MorningWord: 2/27/12

by Dan February 27, 2012 9:20 am • Commentary

MorningWord: 2/27/12:  World equity markets took a bit of a pause overnight as most of Asia was down modestly (Shanghai comp was the outlier up 30bps) and Europe is down across the board, with the DAX the weakest down ~1.2%.   Europe back in focus as German Parliament votes today on Greek Bailout contribution and over the weekend the G-20 suggested to Euro leaders they were not at the moment willing to increase funding to the IMF’s bailout fund.  I guess this is just more of the same rhetoric that we have become accustomed to as it relates to the financial crisis across the Atlantic, but the timing of any uncertainty heading into Greece’s expected debt payments next month could cause some volatility as U.S. and European equity markets teeter near 10 to 12 month highs, all but discounting positive outcomes in the near term.

$100 oil has been getting a lot of attention over the last couple weeks, specifically what it means for global growth at a time that Europe seems poised to enter a recessionary environment on the heals of austerity, and there is a raging debate over what China’s growth slowing from 8.9% in Q4 to possibly 8.3% in Q1 2012 at a time when the U.S. might be very challenged to see 3% gdp growth for sometime.  

New Home Sales will be reported today at 10am, at some point I think it will be safe to say that the XHB (S&P Home-builders etf) will have discounted the bottom in housing, up almost 61% from the intra-day Oct 4th, 2011 low.  On a longer term basis when you back the chart out to the 2008 highs u see that $20 is a fairly significant resistance level and the near term enthusiasm could be setting up for a bit of a disappointment.

[caption id="attachment_9078" align="aligncenter" width="300" caption="4 YR XHB chart from Bloomberg LP"][/caption]


On a shorter term basis, I find it interesting that as the SPX continues to make new 7 month highs, the XHB topped out a couple weeks ago and has made a series of lower highs and lower lows…..This is worth keeping an eye on, sectors that showed relative strength early in the rally that now appear to be a bit tired.

[caption id="attachment_9079" align="aligncenter" width="300" caption="2 Month XHB vs SPX from Bloomberg lp"][/caption]


Obviously I remain cautious up here, and will continue to look for cheap vol to consider stock replacement strategies or protective structures.  Out futures are only down 50 bps as I write and this will be a big test today to see if we do our usual rally after the European close, banks, large cap tech and material/commodity related names will be the tell today…….

MorningWord: 2/24/12:  This market just won’t stay down, kind of reminds me of the end of ROCKY I where Apollo Creed is just battering a bloodied and defiant Italian Stallion and he just won’t stay down, even against Apollo’s urging and disbelief.   The SPX started out yesterday’s session in the red on the heals of weakness in Europe, appearing that it would test the 1350 level only to reverse course and close near the highs of the day and just a few points from last week’s intra-day 7 month high.

There are definitively a handful of odd things going on as it relates to the macro picture, crude oil continues on it’s run away breakout making 10 month highs, as the VIX closed at a new 7 month low.  Something has to give here, with the SPX around 1360, Oil at $108 and VIX sub 17 , this will likely cause some interesting action in the near future, but the gazillion dollar question is what does that mean for equities?  If crude marches higher, equities are likely to pullback and the VIX will likely go higher…..yes I used a lot of “liklies”.  But I think this is an interesting relationship to keep and eye on.

1 YR SPX vs VIX vs Crude Oil from Bloomberg lp

On the trading front:  I use the expression ” I am Fading” this move or that event to signify selling the strength, and taking the other side of the herd….in this market this is clearly not working…..I get it and while I will always continue to try to tweak my trading approach, I am not entirely sure that at this stage of the rally it would be appropriate to pull the plug on that strategy.  What I can do in the meantime, and as I have been doing over the last few weeks is to adjust my sizing of positions and trade a bit less often in a attempt to shy away from the lower conviction ideas.

I think about it a little like this, while I am on a good trading run and have a healthy risk budget (risk budget = period to date profits) I will size my trades at 1-3% of my speculative portion of my trading book (the portion dedicated to options trading which i have routinely stated should not be a ton more than 10-15% of your entire book) than while in a bad trading period I will size my trades at about 1%.   This in my opinion is the only way to stay in the game.



MorningWord: 2/23/12: World equity markets are calm, showing little signs of panic as they appear to back and fill a bit near 7 month highs……..except for a few like Gold approaching 4 month highs, oil making almost 10 month highs, and yield on the 10 yr stuck at 2%.   Investors seem calm, cool and collected as it relates to risk assets and thats fine and good, but they also did last year at this time before the SPX took an almost 6.5% peak to trough nosedive in March brought on by some unforeseen, non market related events….I bring this up because this is kind of how this stuff happens, especially at times when complacency is high and conviction level is low.  

