MORNING BID – The small and the long

Apr 29, 2014 12:58 UTC

Stability is the name of the game right now in equity markets – something that can be seen in the daily moves in various speculative sectors and how investors react to outside influences like Russia and Ukraine (really, the primary factor motivating the more wild ups and downs in the stock market at this point). Signs that the tensions may be thawing – and we’ve seen this movie before – contributed to a rebound in the Nasdaq and other indexes later in the day to leave the tech-heavy index basically unchanged on the session.

But that didn’t help the biotech stocks, and the cloud names like Workday and Salesforce.com (now riding a four-day losing streak), and the sharp declines in these names is something that the folks at Bespoke Investment Group suggest is a phenomena that newer investors haven’t seen before. That is, when stocks just keep falling, and it shows that the break in momentum in these names hasn’t been arrested. “It’s rare for a market to become that information-insensitive (in either direction), so this has been a great learning opportunity for traders that haven’t seen a similar sort of move,” they wrote. It also gives lie to the idea that this was a tax-related selling issue. While those stocks have tended to pop up with the market – and this morning’s jump in futures shows that investors really do have Ukraine close at hand even if the effect is a third-order one – but any jump in the Nasdaq has been a selling opportunity for those names.

Meanwhile, the bigger tech names like Microsoft and IBM ended higher, and investors kept plowing money into utilities and telecom names like the boring AT&T (snooze) or Verizon (snore). As Bespoke puts it: “Our thesis is that
the rotation is hunting stability, and that traders are willing to bid up predictable long term cash flows, with
less emphasis on whether those cash flows are “rich” (high P/E) or “cheap” (low P/E),” they said.

Either way it helps continue a run of outperformance the large-caps have managed against the small-caps in recent history. Mike O’Rourke of JonesTrading notes that just 32 percent of speculative positions in the Russell 2000 are long right now, a sharp drop from 59 percent in early March – yet still higher than the average 25 percent from 2007-2011, suggesting if things get worse, more people could bet against the Russell. (The small-cap Russell has had a notable run, in that it’s about 350 days into a stretch of not closing below its 200-day moving average, a sign of long-term strength. Could this break be on the way? More knee-jerk selling would get us there.)

While growth isn’t entirely being discarded, the stocks with more of their price tied up in future expectations are being shed, and taking other ones with it, like Amazon, a two-time participant in momentum stock moves, which was hammered again on Monday.

MORNING BID – Bubble, bubble

Mar 5, 2014 14:35 UTC

Opinions vary right now as to whether we’re seeing the return of bubble-like qualities across a broad swath of the market or just in select names (which really isn’t a bubble, then, bubeleh, just overvalued stocks).

With the Ukraine issue subsiding a bit, investors had a chance to sink their teeth back into the market, including a number of areas that seemed ripe for buying, like small-cap names, which saw a very strong 2.6 percent increase on Tuesday that outdid the larger-cap stocks.

Fund flows have remained strong to smaller stocks, and the overall valuation picture is still somewhat complicated here, as lower interest rates have tempered concerns about reduced liquidity (it’s a strange thing to see the safe-haven play into bonds not quite recede, while stocks shoot to the moon. The best of both worlds, until it ends.)

Naturally there are skeptics. Mike O’Rourke of JonesTrading has been a consistent one for some time, and he went all-out in a late note, pointing out that the double-levered long Russell ETF had 17 times its average daily volume.

That, he said, is “either some short being covered or a major reach for risk,” also noting the ongoing moves overnight seem correlated with dollar/yen and the bond market. Again, this is more a signal of a risk-on/risk-off environment than one operating on expectations of economic and earnings growth.

With the S&P 500 once again at an all-time high, it’s hard to argue that point, but let’s give it a shot anyway. The bull case would be that the weather will recede as a true problem and that growth and overall cash flow is good enough – and that low yields still make it complicated to invest in other asset classes.

It’s not a stellar argument, particularly when many of the more bullish strategists still also don’t see the S&P gaining much more than a few percentage points in the rest of 2014.

One outlying argument came from Morgan Stanley’s Adam Parker, who points out that even though about 40 percent of tech stocks have a price-to-sales ratio that exceeds 5 times, that’s still not close to the tech-bubble peak, when it was about 80 percent. Admittedly, this figure is at a five-year high at a time when people continue to fear markets rolling over somehow.

Still, the big gains in the S&P and Russell suggest a possible “blow off” move, according to Jason Goepfert of SentimenTrader. He says moves like this, in the past, have been at the apex of a rally – especially as the small-caps and biotechs moved up sharply, and they’re the kind of high-beta outperformers that go nuts just before the deluge. So there’s that.

Longer-term strength can follow moves like this, often after some short-term weakness, however.

MORNING BID – Detangling Ukraine

Mar 3, 2014 13:59 UTC

Geopolitical situations are difficult ones to interpret from a markets perspective. For the time being, markets are responding to the escalation of hostilities in Ukraine – where Russia has bloodlessly taken control of the Crimea region and is threatening more action in the eastern part of the country – with a bit of negativity. The action is notable in U.S. equity futures, down more than one percent, and some buying in the safe haven that is U.S. Treasuries, along with bond markets around the globe.

Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management, said it well enough in describing the market views so far, that “the fallout for the equity markets may be minor over the medium-term. The short-term is more of a gamble. It should serve as a reminder that you don’t put grocery money for the next month in risky assets.”

This isn’t a surprise, of course, nor is it a surprise that the G7 nations are looking at ways to sanction Russia or to boot it out of the G8, easier in theory than in actual practice. The pass-through effects on the world are hard to determine. Ukraine is a big grain producer and disruption to those supplies would result in an inflationary environment there. Also, some of the exported oil out of Russia passes through Ukraine, so it’s not hard to imagine scenarios where the world economy is affected by some kind of escalation that goes beyond what people expect at this particular moment.

Citigroup strategist Tobias Levkovich, in a morning note, said as much: Companies with big international exposure are likely to keep underperforming but “this is far different than worrying that the near 70 percent of sales and earnings in North America would be threatened by events in the Crimea, which is rather unlikely.”

That still seems far-fetched, and the overnight trading in VIX futures does not betray a particularly lofty level of anxiety, with the March VIX contract jumping to about 16.5 from the Friday close of 15.10; with the spot VIX at 14, the level of worry remains subdued for the time being, though it will rise in morning trading today.

The most stark example of the effect on the markets is in the currency world, where the Ukrainian hryvnia has lost more than 20 percent so far this year, as well as the Russian ruble, which has also dropped substantially, though not as much as its Ukrainian cohort. The overnight action is not encouraging here either, as Moscow stocks are off sharply – 11 percent! – and the ruble has dropped another 2 percent.

MORNING BID – Janet Yellen’s rain (snow) check

Feb 27, 2014 14:16 UTC

This is the thing about delaying the new Fed chair’s follow-up testimony by two weeks due to bad weather, you actually make the second hearing something that’s potentially interesting. (It will depend, of course, on whether members of the Senate Committee ask provocative questions, and while you can lead a horse to water, well, you know.)

In the interim two weeks since Janet Yellen last appeared before Congress, the U.S. economic picture has gotten much more muddled. That’s mostly because of poor retail sales and employment figures, and the out-of-control situation in Ukraine which has led to a regional flight of some assets. There’s also been some interesting comments from the likes of Fed Governor Daniel Tarullo, who suggested the Fed should be paying more attention to the formation of asset bubbles and the use of monetary policy to curb them. That anyone is surprised at this shows how pervasive the “Fed put” option has become in the discussion of Fed activities, so we’ve really lowered expectations here.

Meanwhile, Boston Fed head Eric Rosengren said the Fed is looking very closely at activities in emerging markets, which is sort of obvious in a sense but contradicts, if only modestly, Yellen’s thoughts two weeks ago. And really, the Fed’s ability to influence economic activities overseas in some of the world’s developing markets or troubled spots is even weaker than what it can exert over U.S. demand. So maybe it’s just one to grow on.
Either way, Yellen would probably want to comment on the situation, if, again, a smart senator would think to … well, never mind.

Overnight, the situation in the Ukraine has worsened, with armed gunmen taking control of regional government headquarters in Crimea, vowing to be ruled from Russia. The Ukrainian hryvnia continues to sink while the Russian ruble plumbs new five-year lows, surpassing the previous day’s losses, and a bit of risk-off action can be seen in the zloty and a bit of better buying in Treasuries, where the 10-year yield was lately at 2.66 percent. Fund flow figures will be key to watch here to see if overseas flows increase to the U.S. or at least to the developed areas of Western Europe and Japan.

MORNING BID-All the metal in China

Feb 26, 2014 13:59 UTC

Without a lot of fanfare, the U.S. equity market has worked its way back to a few points of all-time highs, as concerns over emerging markets (largely related to Ukraine) have magnified, as have worries over China’s struggling growth.

That’s once again produced the “best house in a bad neighborhood” effect for the U.S. stock market; bond yields remain range-bound in the 2.70 to 2.75 percent area, the 10-year still reflects a value that doesn’t suggest economic acceleration or worries over massive slowing either.

One of the better indicators of the effect of China’s slowdown comes out of Brazil, where Vale SA, the world’s largest iron ore producer and exporter, will issue its fourth-quarter results.

The company was expected to exceed expectations due to cost cutting and higher iron ore prices, but sluggish demand in China is a long-run effect that cannot be shunted aside. Starmine sees the stock as heavily undervalued, as it has been in a persistent downward trend since early 2011, when it peaked at about $35 a share (US); it now marks time around $13 to $14. The company did surprise the last time, so it’s got that going for it.

It comes at a confusing time for those following China. Authorities there have been allowing or guiding the yuan lower, weakening it at a time when exporters have been less competitive due to China’s real effective exchange rate (measured by the IMF and BIS) hitting all-time highs, according to a Brown Brothers Harriman note on Tuesday. “We believe that officials would like to contain further appreciation by moving the nominal exchange rate weaker,” they wrote.

Part of Chinese officials’ motivation seems to be to inject a bit of two-way volatility into the currency market, lest it become a constant one-way bet, but making the environment more competitive for their exporters is also a necessity.

As Bank of America/Merrill Lynch pointed out this week, the U.S. only exports about 0.6 percent of GDP to China (one reason the slowing there isn’t as big a deal for the USA) but China’s exports to the US and Europe are about 7 percent of its GDP – and that’s an issue.

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