MorningWord: 1/12/12

MorningWord 1/12/12: The investment universe seems like a safe place at the moment with the news relating to Europe’s sovereign debt crisis appearing to get better by the day. I say this with a mild hint of skepticism, but some of the price action across asset classes feels increasingly bullish.   European equities are getting a huge boost from a very successful debt sale out of Spain this morning as reported by Bloomberg:

Spain auctioned 9.98 billion euros ($12.7 billion) of bonds maturing in 2015 and 2016, including a new three-year benchmark security, twice the maximum target of 5 billion euros set for the sale. The yield on the three-year notes was 3.384 percent, compared with 5.187 percent when the nation sold similar notes in December.

Italy sold 12 billion euros of Treasury bills, meeting its target, and its borrowing costs plunged. The Rome-based Treasury sold 8.5 billion euros one-year bills at a rate of 2.735 percent, down from 5.952 percent at the last auction.

Yields are getting smashed as we speak, with the Italian 10 Yr yield down almost 38 bps to 6.61%, down from near record highs last week of 7.17%.

Also out of Europe this morning the ECB left interest rates unchanged at 1% and had some mildly positive commentary, headlines from Bloomberg:

*DRAGHI SAYS ECB’S MONETARY STANCE WILL REMAIN ACCOMMODATIVE

*DRAGHI SAYS ECB WILL MONITOR DEVELOPMENTS, READY TO ACT

*DRAGHI SAYS SOME CONCERNS HAVE BEEN TAKEN CARE OF

*DRAGHI SAYS SOME DATA INDICATES SOME STABILIZATION AT LOW LEVEL

*DRAGHI SAYS RISKS TO INFLATION OUTLOOK ARE `BROADLY BALANCED’

*DRAGHI SEES `TENTATIVE SIGNS’ OF STABILIZATION

With the Caveats of :

*DRAGHI SAYS ECONOMIC OUTLOOK SUBJECT TO HIGH UNCERTAINTY

*DRAGHI SAYS ECONOMIC OUTLOOK FACING SUBSTANTIAL DOWNSIDE RISKS

As for my trading I have been short this year and have been wrong, but wrong may equal early.  I am certainly not digging in here, because the SPX could easily see 1300 in the coming days and who knows from there.  I have been short JPM, BAC and DB (all with defined risk) which have been slightly painful and some tech names like MSFT, INTC and AAPL (just this week through weekly puts, and they have been less so.  In front of the ECB meeting this morning I took off short positioning in FXE that was a very nice winner over the last month and will look to re-enter the trade on a bounce that may have started this morning.

SO I cautiously remain cautious on the markets, if they are going to reverse course it would likely be this morning and the banks could maybe take a breather before what could be an uncertain report out of JPM tomorrow morning before the open.  As one of the readers wrote to me this morning, “the fix appears to be in for the banks” but at this point I just cant reverse course.  There is one name that looks intriguing to me, and maybe just for longs to consider stock replacement, but GS with earnings expected next week prior to Jan expiration, the Jan 100 calls (stock ref 99.76) offered at 2.84 look awfully inciting for longs either looking to replace stock or to lever up exiting position or for those just looking to take a punt that it plays catch up in the new year to BAC or C.

 

 

MorningWord 1/11/12: Yesterday’s price action in US equities, while up close to 1% in most major indices was far from inspiring when you compare it to the almost 3% rallies seen in the Shanghai Comp and the DAX.  While there was plenty of out-performance, specifically in the banks, energy and industrials,  I prefer to focus on the disasters du jour like TIF (which was down 10% on an earnings miss) or AAPL closing on (or very near) the lows for day, for 2nd day in a row.

