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, June 24, 2013
Did the Bears Get Complacent?
Check out this image of Oppenheimer's latest technical research note, courtesy of the Reformed Broker.
The entire report simply says "We have no new thoughts. Sell."
We highlight these anecdotes mostly for entertainment value, but are some folks becoming too confident in a big bad decline? Incidentally, Mr. Market's doing a good job of staging a comeback today!
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PBoC: Bringin' on the Heartbreak
Gypsy, sittin' lookin' pretty
The broken rose with laughin' eyes
You're a mystery, always runnin' wild
Like a child without a home
You're always searching, searching for a feeling
That it's easy come and easy go
-Def Leppard "Bringin' On The Heartbreak"
The Financial Times has a story out today regarding a statement by the People's Bank of China on the cash crunch. The statement, which is actually dated June 17th but was only released today, confirms that the central bank is in fact taking a hard line regarding systemic liquidity.
Clearly, the new Chinese government is willing to take a much stricter view on the growth of credit in the Chinese economy than its predecessors. Short term rates have been rising – and even spiking – over the past month and this kind of rate volatility has the potential to lead to liquidity and bank runs. I think we've already seen some evidence of that, but it's been on a very limited basis.
One thing the FT pointed out was that China Development Bank, a state-owned bank, had to pull a RMB20bn ($3.3bn) debt offering but gave no explanation. But given that other top-rated Chinese institutions came up short in their own bond offerings in the preceding weeks, it's clear that the rise in rates is putting a dampener on credit issuance there. Liquidity, like the love of a mysterious gypsy, can be fleeting.
But back to the nature of the statement of the release: this was a statement that was dated last week, yet the PBoC only released it today? Why? I'm pretty sure the price action in the Shanghai and Shenzhen indexes had a lot to do with it. A 5-6% downdraft in a single day can get a lot of people spooked.
Will this explanation be enough to pacify them? I don't know. I imagine it's pretty easy to stoke a greedy banker meme over there, and if folks buy into it, they may not think much of it for now. But if or when this volatility starts to hamper real economic growth, it may not just be the bankers singing Def Leppard in a karaoke bar
Closed-End Fund Bottom Fishing
How do you maximize your purchase? Let's say you want to buy treasuries, looking around I see some of the closed-end funds (CEF) trading at 8%+ discounts to NAV. This generally means that people are in "liquidate out of fear" or mode. CEFs begin to get distorted as fear runs high. I look for these divergences as opportunities to bottom fish as well as maximize my purchase potential. If said fund trades back to its normal discount to NAV (-1%) then I have a 7% appreciation potential even if bonds simply stabilize here. That sounds like a good deal to me. However there are significant other risks in these instruments, as in they are not very liquid and can easily trade much lower. Once must be comfortable with holding them for a long period and "throwing it in a drawer." I am actively buying some bond CEFs today in several different bond areas. My goal is to purchase � positions today and allow for them to move lower should we enter a "waterfall" type event.
Another note on these CEFs, they typically bottom a day before their underlying markets, so it is important to watch them as they can be a tremendous tell for future movement. Unfortunately, I can't buzz the names as they are mostly illiquid funds.
From an equity perspective, I am very light equities and am looking to buy into the 200-day moving average as mentioned on 5/23.
Tuesday, June 25, 2013
Quick preview on an article I wrote today with a thought on Apple (AAPL): earnings season is just around the corner, and AAPL has made it clear that pretty much all of their $100+ billion cash hoard has been invested in US Treasuries. I hope Tim Cook spent some time on a swaps desk in his career. No? Houston we may have a problem.
Just a thought...
When Will Emerging Markets Bottom?
Followers of my writings know I have often talked about emerging markets as the "next fat pitch" given how severely they have underperformed, and the mean reversion potential for overseas equities to play catch-up to US stocks. Fears abound over China's SHIBOR, Brazil's protests, slower growth, currency movement, and much more and now appear daily in the headlines. Indeed, the relative momentum remains down, and risk assets broadly still appear vulnerable in the short-term. However, if its in the headlines, its likely discounted.
Our ATAC models used for managing our mutual fund and separate accounts are currently favoring bonds over stocks, but I can easily see a scenario in the coming months in which a full rotation into emerging market stocks begins past this residual taper tantrum. As the market begins to realize just how oversold inflation expectations and emerging market equities are, a meaningful move can occur and be the big trade for the 2nd half of 2013. And with the ratio of iShares MSCI Emerging Markets Index (EEM) to SPDR S&P 500 ETF (SPY) sitting at 2009 lows and relative support, it seems very plausible that we are nearing the end of emerging market underperformance.
1-2-3 on the Runoff
While the runoff yesterday looked discouraging for the idea of a rally attempt, it carved out a potentially constructive 1-2-3 Swing Pullback on the 10-min SPY.
See a 10-min SPY chart below from this morning's Daily Market Report.
Is the SPY/S&P 500 (^INX) now slated to trace out a larger 3 drives up toward 159/160 SPY (1590/1595 cash)?
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Wednesday, June 26, 2013
Got It, Goose?
