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.
Credit Check and Options Flows
Good morning Minyans -- DÃ©jÃ vu all over again in credit
derivatives, with US CDS taking another leg wider to 45.5bps, while
everything else -- 2 yr. swaps, CDS of large US financials, and
broad index HY CDS -- are basically flat. At current levels, US CDS
have the potential to start sending jitters through the rest of the
complex and pressure stocks even more, so paying attention right
now is probably even more important, especially if your time frame
is on the shortish end.
Early last week,
I highlighted a large option trade in
) that looked like it had a bullish slant. On Friday, the same
contracts were in play again in similar size. Whether it was the
same trader or not, the bets that GPOR will be comfortably in the
70's are growing rather large.
Also in energy, Thursday I Tweeted about a large ratio spread in
), where a trader sold 8000 Feb $50 calls and bought 34,000 Feb $60
calls to open. This position requires the stock to move up sharply
and soon in order to pay off. I'm pointing it out because it jives
well with the Morgan Stanley's take regarding the Transcanada
pipeline that I
Buzzed about on Wednesday
) also saw a large bullish call trade on Friday as more than 5,500
Nov 30 calls were bought to open between $0.35-0.50. The chart also
hinted at the breakout off of a multi-month downtrendline, but here
is the catch: it looks like Friday's spike might have been caused
by the calls trade, as market makers had to buy about 125,000
shares to hedge themselves (out of total volume of 635,000 shares).
It's a chicken and egg kinda thing but worth noting if you are
inclined to follow along.
Interest Rate Market Is Taking Things Seriously
The Treasury market is starting to really take this seriously,
which is why I'm not surprised that credit is wider and equity is
down this morning. Term repos (as in loans longer than overnight)
are now drying up and repo rates are skyrocketing, relatively
speaking. This is due to dealers offering less inventory after
having liquidated their entire T-bill holdings two weeks ago. All
of it makes sense though, there is a move to cash away from
collateral and assets, especially dollar assets.
T-bills that expire over the next 3 weeks are still reflecting this
unease, trading at discount rates of 14+ bps. So at this point, any
sort of resolution is going to get a relief rally. As much as I
don't think the equity market is justified at these levels by
actual economic activity, this sell-off has been more about being
cautious around the debt ceiling and government shutdown. If we do
see any further declines in economic activity, it is going to be
because of a loss of confidence that leads to reductions in capital
investment rather than less fiscal spending.
The USDJPY is flirting with its upward sloping trendline and is
right here, right now at the 200dma. Eyeball credit goes to Duncan
Parker. In addition,
has multi-year support between 78.25 and 79 - currently sitting at
Equity breadth is more than 4:1 negative after the first 30
Click to enlarge
Secondary Battle in Place
, natural gas has hurdled its nearest-term resistance line.
Now we have to see if it can sustain the gains, and continue higher
to test the Oct 1 high at 3.653.
Natural gas is climbing this morning towards a test of its Sep-Oct
resistance line, now at 3.595, which if hurdled and sustained,
should trigger upside continuation towards a test of more important
resistance at the Oct 1 recovery high at 3.653.
Conversely, a failure to hurdle the resistance line followed by a
decline that violates last week's low at 3.482 will point
United States Natural Gas
(NYSEARCA:UNG) lower, towards a test of more important support at
the 9/26 low of 3.402.
Click to enlarge
Tapes that are weak all day (with 2:1 negative breadth or worse)
tend to end that way.
Absent a sudden resolution on the Beltway that clears the debt
ceiling from the wall of worry, the tape will continue to have an
This is the "other side" of performance anxiety and why we often
say, when discussing this dynamic, that the buyers are higher and
the sellers are lower.
Should the partisan bickering continue through the week, my sense
is we trade to or through
My Snake Eyes -- December
SPDR S&P 500 ETF Trust
(NYSEARCA:SPY) puts -- were always right-sized by nonetheless
underwater. That said, if and as we continue to slip -- and the
delta upticks -- I'll begin to peel out of that found money.
I said it last week and I'll say it again; while a default is a low
probability event, this stand-off sums up the state of social mood
and would be an apropos pin prick to government.com.
Not that I wish to see it; trust me, if the US defaults, there will
be no winners. None.