The strength in the SPX ytd (up 2.74% in 6 trading days) is fairly impressive when u consider that it has closed above the 200 day moving average every day this year and looks poised to test the psychologically important 1300 resistance level.  The only problem is that most of these gains have come in just 2 trading days, the first day of the year and then yesterday.  This doesn’t display a high level of conviction in my opinion

7 day SPX from Bloomberg LP

 

Not much to add other than that I remain slightly cautious as we have had very little news in the last couple weeks out of Europe and for some reason most pundits and market participants have appeared to changed their tune from glass half empty to half full in just a matter of weeks.  This sentiment is likely to do with the change in the calendar and the fact that equity markets like the DAX are quickly recouping close to 30% of last years losses.  Don’t mistake complacency and a slow news cycle for bullishness.  The yield on the Italian 10 year is below 7% for the first time in a week, but all eyes will be on the ECB’s rate decision tomorrow morning and the slew of sovereign debt sales slated for the the next few weeks.   The Euro is reversing a good portion of the gains made in the last couple days vs the dollar and is again approaching the 52 week lows.

I remain lightly positioned with low conviction on either side of the markets, but obviously for those who know me I am always leaning slightly bearish.  As we start to digest some earnings in the coming week we will get a great read on sentiment.  MSFT for instance dropped a little tid bit at CES last night that PC sales in the Q4 were worse than expected.  Now that probably doesn’t come as a huge surprise as many tech investors have  become acutely aware of the component shortages resulting from the situation in Thailand that have caused many Q4 pre-announcements by pc supply chain members (including INTC in Dec), but what isnt clear is how stocks like MSFT and INTC that are up about 10% in a month will react to less than stellar guidance for Q1…..this is the trade people, Q4 is baked in the cake at this point….its all about outlook.    So stay tuned, cause your guess is as good as mine.

MorningWord 1/10/12:  Waking up this morning, all seems right in the world by looking at the global equity rally.  The Shanghai Comp closed up 2.7% capping a 4 day,7% rally  taking the index off of lows not seen since early 2009.  European equities are up 2-3% across the board, while our futures up a little more than 1%.  And it’s not just equities, Gold and Crude are up a little more than 1.5%, the Euro is back above 1.28 vs the Dollar and well European Sovereign debt aint doing much at the moment. I hate to use the phrase as it will be used no less than 100x today on financial TV, but the “risk trade is back on!”   If “they” want equities so badly then I say “they” can have them.  As we have discussed a bit in this space in the recent past, the higher they run out of the gates in the the new year is just the harder they will eventually fall, when they do, because they will.  When I say fall, I don’t mean crash like we saw in July and then again August, but it if you think the lows are in for the year then you probably should have your head checked in this new volatile regime the markets appear to be in.

Speaking of volatility, with the SPX gapping up 1% this am, the VIX is likely to mark its first print below 20 since mid-July, right before equities fell off a cliff.  While this isn’t statistically significant, it does serve as a bit of a wake up call for those who have been on the Defcon 5 investment program, but to me it just magnifies the level of complacency I feel exists near term in the markets.   While 20 looks like a fairly healthy support level, and just so happens to be about the long term average for the index, the 15-20 level (highlighted below) could be the most dangerous period for long premium strategies.  This is important because while I will tell you on one hand these are the times you want to be buying options, I will also say for very specific reasons.  For instance, with the VIX at sub 20 it could make a ton of sense to consider buy options for risk management purposes (stock replacement, protective puts) or leverage, but to just be long premium for the sake of it because the VIX is “cheap” could blow you out if the markets just sit here and volatility continues to seep out of the VIX.  So my point here is too use premium purchases in a tactical manner and I would say as we head into earnings season this could be the perfect time to protect winners or to make some bets with defined risk.

1 Yr VIX from Bloomberg LP

 

Today:

An opening like today’s will be a fairly good test of wills on a week that has just a smattering of economic and earnings data.  More times than not I would probably attempt to short this open playing for a quick re-tracement, but with Europe up so much it will take a real piece of news to get things lower.   I know this sounds so 2011, but I guess any under-performance out of the banks could be the very thing to cool the rally, but as I write, Deustche Bank is trading up about 5.5% in Germany, and I would expect our banks to follow suit.