You for the need? The need for speed? Be careful for what you wish, Goose. You've just entered the Danger Zone on a technical basis.
S&P 500 (^INX) 1600 is the first real resistance this week and the underbelly of the broken trend-line is right behind it (well, 25 handles behind it anyway). See the chart below, and never leave your wing-man!
I will also note, while I have your attention, that Goldman (GS), Morgan (MS) and Apple are all under the floor, so to speak.
GDP Internals and What's Driving Today's Rally
There were three factors behind the decline in 1Q GDP: consumption, exports, and imports.
- Personal consumption took out 0.57% from the 0.6% drop (remember these are QoQ annualized numbers so the quarterly figures are extrapolated to an annualized rate).The quarterly annualized drop was from 3.4% to 2.6%..
- Exports dropped to -1.1% from the 0.8% prior estimate, due to a decline in goods exported from 0.3% to -2.5%. Services remained relatively unchanged at 2.4% from 2.0%. This took another 0.28% out of the GDP reading.
- Imports dropped to -0.4% from the 1.9% prior estimate. Goods down to -1.3% from +1.1% and services down to +4.5% from +5.8%. The net effect added +0.38% to the GDP reading.
We think there are three things driving today's rally:
1) Worsening economic data causing another bid for Treasuries, meaning that a data-dependent slowing of QE is off the table if the trend continues. Manufacturing has been better in June, kind of a kick-save for the not-so-great April/May, but June's NFP on July 5 still remains the clincher. Remember that bonds/stocks have been positively correlated lately (as in they both move in the same directions rather than opposite).
2) Relief that China isn't blowing up anymore and their money markets are beginning to normalize to a certain extent. The problem still persists in the future that the ability to arb capital inflows by a loophole with onshore and offshore money flows has now been shut down by the Chinese government. More on this later (hat tip to Professor Branden Rife)
3) Conditions were deeply oversold and were alleviated in the past 48 hours.
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Bidless in Seattle?
Now why would someone step on Mr. Gold's (GLD) neck overnight in Asia when there are no bids around to speak of…unless there was a quarter-end agenda?
Thursday, June 27, 2013
The T-Report: Clear Selling?
Are We Out of the Storm?
On Monday, we wrote that we were closer to the end than the beginning of this sell-off. We have been surprised just how well the markets have responded, with "hedge" products like CDS and ETFs leading the way.
While we didn't get that final massive wave of capitulation in the bond market, we came close and have definitely had one of those moves where hedges come back to haunt investors as the hedge outperforms the asset by a wide margin.
I think this is the first time all year we have seen a good old-fashioned whipsaw. Just as we were moving to neutral if not bullish, most others were piling on the shorts.
The ETF Spiral™ concept had run amok with everyone seeming to believe they understood it, and yet I think relatively few did. Maybe it is years of watching CDS indices cause a spiral, but I think our explanation of what actually happens and why it happens (single name market makers are the real lynchpin) is the best.
It also helped us see the near exhaustion selling and looking for the snap in those products.
But We Aren't Safe Yet
So in spite of several positives, I am switching my stance back to bearish risk here.
I think the Treasury sell-off has nearly run its course. Treasuries look very appealing here for the following reasons:
- There are few if any signs of inflation.
- Serious economic growth seems to be easier to find in Fed forecasts than in the real world.
- 3.57% on the long bond isn't bad with only okay growth, limited inflation pressure, and a Fed that is not raising short-term rates anytime soon and is continuing to buy a lot of bonds.
Investment grade bonds look okay. For the first time in awhile, we see some value in bonds over CDS. While we still see no real core buyer of protection (ie, bank hedging desks), the overall yield on bonds, the spread, and the discount to par make them appealing as well.
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We saw a pretty violent move wider, followed by an equally violent move tighter. The squeeze continues this morning as it trades back towards 85. We were surprised by the move wider, though on a relative value basis, it had gotten just too tight. The move tighter is less surprising as this product has gone from being a fast money product to a hyper fast money product that at times resembles more of a video game than a real asset. That will change over time, but until banks really want to hedge, there is no core buyer of risk.
There are times when there are no sellers, which we just saw, but for now, the overall imbalance is no buyers.
The one thing that could change that is if we see a return of the "basis package" in a meaningful way, when traders really start to like the carry and convexity of owning the basis in a world with so many bonds at a nice discount.
So We Like Treasuries and Investment Grade. What Don't We Like?
In keeping with our theme that the "correction" is almost over, we are tolerant of high-yield and emerging markets here. We liked them 3% to 5% ago in the ETF space, but here we are at best-case tolerant and leaning towards another round of weakness.
But our real focus for bearishness is US stocks and dividend stocks in particular.
Dividend stocks have outperformed credit by a wide margin, but that leaves them vulnerable as:
- They don't offer good relative value versus bonds anymore.
- They are a very crowded trade.
- Many investors used some amount of leverage to boost the "yield".
- The main dividend ETF that we look at, iShares Dow Jones Select Dividend Index (DVY), continues to trade poorly and is seeing outflows.
