRK) released positive data this weekend on its Phase 2 Hepatitis
C drug, and analysts expect the Merck drug to reach the market
about 18 months after the treatments by
(ABBV). It will be interesting to see how this market shakes out as
these treatments are not chronic therapies, they actually cure HCV.
There is an estimated 200 million people worldwide infected with
HCV, so investors should expect a rapid ramp in sales for these
drugs, but the big question is how long will sales grow before
enough people are cured and sales begin to decline. These drugs
have to be modeled differently than the chronic therapies
pharmaceutical companies typically churn out, but competition and
pricing strategy will play a bigger role in the market share and
profitability of these vaccines. None of these treatments are
approved yet, but the Phase 2 trials are showing efficacy rates in
the range of 90%-100%, with minimal side effects compared to
Is Larry Ellison going to Dreamforce ?
The third quarter always provides opportunities to buy companies on
the cheap, mostly due to the proclivity of earnings misses that
occur. This third quarter caught a lot of companies off guard due
to spending disruptions from China, Europe, and our Federal
government. It's not uncommon for a company who missed on
third-quarter earnings to spend the rest of the fourth quarter
trying to rebuild the trust that was just lost. This is done in the
form of conferences, roadshows, or conference calls. All you need
is a glimpse or murmur of increased confidence or the mention of a
"push out" closed, and you have the makings of a great
fourth-quarter-to-first-quarter long idea.
These communications intensify this week as conference season
begins and we wind down earnings. Name a bank, and there is a good
chance that they are hosting a conference or an event in the next
(JNPR) are some of the names that are worth paying most attention
to as they all have been stricken with the overused legacy, broken,
old, and secularly-challenged labels. Citrix Systems, Red Hat, and
Qlik Technologies are interesting contrarian longs at this point.
Besides Fusion's private company event on November 18 in San
Francisco, the conference expected to generate a lot of buzz in two
weeks (Nov 18-21) is
(CRM) Dreamforce, with 120,000 attendees expected. Hopefully,
Salesforce delivers solid numbers beforehand. Larry Ellison was
invited to present, and there is speculation that he will be there
to talk about big data analytics, talk about Exadata, and update on
(ORCL) partnership that was announced in June. There have been
questions about of whether or not this "bromance" still exists, so
his attendance will confirm that it does. The reality is they are
still on a collision course in many areas, so it feels like a lot
of marketing fluff.
Don't miss our amazing line up of private companies on November 18
at the First Fusion Private Company Summit in San Francisco.
Confirmed to speak include the likes of Corel CEO Tom Berquist,
Sumologic CTO & Co-Founder Christian Beedgen,
Hummer-Winblad Managing Director Lars Leckie, Nimble CEO Jon
Ferrara, Echo CEO & Co-Founder Khris Loux, Impermium CEO &
Co-Founder Mark Risher,
(OTCMKTS:SAAX) CEO Dina Moskowitz CEO, Paymentwall VP Bus
Development Jon Wintermeyer.
for more information about the conference.
GT Advanced Technologies Deal Has Interesting Apple
GT Advanced Technologies
(GTAT) deal (to secure sapphire production) for
(AAPL) supply components is very interesting, intriguing, and
Apple signs $578M sapphire deal with GT Advanced
" (Apple Insider)
My first thought is more of a question. Did Apple just effectively
lockout the rest of world from pursuing its TouchID security tech?
There is more to this point. Apple has unfortunately learned how
ineffective having "rock solid" patents are in preventing others
from stealing your designs and IP.
Yes, the company will probably eventually win some more lawsuits
and money from a few iPhone-clone makers. But that pales in
comparison to the 10s of billions in lost sales.
So now, Apple is using it's vast cash stockpile smartly and
strategically by locking in supply for what is likely an already
constrained component material as well as what is likely a
proprietary technology developed by GT Advanced Technologies.
Looking back, Apple now probably wishes it had used some similar
negotiation points in its dealings with
(KRX:005930) as Apple has secured exclusivity and likely a slew of
protective terms under the GT Advanced Technology contract.
: If patents can't protect your designs and IP, exclusive secure
deals with key suppliers just might! Moreover, on the innovation
front this TouchID, sapphire and potentially new screen materials
and designs show that Apple still drives much if not most of the
innovation in the smartphone and tablet segments.
