What traders are watching 11/28/2016 – Dave Lutz

Greg Blotnick – What traders are watching 11/28/2016 – per JonesTrading

TRUMP TRADES– Donald Trump’s economic plans received strong backing[ft.com] from the Organization for Economic Co-operation and Development on Monday, with the international organization predicting the president elect’s infrastructure planswould increase US growth, combat inequality and energize discouraged workers.

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Boosting spending on infrastructure and improving education could relieve some of the burden on the US central bank to support the economy – Stanley Fischer, vice-chairman of the Federal Reserve Board, said[ft.com] well-targeted fiscal policies could lift America’s economic potential. About $500bn had gushed from equity funds and into bonds this year but last week the flows reversed[ft.com], with investors yanking more than $18bn from fixed-income vehicles and pouring $27.5bn into stocks, according to EPFR Global

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Industrial metals also remained red hot on hopes of strong demand for property and infrastructure investment in China and the United States – Chinese steel futures jumped over 6 percent, while iron ore futures also gained about six percent and zinc, used to galvanize steel, powered[reuters.com] to a nine-year high on the London Metal Exchange – China’s top economic planner today approved[bloomberg.com] a 247 billion-yuan ($36 billion) railway plan to link Beijing to neighboring cities as part of a government effort to improve connectivity around the nation’s capital.

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We need to look at month-end rebalancing.  Getting chatter $17-$27B of equities for SALE and Bonds to BUY by rebalancers.   “Largest since Oct 2015” says the Goldman.  Spoos + 5% MTD, TLT down almost 8% MTD

On Friday, investors turn their attention[ft.com] to the US for an update on the health of the country’s labour market. The US economy is expected to have created 175,000 jobs in November, from 161,000 the previous month. Economists expect the unemployment rate remained unchanged at 4.9 per cent, while average hourly earnings grew just 0.2 per cent in November, from the previous month, when they climbed 0.4 per cent.

MOONSHOT– Small company shares on Friday notch their longest winning streak in 20 years[blogs.wsj.com] on a shortened Black Friday trading session. The Russell 2000 Index rose 0.4% in in the shortened session to book its 15th advance in row. This streak ties a run last seen in February 1996. The longest ever streak, 21, was hit back in 1988.  Investors are betting that President-elect Donald Trump will relax regulations, lower taxes and pump money into infrastructure projects. Such policies should benefit small caps more than there larger brethren.


Sustainable Sources of Competitive Advantage by Morgan Housel

Another great post by Morgan who belongs in the pantheon of great financial journalists:

Sustainable Sources of Competitive Advantage

David Paul Gregg invented the CD, which is amazing and changed history. But you’ve probably never heard of him because CDs aren’t difficult to make, and lost relevance over time.

Most things work this way. As soon as a smart product or business idea becomes popular, the urge to copy it and commoditize it is the strongest force economics can unleash. Jeff Bezos summed this up when he said “Your margin is my opportunity.”

The key to business and investing success isn’t finding an advantage. It’s having a sustainable advantage. Something that others either can’t or aren’t willing to copy once your idea is exposed and patents expire.

Finding something others can’t do is nearly impossible. Intelligence is not a sustainable source of competitive advantage because the world is full of smart people, and a lot of what used to count as intelligence is now automated.

That leaves doing something others aren’t willing to do as the top source of sustainable competitive advantage.

Here are five big ones.

The ability to learn faster than your competition

Someone with a 110 IQ but the ability to recognize when the world changes will always beat the person with a 140 IQ and rigid beliefs. The world is filled with smart people who get nowhere because their intelligence was acquired 20 or 30 years ago in a vastly different world than we live in today. And since intelligence has a lot of sunk costs – college is expensive and hard, for example – people tend to cling to what they learn, even while the world around them constantly changes. So the ability to realize when you’re wrong and when things changed can be more effective than an ability to solve problems that are no longer relevant. This seems obvious until you watch, say, Kodak or Sears trying to solve 1980’s problems in the 2000s.

Marc Andreessen promotes the idea of “strong beliefs, weakly held,” which I love. Few things are more powerful than strongly believing in an idea (focus) but being willing to let go of it when it’s proven wrong or outdated (humility).

The ability to empathize with customers more than your competition

Forty-seven percent of mutual fund mangers do not personally own any of their own fund, according to Morningstar. That’s shocking. But I suspect something similar happens across most businesses.

What percentage of McDonald’s executives frequent their own restaurant as a legitimate customer interested in the chain’s food, rather than a fact-finding mission? Few, I imagine. How many times has the CEO of Delta Airlines been bumped from a flight, or had his bags lost by the airline? Never, I assume.

