So, what did you see from the Alcoa (AA) report that you can apply to the wider market? And does this stock deserve the Groundhog-Day-level scrutiny it gets every quarter?
Position: n/a
The currency markets are recovering after moving too far too fast yesterday. Better-than-expected data from Australia, the U.K. and Germany have helped ease some of the recent market jitters. The equity markets have a firmer tone after Alcoa's (AA) report gave a strong start to the earnings season.
News that Chinese auto sales jumped 48%, the largest increase in over three years, also eased some tensions about the Chinese economy. The euro has now recouped all of yesterday's gains after failing to extend yesterday's losses. The pound has gotten an extra boost after the Bank of England left its asset purchase plan unchanged at GBP125 billion. The yen is flat against the dollar and consolidating in the lower end of yesterday's range, as is the Australian dollar.
In emerging markets, the South African rand, which was the worst performer yesterday, is up a percent. The euro is nearing resistance around $1.4000, and the overnight rally is likely to see some profit-taking in morning trading.
Position: None
The G-8 meeting is wrapping up, and there have been no surprises to speak of. The global economies and financial systems appear too fragile to begin reversing the emergency measures. There were the usual platitudes about the Doha trade round and promises to avoid protectionism.
Of note, especially in light of comments in recent weeks from officials warning that currency appreciation would jeopardize their economic recoveries or in other ways underscore the benefits of soft currencies, the G-8 encouraged countries to refrain from competitive currency devaluations.
After rejecting initiatives by the Chinese and Russians (according to news reports) to formally discuss reform of the international monetary order to reduce the role of the dollar, the G-8 draft indicates support for a "stable" and "well-functioning" international monetary system.
A spokesperson for the Foreign Ministry reaffirmed that China supports creating a diversified international reserve currency. This is hardly news. Numerous officials, even in China, Russia and Brazil, recognize that what they want is not reasonable or possible in the short run.
Going forward, while the talk persists, the political benefits are positive for China, as we are not talking about how the yuan has essentially been re-pegged against the dollar, or how Chinese consumption as a percentage of GDP has fallen, or how the incredible growth in loans (doubled in June from May and have already surpassed the full-year goal) may be fueling over-investment and an asset bubble of their own.
That said, this week's developments in China, especially the social unrest that led to President Hu's early departure from the international gathering in Italy and the detention of several Rio Tinto employees on "espionage" charges, illustrates that the yuan and China are not in a particularly strong position to challenge the role of the dollar or the U.S. in the world economy anytime soon.
Position: None
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Alan Farley
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| June Same-Store Sales: Move Along, No Recovery Here |
7/9/2009 8:42 AM EDT
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June same-store sales (actual vs. expectations):
- Costco (COST) -6.0% vs -6.1%
- Stage Stores (SSI) -12.6% vs -8.8%
- Buckle (BKE) +9.6% vs +12.4%
- Children's Place (PLCE) -12.0% vs -8.6%
- Limited (LTD) -12.0% vs -8.1%
- Bon-Ton Stores (BONT) -8.0% vs -8.0%
- Fred's (FRED) +0.2% vs -0.5%
- Dillard's (DDS) -14% vs -10.3%
- BJ's Wholesale (BJ) -7.5% vs -7.4%
- Macy's (M) -8.9% vs -8.8%
- American Eagle (AEO) -11% vs -7.8%
- Abercrombie (ANF) -32% vs -27.8%
- Gap (GPS) reports -10.0% vs -8.3%
- Aeropostale (ARO) +12.0% vs +10.2%
- Nordstrom (JWN) -10.0% vs -10.6%
- Saks (SKS) -4.4% vs 9.8%
- Target (TGT) -6.2% vs -5.9%
Go back and look at the short-sale setup on American Eagle (AEO) I posted in Monday's column. The sell signal will trigger if yesterday's low gets taken out.