[caption id="attachment_9009" align="aligncenter" width="300" caption="1 YR SPX chart from Bloomberg LP"][/caption]


Barring any unexpected positive news, and with breadth as weak as it is, the SPX will see 1300 in the very near future in my opinion.  Chart below highlights new highs in Bloomberg’s composite new high index heading South, and quick…….

[caption id="attachment_9010" align="aligncenter" width="300" caption="Bloomberg New High Index vs SPX from Bloomberg LP"][/caption]


So I remain cautious and will look to short today’s first rally and possibly look to SPY or SDS Puts Spreads, and I think Portfolio hedges for reluctant longs could be in order.  The SPX may have another 10 points it but I think more likely that the next 50 point move will be lower.

I remain short some large cap tech names, and DELL could have been the start of the old tech move re-trace, Long AAPL mar Put Fly, Long XLK March Puts and long March VIX 25/30/35 Call Fly, want to add other exposure, but this should be relatively sufficient in the near term for short exposure.

MorningWord: 2/22/12: This morning’s news flow seems dominated by weak PMI readings across Europe and in China.  Purchasing Manager Indicies, while usually really exciting, are extra special this morning as the readings were actually weaker than expected and showing contraction :(.

The DAX is down 70 bps, marking a 2 day decline equaling ~1.5% from 7 month highs made yesterday morning.  The German index has now more than recovered all of last years losses up ~16% ytd and is apparently basing as it attempts to take out the break-down level from early August at 7000.   This is a HUGE resistance level and one that most technicians are obviously keeping a close eye on, especially as the SPX has already taken out last summer’s break-down levels and flirt with the 52 week highs.   If the DAX breaks through 7000, that will mark a more than 40% rally off of the 2011 lows, and will be a clear signal from investors that the Euro-zone credit crisis is over…….Obviously my view is that it is not that simple……while charts are great inputs, they don’t always tell the whole story.

1 YR DAX chart from Bloomberg LP


Bloomberg had a good story last night (read here) quickly describing what VIX futures are suggesting out to April relative to spot VIX at 18.19.  Basically the crux of it is that the futures expect higher levels of volatility, but this is by no means uncommon when the reading is this far below the 22 year average of ~20.50.

I guess my point is that there are plenty of cross currents out there at the moment that Spot VIX may not be relaying and better indicator for fear readings would be looking out at the futures, and for every weak PMI reading from Europe there are 3 better than expected pieces of economic data from the U.S, for every blowout earnings report from the likes of AAPL, there are some unexpected disappointment from GOOG, WMT and DELL.

The closely watched “data” that usually comes in 3 letter acronyms, could be showing that the economies of Europe and North America on the surface appear to be decoupling a bit, but I am not a believer that this can happen, especially with oil over $105 a barrell and the potential for a greater than expected slowdown in China, oh and lets not exclude the whole host of geo-political risks that remain from last years (and apparently this years) continuation of the Arab Spring and the ever increasing nuclear threat from Iran.   These issues appear to be coming to a bit of a head, and with equity indices clearly in “discounting bad news mode” and short term volatility readings that scream complacency, it could be a decent time to consider stock replacement strategies ( I have written about 2 since Friday (one forGS and one for DELL) as single stock volatility is relatively low and the cost to retain long exposure is relatively cheap when weighed against an investors ability to define their risk.

One of the main goals for RiskReversal is not to be right all the time on direction of individual securities (although we would like to be we know how tough it is even to get a 60% hit rate), but it is to offer alternatives to just owning or shorting securities… was the case yesterday in DELL, my simple view was that if you are long heading into earnings and have enjoyed a good portion of the 25% ytd gains it could make sense to sell your stock and replace with call spreads that offer long exposure out a few months, but with defined risk.   With the stock down 6% in the pre-market, you tell me whether I was right or wrong on direction after detailing selling one’s long to buy a call spread, I don’t see it as either, I just see it as an opportunity to detail my process and discuss my inputs that led me to be cautious, and then offer an alternative way to manage risk.  This is what we hope readers take away from their experience with us.


MorningWord: 2/21/12: “Greece Secures 2nd Bailout and Global Markets Cheer”, ok well maybe that headline was a little pre-mature, as the DAX sits 1% off of the mornings highs and down about 65bps and as the Euro has given back early gains that saw it threatening the 1.33 level vs the US dollar.

The latest aid deal agreed upon overnight by European central bankers, which still needs to be ratified by member nations, again places the burden of compliance on Greek leaders to deliver on expected austerity measures and a whole host of economic reforms.  Last week’s display of social unrest in the streets of Athens make many in the West very skeptical of the ability of Greece’s policy makers to hold things together and ultimately avoid default.  This is a Greek tragedy coming to a theater near you in mind to late March, and the markets can smell it, and that’s the obvious reason for the sell on the news.

