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.
Monday, July 29, 2013
A Rocky Road Ahead
When I was a kid, the local news used to ask, "It's 11:00. Do you know where your children are?" Now for Treasury bond holders, it might be worth asking, "It's Sunday night. Do you know where your yields are?"
I've been talking about the importance of SHIBOR for the past month and trying to understand the relationship between it and US Treasuries, which I have been saying has a good chance of getting caught up as collateral damage in a Chinese deleveraging cycle. But this post by ZeroHedge, complete with charts from a recent report by Morgan Stanley (MS) really takes the cake for connecting the dots.
First, they point out there's a forthcoming government audit of Chinese debt, and nobody really knows how much debt will be reported. An audit conducted two years ago found local government authorities had RMB10.7 Tn ($1.8 Tn) of debt, so you know this number is going to be higher than that. The IMF has already expressed concern about the levels of debt in the Chinese economy and its potential to hamper growth. Clearly, this is becoming an issue. In fact, former Finance Minister Xiang Huaicheng said in April there could be as much as RMB20 Tn.
But the real issue isn't debt levels, but the ability to service it. Here, ZeroHedge says some things that should make folks take notice, if they are confirmed (emphasis mine):
In other words, China is preparing to admit that the level of problem Local Government Financing Vehicle debt is double what was first reported just two years ago, something many suspected but few dared to voice in the open. But not only that: since the likely level of Non-Performing Loans (i.e., bad debt) within the LGFV universe has long been suspected to be in 30% range, a doubling of the official figure will also mean a doubling of the bad debt notional up to a stunning and nosebleeding-inducing $1 trillion, or roughly 15% of China's goal-seeked GDP! We wish the local banks the best of luck as they scramble to find the hundreds of billions in capital to fill what is about to emerge as the biggest non-Lehman solvency hole in financial history (without the benefit of a Federal Reserve bailout that is). If those numbers are accurate, I think the Chinese banks and other financing vehicles are going to dump every liquid asset they can get a bid for, part of which is bound to be US Treasuries. And with that, we'll see more bloodletting in emerging markets as well since prices for bonds and emerging markets have been positively correlated in this wacky QE world we find ourselves in.
In the weeks and months to come, Sunday night is going to be really important for bond investors and it won't be because Sunday Night Football is on.
Something to keep your eye on -- SeaWorld Entertainment (SEAS) could come under pressure due to buzz around the documentary Blackfish, which is apparently a damning attack on SeaWorld's Orca whale treatment practices in the wake of whale attacks at the park. It was released on 7/19, but the negative publicity is really picking up.
Activists are starting to protest at SeaWorld locations. This could turn into a real PR mess. Google Trends is showing a huge spike in activity for Blackfish-related searches. Meanwhile, the financial media is not really covering this. When searching the ticker SEAS in Yahoo! Finance, the coverage is pretty light.
SeaWorld has been arguing that Blackfish is spreading misinformation, but at the end of the day, I think people really have a soft heart for animals and SeaWorld is not looking so hot right now.
I don't know about you, but discussion of Blackfish lit up my Facebook page over the weekend, and it seems the critics are liking it as it has a 97% positive rating on RottenTomatoes.com.
And while Blackfish has only made $123K in box office receipts playing in just five theaters, according to BoxOfficeMojo.com (and data for this past weekend doesn't even exist), the trailer has nearly 1 million views on YouTube. So don't be surprised if it gets wider distribution in a jiffy.
Note that the company reports earnings on August 13.
Bullish Behavior In AAPL
Following last weeks gap above its 50 DMA, Apple (AAPL) turned its Daily Swing Chart down on Friday and tailed up to close near session highs.
This morning, Apple is following through.
It looks like the double-bottom square-outs noted in this space in April and June underlie higher prices.
See this daily chart of AAPL from April.
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Tuesday, July 30, 2013
Fertilizer Shares Being Dumped
The breakdown of a joint venture has occurred between Russian based OAO Uralkali, the world's largest potash producer at nearly 20% of global production, with Belaruskal, citing a violation of their export agreement. Together they accounted for 43% of global exports. This seems to be a gambit for Urakali to grab market share, particularly to China. This is expected to lead to significant drop in prices - possibly as much as 25% to $300 a ton down from the current $400 per ton level. The breakup has been perceived as a cartel potentially shattering.