The inability to understand how your customers experience your product almost guarantees an eventual drift between the problems a business tries to solve and the problems customers need solved. Here again, a person with a lower IQ who can empathize with customers will almost always beat someone with a higher IQ who can’t put themselves in customers’ shoes. This was apparent in the recent election, when understanding the electorate’s mood far exceeded the power of traditional campaign strategies.

It’s also why the best writers are voracious readers. They know exactly what readers want and don’t want because they themselves are customers of content.

The ability to communicate more effectively than your competition

Business success doesn’t necessarily go to those with the best product. It goes to whoever is the most persuasive. George Soros may be one of the brightest minds in finance, but he would fail miserably as a financial advisor. Not one person in ten who reads his books understands what the hell he’s talking about.

Most business edges are found at the intersection of trust and simplicity. Both rely on the ability to tell customers what and why you’re doing something before losing their attention.

This is one of the crazy things that gets harder to do the smarter you are. There’s a bias called “the curse of knowledge,” which is the inability to realize that other people with less experience than you have don’t see the world through the same lens you do. I saw this firsthand when a financial advisor told an utter novice grandmother that a higher bond allocation (which she wanted) didn’t make sense “because of the slope of the yield curve.” She had no idea what this meant, and told me experiences like this eroded trust since she couldn’t distinguish her confusion from his obfuscation.

The willingness to fail more than your competition

Having no appetite for being wrong means you’ll only attempt things with high odds of working. And those things tend to be only slight variations on what you’re already doing, which themselves are things that, in a changing world, may soon be obsolete.

Here’s Bezos again: “If you double the number of experiments you do per year, you’re going to double your inventiveness.”

The key is creating a culture that allows you to fail often without ruin. This means not docking employees for trying things that don’t work, and not betting so much on a single idea that its failure could cripple the company.

Amazon and Google, I’m convinced, are successful because they’re better and more willing to fail than any other company. Accepting lots of small failures is the only way they’re able to eventually find a few things that take off.

The willingness to wait longer than your competition

Rewards sit on a spectrum: Small, unpredictable ones in the short run, big, higher-odd ones if you wait longer.

It’s amazing how much of a competitive advantage can be found by simply having the disposition to wait longer than your competitors.

Waiting longer gives you time to learn from, and correct, early mistakes. It reduces randomness and pushes you closer to measurable outcomes. It lets you focus on the parts of a problem that matter, rather than the chaos and nonsense that comes in the short run from people’s unpredictable emotions.

If you can wait five years when your competitors are only willing to wait two, you have an advantage that is both powerful and uncorrelated to intelligence or skill.

Which is about as close to a free lunch as it gets in business.


Zervos on Election

Key Points from David Zervos’ Post-Election Conference Call:

  • Market appears to be reacting positively to the calm nature of Trump’s victory speech (Trump focused on infrastructure and growth, not on deporting people and building walls), but David is not sure how long that attitude will last and he would not jump into EM currency at this time, nor into risk assets.
  • David had pointed to Brexit as an example of what could happen to the US dollar post-Trump, but he never expected the degree of weakness that we had seen with the GBP.  Seeing some modest weakness in the USD this AM, and though he wouldn’t jump back into EM currencies immediately, he does think there will be a time to get back in to those EM currencies.
  • The bulk of the move in rates this AM has been a result of higher breakevens, rather than real rates, and David expects real rates to drift lower.
  • There have been some concerns about whether the Chinese might devalue, but David doesn’t think that’s a big concern, not in the near/medium term.
  • He believes the mobility of capital and labor in the US will be in a restrictive environment for the next 3-5 years and that does not make him bullish on risk assets at this time.
  • Sees eventual potential for real rate differential trade (real rates in Latam being much higher) becoming interesting again as this plays out.

Third Point 2016 – Letter/Outlook

Third Quarter 2016 Investor Letter Review and Outlook


Third Point returned approximately 5% during the Third Quarter, outpacing the S&P 500 index by 1% and the CS Event-Driven index by 2%, with approximately half the net equity exposure. Results were driven by profits in each of our sub strategies – Equities, Sovereign and Corporate Debt, Structured Credit, Risk Arbitrage, and Privates – and also in each geographic area in which we invest globally. We generated alpha in each month of Q3. Despite a difficult year for hedge funds generally and a challenging start to the year for us, we have delivered positive returns for the year to date.

Our results have been driven by a number of idiosyncratic opportunities that we have invested in over the past six months and we see more of the same types of ideas in our pipeline. Trading and portfolio construction have required a strong constitution this year. The “haunted house” market coined by the late JP Morgan legend Jimmy Lee over 18 months ago has continued throughout this year with a constant string of macro “surprises.” A significant share of our time is spent deciphering the chatter to identify the most relevant “key” that will tip market risk and adjusting positioning accordingly. This year, our research led us to transition away from the short China / long Dollar bet in mid-Q1 and go long energy credit and out-of-favor industrial commodities-related equities. Later in the year, we responded to Brexit by covering shorts during the post-vote panic and increasing long exposure.