The FT has a nice running commentary on all things “Greek” and “Bailout”, well not olives and gyros, but austerity and rock throwing, here.

As for our markets, the SPX has been trading in a fairly constructive pattern for the better part of February.  Since breaking above 1330 early in the month the index formed a very nice base btwn 1340 and and 1355 only to ever so slightly break-out above 1360 late last week marking new 7 month highs.  As mentioned last week, the rally appears to a bit narrow, as new highs and volume don’t seem to be confirming what otherwise appears to be bullish action in equities.

15 day SPX chart from Bloomberg LP


– 1340 serves as a huge support level near term, as 1350 will serve as a level that should get your antenna’s up, but won’t be a 4 alarm fire if breached on light trading……so I guess my point is we will have to see a real test of 1340 on volume to be able to make a convicted short call in the near-term.  This doesn’t by an means suggest that we are off the races, but there is a very strong chance in the next week or so the SPX makes a new 52 week highs.  It is times like this where I think it makes a lot of sense to have a list of names that you want to press on the short side as a sell off unfolds from the new highs, and a list of names that you want to buy where fundamentals are sound and you think could get unfairly punished on a broad market sell off.  Just as markets overshoot on the upside, as they may be doing at the moment, they have the distinct possibility of doing so on the downside, as we witnessed last summer and fall.  I am not looking for a panicked sell off when it comes, but possibly something a bit more orderly that chops off about 50% of the years 8.25% gains in the SPX.  I suspect we get a 50% re-tracement from what-ever near term highs we put in, at some point by the end of Q1, but it is becoming increasingly hard to be set up for this if you have been short for weeks, as I have, so the name of the game is to be nimble and keep some powder dry.

Also one of the reasons why you will increasingly see me introduce some “stock replacement” strategies like I did Friday on Options Action (here).  I think in sectors like the banks the easy money has been made this year and it could make sense to take some profits and replace longs stock with call exposure where you can define your risk.


MorningWord: 2/17/12:  I am in Southern California this morning, and frankly very happy to be away from what I perceived to be a fairly goofy week for US equity markets.  Wednesday’s reversal in AAPL and thus the market had the feeling of a short term top, but it was not to be……Yesterday marked a new closing high for the SPX since July and seemingly appears to be breaking out…..I will go back to the Bloomberg new high composite index and suggest that yesterday’s reading of 324 is fairly weak with the SPX at 1358, but last May’s highs are clearly in striking distance and it appears we will break them with or without broad market participation.

Bloomberg Compositie New High Index vs SPX from Bloomberg LP


I know, I know I sound like a broken record, but here is the thing, I can only tell you guys what the inputs are that I am using to make my investing/trading decisions.  And in this case I have clearly been wrong, so from an investment standpoint I sit in a lot of cash, and from a trading standpoint I lean short both unprofitable positions to be in at the moment.


ALso this morning, Bloomberg columnist Jonathan Weil suggests, “Apple’s Stock May Not Be As Cheap As it Looks”.

Throughout the extraordinary surge in Apple Inc. (AAPL)’s share price, a persistent question has lingered: Why is the stock still so cheap? One overlooked answer may be that Apple’s accounting isn’t as conservative as it used to be.

After topping $500 a share this week, the iPhone and iPad maker now has a $468 billion market capitalization. Yet Apple trades for only 14.3 times its earnings for the previous four quarters — about the same as the Standard & Poor’s 500 Index’s price-earnings ratio — in spite of growth that’s far above average. Revenue last quarter rose 73 percent to $46.3 billion, while earnings more than doubled to $13.1 billion.

Many theories have been floated for why such a rapidly expanding company with such loyal customers would trade for so little. Perhaps investors believe Apple will cling to its $97.6 billion hoard of cash and marketable securities, rather than pay a fat dividend. Others have suggested a lack of confidence about the future. It’s a consumer-electronics company, after all, and competition is brutal.

While each of those points has merit, here’s an explanation that hasn’t gotten enough attention: Thanks to an accounting- rule change for which it lobbied, Apple gets to book revenue from sales of bundled products such as iPhones — which include hardware, software, services and upgrade rights — more quickly than it used to. In short, one reason Apple’s earnings have been so high is accounting inflation, and the market realizes this.

