Did This Guy (David Tepper of Appaloosa) Moved the Market Yesterday?

Time to Short SPY?

No one can dispute the fact that the S&P500 has had an amazing run since November 2012. Once the President and the Congress signed a deal to avert the Fiscal Cliff at the beginning of this year, investors have piled into US equities. Any weakness have been bought notwithstanding macro or corporate news.

SPY, the S&P500 ETF, is now at the top end of its channel and looks tired. Case in point, yesterday's price action. What should have been a good news for equities - April retail sales beating estimates handily and the ensuing sell-off in bond - did not end up being so - S&P500 managed to eke out a small gain. Moreover, the gains came from defensive sectors rather than cyclical names.

Bottom line, it looks like equities are in search of marginal buyers to drive them higher. Sure the big trend is still up, with the S&P500 breaking above its 2000 and 2007 highs, but looks like we are heading into  a short-term consolidation. I would short SPY at these levels with a very tight stop loss.

Corn Crop Planting At Third Slowest Pace in Three Decades

Corn Crop Planting At Third Slowest Pace in Three Decades
CNBC, 13-May-13
By: Patti Domm

Less than a third of the corn crop in key planting states is in the ground, the third lowest level for this time of year since 1980.

The U.S. Department of Agriculture Monday reported that 28 percent of the expected corn crop has been planted, and in key farm belt states, like Iowa and Illinois, the levels are even lower.

"Obviously, we have significant problems," said Rich Nelson, director of research at Allendale. "The trade after this week will begin dropping by both acreage and yield expectations. That's the message right here."

The cold, wet spring has wreaked havoc with farmers' efforts to plant, but even so, analysts and the government still expect a bumper crop. <Click Here for More>

Did China "Cook" the April Trade Data?

Program Videos From Milken Institute 2013 Global Conference

Cramer's Game Plan for Week of April 29

Fortune Interviews StatWiz Nate Silver

Can people use data or analytics to accurately predict the stock market in any way?
The problem is the stock market is this whole contest where you're competing against other creators. So the question is: Are there some traders that are better than others? I think the answer is probably, Yes. I'm not a pure markets guy, I played poker long enough which I think has parallel skills to trading in many respects where you know that some people are better over the long-term and better at accounting for uncertainty and so forth. But there's a lot of volatility and a lot of luck where a market cycle can last for months or years. There are a lot of perverse incentives that get in the way. So while I think there are some good traders, in the near term, even over a period of five or 10 years, it will mostly be dictated by luck, so it's tricky.

Have you ever applied your model to dating?
I did one little analysis with OkCupid for a New York Times Magazine piece a couple of years ago where we were trying to figure out the best night of the week to go out and get laid basically. So OkCupid collected the data of some status reports of people who were out and about using their mobile application. And we looked at the ratio of people who wanted a long-term relationship vs. people who wanted just something for [that night]. On Wednesday apparently you get the highest ratio of people who are just looking for something quick and dirty. <Click Here for More>

Vexing Over the VIX

I am a short-term bear on the US market. Given the performance thus far, there is more downside than upside. Case in point, the S&P500 is up 9% YTD. At this clip, the S&P500 will be up over 36% for the year. This will occur on the back of 13.41% gain in 2012. Inconceivable as the Sicilian from Princess Bride would say. If the US and the global economy were roaring like in the pre-2008 era, it would be conceivable but they are not. The US economy will barely grow at 2% (vs 4%+ pre-2008). Global GDP will be lucky to pull in 3.3% (vs 5%+ in the heydays) growth rate given the obvious slowdown in BRIC countries.

One of the measures of investor sentiment is VIX. Using range of out of the money call and put options, the CBOE estimates the likely movement in the S&P500 index over 1 month period. Today VIX is at 13.36, meaning that the options market forecasts the S&P500 to move 3.86% in the next 30 days (13.36%/√12). That is not a lot considering that the S&P500 can move that amount in couple of sessions. There are VIX future contracts (Bloomberg: UXJ3) where investors bet on the future path of VIX. The VIX future for the end of November is 19.40 suggesting that the investors expect volatility to increase as we head into the dog days of summer.

My hunch is that the S&P500 will test 1,500 in the next month or so. That's not an outlandish prediction because it is just 3.35% from current level and entirely within the range implied by current VIX.