About the Unemployment Threshold Being Lowered to 6% From
A big theme today has been the note by Goldman economist Jon
Hatzius that the Fed will lower its unemployment threshold to 6%
from 6.5%. I've discussed this likelihood at length on the Buzz for
the last 4 months, but I don't deserve special credit for that as I
am not alone by any stretch - and in my eyes the Fed already
implicitly lowered the threshold at the September meeting, which is
THE prime reason behind the recent decline in yields (as we had
before the meeting
In addition, the Evan's rule, which is the name of the 6.5%
unemployment and 2.5% inflation thresholds, has all but been
abandoned since the September meeting (see posts
) by its namesake. The reason is because unemployment does not
totally reflect economic activity anymore due to the structural
problems in our economy.
Anyway, so what does that fundamentally mean for the market? By
lowering the threshold, the Fed is - for lack of a better word -
synthetically lowering the Fed Funds rate by 100 basis points. This
is because rather than the first rate hike coming in the 4Q 2014 -
when the Fed expects unemployment to be 6.5% - it is being pushed
out to 4Q 2015, when the Fed expects unemployment to reach 6% (see
SEP from Sept
). So, for example, a 5-year note issued tomorrow would effectively
reflect 1% less interest for the life of the note because the rate
in year four would be 1% lower than previously assumed, and so on.
More importantly, the structural shift that I expected is occurring
on in the Treasury market. As recently as two months ago, interest
rate futures had been pricing in a perfectly linear 112.5bps of
hikes per year. Now, this has been reduced to a more conservative
94bps-106bps per year. I say perfectly linear because the current
path expects zero problems within financial markets or economic
activity, which is not realistic.
Lastly, let me be clear on the current state of the Fed's forward
guidance and the markets.
The Treasury market is already pricing in the reduction in
the thresholds - implicitly or explicitly - so it is not a new
. The Fed could move around the goalpost or whatever, but the
market is already pricing off lower unemployment targets and, in my
honest opinion, GDP targets.
Nervous Investors Afraid of Missing Out on Upside
At approximately 11:44 a.m. yesterday, there was some large call
buying activity in
(INDEXSP:.INX) options. An investor bought 17,800 March $1925, 4300
March $1850, and 8700 Jan $1920, creating $500 million deltas to
buy. At 12:20ish, we began to see the gap higher on the S&P
500. Secondly, at approximately 12:50, we saw a fairly big call
buyer in the
iShares MSCI Emerging Markets
(NYSEARCA:EEM), buying 135,000 Mar 47 calls and 35,000 Mar 45
calls, which created 3 million EEMs to buy. This was in conjunction
with commentary from the legendary distressed player Oaktree, who
has been buying Chinese equities and selling the U.S. on a relative
Our take is that this could be either a stock replacement with
options or a $10 billion fund spending 10 basis points of NAV
sounds reasonable if you are concerned about weaker prices or melt
up on multiple expansion theme. In layman's terms: "Let's
essentially take money off the table because we may be concerned
about market valuation, but maintain the ability to capture further
as retail may be in the process of driving a near term top into
(XEC) was a short trade idea from
last night's report
. The setup based on several distribution days and what looked like
a test failure of the reversal bar from October 21 did not play out
Climarex gapped up on earnings. However, stabbing back below the
prior reversal from October 30 at 111.27 triggered an Oops sell
signal on a trading basis.
Now, Climarex Energy has carved out 3 Topping Tails in close
proximity for a potentially bigger picture Charlie's Angels sell
Below, see a daily Climarex chart from June and a 10-min Climarex
chart for 2 days.
Click to enlarge
Click to enlarge
The VIX Drip
After that brief spike heading into the debt ceiling the
(INDEXCBOE:VIX) is now back near multi-year lows as the market has
resumes its steady bullish march to new highs. This level may seem
low in absolute terms but keep in mind that the 20 day realized
volatility is now down to 9.85 so the current 12.90 reading is
actually a decent premium especially in the context that external
events, both big and small, from geopolitical to earnings season
recede into the background and we can now expect benign environment
for the next few weeks.
The term structure, which briefly went into backwardation, is now
in a normalized cantango and about as flat as it has been nearly
two years. VIX futures are now running about a 6%-11% premium month
to month; ie December futures are $14.80 while January is 16.40.