Restated Numbers

The easiest way to see the rule change’s impact is to look back at the two sets of numbers Apple reported for fiscal 2009. Originally, the company said it had $5.7 billion of net income for the year on $36.5 billion of revenue. Then in January 2010 Apple retroactively adopted the new accounting principles and restated its previous numbers. The restatement boosted Apple’s fiscal 2009 net income 44 percent to $8.2 billion. Revenue was revised to $42.9 billion, 17 percent higher than originally reported.

Nothing changed economically, of course. Only the accounting did. On the surface, though, Apple’s valuation looked cheaper under the new reporting regime than under the old one.

On Dec. 31, 2009, for instance, Apple had a market capitalization of about $191 billion. Using the fiscal 2009 earnings that Apple initially reported, its price-earnings ratio that day was about 33. Using its restated numbers, the ratio would have been about 23. My guess is a similar effect is occurring today: Had it not been for the rule change, Apple’s P/E ratio would be higher, because the “E” would be lower.

“It would appear that the market continues to consider a significant component of Apple’s revenues and gross profit to be presently unearned and not deserving of a normal market multiple,” said Charles Mulford, an accounting professor and director of the Financial Reporting and Analysis Lab at Georgia Institute of Technology in Atlanta.

Apple was one of a handful of companies that lobbied the Financial Accounting Standards Board for the new rules in 2009. The impact for Apple seems to have been greater than for most others, probably because of the nature of its products. Dell Inc. (DELL) said the rule switch had no material impact on its results. Microsoft Corp. (MSFT) and Oracle Corp. (ORCL) said the same. Hewlett-Packard Co. (HPQ)’s earnings got a slight boost.

The FASB rule change had two main parts. One related to so- called multiple-deliverable arrangements, while another covered software sales. When Apple sells an iPhone, for example, the hardware and software are delivered at the time of sale. Other deliverables include the rights to future software upgrades and other features.

Economic Life

The old accounting rules required Apple to defer large chunks of its revenue and recognize the amounts gradually over each product’s economic life. While the details are complicated, the gist under the new rules is that Apple is allowed to record more revenue upfront.

What’s unknowable is how much different Apple’s latest results would have looked had the FASB not amended its standards. There’s no way to tell from the company’s disclosures. Plus, Apple adopted the new accounting principles right before it introduced the iPad. An Apple spokeswoman, Kristin Huguet, didn’t return phone calls seeking comment.

Let me be clear: I’m not opining on whether Apple is overvalued or undervalued, and I’m certainly not making any predictions about its stock price. The point here is that it makes sense for Apple’s earnings multiple to have declined significantly once you consider how the company’s accounting has changed.

The bottom line: Not all iEarnings are created equal.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)



MorningWord: 2/16/12: Over the past week my trading strategy had become fairly myopic, fairly undisciplined and overly concentrated in an almost unhealthy way.  I had become almost obsessed with shorting AAPL, and desperately looking for ways to play for a near term spike in vol and an outright short for the broad market.  Well things sort of crescendo’d yesterday right about at noon……I swear I was this close to pulling the plug on my Feb AAPL puts (even said so in 2 different posts, should have been a great contra indicator) that were becoming increasingly less likely to be in the money with 2 1/2 days to expiration, but I did a fairly undisciplined thing with the stock up 3%!, I bought more… this is generally not a sound strategy, especially given the way that I had been trading in the name since last Tuesday, But I was less in survival mode and more in “F this” mode, I did not write about this yesterday as this is not the sort of behavior that I would want any reader to try to replicate, and to be frank I got pretty lucky, it could have very easily gone the other way…….

IN  a more disciplined manner though, and as posted on the site, I continued to look for other ways to get short exposure to AAPL without adding to my concentrated single stock bet and bought Puts in the XLK, an etf where AAPL had recently come to make up almost 18% of its weighting……Basically I went all in.  But, and there is a big BUT, not a single time over the last week or so, was I naked short AAPL common stock, even while being undisciplined as it relates to cutting my losses or adding risk at the exact wrong times, I was always able to define my risk, and that is the key……To be very honest, the stock could have gone to $550 for absolutely no good reason, and it probably will after a little bit of a pullback, but I was only exposed to the premium that I owned, and that helped me get my losses back of the previous week when the turn eventually came.  I am still long the March Put FLY and now actually really love the strikes and will look to close remaining Feb puts today or tomorrow morning.

As for the Vol spike, the VIX continues to act like we will be in a fairly different volatility environment for the next few weeks, now that the bulk of S&P earnings are behind us and the markets have to digest a host of geo-political risks, rising oil and the potential for a Greek default. As far as the VIX Mar Call Fly I bought last week, I am increasingly liking the structure but most specifically liking the risk reward as I only paid .27 for a $5 wide fly that is now in striking distance of being fairly profitable.