Shares of fertilizer makers such as Potash (POT) and Mosaic (MOS) are getting crushed, down 25% in pre-market. Shares of CF Industries (CF), which is also in the fertilizer business but produces mainly nitrogen based products rater, is moving down in tandem, off some $10 or 5%. This comes a day after shares of CF surged more than $20 on news that Loeb's Third Point had taken a stake and would be agitating for change. I'm sure Loeb is in at lower prices, but this certainly serves as a reminder not to blindly follow what a well known hedge fund is doing especially on news that brings you late to the game.
While this may seem another nail in the commodity the bull market or a sign the "supercycle" is over, it may actually present long-term opportunity. I'm of the mind that consumables such as agriculture and energy sector will still benefit from growing emerging market demand over the next decade. By comparison the infrastucture build out that uses recyclable materials, such as steel and copper, are likely to continue to see suffer from over capacity and a deceleration in demand.
This morning Generac (GNRC) reported very strong results and raised its second half outlook. From my perspective, few companies have benefited from the socionomics of weak social mood like this back-up generator manufacturer. When mood is weak, we crave certainty and products that offer "just in case" local solutions - like home generators.
Over the past three years Generac is up four-fold.
But just for fun, consider what has happened to the stock of what is arguably the most "just-in-time" global solutions provider out there - FedEx (FDX). Over the same three-year period, that stock is up just 25% and still below its peak-of-confidence, 2007-high price of $121.
Social mood matters, and knowing where mood is headed can be a powerful advantage to investors.
So where do I think Generac is headed from here?
While I am not involved in any way with Generac, I always get nervous when companies up their outlooks. Positive extrapolation of performance is something you see at peaks in confidence - by company managers, equity analysts and investors. Given the universal praise I see by all this morning, I'd offer that caution may be best.
And in that regard, I'd note that over the past twelve months, we have seen the peaking of a lot of weak social mood "me, here, now" stocks - like Sturm, Ruger & Co. (RGR), Cash America (CSH) and even Apple (with all its "i" as in "me" products). And I think the same argument could be made for the peaking in high dividend paying mega-corporations too - another weak social mood "bounce" trade.
To everything there is a season, and I would be cautious to assume that the "safety" trade can go on forever. Even more, I would encourage you to consider what happens to investor psyches should heretofore "safe" assets, like bonds, fall in price along side supposed "unsafe" assets. The teeter-totter of "risk on" to "risk off" could quickly become a very one-side "risk out" trade.
Is Europe Getting Better?
Yes, Spanish jobless claims fell but to 26.20% from 27.16% in the previous quarter. Any improvement is good, but let's cobble together more than one month before we start calling for a change in trend. Anyone that pays attention to employment data points knows that there is a myriad of ways to manipulate the data.
The media is so desperate to put a good face on what's happening that they often intentionally misrepresent data to make it sound better than it is.
France is not only a problem, but it very well may be the "pale horse" of the continent. I've stated for months now that people are wildly underestimating the problems that will come from France. Now we see that French jobless claims are hitting record levels. Almost 3.3 million French are out of work, and this is indicative of the vast majority of Europe.
To be sure, there are some pockets in and around Europe that aren't doing poorly, but like any puzzle, we must step back to see the full picture. What strikes me as interesting is how any piece of data that is "less bad" is immediately heralded as the sign of a bottom or a nascent recovery. Just because something is declining at a slower rate doesn't mean there is improvement. It likely means that it's difficult for things to get much worse without some exogenous event. Based on the data I'm about to present, I believe that things in Europe are actually worse than they've ever been.
Beginning with the PIIGS, Greek GDP is expected to contract by 7% by year's end. Industrial output is down 4.6% year-over-year, and the little manufacturing they have was also down 1.8%. Lending to businesses continues to fall, deposits are still leaving banks, and unemployment is a stifling 26.9% (under 25, it's over 55%).
The IMF has handed down a -1.8% forecast for Italian GDP, which is now down ~10% since 2007. PMI's are still in contraction - manufacturing in June ticked higher, but services fell and both are below 50. Unemployment is over 12% (great compared to the rest of the periphery), and its debt has ballooned to 130% of GDP in the last year (up 650bps from 2012). The YTD deficit is now 7.3% from just 2.9% in 2012, and S&P downgraded their sovereigns to one notch above junk, saying that Italy needs to run a surplus equal to 5% of GDP just to stabilize the debt ratio.
