MORNING BID – Microsoft, up from the ashes

Apr 24, 2014 13:22 UTC

Microsoft heads into tonight’s earnings report coming in on a high, having recently breached the $40 threshold for the first time in forever (it’s all Frozen references this week, folks). The company pushed past $40 a share in early April for the first time in nearly 14 years, and spent most of that time ensconced in a tight range between about $22 and $35 a share, depending on what the overall market was doing. It tanked in 2008 with everything else, and then spent the 2010-2012 period putting together a cumulative 13 percent price loss in the midst of a raging bull market, if evidence of its sad-sack status couldn’t be more apparent.

This year, though, the company’s been the beneficiary (along with the other “horsemen,” Cisco, Intel and Oracle) of a shift away from overvalued momentum-driven stocks towards cyclical technology stories. These are the types of companies that produce steady revenues even if they’re not doing anything but collecting on consistent upgrades of stuff that everybody needs and doesn’t really like. And really, the company had a stranglehold over PC operating systems that it defended aggressively, let’s not kid ourselves.

For what seems like the better part of a decade, the company has also been talking about how it plans on getting ahead for the next technological leap happening around it. Personal computer sales are bound to be slack, because people aren’t buying those and they’re now buying tablets. But hope springs: CEO Satya Nadella plans on taking analyst questions on the conference call, which isn’t the usual thing for Microsoft.

Sometimes changes in strategic direction mean something for real, and even though analysts at times are overly obsequious and eager to please their corporate overlords (“Congrats on the quarter, guys”), they’re still the voice of someone outside the company and therefore aren’t as likely to be blowing smoke. The company’s planning on focusing more on mobile apps and cloud computing in coming years – probably the right choice, given the trend in computer technology at the moment – but the question is whether they can truly capitalize or not.

News from March showed the firm plans on debuting an Office version for the iPad. That put a charge into the stock and would be something of a game-changer; the stock is now the fourth-best in the Dow this year, up 6.8 percent. Starmine’s earnings quality score has been pretty darned high for the company for three years running.

Free cash flow is generally increasing, it’s been paying more and more dividends every year, and they even think the company’s being underestimated by the market, with the $40 or so price assuming a 4.4 percent annual growth rate over the next decade, whereas Starmine sees growth at 6.6 percent, in line with the five-year historical average – which should make it worth nearly $48 a share.

Again, though, that implies an avenue for growth. The Windows division isn’t it. This mega-division posted between $18.68 billion and $18.84 billion in revenue every year for four years running, falling from 30 percent of overall revenue to 24 percent (and that’ll keep shrinking). Again, something to be said for consistency here (for you dividend folk), but that isn’t “growth.” (It’s not “shrinking,” either, so there’s that, too.) Business solutions carries about 1/3 of revenue – and that’s been steady. But the gains may be more likely in the server/tools division, or entertainment/devices for any real traction to be gained. So look to the cloud, Microsoft.

MORNING BID – Volatility, or lack thereof

Apr 23, 2014 13:06 UTC

It was another disappointing night for those looking for heavy volatility out of those reporting earnings – the trio of biotech stocks many were looking at, Gilead, Illumina and Amgen, had varying results, but they didn’t show the kind of bounce that some people were expecting.

In after-hours action Illumina was moving around 7 percent, short of the 11 to 12 percent move the options market was looking for, and Gilead was up around 3 to 4 percent, less than the six percent gain that the options market had factored in. Following the disappointment among those betting on volatility post Netflix-earnings — and the stock still moved a lot, just nowhere near as much as expected — it raises questions about whether some investors might start to temper expectations when it comes to overall volatility, because putting down money on a big swing has been a bit of a loser so far.

The earnings season is young, of course, so there’s still time and lots of momentum stocks out there that can surprise on the upside or downside, so there’s lots to come. The most notable, of course, is Apple, due out after Wednesday’s close. Some positive analyst revision activity of late suggests that the company’s results could surprise on the upside, even if this quarter is generally a transition one for the most valuable U.S. company because it’s a time when it is gearing up for new products later in the year.
What will be notable to watch are the parade of results that lean on the snow as a crutch for an overall poor performance.

Embattled retailer bebe showed some of that with their warning on Tuesday. While weather may have had something to do with it, it’s more notable that the retailer has posted losses for six straight quarters and their EBIT margins are of course negative when lots of their peers are still doing relatively well – be it Ann Taylor, the Body Shop, L Group, or what-have-you.