Also want to keep a close eye on prior leadership like AAPL. The stock, after approaching all time highs yesterday turned on dime and closed on the low of the day.  I have made many arguments of late why I think the stock could be in for a period of under-performance, but when I see action like yesterday it makes me want to dig in a bit especially as we get closer to their Dec qtr report on Jan 24th.  Gonna keep a close eye on this one, if the stock can’t rally in an up tape today it could be very telling….but the stock is up 15% since mid December and I am looking to make a quick scalp this week through my purchase yesterday of weekly puts and then will look to take the profits and roll into a bearish trade for earnings.

1 Yr AAPL chart from Bloomberg Lp

 

MorningWord 1/9/12:  If you want to wrap the whole European Sovereign Debt situation into one sentence, brought forth with a bit of German efficiency, I think the following Bloomberg headline from this mornings pre-Summit Summit does the trick:

MERKEL SAYS NO ONE SUMMIT WILL SOLVE ALL EURO PROBLEMS

Just like companies reporting December quarter earnings in the weeks to come, European Political leaders and Central Bankers will be forced to “manage expectations”.

As for this week there isn’t a ton of expected news, as impact-full earnings reports are limited to AA this evening and JPM Friday pre-open.    As far as economic data there will be a spattering of noise with the most significant reads coming from the Beige Book on Wednesday, Philly Fed on Thursday and U of Mich Consumer Confidence on Friday.  Oversees and I guess here too, all eyes will quickly be focused on the ECB’s rate deceion on a press conference to be held Thursday Jan 12th.

As for morning, as I write at 8:45am, the Euro is up a tad, Gold and Crude practically unchanged, European equity markets are mixed, with the DAX down 25bps, yield on the Italian 10 yr is off a smidge to 7.087% and our S&P futures are basically flat.  A relative calm has prevailed, for the moment.  I for one don’t exactly take the calm for a positive and remain on the cautious side with low conviction on the direction of the equity markets in the coming days/weeks.  I guess I would get a bit more constructive on a sell off in equities that equaled about 5%, taking us back to about 1200 in the SPX and then hold, a girl can hope can’t she?  But in the meantime, I sit an wait and take my cues from some central bank actions here and abroad and after getting a sense for Q1 earnings visibility.  IN the meantime I will take the scraps that I am given, look to make defined risk plays in names that are extended or overdone on the downside and always look to take advantage of what I deem to be miss-priced vol into events…….

 

Below are some thoughts of on last weeks trades that I posted last night in my Trading Diary: Jan 3rd-6th and a few tidbits on where my investing/ trading mind is at the moment:

Trading Diary: Jan 3rd – 6th

10:57 PM EST – JANUARY 8, 2012 BY  (EDIT)

The new year got off to a bang right out of the gates on the heels of an impressive rally on Monday in Europe while we nursed our hangovers for the second straight day.  After only just 2 trading days on Tuesday afternoon, the DAX had reclaimed almost a third of its 2011 losses of 15%.   The “January Effect” was in full effect.  The SPX got off to a decent start Tuesday, but after gapping up almost 1.75% on the opening tick above its 200 day moving average, the index spent the balance of the week trading in a fairly narrow range, mostly between 1270 and 1280.

5 day SPX chart from Bloomberg LP

 

In many ways this action has some conflicting messages for the early going, while it was fairly impressive that the index had 4 consecutive closes above the important technical level, it is also evident that we are in a bit of a holding pattern as the markets wait for news from tomorrow’s Sarkozy/Merkel meeting, and maybe more importantly given Friday’s U.S. unemployment data, Q4 earnings reports and Q1 guidance to either confirm or refute the recently improved economic data (barring pre-announcements, we will likely have to wait until the week of Jan 17th for earnings season to really kick off).

I for one am taking a wait and see approach and find myself with fewer trading positions than I have had in a very long time.  I honestly have no clue what is going to happen in the early going of 2012, and in many ways the markets are also telling you that most market participants don’t have a clue either.   The fact that the SPX closed on Dec 30th at the exact same spot it started 2011, after being up about 10% in the Spring, and down about 10% in the Fall, coupled with a historic spike in the VIX, tells me that no one has an effen clue.  Well except maybe the overseers of your 401ks, the genius mutual fund managers who usually only know how to buy high and sell low.