Today, we are focused on a few key areas: • Understanding the global shift from monetary to fiscal policy: monetary policy’s effectiveness is waning, which will impact bond yields. This influences our overall views of market valuation as well as sector allocation considerations. 2 • Will fiscal expansion become the new world order? While it seems logical and timely, it is challenging considering the very high debt to GDP levels globally. However, fiscal expansion could be an antidote to rising populism around the world which might smooth the way towards stimulatory infrastructure measures at home and abroad. One caveat is that not all countries have the flexibility to pursue such measures. • While China has fallen temporarily off the radar screen, we still see reasons for concern. The stabilization in economic activity has come at the cost of increasing leverage and a potentially overheated housing market. Political change next year may also result in increased volatility.

• We are clearly in the late stages of a business cycle following an eight year (tepid) expansion. While we do not forecast a financial crisis or a recession, a clear path to growth seems elusive. Consumers have been reducing spending and businesses have never regained their pre-2008 capital investment levels. We might soon long for 2% GDP growth. • Earnings have stalled for a few years and while this can be partially explained by falling oil prices, a strong dollar, weak global growth, and flat margins, earnings estimations may be inflated at these levels. This last observation dovetails with both the opportunity and the challenge we face investing today. We have seen a return to a “stock-pickers” market this year. However, that term does not mean what it did fifteen or twenty years ago when we were in our infancy. Then, picking stocks could be done in a virtual bubble and all of our time was spent deep in financial statements.

While our analyst team still spends the vast majority of its workday analyzing fundamentals, getting overall portfolio positioning right is equally essential to generating returns. The macro considerations discussed above must be interpreted correctly and applied successfully. When we add in the use of data sets and “quantamental” techniques that are increasingly important to remain competitive while investing in single-name equities, it is clear that our business is rapidly evolving. 3 We often focus on disruption when generating investment ideas; just as Uber has disrupted the taxi and car rental industries, Amazon has changed retail, and Facebook and Google have altered the print media business, disruptions are also changing investing. While some doors have closed, others are opening. We believe that maintaining our opportunistic and nimble framework has allowed us to transition successfully into this next phase. Our democracy has also been meaningfully disrupted this year.

Social media, primary processes built for the pre-internet era, and illegal foreign cyber-attacks have changed the trajectory of our political system. We try to analyze all of these political and economic events in a dispassionate manner, separating our feelings from what we think the impact will be on the economy, markets, and certain industries. Maintaining such emotional distance has been particularly difficult during the most disappointing and bizarre election in our country’s history. While many important issues affect the next president, from the appointment of a Supreme Court Justice to policies on education, healthcare, immigration, and the environment, we are focused on a few basic questions: What can we expect for economic growth in the coming years and do we face a recession? What is the prospect for monetary policy and where can we see long and short term rates? What impact will rates, productivity changes, and earnings expectations have on multiples? It is too soon to have answers to these questions and we may see surprises on Election Day.

Our short-term base case is for more of the same. This translates into a decent environment for Third Point to find special situations in equity and credit markets and make long-term bets on outstanding companies. Quarterly Results Set forth below are our results through September 30, 2016: Third Point Offshore Fund Ltd. S&P 500 2016 Third Quarter Performance* 5.0% 3.9% 2016 Year-to-Date Performance* 7.2% 7.8% Annualized Return Since Inception** 16.0% 7.4% *Through September 30, 2016. ** Return from inception, December 1996 for TP Offshore Fund Ltd. and S&P 500. 4 Portfolio Positioning Credit Update: Dell and Sprint In addition to Argentine sovereign bonds and energy-focused credit, we have also profited this year from several opportunities to add performing corporate credit exposure. Performing credit is interesting to us from time to time; we typically search for total return opportunities rather than screening only for yield.

We will often look for longer duration bonds in a company we believe has a visible catalyst for an improvement in its credit profile. We are able to create these dislocated positions quickly – before the market catches up – by building on deep fundamental research performed by our sector specialists who work in conjunction with our dedicated credit team. Dell Inc. and Sprint Corp. are two examples that have stood out as top winners this year. During the Second Quarter, Dell announced a large bond issuance to finance the acquisition of EMC Corp. While the Dell issuance is not a situation that would traditionally be popular with event-driven or distressed credit mandates, we believed market dynamics led the deal to price ~200bps wider than where we valued the bonds. Following its own LBO in 2013, Dell significantly improved its business through a variety of operational improvements and cost cutting initiatives. We believed the company would follow a similar playbook with the EMC acquisition and that the pro forma company would be a market leader in several areas including external storage, integrated infrastructure, and server virtualization software.

