MorningWord: 4/24/12

MorningWord: 4/24/12:  Yesterday’s action in Europe was about as bad as it gets and is very likely to portend a fairly rocky spring for the region, both politically and economically.  On the flip side, our equity markets acted about as well as can be expected, continuing demonstrate impressive  relative strength with the SPX closing down less than 1% on the day and at the high end of the daily range.  Not Bad.

2 Day SPX chart from Bloomberg

 

As for today, European equities got off to a decent start after Bond auctions in Spain, Italy, and the Netherlands all passed without much fanfare, but have since give back most of the gains as of 8:45am.  Asia was mixed, with Japan lower and Hong Kong higher, with investors eyeing the Bank of Japan’s stimulus decision on Friday amid rumors of a doubling of the asset purchase program to 10 trillion yen (approx. $120 billion).

Speaking of central banks, the language in the Fed’s release will once again be the subject of much scrutiny, though no surprises expected this month.  The reaction will be more important than the actual release.  The FT.com has a great preview of tomorrow’s meeting (here).

As for Today, yesterday’s playbook probably still holds, U.S. banks stocks need to continue to show relative strength, and not start trading in lock-step with it’s Euro Cousins, if this starts to happen and we see stocks like BAC meaningfully below $8, or GS approaching $100, you can be sure that the SPX will once again be testing 1300.

Additionally, stocks like AAPL that are the “poster-child” for this year’s rally, need to remain orderly, or  the Nasdaq’s out-performance will be very short lived as the stock makes up a disproportional amount of the index’s gains given it’s 12% weighting.   As AAPL heads into it’s much anticipated fiscal Q2 earnings report tonight after the bell I would expect the stock to continue to be whippy, the stock has already traded in a pre-market range of nearly $18.   This morning it traded as high as $579 and now as of 8:45 it is trading at $561.   AAPL’s swings today, and we will get at least one rally most likely to up on the day, will dominate the Nasdaq trading as it is really the last tech titan to report in this cycle that has market moving implications.

Check back after the open, we will have a preview of the report and later in the day we will update the trade idea of selling a weekly Iron Condor.

 

MorningWord: 4/23/12: So much for all that enthusiasm early last week regarding Spain’s successful debt auction…..the bottom appears to be falling out with the Spanish 10yr yield briefly trading above 6% for the first time this morning since Nov.  Spain’s largest equity index, the IBEX  is down 20% on the year with all of these losses coming in the last month.

5 yr chart of Spanish IBEX 35 from Bloomberg

 

That chart is nothing short of frightening as it is within 2% of the 2009 low and apparently in a free-fall.  But that is just Spain’s relatively insignificant equity market, to drill down a bit deeper would be to look at the European banking sector as a whole.

The most recent ECB data from Feb 2012 indicates that the total size of European bank balance sheets is 33 trillion euros.  For comparison, the size of all U.S. bank balance sheets combined is around 16 trillion dollars, 33 trillion euros is approximately 2.5 times larger than all U.S. bank balance sheets
It is our opinion that the the investing community is incredibly complacent in the face of a financial crisis with much more far-reaching implications than the 2007-2008 crisis led by the weakness in the U.S. banking system.  Meanwhile, European bank equity prices (SX7E) approach levels not seen since the 1990′s, the most glaring warning signal flashing bright red.  

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MorningWord: 4/20/12: I started the day yesterday discussing Tech and Bank earnings and fortunately or unfortunately (depending on your investment view) for most other sectors in the market, these 2 sectors appear to be driving the bus for the moment, or at least capturing most of the headlines.  QCOM‘s fiscal Q2 beat coupled with curious fQ3 guidance wiped out more than a month’s performance closing down 6.6% on massive volume and dragging much of the SOX with it.  Bank stock’s inability to maintain gains post earnings (except C and MS) is a bit of a problem, especially with some names liek GS seemingly breaking down, these stocks including MS (which closed up following better than expected results yesterday) still trades horribly in my opinion and will most likely break-down in the weeks to come.

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MorningWord: 4/19/12: Another day and another fairly divergent view on earnings from the 2 best performing sectors in the market in the first quarter.  This morning BAC and MS, 2 of the perceived weakest members of the banking group handily beat expectations and the stocks are up about 5% in the pre-market, while QCOM is following the trend of a few other tech behemoths this week (IBM and INTC)  down about 4% following a definitive beat, but weaker than expected forward guidance.  In a lot of ways this price action makes perfect sense, even-though Bank stocks have had great year to date performances, the stocks across the board have come off prior to earnings about 10%, and well off of the 52 week highs made last spring, while INTC, IBM and QCOM were all trading within 1 to 3% from multi-year highs.  

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MorningWord: 4/18/12:  Europe has taken charge of global markets, as the move from 4-5am Eastern time has been setting the tone for the past week.  Today is no exception.  After a quiet Asian session that basically just followed Europe and the U.S. in the green yesterday, Europe started to see selling shortly after the open and has stayed in the red ever since.  Some hawkish comments from the Bundesbank head Weidmann (saying no more LTRO should be needed) and worse delinquent loan data from the Spanish banks were culprits.  Interesting to see John Paulson finally jumping on the short Europe bandwagon, coming out this week saying that he’s shorting European sovereign bonds.  Better late than never, or just too late?  The European banks down 3.5% after a +4% day yesterday doesn’t send a strong signal.  If the banks can’t hold such a long overdue bounce, we might be at the start of a 2010/2011 Europe repeat.

