February 29, 2016

2016 to be a difficult trading year

Like many kids of the late 1960's, The Grateful Dead was one of my lights to discovery when I searched for the meaning of life. St. Stephen was one of those songs that I played over and over again back then. Robert Hunter and Jerry Garcia wrote the song, which appeared in 1969 on the Dead's third album, Aoxomoxoa.

The Grateful Dead song is partly about St. Stephen and partly about "soul searching" in general (excuse the pun). The song asked many questions ("Did it matter. Does it now?"), but not even a great martyr like St. Stephen could answer them.

Later on when I began to formulate my career choices, I moved from The Grateful Dead to The Wharton School. During that early 1970's transition, I learned finance and began to formulate my investment methodology -- no longer by interpreting Grateful Dead songs, but by questioning whether the market was efficient or simply a "random walk."

I concluded that fundamental analysis suited me well, and I rejoined the working world (and society, my parents would say). After graduating from Wharton two years later, I became a Kidder, Peabody housing analyst.

Markets acted differently in the 1970's. The guiding beam was fundamentals, which seemed to determine stock prices' future trend. Things were more predictable for decades, from 1972 to 2012. But let's fast-forward to 2016, where we have a market that's without memory from day to day.

A Distorted Market

Quants have filled the vacuum created by quiescent retail- and institutional-investor communities, while levered ETFs (another Wall Street "invention") have grown like, well, mushrooms. Both have taken a much more dominant role in our markets.

Unfortunately, the U.S. Securities and Exchange Commission has become effete. Regulators twiddle their thumbs as the New York Stock Exchange and Nasdaq sell customer orders to high-frequency traders, and ETFs exaggerate price moves. The markets grow ever more volatile and break down further.

A Distorted Monetary Policy

Monetary policy has become America's dominant tool for engineering economic growth. U.S. politicians grow increasingly partisan and unable to compromise on legislation, leaving fiscal policy inert. The Federal Reserve keeps short-term rates near zero, while other central banks travel into negative territory.

But as I wrote in my diary yesterday:

*     Negative interest rates and wealth-tax talk aren't pro-growth to me. Instead, they're deflationary -- and if anything, talking about them only adds to the doom and gloom that's already floating around us.

*     We need true tax reform that simplifies the system and encourages growth while paying down public debt.
Of course, no one likes being told these difficult truths. We're like St. Stephen of the Grateful Dead's song: "Wherever he goes, the people all complain."

Just as St. Stephen got killed for speaking out, many investors and traders have gotten beaten up by the volatility that's associated with distorted markets and monetary policy.

Confidence Ebbs and a Crisis Begins to Develop

Today's market is fragile at best. It's influenced by strong deflationary forces that have conspired to reduce prospects for global economic growth and worsened the corporate-profit outlook.

And at worst, the market has been completely broken by the dominance of quants -- who worship at the altar of price and are agnostic to balance sheets, income statements and private-market values.

Either way, fiscal inertia, a dependence on monetary policy and the quants' dominance and influence have materially expanded the market's volatility and unpredictability. This eats away at confidence in a cumulative way that I can't overstate.

Navigating the market with a modicum of confidence (an essential ingredient to successful investing) has been abandoned. 

For Wall Street, there seems to be no answer or near-term solution to the structural issues that have poisoned our markets these days. Meanwhile, the odds of a global recession grow, as Citigroup (C) wrote in a research note yesterday:

"We are currently in a highly precarious environment for global growth and asset markets after two to three years of relative calm. ...
The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies, a large increase in the uncertainty about the advanced economies' outlook (notably for the U.S.) and a tightening in financial conditions everywhere."

Fundamentals remain poor, while concerns about a Chinese structural and cyclical slowdown and Beijing's unsustainable currency regime are rising. Meanwhile excessive leverage and increasing regional risks (such as the risk that Britain might exit the European Union) are additional and growing concerns.

The Bottom Line

Global recession risk and the market's dependence on quants and easy monetary policy could be a toxic cocktail for stocks.

Our market without memory will remain a difficult place to navigate in 2016. And the structural problems above are likely to stay with us for some time, until a deeper bear market shocks authorities into action.