Alas, that likely won't happen; we just have to navigate the
landscape from here to there. And we have to maintain perspective
and (dare I say) enjoy the journey. Easier said than done, but not
Fare ye well into the bell and remember, the definition of an
investment should never be a trade gone awry.
Momentum Move Failure: AMZN
) action today is a good example of the idea that when momentum
moves fail, they fail with a bang, not a whimper.
AMZN showed a constructive 1-2-3 Pullback to its 20 DMA off new
record highs yesterday. Today, AMZN knifed convincingly below the
setup trigger as the failure also stabbed down through the prior
July swing high eliciting a quick plunge to the 50 DMA.
Now, where have we seen an overthrow of a primary July high in
October fail? Can you say the major indices in '07?
Below, see a daily AMZN chart from June with 50 its DMA.
Click to enlarge
Small Caps Get Smaller
Small-cap stocks, represented by the
Russell 2000 ETF
(NYSEARCA:IWM) have been the star performer within US markets this
year, but look increasingly vulnerable not just from a trading
perspective, but an investment one. Growth estimates are being cut
across the board for next year, and it appears unlikely that the
Fed can suddenly increase QE for at least several months to counter
a scenario where the bottom falls out on the wealth effect that
comes from rising equities.
On a rolling 52-week return basis, they are largely extended, and
everyone is seemingly still trying to chase past performance. In
addition, since June, the
(NYSEARCA:EMM) has been outperforming, and has cheaper valuations.
Given the same momentum, is it not the logical choice to position
into those areas with more valuation cushion IF you have to be an
equity investor? As to macro managers such as ourselves, the odds
are growing for a rotation to bonds. A correction may finally be
You're Yellen! My Mustard? No, Your Fed Chief!
Equity futures are higher this morning on news that Janet Yellen
has been picked to replace Ben Bernanke at the helm of the Fed.
Yellen, the vice-chair since 2010, is perceived to have white
feathers sewn in the seam of her pantsuit, symbolic of her dovish
S&P futures popped six handles last night on the news and
remain higher as I write this Buzz. I will remind Minyans that
following an out-sized move, the market tends to probe the
prevailing direction--in this case lower--at least once the
S&P 1600 is the next stair-step support
while 1660 and 1680 are tranched resistance.
Treasuries Are Talking to You
On October 3, the yield on the ten-year dropped to 2.58%. Then
politicians started discussing the possibility of missing a few
days on the debt ceiling. We even had quite a few folks stating it
would not be a big deal. But yields started climbing and have not
looked back since, even as SPX dropped 60 handles. We are now
trading in and around 2.65%. Either the bond/treasury market
believes there will be a big rally in equities, or we are seeing
hints that real sellers are lurking. The crash of 1987 was preceded
by a spike in interest rates. Can it happen again? It is a remote
possibility, but at the very least be prepared, and buying
treasuries does not seem to be the way to go. It will be a big deal
to miss a few days on the ceiling. It's about credibility, and
bonds are clearly showing that. They should be rallying in a big
way with this equity meltdown. That is not the case.
(10yr futures) is still trading under its weekly pivot of 126'105,
the level we are toying with. Note the October lows of 126, support
that needs to hold. We have a critical auction on the ten year
today, so maybe all this is just prepping a short squeeze.
Resistance above 126'105 is 126'160/126'180, the Yellen pop last
night (which did not last for more than a few minutes).
As for equities,
(SPX futures) is now trading under 1650.25, its weekly pivot. For
cash, breaking out of the wedge on the weekly SPX chart and losing
the 20 week moving average (1661) is troubling to say the least.
We Don't Know Jack
Where will you be at 5:30 a.m. tomorrow? I'll be at my desk here in
Seattle, listening intently to Treasury Secretary Jack Lew's
testimony in front of the Senate Banking Committee at 8:30 a.m. EDT
(hence 5:30 a.m. Seattle time). If you were watching CNBC this
morning, you caught Mark Patterson, a staffer for former Treasury
Secretary Timothy Geithner, talking about the limitations of what
Treasury can do with shifting funds around and timing payments with
inflows. The goal of the testimony tomorrow is to nail down exactly
how far Congress can push the US beyond the October 17 "deadline"
without actually defaulting on any "important" payments.