Are you seeing a recovery yet?
I'm not either.
Wednesday, July 31, 2013
First post-Fed move is often wrong, and we saw an initial move higher before a bounce back down (both stocks and bonds).
-No rate hikes, obviously.
-Notes housing strength but mortgage rates ticking up.
-No change to 6.5% unemployment target.
-Still purchashing $85 billion/mo in MBS and Treasuries.
-Will continue buying "until the outlook for the labor market has improved substantially in a context of price stability."
-Esther George was lone dissenter.
Looks like tapering is off the table for now, which some may construe as a sign of legitimate weakness.
Full statement here.
Utilities Vs. Interest Rates
Utilities -- Utilites SPDR (XLU) -- has been one of the sectors lagging today as the 10-year Treasury yield (INDEXCBOE:TNX) is rising and because of Exelon's (EXC) weaker-than-expected earnings results.
Below, a daily YTD chart of XLU versus TNX shows the two have been inversely correlated. Investors will look for safer returns as rates increase and move some of their money from conservative equities like utilities to treasuries. Utilities bounced in July as rates lowered slightly, but it looks like utilities will keep going lower if rates continue higher post-Fed today.
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This second chart shows the same inverse relationship over a 5-year time horizon.
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Clear & Present Markets
1. Barclay's (BCS) is raising $8.9 billion in capital. This is important as it signals that the European banks remain under capitalized, and they need to tap the markets while they can. Keep in mind that things are being held together in Europe because the individual countries are all working together, but if/when that cooperation ends, things will break down and the first one out will be the winner. I am not suggesting that a capital raise is a signal that things are breaking down, but the German elections in September are a source of great uncertainty and contention and raising money ahead of potentially destabilizing events is a very good idea.
2. Along the same lines, we have seen two major German companies announce changes to their CEO position. SAP AG (SAP) ended its co-CEO power split, by consolidating power behind Bill McDermott, who is based in the US. Siemens (SI) had an "emergency supervisory meeting" Saturday to oust its CEO. The European economy has struggled for years now, and it appears to be taking its toll on the management ranks.
3. Russia's Uralkali, the world's largest potash producer, broke up the international cartel that had fixed potash prices. Uralkali also announced plans to increase production by 40% over the next 2 years. The increased production it expected to be directed to China, India, and Brazil, and the production is expected to lower costs by as much as 25%. Potash is the potassium fertilizer needed to grow food, but it is only produced in a few parts of the world. From a global power perspective, this clearly marks increased cooperation between BRIC nations. It will be interesting to see whether the lower price of fertilizer flows through to lower food prices, improving margins for the food manufacturers, or if the seed companies and farmers capture the profit for themselves.
4. Interesting social mood indicator: There are conflicting reports about the company, but Hasbro (HAS) is considering removing jail from a new version of the game Monopoly. As John Oliver astutely observed on the Daily Show's coverage of Goldman Sachs' (GS) use of metals warehouses to manipulate aluminum pricing, "now the game is just about moving metal around in a circle, collecting money whenever you want, and there is absolutely no possibility of anyone ever going to jail."
5. Community Health (CYH) is buying Health Management Associates (HMA), to create the largest US hospital company. The hospitals will play a key role in shifting the health care system from a "fee-for –service" model to a "capitated" reimbursement model. As hospitals consolidate regional physician practices, their purchasing power increases and competition for patients declines. This consolidation is negatively impacting the makers of health care equipment like Intuitive Surgical (ISRG) and Varian (VAR). Business model transitions are not easy to navigate, and hospitals are notorious for ineffective management, but the transition has begun and if you watch, you can pick the winners from the losers.
Thursday, August 1, 2013
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Yesterday, the nation's advance 2Q13 GDP estimate was released by the Bureau of Economic Analysis (BEA). It is the first time the BEA has included "intangible capital" in the figures. The BEA has also rejiggered the GDP figures back to 1929 reflecting the impact of "intangible capital."
In yesterday's report the inclusion of said intangibles had a de minimis effect on the overall numbers. I think that will change in the future given the fact that there is more investment going into intangibles than into tangibles. Nevertheless, yesterday's GDP report, at +1.7% versus the +1.0 consensus estimate, was stronger than anticipated.