Dell has stated a goal of achieving investment grade ratings within 18 – 24 months of the acquisition, setting a path to tightening in long duration bonds and to attractive returns for our portfolio. Sprint has been another of our best performing investments this year. We were able to initiate our position at an attractive entry point in Q1 amidst the energy-driven dislocation in the credit markets and after the bonds were downgraded in February over concerns about Sprint’s near-term corporate debt maturities. We believed we were protected on the downside since the company has minimal outstanding senior or secured facilities and could likely issue new bonds higher in the corporate capital structure to refinance the pending 5 maturities. The company is also continuing to improve its business by strengthening the network in key areas, growing the subscriber base, opportunistically incorporating strategic partnerships, and executing an attractive cost of capital cycle.

Private Investments Third Point Ventures (“TPV”) was created in 2000 and currently invests in Technology, Healthcare, and FinTech companies at various stages. TPV receives all of its capital from Third Point’s funds and does not currently take outside dedicated investments. TPV’s aim is to produce superior risk-adjusted returns while adding perspective, ideas, and insights to Third Point’s general research efforts. We have found that being able to invest across the arc of a company’s life, from start-up through each stage of growth to pre-IPO funding rounds, has enhanced investor returns by exposing us to innovative new companies and thinkers. Our role as board members of these companies has introduced us to other Silicon Valley leaders, broadening our network and deepening our knowledge. While our two full-time TPV employees sit in our Menlo Park office, private investments have been sourced throughout the firm across our technology, ABS, distressed, and healthcare teams in New York. We have a significantly higher bar for such investments given their restricted liquidity and have limited overall fund exposure to 10% of NAV.

Of the 41 TPV investments made to date, 14 generated positive returns upon exit and 21 are currently active. Our current portfolio consists of 12 Technology investments, six Healthcare investments, and three FinTech investments. Privates currently represent ~6% of total portfolio exposure and we expect two of our larger investments to IPO in the next 18 months. Two of our portfolio companies, Apigee Corp. and Akarna Therapeutics Ltd., have contributed to returns this year and we have included more information about them below. Apigee TPV initially invested in Apigee in July 2008 when the company was known as Sonoa Systems. The company originally targeted their hardware appliance-based technology at Systems Oriented Architecture (SOA), challenging the industry-leading IBM as enterprises 6 quickly developed to connect application elements over networks. After recognizing in 2010 that there was a transformational opportunity to apply Sonoa’s core technology, Third Point Ventures helped the company rebrand itself as Apigee and pivot to a focus on enterprise digital transformation via a software platform for APIs (Application Programming Interfaces).

Since then, APIs have become the highway for the fast-moving digital economy. Apigee’s industry-leading API platform enables enterprises to meet the demands of customers with scalable and flexible digital technology. API platforms allow businesses to increase innovation while adapting to highly variable customer needs by securely providing shared data and services. The Apigee Edge API Management Platform connects digital experiences in a secure environment. Apigee’s API platform delivers analytics, security, developer portals, monetization, and policy enforcement. Since 2010, over 300 leading global enterprises have selected Apigee to enable their digital business, including more than 30% of the Fortune 100, four of the top five Global 2000 retail companies, and five of the top ten global telecommunications companies. The benefits of interacting digitally drive a large market opportunity. Forrester predicts that U.S. companies alone will spend nearly $3 billion on API management by 2020. Apigee now employs approximately 400 people. Drawing investors with its attractive growth profile, Apigee completed a successful initial public offering (NASDAQ: APIC) in April 2015. On September 8, 2016, Google announced their intention to acquire Apigee for $625 million in cash. Pending approvals, the transaction is expected to close later this year. Over an eight year period, TPV steadily assisted and guided the company as we invested in the Apigee Series B at $25 million valuation and the Series C, D, E, F, G, and H financing rounds before buying into the IPO. We have not sold shares and have remained active on the Board continuously since our first investment. Following the conclusion of the pending transaction, Apigee will have generated an IRR of ~20% and a multiple of invested capital of 2.4x. 7 Akarna Therapeutics TPV was a founding investor in Akarna in Q1 2015. Akarna focuses on the treatment of Nonalcoholic Steatohepatitis (NASH), also known as fatty liver disease. Akarna was attractive for several reasons:



