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Marc Chandler
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| Dollar Mixed as Markets Await Tomorrow's FOMC |
6/23/2009 7:19 AM EDT
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The U.S. dollar is mixed with the euro and Swiss franc recouping yesterday's losses. Weaker-than-expected euro-zone PMI services data have had limited impact, but the single currency is now overextended and is likely to again fail to make a clear break above $1.4000.
The pound continues to trade with a weak tone, hurt by yesterday's weak Rightmove HPI and concerns about the political situation with Prime Minister Gordon Brown's party slipping in the polls. The Japanese yen has extended gains against the dollar, but yen gains against the crosses have seen Japanese investors take advantage of the weaker crosses. The Scandinavian currencies are slightly firmer on the day, recouping overnight losses along with the antipodeans.
Position: None.
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Marc Chandler
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| Euro-Swiss: Risk Going to the Cookie Jar Too Much |
6/23/2009 8:22 AM EDT
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The euro is slipping back toward the CHF1.50 level, which has buoyed the euro since the SNB announced its quantitative easing/foreign bond purchases back in March. It held most recently last Thursday, when there were rumors of direct or indirect intervention by the SNB.
In the past we favored buying euros as the lower end of the range was approached, including last week, but we are more cautious now. The magnitude of the bounce and the amount of time the SNB bought suggests that its current tactics may have reached a point of diminishing returns. We are concerned that officials may decide to change their tactics. One practical way would be to allow the CHF1.50 level to be violated, trigger some stops and then spring the trap and intervene. Initial violation of the CHF1.50 level could quickly see CHF1.4950, with risk extending toward CHF1.49.
This is not a fundamental judgment of where euro-swiss should trade. It is not a view of technical conditions. It is a view on SNB tactics, plain and simple.
Position: None.
We have a weak gap up today, and that means we continue to get weak buying after yesterday's drop. The last four or five days of trading, when we saw a gap up, it was followed by early buying. A gap down was followed by early selling. Usually you will get a pop on gap downs, and a drop on gaps up, then the market goes in the direction expected. ... With the weakness yesterday, I am not expecting much buying this morning and will seek to short any pops. ... When and if the the buyers show up is not a predictable situation; we may remain very narrow until we get the feds behind us, although I doubt anyone is expecting any action from the feds that would stir the momentum pot. ... Good report on Boston Scientific (BSX) by CNBC, and it has some momentum. ... I will be interested after a small drop...
Position: NM
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Sham Gad
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| FT Front Page |
6/23/2009 9:16 AM EDT
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The front page of the Financial Times reports this morning heavy insider selling by executives across the board. Insiders at S&P 500 firms unloaded over $2.6 billion in shares, and selling in June has outstripped buying by 22 times. With such an impressive rally, it should come as no surprise that people are cashing out.
FedEx (FDX) gave a dire outlook, which should come as no surprise. If the fear factor kicks in again, we could get a nasty shock. Everyone is forecasting unemployment to hit 10%. But the most important questions -- questions that weren't asked during the mortgage bubble -- are the "what if" questions.
What if unemployment hits 12%? What if credit card charge-offs hit 20% to 25%? Remember that no one seemed to ask, "What if real estate declines by 5%?" and we saw how that turned out.
Position: none
912 = 91.65 S
907.50 = 91.20 M
903 = 90.75 S
899.50 = 90.40 M
894.50 = 89.90 S
891 = 89.55 W
889 = 89.35 M
882.50 = 88.70 S
875/877.50 = 87.95/88.20 S
Position: none
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Bob Byrne
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| Morning Trade |
6/23/2009 9:21 AM EDT
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The bulls need to start the day off by pushing the emini above strong resistance at 894.50. If traders can manage a little strength off the open, they can quickly attract dip-buyers and scare a few late short-sellers. A sustained trade above 894.50 gives the bulls a shot at a weak turnaround Tuesday ... with only moderate resistance at 899.50 stopping them from testing strong resistance at 903. The 903 area is strong resistance, but the real test for the bulls comes in a bit higher at 907.50 (moderate) and 912 (strong resistance). If we were to rally as high as 912, I would expect the bears to pounce.