Position: nm
Alcoa (AA) kicked off the earnings season with a bang. ... Jobless claims came in better than expected at 565,000 versus 603,000 expected. So far the reaction is not as positive as one might expect, the QQQQ up from $34.71 to $34.93. Yesterday the trading was tough as we chopped sideways for over an hour before the sellers took us down about 50 cents on the Qs. ... We resumed the previous pattern of early selling and later-day "recovery," ending the day near the highs. ... I am going to look for a drop from the open and expect a bottom at $34.80 if the market is going to respond positively to the news. Let's hope for less chop and more clarity...
Position: NM
Boy, those folks who take the survey at the American Association of Individual Investors are like daytraders flipping back and forth. A week ago there were only 44% bears; this week they are 54%, the highest reading since the March lows. This confirms the elevated put/call ratio I have been writing about these past few days.
Position: Guessing if we get a rally today and these folks were polled tonight, we'd see the bears shrink right back down again.
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Tom Graff
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| Jobless Claims Hurting Treasuries |
7/9/2009 8:54 AM EDT
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The Treasury market is still trying to figure out what to do with last Friday's nonfarm payroll number. So today's jobless claims got a little more scrutiny than usual, and I think that's why the 10-year is off nearly three-quarters of a point and the curve is 5 basis points steeper.Today's 30-year auction is critical. There are few technical stop points between here and 3% on 10s. But then again, there isn't much between here at 3.5% either. So today's auction could either cause a substantial reversal or a substantial rally. Did Treasury buyers get all they wanted from yesterday's 10-year auction? Or do they want some long bonds too?I've taken some of my long Treasury chips off the table after yesterday's big rally. Feels like we've had too many steller auctions. Eventually we've got to get a mediocre one here.
Position: None
897.50 = 90.20 S
893 = 89.75 M
889.50 = 89.40 M/S
886 = 89.05 M
882.50 = 88.65 S
875/877.50 = 87.90/88.20 S
873 = 87.75 M
869.50 = 87.35 M
866.50 = 87.05 M
864 = 86..80 S
Position: none
I like to think I have a good sense of humor, but these people are starting to push my limits. Between commentators putting a positive spin of the horrific retail sales numbers and futures rising on the job report, I cannot decide whether to laugh or cry. The retail numbers were vomit-worthy. Even if you expected them to be bad, the fact that it was not any worse is not a reason to put a bid in the group.
I often wonder if anyone actually reads the reports or just takes out the headline that supports their position. If you back out the seasonal adjustments, raw claims for unemployment were up 17,000, is what I am told by my sources who can actually decipher these things. Continuing claims rose. The auto layoffs not done this week will be done in the weeks ahead. The report points to continued weakness in the economy.
I am not a frequent short-term trader, but if we pop up over 100 Dow points today, I am going to nibble puts on the indices, particularly retail and financials.
Position: none yet
OK, the relief rally began at 866.50 (we did have a quick tick to 865.25) and not at 864 as I had opined ... either way, the bears finally found a level where they were willing to take a siesta. I am not convinced that the bears are going to go into hibernation, but it is likely more bulls begin sending out soldiers to see how bloodied they are when they report back. The affect of this: more intra-day bounces.
Not much has changed for the bulls since yesterday morning. They still need to claw their way above 882.50. A sustained trade above 882.50 adds some fuel to the relief rally and sends us to moderate resistance at 886 and moderate/strong resistance at 889.50. The bears will test the bulls throughout the day, but I doubt they would come out in full force until we trade up to moderate resistance at 893 or (more likely) strong resistance at 897.50.
The bears finally got us through 875/877.50 but then ran out of gas and let the bulls take us back into our support zone. Once again, traders are given the task of pushing the emini through the support zone and attacking moderate support at 873, 869.50 and 866.50. If the bulls do not come back in near 866.50, I would once again watch 864 for strong support.
Position: none
Don, lost in all the chatter we have had back and forth on U.S. Natural Gas (UNG) and other commodity-based ETFs is the question, why is this a popular trade at all?