Greg Blotnick – Nine Baby Boomer Stocks To Buy

Excerpts from Greg Blotnick – Nine Stocks To Buy

HCP, Inc.., a REIT with a 6.4% dividend yield. HCP has 1,200 properties specializing in senior housing, life science and medical offices, with a diversified mix of independent and assisted living. Shareholders have enjoyed a compound annual return of 14.9% since their 1985 IPO, and HCP has increased their dividend for 31 consecutive years. Healthcare expenditures are set to increase with the “graying of America” and HCP is well-positioned to capture this secular growth with their unique, diversified real estate portfolio.
Home Depot (HD) – Boomers entering retirement will spend their free time fixing up their homes, or spending money on second homes to renovate. The stock yields 2.25%, ahead of the S&P 500, and recently hiked their dividend by 17%. Home Depot is the 2nd-best performing stock of the last 30 years, with a cumulative return of nearly 68,000% or ~24% annualized. Revenues should hit $100 billion in 2018 and the industry enjoys long-term secular tailwinds in an aging housing stock and new household formation.
Amazon, Inc. (AMZN) – As boomers age, their preference will shift towards the convenience of ordering online rather than driving to the store. Bezos’ e-commerce monster now captures over 50 cents of each incremental dollar spent online and twenty years of reinvestment are finally showing up in the form of margin expansion and triple-digit growth in free cash flow. Other growth drivers include Prime Video and the firm’s recent entrance into logistics.

What Traders Are Watching 10/31/2016

“What Traders are Watching”

MONTH END– Last day of the Month today, and a Big Mutual Fund Year-End date.   Don’t think we will see any “Window Dressing” (usually occurs into Dec31), but we may see some of these big “Tax Loss” Candidates see relief from recent selling pressure.  


The Fed’s preferred measure of inflation is due later[wsj.com] Monday. Rising inflation and rising yields could undermine the relative value case for stocks, with the correlation between bond and equity prices now positive – Economic circumstances and attitudes of policy makers[wsj.com] have shifted in the past year in ways that suggest the likeliest path of inflation is up, not down. Data released Friday showed that core inflation, which excludes food and energy, reached a two-year high of 1.7% in the third quarter, according to the Fed’s preferred measure. Other data found stirrings of wage acceleration – Global Yields are modestly lower this AM

Japan’s industrial output stalled in September in a worrying sign[asia.nikkei.com] that the economy, already struggling to mount a sure-footed recovery, may be losing some momentum due to weak consumer spending and exports – Separate data showed retail sales fell more than expected in September from a year ago, further evidence that private consumption remains a drag on growth.  The yen is slowly coming down from its lofty heights as markets grow more conscious of interest rates gaps between Japan and the rest of the world, giving a lift to the Japanese economy. While long-term interest rates are rising in the U.S. and Europe, those in Japan are pegged at zero.

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An article I wrote for ValueWalk: Short Selling In A Bull Market – Common Mistakes In Security Selection – Greg Blotnick, CFA

Here’s an article I wrote for ValueWalk: Short Selling In A Bull Market – Common Mistakes In Security Selection – Greg Blotnick, CFA

Short Selling In A Bull Market – Common Mistakes In Security Selection by Greg Blotnick, CFA

It was June 22, 2015 when both articles came out. The NY Times authored a piece titled “The Loneliness of the Short-Seller” and later that day the Financial Times released “Shorters needed.” If past is prologue, the media tends to do a fantastic job at marking turning points – all the way back to Barrons’ infamous cover story “The Death of Equities” in 1979. Contrarians should take note, as the S&P has drifted even higher since journalists lamented the death of short selling sixteen months ago.

Short Selling

Today’s market, while not egregiously overpriced, offers poor risk-reward in comparison to the opportunity set investors were presented in the early 1980’s: an S&P 500 trading at 8-9x earnings combined with double-digit interest rates in decline. 2016 presents the inverse: a fully-valued market combined with rates at the zero-lower bound and climbing, serving as a headwind to further multiple appreciation. For those of us not forced to be fully invested, this is an ideal environment to overweight cash and begin stalking new short ideas. Here are three of my preferred criteria:

1. Cheap Stocks Make Better Shorts Than Expensive Ones.

  • Investors are easily swayed by the allure of a low trailing P/E ratio. It saves them from having to forecast the future, which requires work, and serves as a simple crutch for justifying an investment to colleagues or investors (“the stock is cheap!”). Experienced investors and short sellers know that a low P/E ratio is the sign of a business facing severe headwinds – either cyclical or secular – and that earnings are likely in decline. Forecasting earnings two or three years out often reveals that what appears to be 10x trailing earnings is a value trap, as the stock is trading at 20x forward or 30x earnings multiple years out.
  • For these optically cheap short candidates, secular headwinds are preferable to cyclical. Share prices of cyclicals tend to move swiftly and unexpectedly from the bottom and can quickly lead to large losses, especially businesses with heavy financial and/or operating leverage. At the risk of stating the obvious, the best short candidates are melting ice cubes where the probable outcome is a slow bleed to zero; rather than having to time covering a short, the decision is made for you when the stock gets delisted. Jim Chanos is often asked about the asymmetric upside risk from a short and gives a simple response: “I’ve seen more stocks go to zero than infinity.”