For now, as I expressed in yesterday's opening missive, I'm bearish on the S&P 500's prospects for both the short and intermediate term.

via www.realclearmarkets.com/articles/2016/02/26/a_broken_market_without_memory_will_make_2016_difficult_102031.html

February 26, 2016

Carl Icahn and Greenlight Capital sold lot of their AAPL shares

Carl Icahn has often described his investment in Apple as a 'no brainer,' and the business media have spent perhaps hundreds of hours discussing his and other hedge funds' accumulation of Apple shares.

Business TV has devoted entire programs to the subject, highlighting interviews with Icahn and others. I'm sure the media hoopla that surrounded Icahn's Apple accumulation (not to mention his optimistic tweets on the subject) raised the animal spirits and influenced many investors to buy AAPL over the last few years.

[But] it's a bit bewildering that there's been nary a word or discussion so far about news that Icahn and Greenlight Capital recently disposed of a meaningful amount of their Apple shares. Indeed, nearly all the Apple-related discussion since Icahn's 13F filing disclosed the sale of 7 million AAPL shares has been about the U.S. government's attempts to unlock the San Bernardino killer's iPhone.

February 17, 2016

Trading opportunities exist even though HFT and Algorithm traders are exaggerating short term moves

If you join me in the market's roller coaster ride these days, remember that it's incumbent to capitalize on the market's changing face and idiosyncratic behavior.

I get that stocks' trend, volume and momentum are all indicating that we're in a bear market, but I know that bear-market bounces are often sizable (albeit swift). I also get that 1,812 is the S&P 500's support level -- and like most players, I see that there's a resistance level as well (probably at around 1,920 on the S&P 500).

I also get that global economic growth is wobbly and on a weak foundation, and I understand the growing domestic and geopolitical risks. I know that China's banking and "shadow-banking" systems have bad-debt problems that dwarf the U.S. subprime crisis. And I also know when a hedge fund manager (Kyle Bass) vocally proclaims that nearly 90% of his fund is short China-related securities, that trade isn't likely to pay off in short order.

But this is not your father's stock market, and it's not a time to be self-confident or dogmatic in view. We must lean on the changing conditions that exist today, molding those influences to our advantage (particularly in our short-term trading activity). 

My advice:

*     Don't trust distortive near-term influences on the markets, but do embrace them as opportunities in a market that has no memory from day to day.

*     Remember that many of the normal patterns that we've taken for granted over the years have been partially rendered irrelevant in today's unusual market.

My morning missive on Friday outlined my current views. It's importance to call a trend change, as well as to watch for the emergence of extremely negative sentiment and other factors. You also need to remember the disruptive influence of gamma traders, risk-parity strategies and high frequency traders, and keep their role in mind when interpreting market moves and the opportunities that Wall Street presents us with.

Adopt Second Level Thinking

"The bottom line is that first-level thinkers see what's on the surface, react to it simplistically and buy or sell on the basis of their reactions. They don't understand their setting as a marketplace where asset prices reflect and depend on the expectations of the participants. They ignore the part that others play in how pries change. And they fail to understand the implications of all this for the route to success." - Howard Marks, It's Not Easy

But sometimes, the obvious is less than obvious and the known's are already well known, particularly in the near term. As I recently wrote, so-called "second-level thinking" often trumps "first-level thinking."

Today's Environment Dictates Capitalizing on Market Moves

My baseline case remains that the S&P 500 will show a low-double-digit loss for 2016 as a whole, although there will be wide and violent swings in the interim.

If you agree with my notion that the intermediate-term market outlook is hostile and you have a suitable risk tolerance, you should capitalize on all 5%+ upward moves in the indices (and greater rallies in individual stocks). Indeed, I think being opportunistic is now mandatory for successful trading/investing.

We'll deal with market overvaluation in the future, when distortive factors cause stock prices to become stretched to the upside (as happened some three weeks ago when the S&P 500 traveled from 1,812 to nearly 1,940).

Using the Quants to Our Trading Advantage

"This year, the S&P 500 is off nearly 15% from its 2015 high and 10.5% lower year to date (in line with my forecast of a low double-digit decline for the full year). But the differences between 1987 and 2016 are profound, as the public was more involved in the markets 29 years ago than today.