The myopic expectation that companies will get away with saying the snow is the cause of all their problems is on a par with Olaf, the snowman from Frozen, and his optimistic expectations for what life would be like for a snowman in summer. (Let it go, folks. Let it go.)

Meanwhile, several sectors including industrials and transports are hitting all-time highs again. It appears to be only a matter of time before the S&P 500 rebounds to its all-time high and puts it in striking distance of moving past 1900, a sign of health in the economy even as there are concerns about China’s growth percolating within the likes of IBM’s report and next week’s US GDP figure isn’t going to come in all that great either.

Where’s the juice coming from? As Reuters correspondent Caroline Humer pointed out in a story overnight, for health care names it’s from M&A activity that culminated in the Valeant bid for Allergan, one that Mike O’Rourke of JonesTrading compared unfavorably to the MCI/WorldCom deal all those years ago that represented the apex (and the nadir, really) of the telecom M&A boom of the late 1990s.

Big-cap pharma has been left behind a bit when compared with biotech – the biotech names are up about 125 percent in the last two-plus years even with the recent selloff, while the pharma giants have gained about 55 percent. The thing is, the latter gain is still pretty solid, so there’s that.

MORNING BID – Biotech swings into earnings

Apr 22, 2014 12:48 UTC

Earnings get a bit less boring with a slew of biotechnology and medical device names out Tuesday, most of them after the closing bell.

Among those that will be most watched are Gilead Sciences, sort of the linchpin of this whole selloff the market’s been dealing with in the last several weeks, Illumina, one of the market’s biggest high-flyers in the last couple of years, and Amgen, which compared with these biotechnology names might as well be a telephone company in terms of volatility and overall sex appeal.

The declines in Gilead and other biotech names have been striking, as the stocks have underperformed the S&P 500 by double-digit levels since the full-scale run out of these names began late in February. Unfortunately the options market suggests the action after the closing bell (or even through the end of the week) might be a bit underwhelming. Ryan Detrick of Schaeffer’s Investment Research notes that the amount of bullish call buying compared with put-buying (bearish bets) in both Amgen and Gilead ranks at about the 55th percentile over the past year.

For Gilead, that means over the last 10 days we’ve seen about 218 call options written for every 100 put options, a healthy but unspectacular bit of action that points to generally bullish tidings. It’s certainly not something that suggests worry among investors after Gilead has been one of the market’s duds since late February, and especially since mid-March when lawmakers asked the company to justify its $90-gazillion price tag for its hepatitis C drug.

The at-the-money straddles (buying a call and put option at the strike price closest to the current price) suggest a move of about 5 to 6 percent by the end of the week, which also isn’t that exciting (this is biotech we’re talking about).

The more interesting action looks like it’s coming out of Illumina Pharmaceuticals, which has been basically hammered since it started to sell off with the rest of the momentum names in February – so much so that Goldman Sachs says their underperformance compared with the S&P 500 is enough to warrant a look as they might end up exceeding estimates. That would certainly put a spring in the stock’s step.

Parsing out what the options are saying here is a bit more difficult; Illumina doesn’t have any weekly options, so you’ve got to judge by the monthly contracts that expire in mid-May. Those are real bearish – Schaeffer’s shows a 10-day put-to-call ratio that’s more bearish than 98 percent of readings over the last year, so people clearly aren’t enamored of the selloff in this name and are protecting themselves against more hell to pay in this one.

The mid-May straddles suggest a move of 13 percent by the middle of next month, so that’s not all that reliable a guide for what’s going to happen this week, unfortunately; it just suggest more volatility.

“You can almost say Illumina is a typical biotech; Gilead is in the middle, a little more established, and then Amgen which does not really have a biotech tone to it with the option premium,” said William Lefkowitz, chief options strategist at vFinance Investments. (Amgen’s a pretty staid one in terms of options. The move expected is 3.4 percent by the end of this week, and it hasn’t been crushed the way other names have been, plus, its an $89 billion market cap company, or four times the size of Illumina).

MORNING BID – A week overflowing with earnings

Apr 21, 2014 13:00 UTC

Markets head into a busy week of earnings with a bit of uncertainty around whether the major companies out there will help continue the momentum in the stock market that was regained last week after some weeks of lackluster trading.