As for today, I would like to see AAPL make an attempt to get through $500 and then fail and I think you could see a stock settle in over the next few trading days btwn 490 and 480….this would be healthy and a signal that the fever has in fact broken…….

Also yesterday I mentioned I was keeping a close eye on the banks and this will be important again today…..BAC is now off about 6.5% from last weeks highs and I am hearing that the company’s buyback of their own shares for employee comp ends tomorrow and that once employees receive their shares next week and the company no longer supporting the stock you could see the stock pull back a bit, possibly back to about 7.20 which was support and where it broke out from earlier in the month.   Moody’s put some banks on watch today and this should obviously not help sentiment in the space.


Bit of a bonus….saw Guns N Roses last night at Webster Hall, Axl looks a bit roughed up these days, but he still has his voice, all in I give him a ton of credit for playing small venues without his original band mates……giving the people a least a bit of what they want…..

MorningWord: 2/15/12:  China to the rescue……after hemming and hawing about their participation in Euro-zone bailout, overnight Premier Wen Jiabao and  People’s Bank of China Governor Zhou Xiaochuan suggested that they will be “more involved in resolving the debt crisis”.   The DAX is up about 75 bps on the news, but about 75bps off of the morning highs….

AAPL continues to drive the train here, and during CEO Tim Cook’s talk at Goldman’s Tech Conf yesterday, the stock rallied about 1% in the last hour of the day to close at a new all time high, dragging the SPX up with it.  Obviously this is getting a bit over done near term, and it is not even borderline frenzy activity, it is all out mania….I am gonna throw in my hat on all Feb Puts that I own, But will keep on March Put Fly.   The price action causes me to ask myself once an hour, “Who the Hell is buying this stock at these levels?”, which reminds me of a classic line in one of my favorite movies, Butch Cassidy and the Sundance Kid, when Butch routinely asks Sundance, “who are those guys?”   The Buying is relentless and while I feel it is unsustainable there doesn’t appear to be any end in site!

I haven’t said this in a while, but I think with today’s opening above previous highs it will be interesting to see if the banks can hold any early gains….while AAPL is still on fire, it seems that the fever might have broken in the banking stocks as most have appeared to top out last week on declining volume…..yesterday’s downgrade of BAC at Citi was an interesting call and one that you don’t see often from fundamental analysts when they are trying to be pro-active.

Here were a few highlights from Citi’s downgrade call on BAC from yesterday:

We are downgrading BAC reflecting our view that at current levels the risk/reward trade off for BAC is relatively balanced in the near term. Longer term, we believe BAC still offers attractive value as the company addresses its legacy issues, which should drive down the perceived risk in the stock (reflected via its 3 year beta of 1.6, which is the highest in our universe) and its cost of equity. However, we believe legacy issues will take a while to play out, and our Neutral rating reflects a 1 year outlook. Raising target price to $8.50 (from $8) to reflect slightly lower cost of equity assumption on beta (now using 1.5).

Investor focus will shift to earnings… BAC’s recent outperformance reflects the market’s increased comfort with its capital position, but at these levels we believe investor focus will shift to earnings, which have been weak. Core PTPP was at $10.2 bil in 1Q11, but has fallen to $3.7 bil in 4Q11. Note that our 2012 EPS estimate already embeds a healthy rebound in core PTPP to $6 bil/qtr, which assumes better
capital markets, realization of cost savings and modestly lower legacy servicing cost…yet our estimates still remain well below consensus.

…And we believe consensus EPS estimates are too high. Our 2012 EPS estimate remains $0.50 vs consensus of $0.71, and our 2013 EPS estimate of $0.70 is also well below consensus of $1.09. Note that our $1.00 EPS est. for 2014 assumes core PTPP of $8 bil/qtr with the benefit of lower legacy asset servicing expenses, slightly improved capital markets and execution on internal cost initiatives. It also
assumes another $650 mil ($0.15 impact to annual EPS run rate/share) reduction in the credit costs. Our EPS ests reflect the forward curve, and thus we are not looking for higher short term rates which would be a positive for BAC.

We struggle to find value in the group. The recent move in the group has been driven by multiple expansion as the market has gotten more comfortable with US economic outlook and is less concerned about Europe, but we think at these levels one needs to see positive EPS revisions to get the stocks to work. Given a prolonged low rate environment, we see more downside than upside to forward EPS estimates. Our only remaining Buys are JPM and GS.

ALso yesterday’s new high reading was unimpressive at 253, which not surprising on a down day but still weak when you consider the SPX is still at ~1350.