Not present back then were today's gamma hedgers, risk-parity trading strategies or high-frequency traders who generally follow algorithms that search for price momentum rather than intrinsic value. Nor did we have today's sovereign wealth funds that seem to be selling in order to support their countries' social programs. 

A lot of today's price action also reflects the reduced market liquidity that's been partly dictated by regulators. (You can thank the Dodd-Frank law, the Volcker Rule and the demise of the specialist system and the uptick rule, plus regulators who let HFT strategies to run wild.)

These factors, coupled with machines and algos, tend to exaggerate short-term trends and to some degree jeopardize the value of charts and technical analysis. Today's players often lack the sense of intrinsic value that many of we fundamentalists have. They're agnostic to balance sheets, income statements and private market values. This creates disequilibrium and bouts of overvaluation and undervaluation."  -- Doug's Daily Diary, The S&P 500 Has Passed a Critical Test (Feb. 15, 2016)

Nearly 70% of all trading is now machine-controlled. The public doesn't understand the market any more, and volatility and the political environment have poisoned the well. The result is staggering volatility and unpredictable, random moves to both the upside and downside.

Regulators are impotent and complicit in this. They've stood by as algos, 3x-levered ETFs, spoofing, the HFTs' pay-for-order flow and the loss of the uptick rule (which blocked the algos from working) drove many investors out of the market.

Meanwhile, capital goes to what I've described as "money heaven." But as I've written before, all of this is pity ... but also a long opportunity.

The above factors have reduced the role of technical analysis and poisoned our ability to interpret charts, but that doesn't mean we should ignore opportunities just because the charts "look like crap."

First, remember that many short-term moves are artificial and produced by quant strategies that have no bearing on value or fundamentals. The quants are agnostic to balance sheets, income statements and private value, as they're more centered on allocating capital based on volatility of asset classes and price momentum.

Second, you should always embrace the artificiality of the market's short-term moves, because such moves will likely be few and far between these days.

The market's near-term moves are being parsed and often mis-analyzed by artificial influences (i.e., machines and algos). In my opinion, that's stopped many market participants from taking advantage of the market's opportunities, keeping many players on the sidelines in the belief that "price is truth."

The Many Outcomes of a Policy-Dependent Global Economy

But it's not only the quants that have messed up our markets.

More than at any time in history, the markets are almost totally dependent on government policies -- mostly monetary ones (as the U.S. government has become more or less fiscally impotent). This makes markets react to the slightest changes in interpretation of the government's fiscal or monetary policies.

This dependence on government policy -- coupled with the lack of self-sustaining trajectory or escape velocity for global economic growth -- means we face many more outcomes than usual (many of them adverse).

Consider, for example, that:

*     500 million people live in countries that currently have negative interest rates.

*     The world's central bankers have collectively purchased more than $12 trillion of bonds since the Great Recession began, with little to show for it.

*     A once-relatively unknown, self-professed socialist named Bernie Sanders and brash New York businessman named Donald Trump might actually their respective parties' presidential nominations.

*     Oil prices have dropped by nearly 80% from their 2014 peak.

Again, this is not your father's stock market!

The Jan. 20 "noon swoon" provided a recent good opportunity for traders. The S&P 500 quickly followed an intraday test of 1,812 that day by a move to about 1,935.

Another opportunity for traders has arisen since last Thursday. The S&P 500 has followed last Thursday's retest of 1,812 by a tradable move to almost 1,890.

Rather than get caught up in the "dogma" of a view, I prefer to unemotionally assess the pendulum of volatility and the discounts or premiums to the fundamental intrinsic value of individual stocks, sectors or the overall market. I use that as a guidepost to my short-term trading.

Thus, I moved from a net-short position to a net-long one during both late January's swoon and last week's scary market drop, because discounts to intrinsic value widened during both events.

Catching 5%+ bear-market rallies (and even-larger moves in individual securities) might not be for everyone. But in an investment world defined by low or substandard returns, opportunistic fundamental traders shouldn't bury their heads in the sand and sit on the sidelines as these opportunities arise. Rather, flexible traders will take advantage of these moves.