As put in Reuters’ Wall Street Weekahead, there’s something for everyone this week, from the old-line tech companies like Microsoft that have been the recent beneficiary of the switch away from the high-flying names like Netflix and Facebook (which also report this week) to some big industrial names like General Motors – which has plenty of its own issues with the recall – to Dow components like AT&T and McDonald’s.

So far, earnings have been a mixed bag. There have been some good results from a few Wall Street banks, weak numbers from others, and results out of the likes of IBM and Google that fell short of expectations as well. The fact that old tech names like Microsoft and Cisco are up on the year even as the Twitters of the world are down on the year does suggest more attention to alpha generation in a way that didn’t exist in 2013.

With that in mind strategists for the most part have been trying to point more specifically to stocks that appear undervalued or at least less-loved by the analyst community. Three of those reporting this week are Microsoft, DuPont and Travelers, which Credit Suisse quantitative strategists identified as contrarian picks as analysts in general have been more enamored themselves of the momentum stocks that carried the day in 2013.

All three of those, as well as a few others, will report in a week that will see about one-third of S&P 500 names report for the quarter. But what will be interesting again to see (and here we are again in the equity market looking ahead to the future) is whether second-quarter growth figures recede or if they’ve hit a trough earlier than is usual, which may be happening. After Friday’s spate of generally strong results, second quarter year-over-year earnings growth estimates ticked up to 8.1 percent from 8.0 percent. That’s still down from 8.4 percent at the beginning of April, and much more than on January 1, but if it represents the nadir for this period, that’s a good sign for those concerned about long-term growth in stock prices and for economic demand.

A number of sectors have seen a generalized improvement in their estimates (consumer discretionary stocks are still seeing estimates cut), which points at least to optimism going forward. Dan Greenhaus of BTIG notes that a handful of notable names have seen strong year-over-year revenue growth including Baker-Hughes, United Rentals, Pepsico, and Sandisk. The latter cuts against the grain of those forecasting weak results from companies with large Chinese exposure.

Make no mistake, earnings will dominate the week. Here are a few other names coming to whet one’s appetite: Gilead Sciences, Amgen, Alexion, and Celgene, all biotech names that have been favorites at one time or another, and of course Apple, the largest U.S. company by market value. If year-over-year expectations improve by the end of the week, that’s certainly a promising sign for the current quarter we’re living in.

MORNING BID – Google, IBM cloud market rebound

Apr 17, 2014 13:21 UTC

The markets have remained interesting this week as earnings season has ramped up, but the most interesting index remains the Nasdaq Composite.

The Nazz continues its upward swing following Tuesday’s volatile, deep plunge; it has now gained more than three percent in the brief period between the lows it hit Tuesday and the Wednesday close. That’s a pretty short period of time to see such a dramatic move in the index but doesn’t necessarily point to better tidings ahead. Bespoke Investment Group pointed out that when swings like this are usually seen – there have been 18 such occurrences since 2000 – it doesn’t bode well for the tech-heavy index.

On average, the decline following all of these types of days like Tuesday – where the market opens at least 0.1 percent higher, drops as much as 1.5 percent and then finishes in positive territory – is 2.84 percent in the week that followed. That’s not encouraging, but that’s kind of the way things go when the market sees bouts of volatility like this.

Notably, most of these volatile sessions are clustered around bad market environments – it happened several times in 2000 and 2001 before abating, only to return in 2008; so rough markets are generally when this kind of thing occurs. What’s undetermined now is how well the markets overall will do in a rebound attempt and whether it’s a Sisyphean pursuit at a time when many stocks are doomed for more pain.

Goldman Sachs doesn’t entirely think so, believing some stocks have plenty of room for upside after the momentum-driven selloff took down a lot of stocks heavily. They finger Illumina, Biogen, TD Ameritrade – as among those that could see relief rallies due to the kitchen-sink approach to investing that has driven stocks up, then down, all at once of late.

That may not translate to the entire market, though. Google and IBM results were lousy, with the kind of problems that bode ill for the rest of the market and not just to company-specific issues. Google saw a steep fall in mobile ad rates, while IBM blamed weak hardware sales for its lowest quarterly revenue in five years, as Reuters’ Alexei Oreskovic and Noel Randewich wrote recently.