2. Go Where There’s Dumb Competition.

  • One under-utilized screen for short candidates: stocks with high retail ownership. The general investing public tends to fall for the usual “Three F’s” of short schema (fads, frauds and failures) far more often than professional investors. The ETF/passive boom has spawned profitable short targets as well, particularly decaying levered ETF’s or the rise in oxymoron “low-volatility equity” products. Quantitative screens exist to find ‘retail clustering’ but qualitative analysis is more useful: go through SeekingAlpha comments sections, StockTwits’ “trending” bar, and the Twitter stream for a given stock.
  • Other than fads and frauds, yield plays are honey to the retail bee – particularly in the current low-rate market environment. Some recent examples include MLP’s/offshore driller drop-downs or other ‘yieldco’ capital structures that have no fit with the economics of the underlying assets and exist primarily to enrich management at shareholders’ expense. Screening for stocks with double-digit dividend yields often reveals short candidates, as the market is signaling the dividend is unsustainable and likely to be cut or suspended entirely. The caveat is that timing these shorts can be difficult as they are most akin to shorting a bond – high cost of carry accompanied by an event where the instrument loses 25%+ of its value overnight.

3. Beware The Embedded Macro Bets In A Stock.

  • David Tepper frequently preaches this: investors often ignore the embedded macro bets they are making. For example, consumer staples today trade at 20-25x earnings despite flat top line and mediocre earnings growth. Why? In an environment with zero and negative bond yields, a 2-3% dividend is a healthy substitute and offers the added benefit of pricing power to offset inflation. The same can be said for some REITs and Utility stocks – it is simply a market truism that stocks occasionally disconnect from fundamentals for long periods of time. If you are short any of these three sectors and rates continue their rapid decline, you will lose money regardless of the business’ underlying performance.
  • Other examples of dangerous embedded macro bets would be shorting commodity-linked energy or basic material companies. The equity in a distressed and over-levered shale driller may be worthless with WTI crude at $30, $40 or $50 – but being short said driller as crude goes from $30 to $50 can quickly lead to a 500%+ unrealized loss. Pay attention not only to leverage but to how the stock price has historically correlated to the commodity it tracks and what sort of beta it has to the underlying.

Good luck trading,

Greg Blotnick, CFA

About the Author

Author biography: Greg Blotnick is currently a long/short equity analyst at a private investment firm, covering consumer, TMT and industrial stocks. Greg has spent his entire career in the asset management industry and served as a fundamental analyst for former multi-billion dollar hedge funds. Greg’s experience spans multiple investment strategies including long/short equity, credit, event-driven and capital structure arbitrage. Greg holds an MBA from Columbia Business School and a B.S. in Finance from Lehigh University, and is a CFA Charterholder. 



Merger Monday – per JPM

Market update – the main highlights for Mon morning are strong flash PMIs (from Europe and Japan) and a lot of M&A.  The M&A in particular is interesting as it appears the combination of greater US election clarity and the prospect of higher borrowing costs is sparking an acceleration in deal activity.  The notable transactions from over the weekend include T/TWX ($85B equity value, $108.7B total consideration), COL/BEAV ($6.4B equity value, $8.3B total consideration), GNW/China Oceanwide ($2.7B equity value) and AMTD/TD (~$4B deal value).  Also, QCOM may purchase NXPI as soon as this Wed (in a deal likely to be worth ~$37B).  On the economic front, the flash PMI numbers are encouraging (esp. in Europe).  The Bottom Line for US equities remains the same – while the ingredients for a year-end rally could fall into place (see the “checklist” below), it still seems like the SPX faces an ultimate ceiling up around ~2200 for the time being (as firming yields cap multiple expansion and the ’17 consensus EPS estimate fails to move higher).


daily newsflow

“What Traders are Watching”

HEADFAKE?– China’s producer prices rose for the first time since 2012, indicating further stabilization[straitstimes.com] in the world’s second-largest economy – Producer prices edged up 0.1 per cent from a year earlier, the National Bureau of Statistics said on Friday (Oct 14), compared with the previous month’s fall of 0.8 per cent. It marked the first growth in PPI since January 2012.

China power use growth, a key barometer[shanghaidaily.com] of economic activity, accelerated in September due to more consumption by the service sector, an increasingly significant driver of the Chinese economy, official data showed yesterday.  Electricity consumed by the service sector expanded rapidly in September, with information, computing and software industries surging 17.1 percent year on year – Once again, Was the Chinese Trade Data yesterday skewed due to the Hanjin Bankruptcy?