- So dividend stocks are the weak link for the equity market.
The current sell-off has been largely technical. There is little economic data to which we can attribute the moves. The Fed triggered the action, but it was far more a "liquidity event" than a fundamental event.
I think the next stage will be a "fundamental" event, where we will see some economic data that causes the equity market some real concern.
The combination of increased volatility, higher rates, and a loss of confidence in central planning will lead to some deterioration of economic data.
It won't be a crash or anything serious, but I think the market will see some weak data and will not respond well to that since nothing about this move so far has had anything to do with concerns about the economy. In fact, you could argue that the sell-off has been over worries that the economy will grow too strongly (which I think is bizarre).
So an economic data induced round of selling is the forecast from here. And just like other "liquidity events" that we have seen this year, whether it is gold or the Nikkei (INDEXNIKKEI:NI225), we have seen bounces after the initial event only to break through to new lows shortly after.
5-Wave Decline in FTSE 100 Calls for a Rally
Elliott wave analysis does not have to be complicated. The essential design of an Elliott wave pattern is simple: five waves in the direction of the main trend, and three waves against it.
In a bull market, it's five waves up and three waves down. In a bear market, the other wave around, which brings us to the current wave picture in the British FTSE 100 (INDEXFTSE:UKX).
As you can see, the FTSE 100 has completed five waves down. Five waves meet the definition of an Elliott wave impulse. (We think this decline is wave 1 of a larger down move.) Again, "simple Elliott" tells us that when five waves end, a three-wave move in the opposite direction begins.
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In the FTSE, a corrective second-wave rally could bring prices back to the Fibonacci 38.2% retracement level at 6,349. By the way, the recent low occurred right on the lower weekly Keltner channel level, which strengthens the odds of a rebound.
Wave patterns in the MIB 30 (INDEXFTSE:FTSEMIB) and Belgium's BEL 20 (INDEXEURO:BEL20) are similar, with similar expectations for a rally.
For those who wish to try and take advantage of this potential near-term opportunity, there is a multitude of ETFs with European exposure to consider.
(Adapted from Elliott Wave International's European Short Term Update.)
Only Bulls Rush In?
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S&P futures are at an important spot right here. We're bumping against the 50% retracement with the 61.8% retracement around 1638 just above 1628 gap fill. Support from last November has become resistance (red trend line). If the gap at 1628/29 is filled on a blow-off push, to me this is even more bearish as there's nothing for bulls to aim for other than the highs. Note the setups in play for this bounce weren't particularly clean by any stretch of the imagination. It would take several days to put together a new formation cleanly targeting highs (i.e. an Inverse Head & Shoulders). That's not to say this is impossible or unlikely as much as it is improbable. I'm short the iShares Russell 2000 Index (IWM) and generally bearish overall. However, using my bull lens, I don't see much to justify altering my strategy for now. Yep, it's hurting a little bit being a bear. Every day I'm feeling better about it though. Technical analysis is coming out in a bit on specific names to play to the flush.
Good luck out there!
Friday, June 28, 2013
Good morning Minyans. Just when the bears thought they had it made, yesterday they were stuffed back into the box. First and most importantly, new issues were back in healthy size at $5.2 billion, and most of the deals were of the junk variety. For the right price, money continues to be there. Broad CDS indices and CDS of large US financials and the PIIGS sovereigns all pulled back, some rather sharply. 2-year swaps held Wednesday's stunning gains and are calm in the 15 bps range. The only thing for Boo to hang his hat on is high-yield spreads, which have tightened a bit after touching the 700bps area, but not much, particularly considering the improvement in Treasuries.
As I have stated before, what matters is not the interest rate on the bonds (within reason of course), but the ability of companies to continue selling bonds. And on that front, the greenlight seems to be back on.
If you are short S&P, one approach would be to buy gold as a hedge, setting up the Short SPY-Long Gold pairs trade (dollar neutral) for the reversion to the correlation. Not advice--I can't do that without knowing your time horizon and risk profile--just thinking out loud.
I'm extremely conscious of my own Cognitive Biases; we should all be. The first step toward solving a problem is admitting that you have one.
Deutsche Bank (DB) and Barclays (BCS)-our overseas banking tells-were heavy all session yesterday, and again this morning. Goldman -which has under-performed of late, but caught a bid yesterday-remains my primary tell in the space.
Apple, trading at $390 as I type, is $30 from the price target we fingered in January.
Market breadth is 3:1 negative (a bit worse, but I rounded down)
I've got a pretty big call at 10:30 that I'm currently prepping for; lemme hop, and then I'm all yours.
Good luck today!
SPDR Gold Shares looks like it is reversing in respect to the possible square-out that occurred earlier.
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Can it leave an outside up day/Train Tracks on the important Friday weekly closing basis at quarter-end -- the worst quarter in a half century no less?
Often times, as Gann would point out, major turning points come at the end/beginning of quarters.
Such was the case at the big early October 2011 turning point in the SPX, which led to an outside up month from, which it basically has rallied ever since.
Gold topped just before that in September 2011. Is this a changing of the guard so to speak?