The Bottom Line

Our investment journey so far in 2016 had been volatile and unpredictable, and it's almost guaranteed to remain so. But trading opportunities that grow out of the current period are plentiful and recurring. The rollercoaster ride should continue, so it's incumbent to capitalize on the unique forces that have changed the market's landscape.

I have 21 stocks on my "Best Long Ideas" list vs. 13 on my "Best Short Ideas" one. This is the highest proportion of longs to shorts that I've had since I started these lists for Real Money Pro -- and the greatest absolute number of longs as well.

Personally, I'm starting the day somewhere between small- and medium-sized net long. Am I certain of view? No. If I were, I would have gotten fully invested at 1,812 on the S&P 500 (which I didn't).

This helps to explain the ebb and flow of my net portfolio exposure from market neutral to medium-sized and back again. But one thing I am certain of: I'll use the constantly changing relationship between intrinsic value and current market prices to determine my short-term trading strategy.

via www.realclearmarkets.com/articles/2016/02/17/this_is_not_your_fathers_market_and_its_not_time_to_be_confident_102010.html

February 12, 2016

Bearish on Amazon, Netflix and Tesla

Warnings about Tech Bubble 2.0 have been plentiful, from the proliferation of private-equity "unicorn" valuations to social-media stocks' elevated price-to-earnings multiples to "coders" who became rock stars. We've also seen a ready acceptance of non-GAAP accounting that excluded stock based compensation, as well as mal-investment that was an outgrowth of zero interest rates and the general "bull market in complacency."

And amid a belief that social media would eventually attain massive profitability, we saw conspicuous consumption and lavish lifestyles emerge in San Francisco, the "City by the Froth" (of Silicon Valley).

But yet another alleged "new paradigm" of prosperity and unlimited opportunity -- this time involving social media -- has been hijacked by reality.

The collapsing valuations of Twitter, Ali Baba, GoPro, Box, Square and Snapchat were all signposts of broader weakness months before the TFANGs began to wobble.

And they're likely just the tip of the iceberg in the "de-risking" that I expect among the social-media and Internet leaders. The IPO world's "debutantes in waiting" and private-equity valuations are both spiraling lower. And expect Silicon Valley's perks -- the purring Teslas and Ferraris and extravagant parties at places like Yahoo!-- to disappear faster than LNKD or Tableau Software (DATA) might drop.

I've long cautioned that the deliquesce of previous tech leader Apple's share price would presage a defanging of the TFANGs, which now seem on their way to becoming toothless.

In fact, the TFANGs are beginning to look a lot like Internet stocks did in mid- to late 2001, or how mortgage lenders and insurers did eight years ago. But as with those market leaders of yore, it's next to impossible to determine how far down the TFANGs' pendulum of valuation will swing.

There's no cushion or "margin of safety" from the TFANGs' lofty multiples or even loftier (and unrealistic) expectations. Moreover, the exits in a "crowded room" on Wall Street always become quite narrow when prices convulse and emotions sour.

Stay the heck away from bottom fishing, as the exit door is always narrow in a crowded room. The current "kaboom" in the TFANGs is no different than the dot-com stocks' disintegration in early 2000 or the mortgage lenders and insurers' collapse in 2008-09.

The era of the TFANGs might finally be over, and the "other side" might lie ahead, reflecting technical breakdowns and uncertain fundamentals for TSLA, AMZN, DATA, NFLX, LNKD, etc. The TFANGs are now in "bad" hands, and momentum stocks in bad hands are a potentially toxic cocktail.

That's why I remain fundamentally bearish on Tesla, Amazon and Netflix.

In other words: "Goodbye Yellow Brick Road!"

February 10, 2016

Market showing signs of improvement even while going lower

I remain bearish and net bearish and net short as we get ready for another trading week to begin.

I recently substituted my short of the SPDR S&P 500 ETF (SPY) with out-of-the-money SPY puts. This strategy increases my delta and short exposure as stocks fall, which is what I want right now for a multitude of reasons that I've previously outlined in my diary.

The most important reason is that I believe that for the fourth consecutive year, consensus S&P 500 earnings estimates are simply too high. So are price-to-earnings multiples that fail to incorporate the more-subdued profit picture, the likelihood of a Federal Reserve policy error and the wobbly global growth, political risks and possible geopolitical threats that our flat and interconnected world faces.