A perfect example of this behavior is the 4 day rally in MSFT this year,  seriously WTF??  Can anyone tell me what changed in the story between Dec 30th when the stock closed at 25.96 and Friday Jan 6th when the stock closed at 28.10?  I’ll answer my own dumb question, nothing changed other than some genius at Fidelity, or Wellington decided that after 10 years of sideways action this was finally the year the stock would outperform its peers and quite possibly the markets. But yes,  the company does have a 2.84% dividend yield, $45billion in net cash, and only trades at 10x earnings.  If I had a buck for every-time someone suggested buying MSFT over the last decade because it was cheap, well you know the rest, but I guess that is probably not the reason to buy the stock….the reason to buy cheap stocks is because you feel they have a catalyst that can help them grow future earnings.  Given some of the negative semiconductor pre-announcements in December (including INTC) I would suspect that MSFT will have less than inspiring Dec qtr results when they report Jan 19th and offer very little hints as to how they really intend to grow their earnings from the less than inspiring 5% expected growth this year.

On Wednesday I made the case that implied vol in the name looked very cheap and decided to buy some out of the money Jan Puts, and followed up on Friday (after the stock had rallied ~2% from my initial trade) by buying closer to the money puts.  I think there is a fairly decent chance that if the stock does not go too much higher, or possibly retraces a bit of the recent strength that implied vol in the name will at least stay bid at current levels or possibly go higher between now and their earnings announcement.  I like fading this recent move.

Early in the week I wrote a bit of “think piece” on AAPL after reading the Steve Jobs bio over the holidays.  I laid out a case, 99% conjecture why the company might be on the verge of an innovation plateau and why the stock may have a far more difficult time over the couple years as it has over the last couple.  We encourage readers to take another look and have opened it up for comments.  We are very eager to hear what you guys have to say, as we expect that most will disagree with the thesis………..but that’s what makes a market.  (Read and comment here)

Thursday morning I tweaked a position in INTC that I put on in early December playing for negative sentiment in the Semi space heading into what I thought would be disappointing outlook from TXN into their mid qtr update.  Not only did TXN disappoint, but INTC pre-announced a poor 4th qtr.  At the time I took some profits on half of the position in my Jan Put Spread as I had a nice gain that turned out to be a double from my initial purchase price.  On Thursday I decided to cover the short strike of the balance of the Jan put spread and add the long strike as the stock had risen all the way back above the level where I first put the position on.  At this point I am averaging back in, albeit at much cheaper price levels given all of the decay in the options since early Dec.  I am now playing for weak Q1 guidance, as we already know that Q4 will come in below expectations.  This may be pressing things a bit as many analysts figured that some large orders were pushed into Q1 and the company may be able to actually beat Q1 if they are able win back some of the lost Q4 business, I would say at 25.40 that is in the stock, and disappointing guidance could send the stock back to 23.00.

Late Thursday staring at BAC’s 8.5% rally on the day and the 13% ytd rally at the time I thought things were getting a bit frothy as the stock hadn’t seen a downtick in hours on the rumors that the White House was about to announce a mortgage refinance program……With a low dollar stock like BAC that has been down so much over the last year, and sentiment probably the worst in the space I think you would have to be a bit crazy in the first week of the year to outright short the stock, but with 50 cent strikes, there are plenty of low premium ways to express this view while defining your risk.   With the stock up on a spike, I bought a .5o wide (kind of close to the money) Jan Put Spread that would capture the company’s Jan 19th Q4 earnings release…..I paid .10 for a .50 wide Put Spread that pays 5 to 1 if the stock is trading at levels seen in the last week of 2011.  It won’t take much to break-even on this trade with the slight bit of bad news, I like these sorts of contrarian plays into events where I define my risk and risk what I am willing to lose.