There was MASSIVE protection buying yesterday on the angst about Chinese Trade – The CBOE US Equity Put Call Ratio Intraday (PCRTEQTY) hit 2.52 – A VERY big BUY Signal for Contrarians

China is planning to merge[straitstimes.com] Sinochem Group and China National Chemical Corp in what would be a combination of two companies with more than US$100 billion (S$138.49 billion) in assets as the government continues its overhaul of state-owned enterprises.  It was also not clear how the the plan would affect China National Chemical, also known as ChemChina, and its proposed acquisition of Syngenta for a record US$43 billion – Banks are on Fire in Europe right now as Chinese Headers abate fears of a massive slowdown

BANKS AND RETAIL– Retail sales, a closely watched indicator of consumer spending and a key driver of overall growth, have sputtered in recent months following a strong start to the year. That should change Friday[wsj.com] when the Commerce Department releases its monthly retail-sales data, which measure everything from traditional stores to restaurants to online retailers.

Predictions for the more representative “control group” also look decent. Items excluding cars, gasoline and building materials, which are often volatile month to month, are expected to have increased 0.3% after falling for two straight months – Evidence is mounting that overall retail sales might have picked back up following a summer lull. U.S. consumers were more active last month than in any September since 2008, according to Gallup – XLY (Discretionary) had a close test of the 200dma before rebounding yesterday.

“Options protecting against a 10 percent drop in the XLF cost 9.5 points more than calls betting on a 10 percent rise on Sept. 30, according to six-month data compiled by Bloomberg. That marked the highest spread since April 2014. The spread was 6.8 points on Wednesday, still 11 percent above the measure’s two-year average.” Sounds crowded – “Sell the Rumor, Buy the News?”  JPM up near YTD highs as They beat along with C and WFC

Investment-banking revenue is set to rise 3% in the third quarter thanks in part to a pickup in bond issuance, according to Nomura analysts[blogs.wsj.com]. But that rise masks some deeper concerns in the business. Revenue in stock underwriting is lower than it has been in 20 years, and the dollar volume of deals completed during the third quarter fell 12% from their level in 2015, according to Dealogic.

FEDSPEAK– Fed may have to hike rates faster than it now forecasts, Rosengren says[marketwatch.com] – “My own view is that if the unemployment rate falls as much as I’m expecting than it is possible that we’ll have to raise rates faster than the summary of economic projections” – At 1:30 PM, Speech by Fed Chair Janet Yellen, at the Federal Reserve Bank of Boston’s Annual Research Conference: The Elusive “Great” Recovery: Causes and Implications for Future Business Cycle Dynamics

Traders have priced in a greater than 60% chance of a rate hike at the Fed’s December meeting, when Fed Chairwoman Janet Yellen is scheduled to hold a press conference.  “To me that seems quite appropriate,” Rosengren said. “We have tended to move around the time the Fed chair has a press conference” – The US 10YY remains upside it’s 200dma.

Early Earnings returns[macro-man.blogspot.com] have not been encouraging, and companies have retreated behind the excuse of the strong dollar to justify their poor performance.   Indeed, of the first 25 s&p 500 companies to report, 60% had a moan about the strong dollar.

Bespoke notes[bespokepremium.com] just over two weeks ago, on 9/23, the sector’s 10-day A/D line rose to its highest level since March.  As if a light switch suddenly went on, though, the next ten trading days saw extremely negative breadth as the 10-day A/D line cratered to its most oversold level since November 2012 and one of the most oversold readings for the sector on record.

SPX cash 2120 support held yesterday, but we have fallen below that 100dma and long-term uptrend.  We need a recovery today

FLOW SHOW(EPFR and Lipper) – Lipper[in.reuters.com] said money-market funds posted $10.6 billion in withdrawals during the week – This came ahead of reforms, taking effect on Friday, that would force some funds to let their share prices float with the market.

Some $1 trillion[bloomberg.com] worth of assets have shifted from prime money market funds into government money market funds that invest in safer assets such as short-term U.S. debt, according to Bloomberg estimates. The exodus has driven up Libor rates as banks and other corporate entities compete to replace the lost funding.

·         European stocks recorded $1.1bn of withdrawals in the week to October 12, the 36th consecutive week of outflows, according to fund flows tracked by EPFR.

·         European bond funds were hit with $2.2bn of outflows – the largest weekly withdrawal since June 2015.

·         Non-U.S. stock funds attracted $561 million and their first week of inflows since late August – Emerging market stock funds took in $764 million, and Japanese equity funds added $106 million in their first week of inflows since July

·         $3.4b outflow from equity funds/ETFs this week. Negative 34 of past 41 weeks.

·         $2.1b outflow from taxable bond funds. Positive 30 of past 41 weeks.