Prior to the introduction of this ETF, natural gas futures had a well-deserved reputation as the wild man of physical commodities; I wrote a journal article elsewhere in June 1997 about its extreme volatility. Its forward curve has laid waste to commodity-trading advisers and hedge funds over the years. And worse, its huge roll costs have made it a dog in the world of commodity index trades; the total return of the Dow Jones-UBS natural gas index since January 1991 has been -93.7%.
What on heaven's earth possesses people to get involved in this market? It's rather like running an airline: No matter the history of the past century, there's always someone, somewhere who thinks he can make money transporting backsides from one airport to another. Uh-uh.
Worse, this ETF has so distorted the structure of natural gas futures that bona fide commercial traders are finding them impossible to use in pricing and hedging swaps.
Position: None
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Bob Byrne
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| A Note on Energy... |
7/9/2009 9:57 AM EDT
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One sector that has been clubbed to death is energy -- the oil service and natural gas names to be exact. Everyone is now aware that crude and natural gas have been hit hard, and while I wouldn't look for the Oil Services HOLDRs (OIH) to sprint back to $115, I do expect more aggressive buying to provide better intraday surges. Near-term support levels to watch on OIH are $88.80 and $87.50 with resistance at $94.75 and $97.50.
A few oil service names I watch are Schlumberger (SLB), Transocean (RIG) and Diamond Offshore Drilling (DO). On the natural gas front, I watch Apache (APA), Anadarko Petroleum (APC), Devon (DVN) and XTO Energy (XTO).
Given the volatility of the energy sector, I would be inclined to enter on pullbacks rather than breakouts. Let price come to you...
I'm not passing judgment on the fundamentals of the energy group or of these companies, simply that the sector should see decent upside volatility in the short term (especially suited for the daytraders among us).
Position: None... though I trade the sector often
I don't have any strong disagreement with most of the arguments put forth on this board against many of the commodity, leveraged, inverse and sector ETFs. However, many equally compelling arguments could be made for why a lot of mutual funds and stocks of individual companies are equally a scam and shouldn't be allowed to trade.
In the end, what are the criteria for a security that should be allowed to trade publicly? Based on what I'm seeing, I'm not sure how to answer that question.
Position: none
Ever since the stress tests the banks have been rolling over. It seems as if they rally on every scheme to help them overcome their moronic incompetence and they fade as the gimmicks don't really solve the problems. Whitney vs. Bove? Whitney up in my book. I am flat on the banks but not the asset mangers and boutique investment banks. Anything at 5 times sales or 7 times book is just foolish in my view. These represent excellent sales.
The M&A downcycle is just beginning and it's usually a long one. A retest or correction will reverse the love for asset managers. I don't know what will happen to the market in the short run. I just know that the conditions of the Great Unwind have not yet been unwound, and that means more pressure on home prices, mortgages, retail, and banks.
Maybe I miss something when the financial stock cheerleaders break out the pom-poms. Maybe I don't.
Position: none mentioned
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Tim Melvin
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| Foreclosure Green Shoots? |
7/9/2009 12:13 PM EDT
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I just got my first email about the positive news of falling foreclosures. I expect to get many more between now and the end of September.
I am always mystified by people who seem to base their conclusions and investment operations on headlines alone. Of course foreclosures are down -- they will be until the fall. California has a foreclosure moratorium in place until then.
So does Marshall & Ilsley (MI), a regional bank with a large mortgage portfolio. All this is going to do is delay the inevitable. Many of these homes, particularly in California, Nevada and Florida are so far under water there is no way to rework the loan short of giving the house away.
Position: None
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Howard Simons
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| The Oliver Wendell Holmes Rule |
7/9/2009 12:20 PM EDT
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Chris, you ask which securities should be allowed to trade. As a Libertarian, my impulse is to say, "All of them," but I have to temper that with Justice Holmes' famous observation that free speech does not give you the right to shout "Fire!" in a crowded theater.