The bears have the edge, and if they want to keep it, they need to push the emini through weak support at 891 and target moderate support at 889. Major support comes back into the market at 882.50 and the 875/877.50 area. ... I expect the bulls to put up a big fight at both of these areas.
Position: none
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Tom Graff
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| Mortgage Bonds at Risk |
6/23/2009 9:30 AM EDT
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Treasury bonds are slightly lower with stock futures pointing slightly higher. Activity is bound to be very limited with the Fed looming.
If the Fed does make any nod to an exit strategy in its statement, MBS are the most at risk. The Fed has been the overwhelming buyer of 30-year 4% and 4.5% coupon MBS. Real money buyers have eschewed these coupons, believing (correctly, I think) that these MBS will wind up with extremely long average lives when interest rates normalize.
The chart below shows how severe the price action has already been with Fannie Mae (FNCL) 30-year 4% and 4.5% MBS with the recent rate back up. You can imagine what it will look like if the source of demand (Fed) dries up.
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Source: Merrill Lynch |
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Position: None, underweight MBS overall and low coupons especially
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Howard Simons
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| Integrated Oils and Crude Oil Futures |
6/23/2009 9:55 AM EDT
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Jim, Chevron's (CVX) downstream operations are about five times larger than its upstream; downstream is refining, marketing and transportation, while upstream is exploration and production.
Add in the chemicals and natural gas, and you have a company that is short crude oil exposure. It buys crude oil on the open market and therefore is exposed to rising costs. Therefore, its two-year beta to one-year crude oil future strip prices (12 months ahead) of 0.513 should surprise no one, and the r-squared or percentage of variance explained for this relationship of 0.246 is pretty low.
I took a look back in December 2007 at how various factors affected energy stocks. The integrateds such as Exxon Mobil (XOM) and Chevron should not be considered proxies for crude oil prices.
Position: None
Boeing's (BA) fifth delay of its 787 is a significant negative and will probably clip the budding rally in the aerospace sector. As much as I would like to invest in these names, they are overbought with a deteriorating earnings outlook on the aero cycle. The 787 news just adds another headwind.
Position: none
Venezuela has been attempting to diversify heavy crude oil sales away from the U.S. Since the U.S. heavy crude supply from Mexico has fallen over the past year, the differential between heavy and light has been reduced, and the discount for heavy has been reduced.
The big winner is Canada's oil patch, which also produces heavy crude and benefits from having its crude at a smaller discount to light.
There are also complications with Japan, which is reconsidering a $1.5 billion loan to Venezuelan refineries after the government took over Japanese assets and has fallen in arrears on its oil service payments. In May, the government nationalized an industry with large Japanese investors. Last week, Venezuela's congress passed a law that will permit the takeover of primary and intermediate chemical plants, including a methanol plant where Japanese companies have a majority stake. The fallout for Venezuela could be greater if Japan's government import/export, decides to end coverage for the South American country.
Position: None.
Early cycle. Early cycle. No matter how frequently that call has been wrong, you still hear the Street's analysts recommending early-cycle stocks. It has been the wrong playbook for a year, and it's still wrong. You see, this is the mother of all downcycles, a consumer delevering like we have never experienced before. So the normal beneficiaries of a Fed easing don't get the normal fundamental bounce. Sectors such as housing/building supply, autos, retail, airlines, and trucking will languish as the economy delevers and generates a subpar recovery. Those sectors may rally from time to time, but with poor secular fundamentals and fair valuations, it will be hard to keep it. How many times have some market observers called the bottom in housing? In banks? And yet here we are still facing lower home prices, higher mortgage defaults, and rolling-back-over retail sales. I still believe that BRIC-driven commodities represent the new early-cycle plays. And that the non-U.S./-European consumer will do better than the developed economy ones. And even here, it's not all champagne and roses. It's just less bad on a relative basis. So when you hear the oft-repeated call for the "early-cycle" trade, just remember how long this consumer delevering cycle will last. And file that premature call away for another time. When that call is right, Business Week will have a cover titled "Death of the U.S. Consumer."