Sticking with the bank thesis,  on Friday’s Option’s Action (and previously on the site) I laid out a near term bearish thesis on JPM heading into their Q4 earnings report on Friday morning Jan 13th.  I bought the Jan13th weekly 35/33 Put Spread for .45, playing for a pull back heading into earnings and possibly an outsized move following….the options market is only implying about a 2% move.  The action in Deutsche Bank last week, down about 9.5% vs the DAX which is up about 2.7% in that same time period is a bit troubling.  Something stinks here, and with the yield on the 10 year Italian treasury handily closing the week above 7%, and the Euro in a free-fall closing at practically the dead lows of the week and at 52 week lows, our banks stocks don’t appear have gotten the same memo as their European counterparts that the Sovereign debt crisis has not been resolved.

SO early this week Europe will likely dominate the headlines as we sit and wait for the bulk of U.S. corporate earnings to get underway. As usual I like most others have little edge on this front.  As the Euro approaches 1.25 against the U.S. dollar I will look to take some more profits in the FXE Jan 130/125 Put Spread that I bought in late Nov as this has been a nice gainer for me.

I remain a bit cautious here and as evidenced by my positioning (or lack there of) I don’t have strong conviction, but I want to take advantage of situations where I think vol or price appears to be mis-priced.

 

MorningWord 1/6/12:  Forget Iowa, if we continue to get the sort of incremental improvement on the employment front like we saw this morning, it won’t matter who the Republican presidential candidate is, he will be toast.  I am not an economist, and generally not a fan of the term “de-coupling”, but it appears that is what we are doing as it relates to our economy vs the apparent malaise in Europe.  For a time in the fall our economic data seemed “less bad’, and now it is appearing to actually look fairly decent given the backdrop of the problems in Europe. I have problems with the notion that our economy can “de-couple” from Europe because we both rely so heavily on each other and the likelihood of a sustained slowdown in economic activity in Europe not negatively affecting us isn’t great.  Back in our own financial crisis in 2008/09 there was a lot of talk of Europe or Emerging Markets avoiding our troubles, but inevitably it was impossible, we are all just too interconnected.  

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MorningWord 1/5/12:  Some things change (like the calendar) and some things just stay the same…….The Euro is extending its Q4 decline this morning making new 52 week lows agains the U.S. dollar at about 1.2835.  Since May hihghs (which actually corresponded with the 52 week highs in the stock markets both here and Europe) the Euro is down about 14.5% vs the $.  The next real level  of technical support is ~1.27 .  While this appears to be a fairly significant move, don’t forget the peak to trough move from late 2009 to mid 2010 was a little more than 20%.  I remain long an FXE Jan 130/125 Put Spread that I initiated in late November which remains one of my best performing positions in that time period.

3 Yr Euro/USD chart from Bloomberg

 

European equity markets have been moving around this morning, the DAX opened unchanged, only to sell off about 1.5% and now back to about unchanged on the day as of 9:15am.   Fears back in the markets about Europe’s Sovereign debt crisis as evidenced by the yield on the Italian 10 yr back above 7%.

Back over here our futures are down about 50 bps but up about 50 bps from the early morning lows.  At one point after some better than expected unemployment data the futures were practically unchanged, but since pared the quick gains.

The real news this morning is the mixed results from retailers with same store sales and some corresponding earnings pre-announcements.  Some standouts to the downside would be JCP, GPS, TGT and M……all with earnings misses (excluding GPS who just disappointed on same store sales) that will likely be explained away by heavy discounting.  JCP is trading down about 6.5%, GPS down about 5% and TGT down about 4%.  Will be interesting to see if some of these disappointments drag down other retail and consumer discretionary names that have outperformed the broad market of late.