·         U.S. high-grade bond fund outflows fastest since March

·         High-yield junk bond funds had $72 million in withdrawals, and investors pulled $385 million from Treasury funds

INVERSIONS– The Obama administration, in its latest bid[reuters.com] to prevent American companies from minimizing U.S. taxes by rebasing abroad, issued final rules on Thursday to combat a key tax-reduction technique known as earnings stripping – Six months after proposing the regulations, the U.S. Treasury made good on its pledge to move swiftly against corporate tax inversions by rolling out the new final rule, despite opposition from business groups

·         Cross-border M&A activity fell by nearly a fifth in the third quarter of 2016, as political uncertainty stifled dealmaking – There was $373 billion of cross-border activity in the quarter, according to new data from law firm Baker & McKenzie[city.wsj.com].  A -22% Change in volume from Q3 2015.  The report cited three key drivers for the macro-political uncertainty:  Brexit vote, US elections, Tightening of US monetary policy

GOLDEN?Demand for gold in India[kitco.com], the world’s second-largest consumer, picked up as the festive season began and discounts narrowed, while demand across rest of the Asia continued to improve – Gold discounts in India narrowed to the smallest level in nearly nine months as prices fell during a key Hindu festival Dussehra boosted retail demand.

The MacroTourist[themacrotourist.com] nails the Sentiment in Gold as he scans the headers of his inbox and lays out a bullish argument fer the yeller metal

OUTAGE– “U.S. crude’s structure gained support from the extended outage[reuters.com] of a pipeline capable of delivering 450,000 barrels per day of crude into Cushing”  Plains All American’s Basin pipeline is the largest outbound pipeline from the biggest oil shale play in the United States, the Permian Basin, and news[businessinsider.com] of the extended outage caused a narrowing in the spread between the front-month to second-month crude contracts, as traders anticipated a draw of nearly 2 million barrels a week from Cushing due to the outage.

Oil is battling to stay upside $50 into Expiry Monday.


SKITTISH – Only 30 percent of Japanese households have experience investing in stocks and nearly 80 percent say they would not take on risk even for an investment yielding significant returns, a survey showed, underscoring the difficulty of reversing the risk-aversion widely blamed for prolonging Japan’s chronic deflation.  The poll[reuters.com] of 25,000 households conducted from Feb. 29 to March 17, is the first most comprehensive survey in Japan on financial literacy and households’ investment behavior.

BEAST – SoftBank and Saudi Arabia have teamed up to launch[city.wsj.com] a giant tech fund based in the UK.  The Japanese internet and telecommunications conglomerate said Thursday that it expects to invest at least $25 billion over the next five years.  The Public Investment Fund of Saudi Arabia will consider contributing $45 billion over five years to the new fund as a lead partner.  SoftBank added that the fund could eventually reach $100 billion, as other “global investors” come onboard.  The move by SoftBank follows its acquisition of FTSE 100 chip-maker ARM for £24 billion this summer.

HARD EXIT – ‘Hard Brexit’ or no Brexit, Donald Tusk warns UK[ft.com] – Idea that Britain can retain benefits after leaving is ‘pure illusion’, says European Council chief – Comments by European Council President Donald Tusk, who will run the Brussels side of Britain’s negotiations on leaving the EU, that the bloc will not offer London any softer terms than a “hard Brexit” helped keep the pound under pressure. Such a deal would end Britain’s membership of the single market and disrupt access to the country’s main trading partner.



Friday 14th

China – CPI, PPI

A$ – RBA Financial Stability Review

JPY – Japan to Sell 5-Year Bonds

EU – Trade Balance

MARKETS – Money Market Reform implemented

FED (8:30) – Fed’s Rosengren Gives Opening Remarks at Boston Fed Conference

ECO (8:30) – PPI; Retail Sales Advance for September

ECO (10) – Business Inventories; U. of Mich. Sentiment

FED (12) – Fed Chair Yellen Speaks at Boston Fed Conference

Energy (1) – Baker Hughes Rig Count

CFTC (3:30) – “Commitment of Traders” data



Unicorns – One King’s Lane – Fortune

Bed Bath & Beyond

E-commerce site fell a long way from its near-unicorn days.

Bed Bath & Beyond paid just $11.78 million to acquire online retailer One Kings Lane earlier this year, according to recently-filed regulatory documents.

The deal was publicly announced in June, but Bed Bath & Beyond BBBY 0.73% only would say that the “purchase price was not material” to the company, which currently has an enterprise value of around $7.6 billion. One press report suggested a price tag south of $30 million, but it seems even that estimate was way too high.

What Bed Bath & Beyond actually paid underscores how far One Kings Lane fell below investor expectations.

One Kings Lane was launched in 2009 by Ali Pincus and Susan Feldman as a Los Angeles-based flash sales site focused on high-end furniture and home decor. It would go on to raise more than $200 million in venture capital funding, from big-name firms like Greylock, Kleiner Perkins, Institutional Venture Partners, and Tiger Global. Its final outside funding round came in early 2014, at a post-money valuation north of $800 million.

The $11.78 million price-tag is net of any acquired cash. Bed Bath & Beyond also said in its regulatory filing that the results of One Kings Lane’s post-acquisition operations have not been material.

A Bed Bath & Beyond spokeswoman has not yet responded to a request for comment.