Todays Reads - Cyprus, Bill Gross, Robert Shiller

Today's Reads
Interesting readings from today

Cyprus is the new epicenter of the European financial crisis. In return for Eu10 billion bailout, the EU imposed 9.9% tax on deposits greater than Eu100K and 6.7% on less than that amount. If approved by the parliament (vote postponed), this is will raise Eu6 billion. This is quite an unprecedented move and will likely impact market tomorrow especially given that everyone is looking for an excuse to sell. Forbes even compares this to Lehman debacle. Note that banking system in Cyprus is 8x larger than the economy, so bailing them out is bailing out foreigners especially the Russians, not a politically palatable solution for Euro politicians.

Pimco's Bill Gross, in his March think piece "Rational Temperance" attempts to answer somewhat un-answerable question, when would we know when there is irrational asset bubble. My view is that you don't. But he does make an interesting point in that HY debt market is a better indicator than equity market because it is set by institutional investors or better informed people. Basically says look at the issuance, which is inversely correlated with future returns, that'll give you the probability of irrational bubble - currently 6/10 in his view and moving higher.

One of the points Bill Gross makes is that he found the close relationship between HY spread and equity interesting. Duh! That comes directly from Black-Shoals option pricing model. Basically, equity and debt are joined at the hip; no wonder they act in a similar fashion.

Talking about market peaks, Prof Robert Shiller attempts to put that in perspective in a NYT oped, Yes, We’re Confident, but Who Knows Why. His answer to whether we are in a stock market peak now is typical of an academic, we don't know. He uses two measures to take the gauge of the market (1) valuation confidence i.e. % of institutional investors and individual investors who think market is not overvalued (2) cyclically adjusted price-earnings ratio (CAPE), which is real, or inflation-adjusted, Standard & Poor’s 500 index divided by a 10-year average of real S.& P. earnings. Currently, both confidence and CAPE are at relatively high levels but based on 2000 and 2007 experiences, they don't tell anything about the future.

The Big Short War on Herbalife

The Big Short War
Vanity Fair, April 2013
By William D. Cohan

Hedge-fund titan Bill Ackman has vowed to bring down Herbalife, the 33-year-old nutritional-supplement company, which he views as a pyramid scheme. With his massive shorting of Herbalife stock, the price plummeted, prompting two fellow billionaires—Ackman’s former friend Dan Loeb and activist investor Carl Icahn—to take the opposing bet on Herbalife. As the public brawl rivets Wall Street, William D. Cohan learns why, this time, it’s personal.

The supremely confident billionaire hedge-fund manager Bill Ackman has never been afraid to bet the farm that he’s right.

In 1984, when he was a junior at Horace Greeley High School, in affluent Chappaqua, New York, he wagered his father $2,000 that he would score a perfect 800 on the verbal section of the S.A.T. The gamble was everything Ackman had saved up from his Bar Mitzvah gift money and his allowance for doing household chores. “I was a little bit of a cocky kid,” he admits, with uncharacteristic understatement.

Tall, athletic, handsome with cerulean eyes, he was the kind of hyper-ambitious kid other kids loved to hate and just the type to make a big wager with no margin for error. But on the night before the S.A.T., his father took pity on him and canceled the bet. “I would’ve lost it,” Ackman concedes. He got a 780 on the verbal and a 750 on the math. “One wrong on the verbal, three wrong on the math,” he muses. “I’m still convinced some of the questions were wrong.” <Click Here for More>


Icahn verus Ackman (25-Jan-2013)

Google-Apple Valuation Gap Widest Since 2005 on Ads

Google-Apple Valuation Gap Widest Since 2005 on Ads

Bloomberg, 6-Mar-13

By Brian Womack

Google Inc. (GOOG)’s prospects haven’t looked so promising to investors relative to Apple Inc. (AAPL) since before the iPhone was introduced.

Google’s shares, which climbed to a record yesterday, are now trading at 25 times profit, compared with a price-to- earnings ratio of less than 10 for Apple, according to data compiled by Bloomberg. That gap is at its widest since June 2005, two years before competition between the two companies in mobile devices began to intensify.

Investors are willing to pay more for each dollar of Google’s earnings relative to Apple amid optimism that Google, with more than 40 percent of the U.S. online-advertising market, will command even more of the $37.3 billion that businesses spend each year to reach Web audiences. Google also has used an alliance with Samsung Electronics Co. (005930) to gain share in mobile software, feeding the competitive threat weighing on Apple as investors await the next big product from the iPhone maker.

“There’s only one company benefiting from all the growth areas of the Internet -- be it video, mobile, local, social, display advertising,” said Sameet Sinha, an analyst at B Riley & Co. “Apple has just done well in devices, nothing else.”