Bloomberg New High index vs SPX from Bloomberg LP


MorningWord: 2/14/12:  Late yesterday we posted a chart showing Bloomberg’s Composite New High Index as of Friday’s close vs the SPX which was clearly showing narrowing breadth of the market.  As of yesterday’s 4pm close this reading improved a bit from Friday’s dismally low reading of 183, but as we appear to be trading in a narrower and narrower range, readings that are less than 50% of those a week ago are just not gonna cut it.

Bloomberg New High Composite vs SPX as of Feb 13th close From Bloomberg


It appears that a lot of traders (including myself) are waiting desperately for a pullback, while the dumb money, I mean mutual funds just keep buying the same few names at all time highs…..I don’t get this one bit.

How Do You Like Them APPLES?

OK, now for our daily installment of our AAPL rant………The 18% rally since the company reported it’s Fq1 on Jan 24th, is obviously jaw dropping when measured in market cap, which has gained about $100 billion since the start of the year.  The chart below tells 2 stories, the first 8% or so following earnings shows the gap on better than expected results (very fair considering the magnitude of the beat) and then a very healthy consolidation at all time highs….the second period, the 10% rally since Feb 2nd ( a period the SPX was up less than 2.5%) shows something entirely different……..Some of you out there think that the “markets” are a “rigged game” for those in the know.  I believe this chart (below) could be exhibit A for the above rigged game theory, especially if on Feb 23rd at AAPL’s annual shareholder meeting the company does in fact announce a dividend.

15 day AAPL Chart from Bloomberg LP


I think it is very interesting that since the fall of 2009 we have seen numerous perp walks of hedge fund baddies busted for insider trading ranging from hundreds of thousands to no more than tens of millions of dollars in ill gotten winnings, but if the mutual fund community did get the “wink wink, nod nod” that AAPL was going to introduce a dividend (either a regular or special) then this could be the largest instance of insider trading by seemingly respectable institutions ever known.

I know, I know, I sound a bit bitter as I have been losing money trying to short the stock since last Tuesday, but losing money shorting stocks, happens, and trust me it wasn’t the first time and certainly won’t be the last, but this situation stinks, and if the mutual funds got the early call, and drilled the shorts by design, then I hope the feds will use the same fervor to investigate this price action as they have with the “villains of the hedge fund industry.”

One last point, yes I have been wrong in the name for the last week, but as my posts show, in all instances I have defined my risk and cut losses at different instances, this is the only way to trade a situation like this.  Very soon we will get a dramatic intra-day reversal, and the fever will break, but until then, I don’t think it makes sense to be naked short the stock, if it continues to consolidate in this $500 range it could easily make another move higher on the least bit of good news, although this will become increasingly more difficult as the market cap grows ever bigger and bigger, who the hell else will be left to buy the stock??


MorningWord: 2/13/12:  Tomorrow is Valentine’s day and in a household of 4 with me being the only male, I decided to pile it on and have a cavity refilled on the same day that I will have to shower my family with hallmark crap flowers and sweets just to get to max pain.  But lets talk about today, “AAPL Day”, this will be the day that the stock finally tops $500, and many of you will remember this day for a long time….I remember when CSCO topped MSFT to be the largest market cap company in the world in March 2000, and the question then was, “will CSCO be the first company to top $1 trillion in market cap?”   By no means is the stock trading above that round number, but with calls this weekend for DOW 15K, many will wonder how much higher this thing can go…………

Well oddly today on “AAPL Day” the thing on most investors minds is will the company announce a dividend at their Feb 23rd annual meeting?   My own quick thought here is that I would be fairly surprised if Tim Cook in his first full quarter as CEO made such a decision, which was something that AAPL founder Steve Jobs had not been in favor of for years since his return to the company in 1997….. This may sound silly but in some ways any big “about faces”  to Jobs’ way of doing things so soon after his death could have some odd optics.  Unless this was something that Jobs had been coming around too prior to his death in October.

Of AAPL’s almost $100 million in cash, the company on their last earnings call suggested that $64 billion of it is abroad.  AAPL is one of many US multi-nationals pushing for a tax holiday to re-patriot their overseas cash, but this doesn’t seem like strong possibility under the current administration, unless of course they were committed to re-investing it back on our soil, and I am not sure, paying a huge dividend to the Jobs estate and current officers (obviously shareholders too) fits the bill.  I guess more importantly is what does the company paying a large quarterly, or even a one time special dividend signal to shareholders, that their most innovative days are behind them, that the shareholders can find better use for the cash than the company can?

There is obviously a lot of good news in the stock at current levels and expectations have built up for an event that usually is a “non-event”.  So this short may take a little bit, but I am going to keep at it an define my risk!




MorningWord: 2/10/12:  The SPX continued its recent trading pattern yesterday of putting the daily lows in morning, prior to the European close, and then letting AAPL drag it up the rest of the day as that stock seems to slap on an additional $10billion in market cap a day!