This is Russian Roulette, obviously. As Mr. Patterson was trying to
point out (in between Joe Kernan trying to channel Rick Santelli),
the idea the Treasury can shift things around has one really big
caveat: It assumes those who hold T-Bills are going to roll the
face value. If any substantial number of note holders ask for the
entire value at maturity, it's a completely different deal. I think
it's clear we can go some number of days beyond October 17, and
that's the message Wall Street will take from Secretary Lew's
testimony. Is this bullish for equities? Bearish? We're in fear
mode right now, so I think it's hard to tell.
We had essentially no movement in Washington, DC over the last 24
hours. Just like yesterday, however, there are some positives. The
Senate Democrats are apparently working on a "clean" CR and debt
ceiling extension. I've heard two months, but I would expect the
extension to go into January, so lawmakers don't have to deal with
this over the holidays. The buzz about a separate bipartisan Senate
effort to wrap a clean CR and debt ceiling extension with a
specific framework for negotiations continues to build and staffers
are apparently working pretty diligently on this. I'm also hearing
about a $1 trillion debt ceiling raise bill in the Senate, which
would essentially get us beyond the 2014 midterms -- though I don't
think there would even be enough Democrats to support this since
the optics of that would be terrible.
If the rest of the week in the markets goes like yesterday and
today thus far (to 11:45 am EDT when I'm writing this), I think
Congress will start getting serious about doing a deal. And I chose
the word "start" purposefully because I don't think more than a
half-dozen people on the Hill have been serious about doing a deal
to this point. I also strongly believe Congress has convinced
itself the October 17 deadline isn't really a deadline. Because of
this, I think there is a 50% chance we go beyond October 17 without
a deal (up from 10% yesterday). Why the big jump? Nobody in
Congress sees the 17 as a deadline, so they can go beyond it with
no real consequence (their thinking, not mine.) Also, there's this
last item we need to remember:
This crisis has been great for Congress and both political parties
in one monumentally self-indulgent way -- money has been rolling
into campaign coffers. All this controversy is great for
fundraising from partisans on both sides. I'll skip the long
lecture on how this is a perfect example of why we need
Constitutional-level campaign finance reform, but anyone trying to
apply reason to the unreasonable in Congress needs to understand
this counterintuitive metric. The closer they take it to default,
the more money they'll be able to raise.
Thursday, October 10
Long-term Fracking Play
As America continues on the path of energy independence, I have
been looking for some good long-term fracking plays. My favorite in
the space is
This is on the chemicals side rather than on the exploration &
production side of things. From a fundamental perspective, it has
just about everything you want: P/E around 20 with a growth rate of
close to 40, giving a low PEG of around 0.5. Plus, it has a Return
on Equity of 29! Net margins are around 15 where 10 is more
typical, so the company is running an efficient company, and it has
multiple product streams for further penetration with existing
customers. Product lines include drilling products, drilling
chemicals, efficiency chemicals, treatment chemicals, fracking
chemicals, and foaming/gap expansion chemicals, so it's not just
fracking chemicals but a focus on overall increases in well
production. I see the fracking chemicals becoming a lead-in type of
product to get the company's foot in the door and allow for
additional product sales once FTK has established a relationship
with the customer.
The balance sheet = High liquidity, with a current ratio around
The cash flow statement is a little concerning on the FCF side, but
it is distorted by the recent acquisition as well as by refinancing
measures to reduce interest rates on long-term debts. Balance sheet
management has been top notch, in my opinion.
Technicals look good-to-in-a-strong uptrend, which is exactly what
you look for in a small growth company. I could easily see this
thing doubling in a year and double again in five years. It is
pretty much a "catch-it-on-the-50-day-dip" type of stock. I plan on
buying 1/2 here as it recaptures its 21-day moving average where
the market dipped below its 50-day and is trying to recapture that
now. I am taking a Â½ position here and would round it out against
the 50-day moving average should it happen. If not, I will just
have to buy it higher.
Click to enlarge
T-Report: Lew-Lew Lemon and Our Top Trade Ideas
I think he is more political than a Treasury Secretary should be,
even knowing that it is a political position. Having said that, I
think he hammered home the point that America should not default.
There is no easy way to deal with a default and it is unclear what
will happen if we default. He remained "on message" that the debt
ceiling should be raised and a default should be avoided.