I would say this is a good guiding principle. A security that is inherently disruptive to another market should be questioned. This is why I don't like the commodity-based ETFs; they withdraw liquidity from other markets and interfere with actual commerce.
Even then, I would be fine with these things trading to the extent their positions do not receive the position limit exemption applicable for other non-commercial participants.
I have no problem with allowing the inverse and leveraged ETFs to trade, as they can be duplicated with equity market strategies and affect only other equities, not external commerce.
Do I like the vehicles personally? No. Experience shows they often behave like Elmer Fudd's shotgun, doing more damage to the user than to the intended target. But just because I don't like something is no reason for me to call for their ban.
Position: None, 3 times and inverse
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Rev Shark
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| More From Roubini |
7/9/2009 12:21 PM EDT
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The latest from Dr. Doom, Nouriel Roubini, has been posted here, and as you might expect, it is not very optimistic. He certainly was subjected to a lot of ridicule, particularly on this site, as the market bounced, but his big-picture negativity was the correct call. I'd be very interested in hearing some refutation of his latest post, which strikes me as containing some pretty compelling logic.
Position: None
The Bank of England is throttling back its counterfeiting -- excuse me, quantitative easing -- operation. The pound has rallied, and gilts have sold off on the news.
This is a knee-jerk reaction; with "jerk" being the operative word. When the BOE got into this tawdry game on March 5, 10-year gilts rallied from 3.643% to 3.358%, and then down to 2.951% on March 12 when the Swiss National Bank joined them. They presently are at 3.787%.
This actually is better than our 10-year Treasury did. It rallied from 3.0066% on March 17 to 2.553% on March 18, and that was it. It got to the gates of 4% in June before reaching its current level of 3.395%.
The moral of the story? The rational expectations school got it right: only unanticipated monetary increases can affect output and employment. Everything else affects only inflation expectations, a category that includes currency valuation and the shape of the yield curve.
Position: Summertime, and the easing ain't easy
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Tom Graff
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| 30-Year Auction |
7/9/2009 1:07 PM EDT
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While not terrible, the long bond auction wasn't good. All day the long bond had been down 8 to 10 basis points as a pre-auction cheapening. Even with that concession, the auction still couldn't beat pre-auction trading, coming in at 4.30 vs. 4.29% just before the market. This isn't about foreigners fleeing; the indirect bid was a very healthy 50% of the auction. I think that after so many strong auctions in a row, the Street is choking on Treasury bonds.I'm not likely to look at a long duration position again until we move up to the 3.50s on 10s.
Position: None
The dollar has been hit again since the close of European markets. Losses are broad based, with most emerging market currencies participating, though the Mexican peso is a clear laggard as concerns about the budget (and therefore rating) implications of last week's elections. The main driver appears to be players being stopped out of short foreign currency positions, which had been the trend since the start of the month. Some momentum players are getting long the foreign currencies. While the gains in the foreign currencies look impressive, they are still mired in the ranges that have plagued players since late May.
The combination of market positions and momentum warn not to fade this move yet as there will likely be follow through tomorrow. Tomorrow France, Italy, Greece and Netherlands report industrial production data and this data will likely be seen as consistent with the "green shoots" story. The US reports trade figures, which given the rise in oil prices may deteriorate, and Univ of Michigan preliminary measure of consumer confidence for July. Risk is a bit of slippage from the 70.8 reading in June. These reports should not stand in the way of additional dollar selling--near-term. Despite the dollar's firmer tone since the start of the month, sentiment remains largely negative.
Position: None
Here are a few stories and videos from our flagship site that you may have missed:
Position: None
Howard. Was that just a hipshot or do you really believe that ETF's, or any other product which materially effects the trading of a vanilla security like common stock, have no ultimate effect on the operations of the underlying enterprise?
Increased volatility and stuck correlations are bad- expensive; distracting; shackles on the best dancers if you want a literary reference- for enterprises in a capitalist system.