For a stock like AAPL, with the largest market cap in the world to be up 3.5% yesterday making its 5 consecutive all time closing high on massive volume has to tell you something.  [private]Now as many of you know I haven’t exactly traded this well this week, but I think we are very near a point at which this could be a great near term short…..yes I did say the same thing this Tuesday, Wednesday and Thursday, but I really mean it today!  As I write at 8:40am, AAPL is trading up in the pre-market with the S&P futures with their worst pre-market action of the year (down 90bps) while the DAX is down about 1.8%.   AAPL wants to go to $500, and some very silly people are doing everything in their power to get it there…..My fascination with AAPL this week is not because I don’t like the company, the valuation, their growth prospects or their products, in fact I am a fan of all of the above, my fascination is with the “cult of the stock”……..I don’t buy into this sort of price action whether it be GOOG in 2007, AOL in 1999 or CMG now.   All the power to you guys that do, I guess I am just a bit jaded after living through the internet bubble and I know how this story ends.

As for today, while I am bearish and short, I am going to be careful not to press the down opening and wait for a rally to press the short….I think this could be the near term top and AAPL’s action yesterday and this morning could be the tell, it just felt too giddy….

AAPL is going to defy the overall market action this morning and take a shot at $$500, and thats when I get aggressive.

The breadth has been getting worse and worse and in a lot of ways this last attempt at 1350 feels like it has been on the back of a handful of stocks…..

MorningWord: 2/9/12:  In what has been a fairly uneventful week so far as it relates to news flow, the SPX continues its trends of putting its lows for the day in the morning and seemingly spending the afternoon rallying post the European close.

5 Day SPX chart from Bloomberg LP


Obviously this is healthy looking action, but it appears that the breadth in the market is getting a bit narrower as we approach last years highs.  Chart below makes this point pretty clearly, with the SPX at 1350 (or there abouts) we had 397 new 52 week highs yesterday vs the readings of over 100o last Feb, Apr and May when the SPX traded above 1300, and specifically the 1200 reading on the May 4th, 2011 52 week high.

Bloomberg's New High Index VS SPX 1 yr from Bloomberg LP

It feels to me that this is the AAPL blow off rally in the market, because everyone owns AAPL and wants it to go higher it is and dragging the market up with it (AAPL the largest weighted stock in the SPX at about 3.6%).  I have gotten a lot of hate mail about my AAPL call the other day…..and such is life, some people out there are emotionally attached to the stock and that’s all fine and good, I tend to be emotionally attached to things like family and friends.  But I guess the point is I am a trader and tend to trade the speculative portion of my portfolio in a contrarian fashion, so with a gun to my head I would much rather sell APPL here than buy it, and Tuesday based on my overall market call (which has been wrong week to date…it happens) I decided to risk less than 1% of the underlying stock price to make a bet that the stock would start to pull back a bit and fill in a portion of the earnings gap……I will do this trade time and time again, and while I will usually be a bit early, this has been a winning strategy over the long run, it certainly isn’t for everyone.

So as I write, it appears that the Greek Parliament has reached a deal on a Austerity package and now maybe the SPX at 1350 with declining breadth can take a bit of a pause….


MorningWord: 2/8/12: It is not often that the first story that I read in the morning from Bloomberg top stories makes me vomit a little in my mouth, but this one, “BlackRock’s Fink Says Investors Should Be 100% in Equities, Take More Risk” takes the cake.   I think it is safe to say that Larry Fink, the co-founder of BlackRock which manages more than $3 trillion in assets (your assets),  just won the first of what will likely be an ongoing series here at for the most Self-Serving A-Hole of the week.

If that doesn’t make you want to take some profits in stocks that you own I am not sure what will.   Many of you have heard me say this on numerous occasions over the last year, but everyone and their mother want/need risk assets to go up, and most of the time those who have the most to gain from the investing public being “bullish” and calm will do their part to make sure they don’t send the wrong message and be a bit cautious while their still appears to be a whole host of risks out there.   But you guys know me, I am just here to rain on everyone’s parade.  

U.S. equities remain amazingly resilient, the last  2 trading days in a row the SPX shook off early weakness to close near the highs of the day.  This is obviously pretty good action, but again it seems like we are trading on fumes here….AAPL computer alone is not going to be able to break us out to new 52 week highs….

[caption id="attachment_8670" align="aligncenter" width="300" caption="2 Day SPX chart from Bloomberg LP"][/caption]


As for today/this week, Greek deal or not I am positioning for what I think is an impending decline in Equities….