I don't think a default would be as dire or apocalyptic as Lew
makes it out to be, but agree that tempting fate with a default
just doesn't make sense.
So Sell US CDS
Hearing 1 year CDS is still 60 bid and 5 year is 34 bid. Seems like
either should be sold. The US will not default.
We had that call last Friday and in spite of the noise it hasn't
really moved much either direction since then.
We did confirm that a 3-day grace period would apply to any missed
payment in regards to triggering a Credit Event. We don't think we
will have a missed payment, but figured we would pass along the
clarification we got from ISDA.
Go Really Long Bank Credit Risk
We discussed why we like buying bank bonds and selling bank CDS
earlier this week. That is a longer term trade, but one that we
IG21 - Not our favorite index
IG20 rolled into IG21 with only a few name changes. One of the
changes was adding
Assured Guaranty Municipal Corp
(AGO) to the index.
On a quick glance it looks like it is trading at 550 bps. No other
name is trading at 300 bps. It is almost double the next widest
name. There are only 6 other names trading wider than 200 bps. The
company has no public debt at this entity. Bond investors don't
know this company particularly well (or at all). The equity market
capitalization of the holding company is also small.
So I am not sure who thought this was a great addition to the
index, but they basically added a small, not well known, outlier to
We continue to do some work with the S&P/ISDA 150 Credit Spread
index which is based off of names in the S&P 500 equity index
and includes financials. We think that as products develop around
that (trueEX/CME futures for example) that the index will have a
more broad based appeal.
Decisions to add a name like Assured Guaranty only seem to make the
CDX index less relevant to a broad audience, rather than more
At 80 bps, trading a few bps rich, I would rather find single names
I like. Too much of the spread is driven by a few names that
deserve to have that high spread. Too many names pay you nothing
with a chance to LBO or do something else to push them wider.
Hearing that Citi put together a long report lamenting what Basel
will do to the repo market. Our sense is that the Basel Leverage
rules will not be changed easily or that significantly. That has
implications for many businesses. You can read our open letter to
Basel as part of the official comment period.
We have done a longer white paper to help clients prepare for the
changes and look for opportunities. Please
if you want to see that more in depth piece that looks at the
impact across products.
A Slowing Economy
Equities remain strong. The combination of knowing that Janet
Yellen will be there to buy bonds every step of the way, coupled
with the realization that the government will avoid hitting the
debt ceiling is working its magic.
It might be a bit early to start selling this rally, but it feels
that this "dip" has been bought often and early (like Chicago
voters) and has ignored too many signs that an economy that was
already not growing as fast has continued to falter.
While stocks might be able to forget there were any questions about
Washington, businesses are likely to take longer to decide to be
more aggressive on growth.
For those keeping score, Spain and Italy are up over 4% in the past
week while U.S. markets are still slightly down.
BlackBerry Co-Founders Up Stake in Company
(BBRY) shares are popping a bit after co-founders Michael Lazaridis
and Douglas Regin have increase their stake in the company to 8%.
According to their
, they are considering "all available options with respect to their
holdings of the Shares, including, without limitation, a potential
acquisition of all the outstanding Shares of the Issuer that they
do not currently own, either by themselves or with other interested
I am currently long the
December $9 call butterfly spread
on BlackBerry that is essentially a bet that the Fairfax bid for
$9/share goes through this year. Because of the structure of
butterfly spreads, I'd actually lose out if that bid got upped in a
As it stands now, with BlackBerry up just 0.7% today (vs.
(INDEXNASDAQ:.IXIC) up 1.9%), Mr. Market is still rolling his eyes
at the idea of BlackBerry getting taken over by Fairfax OR
Lazaridis/Regin, but I'm sticking with my butterfly play as the
risk-reward is very reasonable.
Friday, October 11, 2013
T-Bills: Here We Go Again
I wrote yesterday a few times about how October expiry T-bill rates
were coming down - a good thing from a liquidity standpoint. This
morning the entire T-bill curve is getting infected by the
short-term debt ceiling agreement, which just pushes it out into
the future. We're seeing late November and all December T-bill
rates skyrocketing. The fulcrum point seems to be the Nov 29/Dec 05
bills. Dec 05 was 4bps yesterday morning and now up to 22.5bps.