An 11-percent drop in emerging markets including China, Brazil, Russia and India was partially to blame and that’s worrisome for tech names dependent on enterprise-spending, such as Oracle, Cisco, EMC and Hewlett-Packard. Looking further, these reports, should they continue to disappoint, will take the market’s renewed fervor and bury it. Robert Sluymer of RBC Capital Markets believes that the current technicals suggest nothing more than a ‘technical’ rebound that fizzles within a few days time.

And Scott Fullman, senior managing director and chief strategist at Increasing Alpha, who studies options activity, notes that with options expiration coming today that there are currently about the same percentage of calls and puts that look set to expire worthless – about 28,400 calls and 28,200 puts that have no bid are expiring. That means people are still collecting premiums, Fullman said, a sign they’re not really to stop trading them even this late in the one month cycle that marks expiration; they’re worried about volatility and using this to make a bit of money and also remain prepared against sudden market moves.

It speaks to wariness of more declines, and more earnings like Google and IBM will surely bring them.

MORNING BID – Big Mo, Oh No

Apr 11, 2014 12:51 UTC

The question of whether the market is going into a longer, broader correction is one with a lot of wrinkles.

Whether these high-flying stocks are going to come back is the easier question to answer. Why? Because unlike stocks where most of the embedded value is in existing earnings and existing growth – things a person can cling to, like the utilities or telecom – these stocks ride based on their expected growth for years down the line.

And when the unknown is combined with optimism you get price-to-sales ratios of something like 20. So when they cheapen – that is, sell off – those price-to-sales ratios (just another way of valuing a company) they drop to 15 times sales, which when compared with the S&P 500 is still ridiculous (the whole index tends to run around the 1.7 area of late). Which tells you of course that valuation was never the name of this game to begin with.

So with the valuation not there, and investors no longer getting the gratification from seeing stocks rise as soon as they buy them, there’s a couple strikes against them. A third one is supply. Motivated sellers, knowing they bought the stock at higher prices, are therefore champing at the bit to get out of positions if the market surges to a level they’re satisfied is enough to either lock in profits (if they’ve been in a while), get out at even (if they bought recently) or get out with losses because they know they’re screwed. Because, make no mistake about it, people who bought these high-flyers this year are underwater, sometimes seriously so, and unless sentiment does a complete about-face, these “investments” suddenly don’t look like so much fun to own. Broken momentum stocks are an ugly thing – just ask those who rode shares of Crocs into oblivion.

How are we so sure of this? Using volume-weighted-average price data (and a big tip to Mike O’Rourke of JonesTrading for cluing us in on this). Using Datastream, we found that some of your momentum favorites have been on average purchased at much, much higher prices this year than they stand now.
A group of 24 big-gaining names with most of their value wrapped in future expectations, as identified by Credit Suisse, have disappointed those who jumped in this year hoping for lots of gains.

We won’t go through all 24 here, but here are five favorites, listing the VWAP, or average price investors have paid this year, along with Thursday’s closing price, and the difference between the two:

  • 3D Systems $71.90 $48.78 -32.2%
  • Twitter $56.81 $41.34 -27.2%
  • SolarCity $71.17 $55.13 -22.5%
  • Workday $94.28 $75.62 -19.7%
  • Netflix $385.91 $334.73 -13.2%

Not much to like there at all. On average, investors in Twitter in 2014 are down 27 percent from where they bought the stock, and it’s not even as if a 27 percent gain will get them to break-even - at $41.34, that stock now needs to rise by 37 percent to get back to this break-even VWAP level.
That’s a tall order, especially when sentiment is moving against the shares and hedge funds are correcting themselves from being more overweight in momentum than they were any of the other style factors that strategists measure (which include things like beta, volatility, earnings yield, dividend yield, and a few other metrics).

If there was one area that wasn’t constrained by the hedge fund managers, it was momentum – thanks to a rosy 2013 that many figured would just roll on in 2014. It’s been anything but that. Now, some strategists are warning that earnings are the next point of measurement and sure, that’s true – but that’s more for companies within a small range of where most think they’re valued. These stocks are different – the forecasts for growth over coming years vary wildly, because with names like this, things are just inexact (and even more so with biotechnology names, which are frequently all-or-nothing stocks).

Momentum works two ways – and now it’s working in the wrong direction for the bulls.