And as I've recently emphasized in my diary (and in a recent Bloomberg Radio interview), the "negative wealth effect" of lower stock prices could push the U.S. economy over the cliff and into a recession. My current odds are for a 35% chance of a "garden-variety" recession and a 15% chance of a deeper recession.

What I Expect in Coming Days
I think a $181 "capitulation low" for SPY and a 1,810 intraday for the S&P 500 are still a distance away.

That said, perhaps we'll see a "flush" towards a capitulation low in the days ahead if  we see more disgust and dismay that "clears the air."

I continue to think an 1,810 low for the S&P 500 will hold, but we'll see. The CBOE put/call ratio has dropped from 1.18 to 0.96 over the past three weeks, while other sentiment indicators are exhibiting less bearishness and reduced fear --concerning signs.

Notably, there's been a clear rotation in the last week that investors can take as either a positive or negative. Specifically, the U.S. dollar's weakness has helped the oversold sectors of commodities, energy and materials-and-manufacturing stocks while hurting the TFANGs and technology.

To me, it's still an open question as to whether this leadership change is sustainable, although I recently added exposure to DuPont (DD - Get Report) .

My Take on Friday's Schmeissing

"In terms of Friday's action, sure it was ugly, but it was highly concentrated in those fan faves. The selling barely registered outside of those stocks.

The clearest example I can provide for that is the number of stocks making new lows. Friday's action on the NYSE saw 169 new lows with the S&P at 1,880. The last time the S&P was in this area one month ago, there were 1,375 new lows. Heck, last Wednesday had 227 new lows, so there were even fewer new lows on Friday.

So, ask yourself this: If the S&P breaks 1,875 this week, do you think we will see more than 1,375 new lows on the NYSE? I'm in the camp that says it is unlikely and that would make it a positive divergence."

The S&P 500 shed some 1.8% on Friday to close at 1,880, within 1% of my fair-market-value calculation. I remain defensive on the major trend for now, but like Ms. M, I'm going to be closely watching the "quality" of the decline. I think that could result in a successful test of the S&P 500's recent low.

The NYSE's new-52-week-low list hit 1,395 issues on Jan. 20, the same day the S&P 500 hit an apparent "capitulation low." But the number of new lows on Friday was meaningfully below that. A successful test should consist of substantially fewer new lows.

For most players, this remains a time to err on the side of conservatism. The reason you maintain high cash reserves is for a rainy day -- and it's certainly raining now.

Cash is an asset class that provides a good defense.

And don't forget that T.I.N.A. -- "There Is No Alternative" to stocks -- is B.S.!

via thestreet

February 3, 2016

No point owning Apple shares right now

Stated simply, Apple's quarterly results and message behind it were "Crapple."

    "Stay hungry. Stay foolish."     -- Late Apple co-founder and CEO Steve Jobs

Steve Jobs famously gave a moving commencement address at Stanford University's 2005 graduation ceremony where he uttered the above four words and made them famous.

But I believe it's now foolish to own Apple shares. If I owned the stock, I would sell it -- as my analysis continues to suggest that the company's best days are behind it. I think AAPL's future sales-and-profit outlook is worse than consensus expectations, and that the tech giant's valuation faces numerous headwinds.

Despite bullish protestations from the sell side and numerous large Apple stockholders (e.g., Carl Icahn), my negative view has been firm and consistent over the past year.

I now expect Apple to produce three consecutive quarterly earnings-per-shares results over the balance of the company's fiscal year that are down on a year-over-year basis.

And I project lower and below-consensus results for the full fiscal year as well, down 7% to 10% to around $8.50 a share vs. $9.20 a year earlier. Furthermore, I don't expect fiscal 2017 EPS to meet FY 2015's results.

This means that in order for Apple's shares to rise over the next two years, its price-to-earnings ratio must rise even higher -- something that I don't expect for many reasons. Personally, I'm maintaining my short position on AAPL and keeping the stock on my "Best Short Ideas" list.

I updated my bear case for Apple a few weeks ago. My constant refrain has been that Apple's greatest threat is its past successes, which have ballooned the company's size whether measured by sales, profits or market capitalization.