Position: none
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Tim Melvin
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| IPC on the Tape and on the Block |
6/23/2009 11:02 AM EDT
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IPC Holdings (IPCR) is on the tape this morning saying that although it is still not in favor of the offer from Validus Holding (VR), it is open to other suitors. The reinsurer previously turned down an offer from Max Capital (MXGL) to pursue a deal with Validus.
The Validus offer of 1.2 shares plus $3.75 works out to better than $28 a share. The board at IPC seems determined to get at least book value or somewhere around $32. Validus seem to be ready to go ahead with an attempt to replace the IPC board to get a deal done at the lower price.
A deal is going to happen here, I think. I suspect we will either get a white knight entering the picture or a new offer somewhere near $30. This situation is perfect for either selling the September 25 or 22.5 puts, or considering a buy-write using the $30 calls. It looks as if the options in this one are thin with very wide spreads, so orders need to be placed carefully.
Position: none yet
Howard, dead right on how Chevron (CVX) is currently configured. So much coming on stream though in next year, hoping ratio changes. Bob -- early cycle and Boeing (BA) -- very, very worried about Boeing, as it really did screw up; I am aghast at how bad. ... Early cycle has been a massively bad investment and an occasional good trade.
Position: cvx
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Tom Graff
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| Treasuries Higher, Flatter |
6/23/2009 11:25 AM EDT
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The 10-year is up almost half a point while the 30-year is now better than 1 point higher. The two-to-10-year curve slope is 5 basis points flatter. A bull flattener (in which all rates fall but the 10-30 segment of the curve declines in rate more so than the two-year) tells me the market is expecting the Fed to be on hold for a long time. To that end, JPMorgan Chase's (JPM) economic team is out today saying they expect the Fed to hold its target rate at zero to 25 basis points through 2011. I agree with their economic assesment, though I'm not entirely sure the Fed won't start pulling back on quantitative easing long before then, a de facto tightening. However, if you even believe the Fed will stay at zero for a year or more, the whole Treasury curve is cheap.
Position: None.
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Marc Chandler
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| EPFR Flow Report Summary (June 10-17) |
6/23/2009 11:32 AM EDT
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Large sums ($55 billion) continue to exit the money market funds to be put to work in equities and bond funds.
EPFR global-tracked equity funds took in $508 million. Flows into EM offset liquidation in Japan, U.S. and European equities.
Watch to see if the next report reflects the fall in equities. Most of the BRIC group -- Brazil, Russia, India and China -- have done worse than the major bourses. Equities in Russia, Brazil and India have lost 16.5%, 3.8% and nearly 6% respectively. China was the exception, gaining 4.2%.
Position: None.
As of this hour, the equity put/call ratio is in the 90% area. There are still many hours to go in the trading day, so we might not close there, but we haven't had a reading with a "9" handle since early March -- before the low.
This negative sentiment would be coming just as we're getting oversold (see today's column) and just as we head into the end-of-the-quarter markup period.
Position: Looking for an oversold rally into quarter end.
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Howard Simons
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| Treasury Curve's Mixed Messages and Japanese Parallel |
6/23/2009 12:14 PM EDT
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Tom, I've been getting whiplash trying to keep up with the changing expectations involved in various yield-curve indicators. As recently as two weeks ago, both the forward structure of the Eurodollar curve and the term structure of forward-start "swaption" volatility were indicating expectations for short-term rates rising by year's end.
A better guide may be Japan. For the 2001-to-mid-2006 period, Japan had both the lowest interest rates and the steepest money market yield curve in the world. The market kept expecting Japanese rates to rise, and it did not happen for more than four years.
The downside, of course, is that Japanese rates stayed low because the Japanese economy kept spinning its wheels. Can that experience be repeated here? Unfortunately, yes.
Position: None
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Doug Kass
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| Recommended Reading |
6/23/2009 1:01 PM EDT
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Great observation on the elevated put/call ratio from The Divine Ms. M. below.