I imagine the market is just taking the same precautions as they
were for the near-term debt ceiling. The major, major problem is
that now it has infected a full 3 months of T-bills, that's a major
problem from a collateral standpoint. See my screen grab of bill
rates below. Keep in mind the price move in bills that far out is
much larger in magnitude than the nearer to maturity bills.
I see gold and oil getting crushed this morning, it is very
possible these two events are connected.
Click to enlarge
My thesis that we would receive a counter trend rally proved
profitable, while the notion of attempting to fade yesterday's
market muscle was a rather weak attempt. Patience allowed us to
attempt a low risk short entry on the market with tight stops. That
proved to be a short-lived experiment. After the close last night,
President Obama rejected the band-aid approach offered by the House
Republicans. As has been the case, this will drag on for the
balance of the weekend and into next week.
The volume and out performance of the banks yesterday were the two
most impressive measures.
(JPM) came out this a.m. with some rather large numbers to back it
up. What we need to gauge now is how do we hold up? The trading
thesis dictates that if the low was set on Wednesday then that was
an exhaustion of internals. Now, we may see prices move back down
to put in a higher low and confirm the bottom. That likely will be
experienced next week, so we have the whole weekend to marinate ice
cubes and wait with wonder.
What has me leaning out of my chair to stair at the road not yet
laid is the news this am Bill Fleckentsein is re establishing his
short fund. This is a man I would never want to be on the other
side of a trade with. The beauty is he possess the patience to
wait. Recall he closed his last fund at the depths of the markets
low in 2008/2009 and has sat back for 5 years. If you want to get
me bearish, then I think we need to portfolio managers jam the tape
into year end, open 2014 strong, and have this market sitting
frothy with a spring taper. This would send shock waves through the
system. If the market is to trade above 1695 in the coming
days/weeks, look for my final objective to hit SPX 1760-1820. The
speed of our pace to that approach will dictate how fast Mr.
Fleckenstein opens his wallet.
One Step or Two Steps?
Twenty-four hours after movement towards a stand-down in DC, a
better picture of what's driving this has emerged. As I suggested
it was polling data
Could you do your job without a real-time quote feed? Almost
certainly not. Without it, you'd be blind to what the market was
doing. You'd have no idea whether you were performing well or
Wall Street is to Real Time Quotes as Politics is to Polling.
I wrote yesterday
showing the GOP with historically bad "favorable" ratings, down to
28% and sinking fast even within the ranks of self-identified
Republicans. While this scared the hell out of party regulars
(nobody wins an election with a 28% favorable rating), what
prevented the Tea Party from claiming (as they have consistently
been doing) that falling poll numbers were caused by "not being
conservative enough" was the
WSJ/CNBC polling data
on the Affordable Care Act ("Obamacare").
After all the grandstanding by the Tea Party about defunding the
ACA over the past two weeks, "Obamacare" is polling at some of its
highest "favorable" numbers ever. So not only has the Tea Party
succeeded in clobbering the GOP's ratings, they've made Obamacare
more popular in the process. This, combined with the movements in
the equity markets, have the Republican leadership highly motivated
to quit listening to their minority coalition partners and close a
We got a scare overnight when the
reported that President Obama rejected the GOP's offered deal.
Futures dropped until the
retracted the report, but I actually think it was accurate. I
believe President Obama rejected a deal that only extends the debt
limit for 6 weeks. I expect what we'll get is a deal to extend the
debt ceiling and reopen the government. I expect this will be
wrapped up in a broader framework of some sort to bring House and
Senate members into conference on the budget that was passed so
many months ago.
How long will the extension be? We know staffers for Senate
Democrats are pushing for an end-2014 deadline. If there is a
strong structure created for the budget negotiations, I'd expect
the deadline to be pushed out until January to avoid revisiting
this issue over the holidays. My guess is we get a 3-month deal, no
changes to the ACA, and some sort of specified group to work on
both cuts and closure of tax loopholes.
Remember that Monday is a federal holiday, so the bond markets are
closed. Equity markets are open. I believe we have a deal before
the equity markets are open Monday, but keep the idea that the
holiday could stretch things into Tuesday in the back of your head.
Disclosure: Minyanville Studios, a division of Minyanville
Media, has a corporate relationship with BlackBerry.