Google fell less than 1 percent to $831.38 in New York, while Apple declined 1.3 percent to $425.66. Google’s U.S. shares have added 35 percent in the past 12 months. Apple has dropped 20 percent in the same period, though its market capitalization is still more than $100 billion higher than Google’s. Apple remains the world’s most-valuable company, followed by Exxon Mobil Corp. (XOM) and Google. <Click Here for More>

Interview with Jeremy Siegel

Though stock market volatility continues to rattle investors' nerves, the future looks bright for equities in the U.S. and many emerging markets, according to Wharton finance professor Jeremy Siegel. That's not so for bonds, which could become money-losing investments as rising interest rates drive bond prices down. In an interview with Knowledge@Wharton, Siegel says that investors should think about reducing their bond holdings, buying more stocks and keeping just enough cash for a rainy day and other liquidity needs, since interest rates on cash are near zero. With the housing market -- so critical to the U.S. economy -- clearly improving, anyone who has held off buying a home should think about buying now while prices and mortgage rates are low, Siegel adds.

Q4 GDP revised to +0.1% (from -0.1%)

The BEA revised Q4 GDP to +0.1% (from -0.1% reported on January 30). The revision was not a surprise. Nobody believed that Q4 GDP was negative. What was surprising was that the revision was so minute.

Much of the upward revisions came from trade sector. Exports added 0.3 ppt more while imports added another 0.2 ppt. This suggests that global economy was more resilient than thought. Another 0.2 ppt up revision came from non-residential structure. Not a surprise again, given that real estate has gotten a boost from the Fed's accommodative policy.

What contributed less to Q4 GDP were Equipment & Software Investment (0.1 ppt), State & Local Government (0.1 ppt) and Inventory (0.3 ppt). Inventory subtracted 1.6 ppt from GDP vs 1.3 ppt in the prior reading. It appears that inventory stuffing at JCP and KSS, which reported yesterday were exceptions rather than a rule.

Subtraction to GDP from inventory is a very bullish sign. Inventory cycle could easily add 1 ppt to GDP in a future quarter.

The Onion's Take on Sequestration

Obama, Congress Must Reach Deal On Budget By March 1, And Then April 1, And Then April 20, And Then April 28, And Then May 1 And Then Twice A Week For Next Four Years

The Onion, 27-Feb-13

With the dramatic, across-the-board sequestration scheduled to occur this week, the nation’s leading economists have warned that President Obama and Congress must come to a compromise on the budget by Mar. 1, and then again by Apr. 1, and then Apr. 20, Apr. 28, and—after Congress is once again unable to come to a comprehensive agreement to fully stabilize the economy—May 1, along with agreements twice a week, every week, for the next four years.

Experts say that without reaching a deal this Friday, the automatic $85 billion reduction in government spending will immediately slow the U.S. economy and impact thousands of middle-class citizens. Officials said the same exact thing will happen next month, the month after that, and the month after that if Obama and Congress fail to meet deadlines created by the preceding, incomplete deals.

“If the president and Congress are unable to reach a grand bargain by Mar. 1, what they will likely do is reach a set of 100 or so smaller bargains, all with their own deadlines, and all of which could potentially plunge the U.S. economy into a recession,” said Princeton economics professor Marshall Kahn. “So, the Mar. 1 deadline is absolutely crucial. Just like the one next month will be. And the 12 deadlines in May. And the bi-daily deadlines that will kick in during the summer.” <Click Here for More>

Right and Wrong on Natural Gas on the Same Day

Yesterday, I was right and wrong on my call on natural gas price, which I made just the day before. I said the price is trending higher, and it did. Then later price fell.

Natural gas had a massive move yesterday. It was up 3% by noon and by the end of the day was down almost a percent, a massive reversal  Looking at the UNG (natural gas ETF) trade, someone put big trades around 2:00pm that caused price to crater. There is no news on natural gas around that time. One plausible reason could be the expiration of natural gas future contracts but that event was the day before (Feb 26).

If you don't know whom to blame, blame the weather. That's exactly what the WJS did (Natural Gas Prices Reverse Gains As Forecasts Turn Warmer). But weather did not turn warmer. According to more credible source, AccuWeather, they put out a story yesterday morning that said the opposite (Winter to Continue: March to Yield Snowstorms).

Time to Go Long UNG

If you had tried to put on a seasonal trade on natural gas at the beginning of this winter, you'd have lost a bucket of dough. Natural gas price slumped this winter owing to demand-supply imbalance.