Position: None
Huntsman Chemical (HUN) announced on the wire that they have reached a settlement with the consortium of banks that allegedly conspired to block the takeover of the chemical company. The settlement is valued at $1.7 billion and includes $620 million in cash with the balance in financing commitments. Combined with the $1 billion received from Hexcel and Apollo Partners this puts them in a strong position to emerge from the recession as a major chemical company. With the settlement of the litigation, Huntsman now has $1.7 billion in cash.
Insiders at the company like their prospects. The have been heavy buyers of the stock. As a long term holding to the chemical industry I like the stock. It could move lower in a weak market so I would establish positions slowly and carefully.
Position: Long HUN
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Tom Graff
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| RE: Howard and Treasury Curve |
6/23/2009 1:22 PM EDT
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Japan is the easy parallel, but perhaps the U.S. in 2002 to 2005 is the better comparison. In 2002, as now, all of the following held:
- Fed holding rates extremely low.
- Fear of deflation.
- Economy coming out of a recession.
- Investors holding an unusual amount of cash.
All during 2002 and 2003, eurodollar futures were constantly pricing in a hike in two to three months. It kept not happening, but the futures kept pricing it in two to three more months. Investors feared owning long bonds, figuring that when the Fed finally got around to hiking, long bonds would get crushed.
| Merrill Lynch Analytical Plotting System
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Merrill Lynch |
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In reality, since the Fed kept holding rates low beyond anyone's expectation, the way to play it was to own long bonds. Even when the Fed finally started hiking, as the chart below shows, the long bond actually rallied (falling interest rates equals higher prices). Why? Because the feared consequence from the Fed's accommodative policy (inflation) never came to fruition.
Now today's circumstances aren't exactly like 2002 to 2005, but I think it's similar enough that a substantial curve-flattener is a good play. The fear of inflation is much greater today than during that period, and yet I think the real economics suggest inflation is less likely today, not more.
Thus I'm long the long bond.
Position: Long long bonds
Great analysis, Tom. I think another point to consider in addition to inflation is the role of two different volatilities, those of key currencies and of the bonds themselves.
As we are dependent on the kindness of strangers to finance our deficit, anything that threatens their return will raise the liquidity premium, or gap between long- and short-term rates. At present, bond volatility is high while currency volatility has fallen considerably from last year.
I expect currency volatility to rise once central banks start to hint at removing liquidity. The odds of them coordinating their moves perfectly are low. If correct, this will lead to higher long-term yields once the central banks tighten, a move opposite the one you noted back in 2004-2005.
This is not an immediate risk, though.
Position: None
Great great piece to the left by Don Dion about Apple and ETFs . i continue to believe that apple should be bought here as there is too much good in the pipe.......he's got some great ways to play it....
Position: none
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Doug Kass
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| Memo for Rev Shark |
6/23/2009 2:42 PM EDT
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To clarify my position to which you referred in your thoughtful post, I did not intend to suggest that fundamentally based investing is superior to a technically based strategy.
Rather, I presented the view that technical analysis might be more useful in a trending market than in the current choppy setting.
Position: None
Dougie, I am sticking with Meredith on the long term bank fundamentals, despite the recent improvement in bank stocks and the stress tests results. And, I am leaving out the size of the spreadsheets. One more thing. If there is a double-dip in the economy, for which I am already in print, the banks have access to much less government backstopping. Thank the handful of banks that returned the TARP money for this. Can you imagine the banking industry going back to taxpayers for more bailout money? That said, I am pretty flat the group.
Position: none
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Tim Melvin
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| Nice Report From Kroger |
6/23/2009 3:02 PM EDT
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Kroger (KR) had a nice earnings report this morning. Profits at the grocery chain jumped better than 12%. Sales fell slightly in the quarter from $23.2 billion a year ago to $22.8 billion this year.
Same-store sales were up 3.1% in the quarter. The same-store growth is impressive given the fall in gas prices and commodities such as milk from last year's levels.
Management cited two trends for the strong quarter. First, cost-conscious consumers are buying more of the lower-priced but higher-margin store brands. Sales of store brands are growing at double-digit rates and are now 35% of total revenues.