So, of course, is having securities out there that pretty much blatantly circumvent Fed rules like Reg T. Maybe just scratch Reg T- it would be easy to justify doing it, academically- easy as it was to prove how useful portfolio insurance was in the late 80's.
Now 1987- there was a crowded theater for you.
Position: None
Doug, the bulls are huddled in an office in Maine with a bottle of cheap whiskey and wishing that when they breezily declared the market had risk to the mid-800's they had been even more convinced it would actually try to get there.
To update- we have sold most of our TLT position after what was ultimately a decent run even after we were early. Maybe the longs we hold and are nibbling at in here will work out too.
Position: Long TLT
Bill, there's no one single answer here. We saw, for example, in the financials how a collapsed stock price could affect the ability of the firm to conduct its core business.
For other businesses, it is not so clear. Let's say I'm a fertilizer or petrochemical firm or a utility who uses natural gas. There an external player can raise my operating expenses; this is the situation I posed.
Now let's say some ETF hooligans start a 3X inverse fund involving that firm's stock and temporarily drive it below value. Please note how I say "temporarily;" if the price goes below value, someone will buy it for less. Now my stock price is less, and that may make some investors and option-compensated investors unhappy, but does it really affect my operations? It could affect me strategically if I was planning on using that stock for, say, a merger.
I think we both can see the central problem that always arises quickly when we put our regulator hats on: Once you start creating rules and restrictions, it is very hard to get them right and not create artificial economic rent.
In direct answer to your question, some ETFs can affect both the stock and the operations; some affect only the stock.
Position: None
I do not think there can be any doubt that ETF's are changing the market. The trading of these raises and drops the valuations of companies in the index and that does have an impact on business. Acquisitions can be hampered because of price drops based solely on index movement. They basically suspend Reg T and encourage excessive risk taking by investors who may not understand what they are doing. When I opened a futures account years ago I had to prove my net worth and credit as well as a basic understanding of the markets I wanted to trade. My current options broker knows me better than my ex wives ever did. ETF traders can just open an account at a broker and lever up.I have a feeling that the leveraged funds will someday be pointed to as a toxic invention that hurt the companies in the indexes and investors alike.
Distortion in values and encouraging excessive speculation is not good for the long term health of the capital markets
Position: none
The daily chart for Alcoa (AA) has been damaged this week.
| AA Daily -- NYSE
Alcoa |
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Tradestation |
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The action today, following positive earnings, is particularly weak. Alcoa began the day with a gap higher open as investors bid it up on the news, a strong follow-through after Tuesday's and Wednesday's high-volume positive closes.
Alcoa opened against heavy resistance near its declining 200-day moving average just below $10.00. The stock is now trading in the red, having a very difficult time getting on the plus side despite a positive DJIA and is also below its 50-day moving average for the fifth day. Since the powerful breakout in mid-March, Alcoa has been supported by its 50-day.
The reversal action today, as well as the trade earlier this week, has taken out this support. I expect Alcoa to fall further in the next few weeks. The first area of support is $8.00.
Position: Long AA (in managed accounts)
The options market seems to think that AIG is history. In spite of the enormous amount of bailout funds received by the insurer and derivatives speculator a Citigroup analyst issued a report this morning saying that there is a significant chance the company's shares are worthless. The Citi analyst said the selling of assets at discounted prices and continued exposure to credit default swaps imperiled the equity in the company. The January 10 puts price the equity at around $.50. The January 2011 options price the shares a little higher, implying to me that the market thinks if they survive six more months they just might make it.
I will leave it to the options experts that contribute here to figure out if there is a spread trade here but every time I can recall seeing this kind of options pricing, the market was right.