Meanwhile, earnings have started strong here in the U.S., but price action might have gotten ahead of itself based on IBM and INTC after hours moves yesterday.  Both names reported decent numbers, with light revenue a bit of a concern for IBM and weak margin guidance the soft spot in the INTC report, but the main reason for the move lower is probably the lack of buyers after such a consistent run ytd.  Also, just an interesting side note, if you didn’t see it, check out the WSJ lead article about the Instagram acquisition by Facebook.  Mr. Zuckerberg basically negotiated the deal solo at his house and pulled the trigger on his own.  Nice to throw around a $1bln check in a weekend…New economy indeed.  
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MorningWord (Late): 4/17/12:  Since I last posted there has been plenty of news, but the futures are practically in the same spot they were at 7am.  GS beat estimates, but not by the margin some might have expected, the stock is basically trading unchanged in the pre-market as investors await the 9:30am conf call.  Bloomberg’s summary of the results:

(Bloomberg) — Goldman Sachs 1Q EPS $3.92 vs est.
$3.55 (range $3.05-$4.00)
• Rev. $9.95b vs est. $9.41b (range $6.7b-$10.5b)
• Boosts qtr dividend to 46c-shr from 35c, BDVD est. 40c
• FICC rev. $3.46b vs $1.36b Q/q
• Equities rev. $2.25b vs $1.69b Q/q
• I-banking rev. $1.15b up 35% from $857m Q/q, down 9% Y/y
• Underwriting $665m vs $387m Q/q; advisory $489m vs $470m Q/q
• Investing and lending rev. $1.91b vs $872m Q/q
• Includes $169m ICBC gain, $266m in other net rev.
• Inv. management rev. $1.18b vs $1.26b Q/q
• Comp. ratio 44%
• Tier 1 capital 14.7% vs 13.8% Q/q; Tier 1 common 12.9% vs 12.1% Q/q
• Bought back 3.3m shrs at avg. cost of $111.28 vs 9.2m shrs at $98.54 in 4Q
• Call 9:30am 888-281-7154

 

On the data front, Housing starts dropped 5.8% month over month, which was well below the consensus estimate, while building permits jumped, which is probably a net neutral.  The fact is that our economic data is surprising more to the downside than the upside at the present, and this should possibly serve as little reminder to the situation last year at the same point.

As for today, I think it makes sense to trim some shorts, especially if stocks like AAPL and PCLN that got beat up of late find there footing and if they appear they are poised to re-trace a bit of the last few days slide.

Banks stocks likely to hold the key, along with some of the aforementioned high-fliers today, as any disappointment on GS’s calls could cause the group to re-test Friday’s lows.  Equities did their best yesterday to hold despite some prior leadership (AAPL, PCLN, SBUX, CMG, CRM, GOOG) all taking it on the chin……but as suggested below, maybe we are seeing a changing of the guard, that the next leg of the rally (if it comes) will be a bit broader than the last few months.

MorningWord (Early): 4/17/12:  Europe has been the region of strength to start this week, trading higher after a weak open for the second straight day, despite another broadly red finish in Asia, (Shanghai Comp was down close to 1%).  The U.S. had a hard time holding gains yesterday even with a strong retail sales report, but earnings, particularly in financials might be the catalyst to continue the rally started in Europe.  A slew of financials reports this morning, with GS the highlight (in addition to NTRS, STT, and USB), and KO and JNJ reporting as well.  

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MorningWord: 4/16/12:  As I write at 9am, the S&P futures are up about 50 bps, which is fairly unimpressive when you consider the Index’s last hour swoon of almost 60bps on Friday.  Europe’s strength this morning is fairly impressive when you consider that Yields on the Spanish 10 yr are topping 6% for the first time since December, and despite headlines of European doom and gloom, markets actually found some strength shortly after the open, as strong export orders in Europe (moving the region to a trade surplus of 2.8 bln from a deficit of 2.8 bln last year) gave bulls a reason to buy, and are an indication of continued German strength despite the gripping austerity in the South.  Interestingly though, the Euro finally broke the 1.30 level despite the robust trade numbers, touching 1.2995 overnight and still trading lower from Friday’s close.  Pay attention to the unchanged mark on the Euro for the year, around 1.2950, where asset managers go from up to down on long Euro-related assets.  

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MorningWord: 4/13/12: Yesterday’s market breadth was fairly impressive when you consider the lack of participation by AAPL, notching it’s 3rd consecutive lower close.  In the last 2 trading days, the SPX has nearly recovered 50% of it’s losses since making a new 52 week high on April 2nd, which seems like a fairly reasonable re-tracement as we head into the think of what will be a very crowded earnings reporting period, and likely to be very instructive for the potential of the continuation of the year to date rally.