And this is the steepest part as traders are pricing in that the
next budget deadlines begin rolling in after the new year. This has
taken its toll on VIX related exchange trade products (ETPs) such
as the iPath S&P Short Term Volatility (VXX) which is now
hitting a new all time low. Remember, these future measures must
converge towards cash as they approach expiration. Given the
natural contango that means they have a downward drift even if
volatility remains flat. Highlighting this inexorable lumbering
towards zero the VXX will have a 1-4 reverse split effective
tomorrow. This will be the third time since its launch in 2009. So
the original price on an adjusted basis is now $6,400. As a long
term hedge that has not worked out so well.
Which leads to the notion that catching spikes in volatility is
often short lived and very hard to time. That may be the reason the
Chicago Board of Options Exchange
(CBOE) recently launched the
Short-Term Volatility Index
(INDEXCBOE:VXST) which a 9-day volatility measure. I'm sure that
futures, options and ETPs will follow in coming weeks. This will
help traders align short-term hedges with known upcoming events.
Overall, the option measures such as the VIX and put/call ratio,
combined with other sentiment readings such as bull/bear reports,
are creeping towards complacent levels far from extremes meaning it
can persist for longer than expected. For now having a moderate
amount of insurance, rather than expecting a huge correction, seems
the prudent approach.
Thursday, November 7
I had dinner the other night with Claus. It was one of many dinners
I have shared with this brilliant stock market strategist. Like me,
he is bullish, even though there may be a near-term minor pullback
in the equity markets.
The drivers of a new secular bull market remain, at least in my
opinion, the election of smarter policy makers (and therefore
smarter policies), the American Industrial Renaissance, and the
Energy Independence theme driven by fracking and horizontal
drilling. Those themes are profoundly bullish if you consider the
implications of their impacts.
Indeed, in 2008, the Eagles Ford oil production resource was
producing 352 barrels of oil a day; now it is producing 536,000+
barrels per day, which is coming close to eclipsing the Bakkan
production that is slated to exceed 1,000,000 barrels per day by
the end of this year! This energy independence theme is
exceptionally bullish given that if we can end our dependence on
Mideast oil, it could add 2 to 3 multiple points to our P/E stock
If so, it implies a trading target for the S&P 500
(SPX/1770.49) of above 2000. That said, I do indeed have a negative
timing point in the short-term for the S&P 500 with the
implication that the S&P "tops" between 1775 and 1825.
Longer term, I think the S&P goes substantially higher, but in
the near-term, I think we are making another short-term "trading
top." Interestingly, yesterday's trading action tends to confirm
that despite the
(INDEXDJX:.DJI) Delight (+128). Indeed, yesterday was a fairly
strange session with the Dow better by 128 points, while the
(INDEXNASDAQ:.IXIC), and the
(INDEXRUSSELL:RUT) were all down on the session. Moreover, there
was a big rotation out of the biggest winning stocks of the year.
To be sure, in Wednesday's session the three biggest losing sectors
were Transports (-0.71%), Healthcare (-0.33%) and Consumer
Discretionary (-0.24%), while Utilities (+1.32%) and Consumer
Staples (+1.10%) were the biggest winners. Verily, the 50 S&P
500 stocks that have been up the most this year were down an
average of 1.02% yesterday as can be seen in the attendant chart.
Click to enlarge
The bottom line is that the new bull market high achieved yesterday
was not accompanied by all of the metrics I would like to have
seen. Thus, yesterday's move appears to be questionable. The
Selling Pressure Index actual rose one point yesterday, while the
Short-Term Trading Index fell. That is not the kind of action one
wants to see when the Dow is better by triple digits. Accordingly,
I am again going to respect the timing models, which are looking
for a short-term trading peak beginning next week.
To Action There Is an Opposite and Equal Reaction
Despite articles in the paper this morning that an ECB cut was
expected, the markets are reacting to the news with surprise.
Markets are neither rational nor irrational. They are rationalized.
Even certainty can be rationalized into uncertainty with the
expected morphing into surprise.