That means gains from current market value or operating successes have grown more difficult to achieve in the face of the difficulty in providing new products that can meaningfully impact Apple at the margin. This challenge was omnipresent throughout yesterday's earnings release and conference call.

In some ways, the challenges facing a maturing Apple and the headwinds to the company's stock outlook are more difficult and fundamental than those that existed at the stock's September 2012 share-price peak. 

In typical herd fashion, analysts have almost universally responded to yesterday's results by stating that AAPL is "cheap." They argue that investors should buy on the bad news because of Apple's expanding ecosystem, large cash-flow generation and sizable cash balances.

But increasingly, the sell-side community seems to me to be defending the indefensible. I demur on all counts:

"The stock is cheap" argument claims AAPL is a bargain because yesterday's results were better than feared, but that's just Wall Street humor. If Apple is really cheap, then why did most analysts take a hatchet to their numbers?

By the way, FBR and Barclay's used almost the same "not as bad as feared" words in their analyses.

Don't Blame China

In a departure from the prior quarter, Apple CEO Tim Cook blamed the global economy for some of the company's woes. We're conscious that China is slowing, but Cook should stop with the excuses about the economy, as both analysts and management have asserted that Apple has never been about the economy.

And if Apple is now linked to economy (given that the iPhone's last product-cycle upgrade is nearly finished), then we must recognize that Apple is a maturing industrial company. In that case, management and shareholders shouldn't be surprised by AAPL's current P/E of around 11.

The reality is and has been that the company's "story" has mostly been about Apple's product cycle. The fact is that Apple was absent from the big-screen market for two years and has backfilled an enormous amount of latent demand. This was a "game changer" that took the company's selling trajectory above its natural run rate, but borrowed from the future in the process. 

Apple also went hard into China at the same time, but now the company's new-product cycle is almost over. On top of that, they stuffed a bunch of product into the channel, making the eventual downside worse.

Tim Cook and John Chambers

Tim Cook is starting to remind me of John Chambers, CEO of Cisco (CSCO). Chambers also started to whine more and more about the economy when CSCO was no longer a growth business in the last cycle. (He never talked about the economy when things were good and the Cisco enjoyed the tailwinds of a strong and dominant product cycle).

Large Cash holdings

The "Apple has a large cash hoard" argument falls short on several fronts to me.

First, as I wrote previously, AAPL's net-cash levels are flat-lining. As I noted: "Several commentators have mentioned recently that Apple has over $200 billion of cash. While that's factually correct, we should look at cash net of debt -- which in Apple's case has been flat-lining for a long time (principally due to share buybacks)."

And more importantly, every dollar of Apple's cash that's overseas has nowhere near $1 of worth to shareholders, as it faces U.S. taxes if it's repatriated to America.

The Bottom Line

    "Our goal is to make the best devices in the world, not to be the biggest."
    -- Steve Jobs

The business media initially reported Apple's earnings yesterday as a "beat," although all of the analyst estimates had gotten cut big time. And Apple missed the lowered estimates in all product categories.

So, the bottom line for me is simple: Sell Apple. Peak Apple. It's ... Crapple.

Position: Short AAPL (small)

February 1, 2016

Contrarian view suggests market could rise

I'm not much of a technician, but the S&P 500 has now broken through the resistance level that three previous attempts failed to breach. 

We're now more than 100 handles above the S&P 500's "noon swoon" from last Wednesday, and I suspect more players will now more comfortably view that bottom as a "capitulation low."

Although nothing in the investing game is certain, breaching the $191-$191.50 resistance level on the S&P 500 ETF (SPY) could galvanize traders and investors to make the next move higher. Considering the magnitude of the decline we've seen recently in individual stocks and sectors, that could be a surprise to many.

I currently have the biggest list of individual long positions that I've had in more than a year. These include my recently added longs of the Blackstone Group, DuPont, Goldman Sachs and Procter & Gamble.

The bulls have become bears -- and the few market watchers who've been expecting a bounce haven't been particularly convinced, and many saw any rally as just a brief respite in an overall bear market.

But the contrarian view of a more-meaningful rise appears to be gaining weight in probability.

Position: Long PG, GS, DD, BX