According to the BEA, "The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, exports, nonresidential fixed investment, private inventory investment, and residential investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The acceleration in real GDP in the second quarter primarily reflected upturns in nonresidential fixed investment and in exports, a smaller decrease in federal government spending, and an upturn in state and local government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE." The bad news was that 1Q13 real GDP growth was revised much lower to +1.1% from the previously reported +1.8%.
Subsequently, I received this email from a portfolio manager, "Everyone on the planet thought 2Q GDP would be lower than 1Q, companies were saying that as well, S&P revenue growth has been negative two quarters in a row, and now we get a first print of 2Q GDP at +1.7%. This will probably be revised lower than the 1Q13, and so then we have three quarters of sub-1% growth. It feels like we are sinking back into a recession with trillion dollar deficits, while we continue to spend $85 billion a month in QE."
Plainly I do not agree, and yesterday neither did the stock market, possibly because the FOMC statement was more dovish than expected. The result saw a multi-swinging session that left most of the indices I follow in the red. I would note that the S&P 500 (^INX) (SPX/1685.73) has only had one substantive close above my July 19th timing point, and that was the next day! So as long as the SPX stays above 1684, I think a short/intermediate top is being built where we could get an overshoot into the often mentioned 1700 - 1730 zone. However, a close below 1684 triggers a short-term downside objective of 1644, and probably more. This morning, however, China shows signs of an expanding economy, European banks are reporting decent earnings, and Euro zone manufacturing is growing for the first time in two years; and that has the SPX preopening futures up by about 12 points as thing are getting curiouser and curiouser . . .
Major Crossroad for ZN
ZN has closed yesterday's NVPOC at 125'230 on ISM and claims (chart 1). This level could be support today, but we have retraced a good portion of yesterday's frenzy bounce. Longer term, yesterday's monthly close held the trendline in place since 2006 (chart 2), but we lost that level today after hitting shorter term trendline resistance (chart 3) once again. If you are confused, don't worry you are not alone. This is a daytraders market for bonds and treasuries, but the next fib level of resistance for TNX is at 2.846% - the potential impact of the inverted head and shoulder (chart 4).
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As for equities, FOMC rallies tend to last into Fridays, with the first of the month and NFP a bit of a heavy skew. Next week is a whole new ballgame.
I have no edge on tomorrow's NFP but as someone just asked "What could possibly get them (stocks) down tomorrow?," I figured I would respond on the Buzz.
The answer, in my view, is a much better than expected number, as bull phases tend to end on good news, not bad. I have no basis with which to expect a much better than expected number, but as I thought it, I figured I would share it. That, and $2.50, will get you on a NYC subway.
Is this 2003, 1987 or 2000? Hard to tell; I will say that anything less than an �ber-bullish take on the tape is being mocked, for lack of a better word. That won't matter until it does but if and when it does, it will be telling with the benefit of hindsight. We say the chart of consumer confidence in 2007 vs. present day yesterday; keep that in the back of your crowded keppe.
I am hearing stories of large asset allocations (out of Treasuries into mid-caps) but flow, quite obviously, is second hand information, for what it's worth.
Fare ye well into the bell and have a mindful night.
Friday, August 2, 2013
Payroll Seems Weak Across the Board
The NFP report was a miss for this month with downward revisions for the prior 2 months. The household survey was better overall, but it showed 174k part-time jobs versus 92k full-time jobs, which seems bad.
The labor participation rate dropped, making the unemployment rate decline less impressive.
The PCE deflator remains at 1.3%, giving the Fed leeway as yet another inflation indicator is below their 2% target - though this one is increasing, which could make some hawks nervous.
Buy bonds and sell stocks on the back of this.
Pre-open, SPDR Gold Trust (GLD) traded down to 124 and in so doing tested its 20-day moving average prior to a thrust and stab back up though yesterday's lows.
The early sell off also satisfied Gapfill from July 22.
The presumption is that following a consolidation/intraday bull flag, a continuation higher should play out…probably today.
The big picture looks like the rubber band is being pulled back for an attack over the 50 DMA.
See 10-min GLD for 2 days and daily GLD from June here w/50 dma and 20 DMA:
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