MORNING BID – The same-store situation

Apr 9, 2014 13:36 UTC

Same-store sales figures may be enough to inspire some investors to resume paring portfolios of some consumer discretionary stocks that have underperformed in the last five or six weeks.

Equities rebounded on Tuesday, but the overall feeling is that the market hasn’t yet finished with the bout of selling infecting the high-volatility, high-beta names that dominate conversations.
Most consumer names aren’t in this rarefied air (they don’t trade at price-to-sales ratios of a gajillion) but they’ve still been a target for some time on bad news.

The ones to watch are the likes of Costco, expected to come in strongly, while teen apparel retailers face some pressure, even with easy comparisons to a year ago. Gap, Zumiez and Buckle all look to post worse year-over-year results for March, and Shoppertrak data has shown how mall visits have changed over time. People no longer wander the mall for hours, but find deals online, shop at a few stores, and get outta there. That’s not a weather thing, that’s a “how I run my life” thing.

This data is likely to be bad news. Excluding the drug store sector, same-store sales are expected to have grown at a 1.5 percent rate for March, down from the 2.7 percent growth rate for the ex-drug sector last year, according to the Thomson Reuters outlook.

Investors hope retailers see a pickup in the next few weeks and that the group’s earnings reports point to underlying demand that was at least seen in the car-sales figures and some signs of home-buying activity. That might revive some demand for that sector, which is down 5.4 percent since March 7.

Hedge funds seem to be still reducing positions in this area even as they don’t drop out of the market entirely; ETF flows this past week show more reduction in buying in consumer cyclical shares, according to Credit Suisse, though it hasn’t been terribly pronounced.

BUYING WHAT AND WHERE?
There’s been a bit of strange activity here and there in some of the official Fed and Treasury data.
First, a number of weeks ago, someone either sells or moves about $100 billion in holdings that had been custodied with the Federal Reserve – the biggest ever such move.

It has since been restored, and yet it remains a mystery; speculation had focused on Russia as the culprit, but no proof is there. Monday, new data showing who the buyers were of the most recent Treasury auctions (two weeks ago) showed a big buy by banks and other similar institutions of five- and seven-year notes. They accounted for about 15 percent of the auction, compared with about 0.11 percent of the February auctions of five- and seven-year paper.

Again, there’s not much in the real facts here and a lot of speculation – quarter-end positioning wouldn’t seem to make sense, as banks looking to shore up their balance sheets could just buy lots and lots of bills. Is it mortgages? Unclear.

MORNING BID – Momentum stocks: A primer

Apr 7, 2014 13:25 UTC

Lots of stocks have been getting killed in the last several weeks and the declines don’t seem really like they’re set to abate headed into a week where news is again at a premium (sure, earnings, but it’s just a few names, and they’re mostly decidedly not in this category of the momentum names that fueled the rally in 2013). So the likes of Facebook, Tesla Motors, Netflix, Alexion Pharmaceuticals, and a bunch of others have seen their fortunes turn in the market. But at this time we thought it would be a good way to get into this topic again by trying to lay out just what the hell a momentum stock is in the first place, because they exhibit a number of characteristics beyond just “a stock that’s going up very high.” So here goes:

Growing Industries: Internet retail, internet security, solar, cloud computing, companies that use the cloud for providing services (think Salesforce.com), biotechnology, and anything else where the prospects for growth are big and related to a growing sector of the economy. Utilities don’t really qualify here, naturally. The reasons are two-fold: for one, in order to jump onto a rising growth story, you’d want to be in a place where the expected future returns outpace the returns you’re getting now, something you won’t get from the telephone company, someone who sells toothpaste, or the guys hooking up the electricity.

Revenue, Revenue, Revenue: Credit Suisse’s quantitative research models shows that the big winners in 2013 were those whose price when compared to enterprise value showed most of the value in the stock wrapped up in their future growth prospects. Lots of these types are showing a big boom in the money they’re bringing in every year, even if that’s not translating yet into earnings – Tesla, for instance, saw its revenue rise by about 75 percent in 2011, which then doubled in 2012, and increased nearly four-fold in 2013. That’s growth, and that’s what feeds the expectations for more growth. The exception here is probably biotechnology, where much of the prospects are given over to expectations for a drug approval – though it’s notable that Alexion, for example, has posted revenue growth of 37 percent or better for five years running.