The other trend is one I have talked about often: people are eating at home and avoiding restaurants. More and more, I think going long a few grocery stores and shorting the casual dining segment has the makings of a great paired trade.
Position: none
I agree with Tim on Huntsman (HUN). This settlement will reduce interest costs going forward and I expect margins will improve.
Position: Long HUN
Huntsman (HUN) was a classic busted-deal stock. I love these situations. Often when a merger fails, you will see extreme selling come into the stock by arbs and investors who are just plain old disgusted with the target company. The price can be forced well below its value.
I have a friend who buys cheap out of the money puts on every announced merger. He tells me that the one out of 10 deals that falls apart more than covers the losses on the nine that go though as announced.
Bronco Drilling (BRNC) is another busted-deal stock. The company is struggling right now with the weak drilling market in North America but not so long ago there was a buyer offering more than triple the current quote.
Position: na
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Howard Simons
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| The Trend Is Your (Non-Facebook) Friend |
6/23/2009 3:38 PM EDT
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Rev/Doug: I don't think technical analysis is more suited to a trending market for the very simple reason that anything works in a trend. The trick is being able to differentiate between a trending and a non-trending market.
In the short term, fundamentals are pretty much useless. They are a Rorschach test based on old information and tell you nothing about investors' risk preferences or what levels they consider to be attractive and unattractive. In the long term, fundamentals are more useful.
I go the other way with technicals in the long term. As corporations change over time, their past history becomes less and less useful. As I am fond of saying, wheat is still wheat, but IBM (IBM) today is a very different company from what it was 50 years ago.
Bottom line? Use whatever combination you feel comfortable with using. There is no magic bullet or software program or indicator. And if there were, it would be rendered useless once it was adopted widely.
Position: Buy low, sell high. Repeat if necessary
I thought Huntsman (HUN) would clean up on that case, Tim... As far as technical analysis, what a shot across the bow!
Don't miss tonight's Off the Charts section -- potpourri of our people!
Position: none
Oracle (ORCL) looks real good on the surface. Always what you want to hear at conference call, but remember tech has been in a state of gloom ever since Research In Motion (RIMM), and tech is only as good or bad as its last major data point -- which will be Oracle tomorrow.
Position: none
Now we know why Darden (DRI) was weak -- big guidedown. Very disappointing...
Position: none
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Jim Cramer
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| Obama and Health Care |
6/23/2009 6:39 PM EDT
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If that is about as negative as Obama can get and the stocks didnt get hit on it, dont you think we have caught the bottom in all health care except maybe Humana (Big medicare advantage player) and United Health--totally hated company...
Position: none
US Bancorp, one of my fave names,profiled well on our flaghsip site today.......
Position: none
I will lay it out on the line...why? Because I am tired of the same fight week after week. I have made argument after argument, and yet when I speak on leveraged ETFs my arguments have not been countered. Period. I hear all this muck about gaming and manipulated the close (on down days only, I might add), yet none, I repeat, NONE of the arguments I have made have been countered. These instruments trade is so little volume compared to the market, that they cannot be used effectively to manipulate. The ProShares UltraShort Financial (SKF) is always mentioned, but never the Direxion Daily Financial Bear (FAS). Ironically, these funds hold significantly more...I mean SIGNIFICANTLY more assets in the long funds, than in the short funds.
Furthermore, some may argue, well people are just shorting the ultra longs rather than buying the ultra shorts, and that has some merit. However, to hold these any amount of time is expensive. How expensive? Check the borrowing rates. In most cases, it costs two times as much to short the ultra long than the ultra shorts.
And continually pounding on these by buying them long is inefficient. Survivorship bias makes each long dollar in an ultrashort position worth less with each purchase. Why bang on the SKF when you are really just banging JP Morgan (JPM) for the most part, if you are after a different financial.
Volume? The SKF traded as much today as yesterday. So yesterday, it manipulated, but today, it traded almost the EXACT same volume yet somehow...the financials went up.