The chart below shows the very tidy channel the SPX has been in, basically btwn 1350 and 1250 barring the early AUG to late OCT meltdown from 1250 to 1100….SO here we are, the markets moment of truth, do we get through and make new highs?  Well you guys know where I stand, but that clearly doesn’t mean it is not gonna happen, it just means that i am not positioned for it to happen, and the higher it goes in the near term the better the shorting opportunity will be.  I guess the real issue is sizing of the short at current levels and that is why for those of you who agree, you have to avg in a little to this position and then press it when it starts to go your way…..

[caption id="attachment_8671" align="aligncenter" width="300" caption="1 YR SPX chart from Bloomberg LP"][/caption]


MorningWord: 2/7/12: Greek default fears spooked yesterday’s opening a tad, but as we have become used to in 2012, the opening tick was in fact the low for the day, and quite impressively we closed on the highs, nearly unchanged.

Yesterday Intra-day SPX chart from Bloomberg LP


U.S. equities display amazing resilience even as they appear to be a bit overbought and approach last years highs.  It is my strong opinion though, that our equity markets appear to be trading on fumes as yesterday’s NYSE volume was the lowest of the year so far and that is not a good sign for those looking for volume to display conviction of buyers.

Yesterday late in the day I bought a March Call ButterFly in the VIX as I feel with the index trading at lows not seen since late July that the time is right to look for a spike in Vol btwn now and March expiration.  While there appears to be many reasons for the markets to take a pause after the first 38 days of the year and almost 7% rally in the SPX, it also appears that we will likely need a little push from elsewhere to get us on our way……maybe it will be the eventual Greek debt default and the realization that Europe will in fact go into a recession, or the 2nd consecutive Arab Spring, or maybe a hard landing in China, who the heck knows, but when thing I am fairly certain about is that when things are this complacent it usually doesn’t last too long.  The call fly above is not exactly a high probability play, but I am spending a small amount of premium for a trade that would be up substantially if the VIX spike some 40%, which it most likely would do if there was a meaningful sell off in the SPX.   The position could serve as a nice hedge to a long portfolio of stocks, or an outright bearish bet.

Speaking of complacency, a lot of you seem to be itching to short AAPL here, as I have gotten numerous emails with charts showing that AAPL has just touched the high end of the uptrend channel it has been in since last Spring….even with the futures down this morning, the stock is up in the pre-market, I obviously don’t get it and I think you would have to an absolute fool to buy the stock here at all time highs……Obviously thing are firing on all cylinders here and the company will continue to execute (for now) as they have the blue prints already in place for new iPads and iPhones, and anything else they can come up with will just be gravy, BUT everything that goes up has to come down at some point, and this stock seems very close….

[caption id="attachment_8633" align="aligncenter" width="300" caption="1 yr AAPL chart from Bloomberg LP"][/caption]


SO not to disappoint any of you, I have had my finger on the trigger and have been waiting to buy a near the money put spread that offers a good risk reward, or looking to leg into a spread.  Stay Tuned, as I was really waiting to look for an opportunity where the stock appears to be making a giddy blow off top!  I will be looking for a move to about $435, or at least an attempt for the stock to fill in a portion of the earnings gap.

MorningWord: 2/6/12:  Call it a bit of a Super Bowl hangover if you will, but the liklihood that the SPX’s close on Friday (the highest close since July 21st) would be able to follow through on today’s opening wasn’t particularly great……Since briefly flirting with 1200 in the SPX on Dec 19th, the SPX has rocketed nearly 12% with out a pullback of more than 1.5%, I guess my point here is that equities feel a bit extended and maybe discounting a fair bit of good news at current levels.  I know I know I sound a bit like a broken record here, but at this point I think it is fair to say that even if you are int he bull camp you would rather see the market consolidate up near last years highs and then make an attempt to meaningfully breakthrough.

Last week prior to QCOM‘s earnings I posted a long term chart that I thought was kind of interesting (below).  The stock on a few occasions in the last 12 months had flirted with the $60 level, a level that it had not traded above since crashing below in June of 2000 during the tech wreck of that period.

QCOM long term chart 1991-2012 from Bloomberg LP


While this is an amazingly bullish chart, last weeks breakout wasn’t exactly that convincing as the volume seemed fairly mediocre when you consider that the stock broke out of a 12 year range.

1 yr QCOM chart from Bloomberg lp


Volume for instance on Thursday (the day after their Q4 report) was about 35 million shares vs the 44 million shares the stock traded on November 3rd the day after the company beat their Q3 estimate.   So i guess my point is we want to see break-outs that are confirmed by volume and in this instance while price action is fairly impressive, I am not sure this one sticks…..Much like my discussion above of the SPX, I think there is a good chance that QCOM will need to consolidate here before making a meaningful move higher…..