Rising Stock Price: This is sort of a no-brainer, but it’s a little more nuanced than just “OMFG LOOK AT THAT.” (Ok, maybe not much, but let’s unpack it anyway.) There’s a lot of talk about stocks that steadily rise and then go through a period of what people blandly call “consolidation,” but in a sense that kind of thing is important – it means that investors are seeing their stocks sit, churn for a while, and not really move, but those confident in the prospects and in the valuation of a company will buy as these dips occur, thus ensuring a “base” when the stock falls back. They’re not “value” investors, but they’re investors believing that a company’s value sits at a certain price where they’d be willing to buy, again and again. But these stocks exhibit no such pattern – they don’t really come up for a breather at all, and sort of just simply keep going and going and going. So investors who get into these names, including but not exclusively hedge funds, are doing it and finding what Mike O’Rourke of JonesTrading called “instant gratification from price appreciation.” When investors talk about stocks going “parabolic,” that’s what they’re referring to – look at Netflix last year, rising with barely a stop from around $90 to more than $450 a share.

Volume and Volatility: This is an underappreciated aspect of the stock-price move, and that when you see these stocks start to take off, often volume will bust out in a big way on the up days as more and more people jump in to take advantage. They also tend to move around a lot.

Short Interest: Not always necessary, but often an added part of this. Just as these stocks often attract hungry buyers, there are a lot of hungry sellers who jump in as well and believe – as is likely the case – that the valuations are absurd. But with momentum stocks, that doesn’t really matter, so you see lots of shorts get burned. Green Mountain Coffee Roasters, Tesla, Netflix and a few others are good examples of those that built a stubborn short base for quite a while. Eventually, they will be right, but they may not even be in the stocks anymore, having gotten run over by big big mo.

Faddish Industries: Those that buy these names can either be emotionally connected to a story – prostate cancer drug maker Dendreon had for years a fervent group of followers who lived and died on every regulatory announcement – or they come out of brands that naturally attract buyers because they have a consumer appeal as well. Netflix, Priceline, TripAdvisor, or Tesla all work in this description. Sometimes they’re even an outlier in an otherwise slow-growing industry because of “fad” appeal – Crocs was a big momentum stock for a long time too.

So what’s all this make out as? The question is when people start to find value in these names, but given that tradition valuations don’t work (Netflix is valued at 20 times sales; the S&P is 1.7 times), investors start to see the upward momentum in these names sag, and then quickly exit as fast as they got in – Morgan Stanley points out that a basket of stocks consistent with hedge-fund overweights lagged a basket of HF underweights by 7.7 percentage points from March through April 4. There’s a point where these stocks become “broken” – and it can take several attempts before it happens, as it did in the dot-com era, but once it happens, there’s little real way to stop it. The average price paid by investors in a lot of these names ends up being higher than where the stock is at a given point, and that acts as a ceiling on a rebound. A few stocks escape this, but many don’t.

MORNING BID – The Cleveland Administration in the market

Apr 2, 2014 13:43 UTC

It took the market a little while to get the full measure of the day’s biggest economic news. (And no, it wasn’t the shout-fest on CNBC that seemed to have resulted in the delaying of an IPO and one of the first real reckonings among many people about the ramifications of high-frequency trading.)

But it seems to have truly settled in now: Car sales were up big in March, to a seasonally adjusted annual rate of 16.3 million units. That’s better than expected, and it’s one of the first big data points that lends credence to the idea that there was a real constraint linked to winter weather that was the worst in about 13-14 years.

With all things market related, it’s the future that matters, and that’s what allowed the S&P to push past its most recent level for its first close in the ‘Grover Cleveland administration,’ as blogger Eddy Elfenbein pointed out, pushing past Chester A. Arthur for the first time (that’s 1885 – this is a bit too ridiculous to further, so I’ll stop here).
The gainers were once again, technology, with an odd mix of leadership between a few big momentum favorites turning it back around again (Priceline, TripAdvisor), and some older tech names getting a bit of a boost like Cisco Systems, helped by it being its ex-dividend day, and Hewlett-Packard, which is just sort of old.

And that kind of puts us at a crossroads. Michael O’Rourke of JonesTrading suggests we could see a breakout after a month of churning in this market, though it’s possible the day’s gains came from some beginning-of-month flows into equities as investors allocate funds in that direction. ETF flows per Credit Suisse show lots of money headed in the direction of large-cap stocks – $6.4 billion out of the $7.5 billion on the week – with the biggest outflows out of healthcare ETFs, not exactly a surprise given the selling in biotech last week.