Still, no one should have been surprised by the ECB actions. Pull
up a chart of the Euro and you will see a major peak at the end of
October. If you were a central banking looking at a chart at the
end of October, you would have felt that the euro was way too high,
especially coupled with weak inflation. (And I suspect you would
have been receiving a few phone calls from national European
leaders emphasizing just that too.) But please notice how the ECB
acted this morning AFTER the turn. The shift in sentiment had
Yet again, a central bank has reacted to mood late. The net result
is the equivalent of throwing more gas on a fire that has already
begun to burn. It is how you get $0.02 moves in the euro. (And to
those who need another recent example, take a look at India. The
same kind of central bank action with the same after the turn in
sentiment timing with the same "whoosh" effect.)
All that said, while the markets are rationalizing what the ECB's
actions now mean to equity and bond prices, I'd offer that the
timing of its action is very late in this bullish equity cycle.
Lowering interest rates with equities at record highs is not normal
by any stretch of the imagination.
If I had to offer an analogy, it feels a lot like what we saw in
Japan earlier this year.
Twitter Gets Downgraded
I joked earlier about analysts downgrading Twitter on account of
the huge spike above the $26 IPO price, but as it turns out, we've
actually gotten one!
Pivotal Research downgraded the stock to sell from buy, though it
added $1 to its target price, taking it to $30, which is 35% below
the current price of $46.
This is a tough situation, even if you believe in the company
longer-term, because we've got a $30+ billion market cap vs. $1.1
billion in expected sales next year.
Remember, Facebook got spanked when it disappointed
in its first earnings report
as a public company. If you recall, Facebook actually met EPS
estimates and beat revenue expectations. But investors took a look
at the usage and growth metrics and said "this aint good enough."
Going into that report, Facebook had already lost a third of its
value, and fell another 12% after earnings.
So what's gonna happen if Twitter actually misses following a huge
rally in the stock?
The bottom line is, expectations are running quite high with
Twitter. That's not necessarily a bad thing, but at these lofty
levels, Twitter's going to have to put up some mighty numbers when
it reports. (likely January)
Friday, November 8, 2013
Quick Clarification on NFP Results
I just received a few questions on NFP so I figured I'd help
clarify with what I know about this payroll report.
The household survey, which reflected a decline of 735,000 jobs, is
due to the government removing the furloughed federal workers from
that survey (there was +/- 800K federal workers furloughed during
the shutdown). My understanding heading into the report was that
the government would not deduct the federal workers from the NFP
report because they received back pay. However, given the 0.4% drop
in the participation rate to 62.8% - which has to be the largest
one month drop on record - it appears that the BLS just removed
them from the workforce.
(INDEXCBOE:TNX) is at a key retrace, 2.728%, which is 50%
September/October. Note the steady climb since the FOMC day in
October. Treasury bulls need to defend this area, or we could see
some yield acceleration into year end.
Click to enlarge
As for the futures,
makes an incredible swing from weekly R1 to weekly S1 in less than
1 minute. Resistance will be 126'130, the 11/5 VAL.
Click to enlarge
We have tested every system under the sun and, amazingly, we
have found one that actually works very well. It is a very good
system… (under the realm of) trend following. The basic premise of
the system is that the markets move sharply when they move. If
there is a sudden range expansion in the market that has been
trading narrowly, human nature is to try and fade that price move.
When you get a range expansion, the market is sending you a very
loud, clear signal that the market is getting ready to move in the
direction of that expansion.
-Paul Tudor Jones
I don't normally put up 2-hour charts as it isn't my timeframe, but
you can see this on the daily charts as well. Yesterday, we had a
range expansion day that broke below the old breakout level. Now,
we will see if we can consolidate under and fall, or regain and say
"Just kidding!" Personally, I am concerned and have been
for the last several weeks. The internals have been indecisive at
best, but certainly giving warnings. The chart burned off all of
the overbought on the NYMO, and then it didn't fire upward. We had
a bit of a push through failure yesterday then we engulfed the
whole last 2 weeks' range. This was a massive range expansion day.
A day that should get your attention. From a trend following
perspective, we just broke my close-below-the-prior-2-days rule.
This is a rather ominous sign, and to me, it says that perhaps it
is time to go hit the 50-day moving average below (about 1710ish).
We still have not tested the 200-day moving average at all this
year, so that is always a possibility, but it is too far out for me
to gauge. Right now, NYMO closed at -43, so we really don't have
much immediate downside potential; however, we could rest here and
then fall quickly after a couple of days. Keep an open mind these
days; yesterday was an important day.
Click to enlarge
Click to enlarge