10 day SPX chart from Bloomberg

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MorningWord: 4/12/12:  I’ll be brutally honest, it’s been a little hard for me to concentrate much on the markets for the last 16 hours since meeting one of the all time greats in rock n’ roll last night on the set of Fast Money, Bob Weir of the Grateful Dead.

Me, My Sister Stacy and Bobby

 

But let’s give it a shot.  Yesterday’s bounce of about half of the previous day’s losses was  generally unimpressive with the breadth fairly week.  The chart below of Bloomberg’s Composite New 52 Week High Index showed and anemic reading of 80, levels not seen since the little early March sell off, and just a tad above the readings we saw during much of last summer and fall.  This is not exactly that surprising given the fact that the broad market was down for 4 days prior to yesterday, but something to keep an eye on today as it appears we are going to be up on the opening.  

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MorningWord: 4/11/12:  It only took about 100 days for the SPX to book it’s second down day of more than 1.5% this year.  Talk about orderly, and even yesterday with the VIX up 8.4% after the previous day’s melt up it didn’t seem like fear was abound.  There is an obvious underlying bid to equities (specifically in the U.S.), it could have something to do with the Fed’s intended goal of keeping rates really low, for a really long time, the yield on the 10 yr is back at 2%, so most money managers continue to ask themselves; where the heck else am I going to put my cash??

Fears of a resurgent debt crisis in Europe have been permeating the markets for the last few weeks, and fairly quietly, European equities had been showing this strain, as of yesterday’s close the DAX was down about 8% from the March high, while Deutsche Bank a decent proxy for the health of Euro Zone financial services was down about 17% from it’s March highs.  

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MorningWord: 4/10/12: The 4 day, nearly 3% sell off from the intra-day 52 week high made last week has been in a word, Orderly.  Even yesterday, with Europe closed, when they had the opportunity to get a little sloppy, the underlying bid remained, and before 3:30 or so it appeared that the SPX would close on the highs of the day.   Frankly the first and last 30 mins of the day, were really the only moments with any resemblance of uncertainty.

The so called “fear index”, the VIX, popped more than 12% yesterday, on what seemed like a sell-off that lacked a ton of “fear”, but the pattern of early to mid month pops maybe one to take a closer look at as market participants try to gauge the potential for a meaningful re-tracement of the SPX’s ytd move.

4 Month VIX chart from Bloomberg

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Bonus: Last night I saw Bruce Springsteen at MSG in NYC and it rocked…..a clip from my view of a Rarely Played cover; Trapped.  Enjoy, I did!

 

MorningWord: 4/9/12:  This morning will mark the 3rd consecutive lower opening for U.S. equities in so many sessions, and the first time this has happened all year.  While most global equity markets were closed Friday in observance of Good Friday, the weakness we saw in Asia overnight was a bit of a delayed reaction to the weaker than expected U.S. Jobs report issued Friday morning and inflation data in China that was hotter than expected.  European markets are still closed today and I think it is safe to suggest that they would likely be down in sympathy with our  futures which are weaker by about 1% as of 9am.  

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MorningWord: 4/5/12:  

9:20AM: Jobless claims fall to the lowest levels in 4yrs, while this news doesn’t come as a huge surprise, the markets reaction on a holiday shortened week could.  S&P futures got a tad of a lift off of the data, but the DAX has not, and is still down 90 bps on the day.  So the real question longs have to ask themselves is what is “IN” the market at current levels? Have we gone from a glass half full to a glass half empty scenario?  U.S. data continues to show incremental improvement, while Europe is soft and Asia is generally mixed.  Over the long weekend I am sure we will hear all those self-serving mutual fund A-holes who want you 100% invested in stocks suggest that the U.S. economy is about to do what it has never done before and “de-couple” from Europe and China.  Obviously you know where I stand on this, and the truth is, U.S. equities are probably a decent buy with the SPX btwn 1300-1325, my sense is that we will have that opportunity in the coming months if Q1 earnings are inline to slightly worse and Q2 guidance is a bit guarded.

The easy money has been made this year, and while correlation reached historic levels in the last 12 months, we may be entering a period of haves and have nots.  A quick example of this would be SNDK down almost 10% ytd after this weeks pre-announcement and the SOX  and INTC up about 15%.  Or MSFT up 20% ytd and GOOG down almost 2%, I use these big cap tech examples as tech was the one of the best performing sectors in Q1.  So as the next 9 months may not be the layup like the last 5 months, investors may need to roll up their sleeves a bit and do a little old fashioned stock picking.

So for today I want to wait for the first rally and then lay into it on the short side with index etf’s, but keep a tight stop, don’t want to be selling a low here after a 2.5 day sell 0ff.  A good level to attempt this maybe unchanged on the day or up a bit above 1400.

8AM: Yesterday’s price action in U.S. equities was fairly orderly (despite being the second worst daily performance of the year) with the SPX trading in about a 65 bps range after the markets initial gap lower, and closing about 5 points off of the lows.  Many (including me) who were looking for a confirmation of a topping out, leading to a sustained sell off, should be mildly disappointed as there was clearly a bid underlying the weakness.  

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