Now then, on the high-frequency trading (HFT) issue. Felix Salmon points out that the fervor over Michael Lewis’s book comes at a time when HFT action has diminished somewhat and the money being made isn’t what it was a few years ago.  But critical mass takes a while on these things, and a Lewis book seems to have turned out to be a catalyst for discussions of both the fairness question and how it relates to the underlying technology: Is this skimming or the way these firms provide liquidity (though one would argue who has asked them to act as an intermediary in some of these cases).

It seems to have thrown a monkey in the wrench of Virtu Financial’s IPO as well, at least for the time being. The times have changed – when smaller shops were doing the bulk of this activity and hitting other banks in their prop trading operations, it seemed like it was in a weird area and the nebulous definitions of what HFT did in the market didn’t move anyone to act, despite books from the likes of WSJ’s Scott Patterson or others. Things seem to be moving another direction now — and the old defense, that the HFT world provides liquidity and is totally benign (or worse, the knee-jerk “free markets gotta be free” assertion), isn’t enough. Institutions may be the ones most affected, and the concerns people have are there even if, as Salmon notes, the idea that Greenlight’s David Einhorn qualifies as the “little guy” doesn’t quite pass muster.

MORNING BID – Of bubbles and evaporating weather troubles

Apr 1, 2014 12:55 UTC

There seems to be a battle in the market between those who believe stocks are in, or are nearly in, a bubble (that should remind investors of 2007, 2000, or another time when the market was significantly overvalued), and those who believe all is well, things may be a bit frothy but hang in there – that kind of thing.

This could be the result of who is driving news flow.

People with boring diversified portfolios (and good on ya for that) probably see this as less of a big deal, given steady appreciation in stocks. Those with big positions in the momentum names that were hammered in the last week – one of the worst in terms of performance for hedge funds relative to the S&P since 2001, according to Goldman – might see it differently.

Really, what’s happened is that the more speculative areas of the market have been the focal point for some serious gains, and now, a good deal of selling. Sure, the biotechnology stocks aren’t at the point experienced by homebuilders and financial stocks in 2007, but who would want that anyway?

Citigroup is still down about 90 percent from its peak all those years ago. And financials are the only sector since October 2007 that still boast a negative total return (it’s not a close call, either – it’s still like negative 30 percent).

Bank of America/Merrill Lynch said in a note that the average biotech stock trades at 24 times sales, the highest since the tech bubble. Still, BofA/ML is sticking to its premise: “While we continue to recommend that investors fade secular growth stocks (and bond proxies) in favor of inexpensive cyclicals, overall market fundamentals remain favorable, and the frothy spots appear well contained. Equity bubbles rarely happen when everybody is talking about bubbles, and equity sentiment remains subdued, unlike the bullish levels of 2000.”

Whole load of assumptions in that sentence – equity bubbles rarely happen when everybody is talking about them? Sure didn’t feel that way in 2000 and 2007. And frothy spots are pretty contained when the baseline is still that it hasn’t engulfed the majority of the market the way it did in 2000.

This isn’t to say BofA is wrong on this front. The market doesn’t, as a whole, feel as overwhelmingly overpriced as it did in the 2007 period or in 2000. Indeed, even the IPO market, which has been chock-a-block with unprofitable companies, including a lot of biotech names, has not extended its gains to levels comparable to the 2000 tech bubble.

So, a bit more of a correction is certainly possible, and those who believed the market would churn its way through the year are pretty much on target for now. The S&P gained 1.3 percent in the first quarter, and a repeat of that for three more quarters for a 5.5 percent or so price change in the year wouldn’t seem out of line with expectations.

Investors should get a reasonable clue of the path of consumer spending as the nation’s automakers release data on their sales in March. GM, Ford and Toyota are expected to see smaller sales gains than Chrysler, but the hope is for slightly better sales as payback for recent weather-linked sogginess, right when the market is hoping to see such encouraging news.

Morgan Stanley sees this as the case, noting that one of its proprietary indicators of consumer activity is seeing a rebound in housing, auto sales and other consumer areas, while Goldman Sachs last week wrote that “we believe that dealer traffic experienced an inflection point mid-month,” anticipating a seasonally adjusted annual rate of car sales to come in at 16 million.

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