Demand was curtailed by above average temperature in the continental U.S. Supposedly, February 2012 to January 2013 was the warmest February-to-January period since at least 1880, when the NOAA started keeping records.

On the supply side, natural gas continued to pour out Shale formations in the mid-continental U.S. The U.S. produces more natural gas than even coal.

This demand-supply imbalance resulted in bloated inventories. Natural gas in the underground storage during this winter was at the high end of 5-year average. This situation is about to change. We could see a late winter cold snap in early March, which could pull the temperature in the eastern seaboard to below average, and increase demand for natural gas, the source of home heating for more than 50 percent of US households.

From a technical standpoint, the UNG (natural gas ETF) chart looks interesting. It has decisively broken above the "winter" downtrend and is comfortably resting above both (1) 50-day moving average and (2) 50% Fibonacci retracement level. The weekly EIA inventory data this Thursday will be pivotal. If natural gas price holds up after the release of the data, we might be seeing a short-term upswing in UNG price. I'm betting on that outcome. I'd say it's time to go long UNG.

Italian Election Results - 2013 (Final)

Source: Interior Ministry

Paper: Fiscal Crises and the Role of Monetary

Crunch Time: Fiscal Crises and the Role of Monetary

By David Greenlaw, James D. Hamilton, Peter Hooper, Frederic S. Mishkin

February 22, 2013

ABSTRACT

Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates which in turn make the debt problems more severe. We analyze the recent experience of advanced economies using both econometric methods and case studies and conclude that countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics. Such feedback is left out of current long-term U.S. budget projections and could make it much more difficult for the U.S. to maintain a sustainable budget course. A potential fiscal crunch also puts fundamental limits on what monetary policy is able to achieve. In simulations of the Federal Reserve’s balance sheet, we find that under our baseline assumptions, in 2017-18 the Fed will be running sizable income losses on its portfolio net of operating and other expenses and therefore for a time will be unable to make remittances to the U.S. Treasury. Under alternative scenarios that allow for an emergence of fiscal concerns, the Fed’s net losses would be more substantial.

[Full Paper]

Cramer's Game Plan for Week of February 25

Italian Election 101

Italians are going to vote this weekend to elect a new government. Polls close on Monday at 3:00pm local time or 9:00am EST. Exit polls start coming out soon after that. Final results are made available probably late Monday or early Tuesday. For the market, the best outcome is a clear win by center-left coalition led by Bersani. But given a late surge by populist Grillo, the outcome is anything but certain. Investors do not seem worried. The yield on 10-year Italian government bond has hardly budged in the past week (see the Chart). For political buffs, the key to the Italian PM chair is the Senate seats, and the key regions to watch are Lombardy, Campania, Sicily and Venetto. 

Italian Election 2013
The February 24-25 election is for 630-seat Chamber of Deputies and 315-seat Senate. To form a government, a party or a coalition must have a majority in both chambers, also called perfect bicameralism. 

In Italy, voters do not vote for a candidate but for a party. A citizen must be at least 18 years old to be allowed to vote for the Chamber of Deputies and at least 25 years old to be allowed to vote for the Senate. For a party to secure a seat in the parliament, it must cross a threshold (table). 

Seat Assignment in the Chamber of Deputies
Getting a majority in the 630-seat Chamber of Deputies is easy. The pre-election coalition that wins the largest share of national vote will automatically get 340 seats (54%). Within a coalition, seats are allocated to parties in proportion to their vote shares after they meet the threshold. The losing coalition/party is assigned the remaining seats on proportional basis after they meet the threshold

Seat Assignment in the Senate

Getting a majority in the Senate is more difficult and where all the complication of electoral politics come into play. Italy is divided into 20 regions, each with different number of senate seats based on size and population. In 17 of 20 regions, the pre-election coalition that wins the majority of votes in the region automatically get 55% of seats assigned to that region. So Senate election is the key to forming an Italian government. The key provinces to watch out for are, Lombardy, Campania, Sicily and Venetto. 

There are 6 pre-election coalitions,

1. Center-right coalition led by Silvio Berlusconi

2. Center-left coalition led by Pier Luigi Bersani

3. Centrist coalition led by Mario Monti

4. Left-wing coalition led by Antonio Ingroia

5. Populist party led by Beppe Grillo

6. Libertarian party led by Oscar Giannino

 
References

2013 Italian Parliamentary Election Pre-Election Report

How Italy's election works