ETFs, maybe they are not. But they are instruments, and serve a purpose. Education takes time. How many of the writers here have bankrupted an account trading stocks? I bet almost everyone, yet stocks can still be traded. When are you going to get it? It is not the instrument, it is the trader/investor. You can manipulate ANYTHING if you want to. Why should we keep options or futures? What percent of options expire worthless every month? I've heard the numbers reach in the 80 percent area, yet we still keep those. No, no wealth destruction there.
So, this is the SEC's fault. Furthermore, it is interesting to note that most of the SEC wants nothing to do with removing the short sale rule, yet political pressure will have them do it. Fidelity and Invesco both stood in front of the panel and argued for no change, so apparently they support all the leveraged ETFs and short funds they have...if only they have funds.
Enough of the pomp and circumstance. Facts. We need them. I have posted a dozen articles with numbers, facts, and history. It has only been met with conjecture and "unknown" info. Are we really saying that the average reader here is so uninformed that they cannot trade these vehicles, or use them properly. It is time for the readers to stand up on both sides. What say you? Yay or nay for these products, and why?
There is so much more going on in this economy of ours. Society wants to pass blame instead of realizing its own mistakes. It is so easy to blame one product, one concept, and skip over others. The problem is not the leveraged ETFs. I wish it were. If I could tell my best friend he lost his mortgage business because of leveraged ETFs, if only I could tell my client that he has to spend less because it was the fault of leveraged ETFs, and if only I could tell my dad that he didn't have to go back to work over age 70 (because he is too stubborn to take money from his kids) that this happened to him, because of leveraged ETFs, it would all be so simple. But it is not. We have real problems in this economy...in this world...yet we toil away each week blaming it on leveraged ETFs. If only it were so easy. It is time for us to wake up and talk about the real problems and real solutions.
Wake up! Speak up!
Position: short SKF, FAS
long on thoughts, but short on time
Instead of looking always at the negative, here are some possible applications on the leveraged ETFs that we use in our Fund.
First, we examine the dollar volume cash flow in each index into each fund, and measure the differences, then plot this on a logarithmic scale day by day, as a replacement/enhancement to the VIX to get a volatility/fear measure, and look for changes in market sentiment or possible turns in the indices.
Second, we measure the borrowing rates for the leveraged ETFs to locate sharp mark ups, which may indicate an additional change in sentiment. Something that is harder to borrow, commands a higher short interest rate, which in turn, has been an early indicator to our Fund in market sentiment shift (if only by a day or two).
If you know they are inefficient over the longer run due to compounding, develop put strategies or put spread strategies and marry them with the underlying index to create a hedge position with a compounding advantage over a longer time period.
Develop strategies, such that we use (that we termed and trademarked "InterETF" spreads) that focus on pricing discrepancies within the underlying and options to gain a possible advantage in a hedged trade format.
(p>
Read. Oh, its so hard sometimes, but read what the product is about, just like you should read a companies annual report and understand just why you are investing in Apple (AAPL) other than because you own and iPod and iPhone and someone told you to buy. Read what the sponsors of the leveraged ETFs advise on usage. I know it is tough to take the torch in your own hands, but I don't think we are giving individuals enough credit for their intellect.
Short term...very short term hedges, for those that can watch and move in the market in fast time periods. (NOT advocating a long term hold).
Go long by going short. Build a long position by shorting leveraged short ETFs (if you can find the inventory). Consider protecting your account with far out of the money calls, or calls on the inverse ETF (-1x) in a proportional format. Or short the ultrashort while shorting the single long ETF, in a proportion of comfort.
Talk to a professional that uses these to get a better understanding of how and why they use them, and if they are at all appropriate for you.
Instead of constant complaining, why don't we consider some uses. We focus on the negative, and avoid an edge. Aren't we always looking for that edge? Who believes in buy and hold anymore? Raise your hand. Ok, you there...the only person with your hand up. Put it down. You look silly sitting at the computer with your hand up.
The dark side awaits. Ironically, the universe was saved because there was good in the dark side. Do not be blinded by obsession, hate, or power as it leads nowhere.
Position: Long with my eyes open, short on power
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