Yesterday’s late day rally in the equity markets was impressive, and I would expect continued resilience in the new year as mutual funds get re-weighted.  Once we get into the meat of earnings in Mid Jan and a better sense how European leaders plan to tackle their debt crisis this year, I would expect to see more convicted trading patterns .  IN the meantime, I am gonna remain slightly cautious and look to take what the market gives me……Yesterday I posted some thoughts (ok to be fair a lot of thoughts) on AAPL and why the stock may under-perform this year and offered a way to protect longs while still offering upside participation.  I think in uncertain times these sorts of strategies are prudent, especially if you have sizable gains……Also in the theme of taking what the market gives you a put on a little trade (albeit low conviction) in MSFT as I thought Jan options were cheap form both a vol perspective and a dollar perspective.  Stay tuned for more trading in names that get overdone on either side of the fence.

 

MorningWord 1/4/12: If you were to look at the performance of the German equity market and see the DAX up 3.6% ytd (off almost 2% from yesterday’s highs), after just 2 1/2 trading days you would think that some one knows something in front of Merkel and Sarkozy’s pre-summit summit meeting scheduled for Jan. 9th.  As our equity markets have been only open for half the time thus far this year our gains are a bit more muted up only about 1.5% in the SPX (less the 40bps in the futures this morn, so about 1%).  Economic data out of Germany that was better than expected is clearly the culprit for the DAX’s early out-performance of the SPX, but this could also be a little bit of catch up game as the SPX was unchanged in 2011 and the DAX closed down 15%.

There is nothing like the changing of the calendar to help you forget the ills of the prior year.  The “January Effect” can be very compelling for professional fund managers, to play a little bottom fishing with last years losers, but by no means does it signal the course for the balance of the year.  If anyone thinks for a second that the lows are in for the year than you better get your head checked early and often this year…..The VIX’s muted sell off yesterday was a clear indication that uncertainty remains, and when the SPX was up a little more than 2% at one point mid day yesterday I would have expected to see the VIX getting creamed, especially on a day that saw, the Euro, Gold, and Crude all rallying with serious equity market rally the world over.

Yesterday in my morning post I suggested that I would be very interested to see how the banks act and if they actually can lead the way……Financials were clearly one of the best performing sectors yesterday with charts of stocks like Citi appearing to be at an important inflection point.  Since making an intra-day low in early Oct in the low 20s, and then rallying almost 60% from that point, the chart has made a series of lower highs and higher lows and looks like the triangle pattern that has formed is about to be broken one way or the other……This is a tough call here because when the U.S. bank stocks finally bottom they may go up for weeks……

1 Yr Citi Chart from Bloomberg LP

Stay tuned on the bank stocks, it won’t be long before we start to get some earnings out of the group, as a week from Friday we will see what the usually upbeat CEO of JPM has to say when the company reports their Q4 and gives guidance for Q1 2012. 

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MorningWord 1/3/12:  After a fairly volatile year in 2011 that saw a 21% peak to trough draw-down in the SPX and a 30 plus point surge at its highs in the VIX (but still closing up over 30% on the year), the SPX closed dead flat on the year, who would have thunk it?

The DAX has had a heck of a year so far up almost 4% in less than 2 days of trading after closing down about 15% on the year in 2011.  This sort of early enthusiasm could have some legs, but I sincerely doubt that we have seen the lows of the year (haha).  The higher they go in Jan the harder they will ultimately fall when European sovereign debt fears hit once again…..

Even with the relative calm int he equity markets over the last few weeks, there continues to be signs of fear……..As I mentioned above,  the VIX remains elevated well above the historical average of ~20, but with the new year rally it will be interesting to see how long it holds before once again becoming a teenager (the VIX has remained above 20 since July 26th).  As European equity markets rally the yields on European Sovereign debt remains elevated towards last years highs….the yield on the Italian 10 year continues to hover around 7% signalling continued fears that the crisis is not over.

As I write at 9am the S&P500 futures are up about 1.6%, about 50 bps off the opening highs……while Europe’s equity market strength can be attributed to better than expected manufacturing and unemployment data in Germany, but all eyes will be on our own ISM Manufacturing data to be reported at 10am today.

The Euro is trading at a one week high vs the US dollar and back above 1.30, while crude oil is back above $100……Gold is having a day after collapsing into year end to close at the lowest levels since mid July after falling almost 20% from the peak made in Sept.

As for our equity markets

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