Position: none
Every ETF that covers common stock has an effect on the operations of the underlying enterprise; it's just that the negative effects used to be less obvious. I talked about this in an article a few weeks ago, but would add the following: first, that which affects the stock affects the operations of the underlying enterprise. Think of the debt covenants that rely on a certain level of the common, or lenders to mid-size companies that require warrants, or even crazy scenarios like that of CHK last year. Each dollar that enters the markets via an index instrument diminishes the ability of good companies to dynamically attract more capital than bad ones. For a long time, there were other benefits that outweighed this fact, but we have reached the point where the balance is probably neutral at best.
Second, a big issue with derivatives isn't the vehicles themselves, it's what gets tucked in under the wings. As you increase the distance between the vehicle in question and the base underlying enterprise the relationships between the two get attenuated by real-world factors. Sure, you can isolate the factors that are unknowable from those that are axiomatic, but as you increase the purity of each in search of spreads, you concentrate the risk from the unkowable part. A portion of the profit from the spreads gets retired with every trade and every new entry- but the risk does not.
Position: None
"Each dollar that enters the markets via an index instrument diminishes the ability of good companies to dynamically attract more capital than bad ones..."
I would counter this by arguing that even though in the short run this could keep a "good" companies price somewhat down, and a "poor" company at a higher price, then the value of the "good" company would be identified by the market, and you would see a shift of holders in the "poor" stock itself, selling it for that higher price, and moving those assets directly into the "good" company at what is considered a discounted price. In essense, the argument that a good company cannot attract capital due to ETFs is saying that the markets are not efficient. That the efficient market theory is trumped due to volume in ETFs. Eric Oberg actually covered the concept that ETFs and leveraged ETFs create a survivorship bias for the stronger companies.
Position: nm
Several arguments have been made that leveraged ETFs skirt the Reg T requirements. I think many people are giving way to much credit to how far individual traders are willing to stretch their $25,000 to $100,000 marginable account. I am sure there are a few that lever their accounts up and go for the home run, but it seems, from reader feedback, that most trade these intraday or use them as hedging vehicles. Furthermore, I would suspect that the vast majority of people trading these vehicles actually qualify for portfolio margining as opposed to Reg T margin requirements; therefore, they can still get the 6x leverage into their accounts (if that is what they want) without even using the leveraged vehicles. What's truly ironic is that we are arguing that individuals don't have the right to use these leveraged products, yet they use leverage everyday. You buy a home with leverage, you buy a car with leverage, if you use credit then you use leverage, but we are pounding the table for people to get out and buy a home, get out and spend your money to get the economy going. Companies are built upon leverage, grow with leverage, and yes, some die due to leverage. So many argue that they are standing up for the little guy, the individual investor, yet my inbox has been litered with people using them, sometimes successfully, sometimes not, but using them, and thankfully for the opportunity to have choices. I have received one, just one, email in my time writing here of someone against them. (I'm sure I'll be flooded with hate mail now, but so be it). Until actual facts are laid out, such that I've done numerous time here, I will continue to defend the idea that they can be used, can be used effectively, and any negative impact is short lived and should be offset by the efficient market theory.
Position: questioning how many of those ETF dollars would have stayed on the sidelines due to the high cost of mutual funds and lack of tax efficiency
The dollar was largely weaker as sentiment reversed on Thursday, but the euro was still unable to move much above 1.40. Yen was also softer and underperformed the buck, so dollar/yen traded back to 93. EM currencies were largely firmer, but have yet to recoup their recent losses fully. Biggest gainers vs. USD on the day were PLN, HUF, GBP, SEK, and NOK, while only losers vs. USD were MXN, KRW, PKR, and JPY. US weekly initial claims fell sharply to 565k, but data distorted by seasonals. Continuing claims surged, however, pointing to a still-weak US labor market. FX markets still struggling to find next trend, so volatility to remain high as we close out the week. We think EM currencies are likely to remain under pressure near-term. Fed balance sheet shrank $12.8 bln to $1.99 trln this latest week, while Fed UST custody holdings jumped $22 bln (biggest rise since mid-May).
Position: None
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