Archive - Aug 20, 2012

With Apple overtaking Microsoft's 'peak-market-cap' and becoming the most 'valuable' company ever traded, we thought a reflection on what humans (as opposed to machines programmed by humans) did the last time a world-changing technology company went ubiquitous.

AAPL is making headlines once again with its market-moving impact, its law-of-large-numbers-crushing daily moves, and its seeming cult of indifference among retail and hedge funds alike. As the stock price hits new all-time highs, we note that options prices are also breaking records with the complacency regarding any downside risk near post-2009 highs. The last three times we have been up at these levels has seen significant reversions in price: Nov 2010 -7.3% in 6 days, -12.68% in late July 2011, and a late Feb 2012 drop of 5.83% in 4 days.

One day - - maybe in a month, a year, a few years - God knows - - - Apple is going to make the first in a series of stumbles. I cannot conjure what kind of epic screw-up Apple would have to make in order to surrender its firm grasp over Earth, but there is no such thing as a company that thrives and dominates until the end of time.

A key sticking point in the ongoing presidential debate is what happens to US tax rates, either for just those making over an arbitrary $250,000/year, aka "the rich", or for everyone. To put this debate into perspective, here is a chart that shows how over the past 20 years the US funding needs (demonstrated previously here), have been met in terms of the only two components of US funding - tax revenue and debt issuance.

Silver has popped almost 2% today - its biggest jump in 3 weeks - as it nears its 100DMA. So what? It's still down notably from its Q1 swing highs but two things stand out to us as intriguing. First, oil priced in ounces of silver has seen a very narrow range of values since Bernanke's Jackson Hole speech in 2010 (QE2) when money-printing went full retard; and very recently the price of oil in silver had reached the upper end of that channel - and is now reverting. Second, the recent outperformance of silver over Gold has reverted the gold/silver ratio to its post-Bretton-Woods (1971) average at around 56x (up from a recent low of around 32x in April 2011). It seems there are stirrings in the real asset markets as energy and hard-money revert.

Facebook shares took another hellacious dive last week when the lock-up period for insider selling ended on Thursday. Gluttonously coveted by investors in the months leading up to the IPO, the stock has become a pariah after falling 50% from its $38 offering price in May. Was it jinxed from the start, as some have suggested? It is indeed true that technical gremlins on Nasdaq plagued the order book the day Facebook went public. And although some sore losers have sued to get their money back (if not their hands, belatedly, on fire-sale shares) the exchange glitches seemed to us like business as usual. Facebook’s real problem is that it is just another Internet fad that will probably never earn a profit commensurate with the $100 billion valuation it was given by IPO buyers.

The easy answer is - well, its those dumb money 'safe' investors finally rotating from bonds to stocks; but what about fund flows provides any evidence for that reality. Alternatively, we suggest, the recent (and somewhat market-unexpected) pop in macro data (surprising to the upside) has seemingly provided a Goldilocks for equities (growth is rising and even if it drops back, Bernanke's got our back) and the inverse for Treasuries (growth is rising and if that's the case then Bernanke's Bond Buying extravaganza is over - mark 'em down). What is stunning to us is the incredibly tight correlation since LTRO2 between macro data (trend and beats/misses) and 10Y Treasury yields. While correlation is not causation, discussion of the macro thesis is strong top-down and suggests more than one person believes this correlation. Our concern - what  dominant data is this macro strength based on - NFP/Claims beat? Retail Sales beat? (consider the controversy of the seasonal adjustments in both and what that would do to the macro data index.

Why Do They Need So Much Ammunition?

Just two short weeks ago, we noted that Best Buy's 'news' regarding take-overs, take-unders, LBOs, MBOs, or whatever it was - was an opportunity to fade the initial spike. Today's reality-check is cracking the stock down over 7% on heavy volume - as while founder Schulze (who left in June) restates his desire to pursue his proposal, he was 'schocked' that the company has just named a new CEO - signaling the company's desire to keep operating as a going concern as a public company.

In a normal market, whatever that is, we would not feel the need to note every tick in the Spanish equity market; but today's 2% decline - its worst in 3 weeks - is the first down-day in 10 days. IBEX, the Spanish equity market index, rallied over 29% from it's lows on 7/23 (following a decent leg down after the EU-Summit disappointment) only to perfectly reach its Maginot Line at the 200DMA on Friday and this morning. The volatility regime is very reminiscent of last year with the binary (chaos or serenity) scenarios the only ones left for most market participants and with a short-selling ban doing nothing but exaggerating the whipsaws, we wonder if the IBEX is due to revert back further - more in line with its sovereign credit moves on Draghi's 'believe-me!' speech. Perhaps the realization that another rumor (rate-caps) has come and gone has broken the cycle of faith...

While the geopolitical focus is once again all over Iran and Israel, it may be time to take a quick look Egypt, where the recently elected, and pro-US president Mohamed Mursi is "preparing to use aircraft and tanks in Sinai for the first time since the 1973 war with Israel in its offensive against militants in the border area." Reuters continues: "The plans to step up the operation were being finalised by Egypt's newly appointed Defence Minister General Abdel Fattah al-Sisi as he made his first visit to Sinai on Monday following the killing of 16 border guards on August 5. Egypt blamed the attack on Islamist militants and the conflict is an early test for President Mohamed Mursi - elected in June following the overthrow last year of Hosni Mubarak - to prove he can rein in militants on the border with Israel. "Al-Sisi will supervise the putting together of final plans to strike terrorist elements using aircraft and mobile rocket launchers for the first time since the beginning of the operation," an Egyptian security source said. Another security source said the army was planning to attack and besiege al-Halal mountain in central Sinai, using weapons including tanks, where militants were suspected to be hiding." Of course, what can possibly go wrong in the middle east once a government decides to escalate military expansion against militant terrorists. Look for crude to rise ever higher, and for SPR release rumors to hit the tape daily as yet another market is ensnared in price controls ahead of the election.

That's geheimnisse, not gezundheit!

With US and European equities showing a strange (though small) taint of un-green this morning, we thought a quick top-down versus bottom-up look at what has been going on was worthwhile. Macro-wise, US economic data has been modestly supportive with Citi's Economic Surprise Model mean-reverting as data came slighlty better than economists had predicted - though notably a weakening trend (but second derivative green shoots are back in vogue it seems). This supportive macro picture is at total odds to the bottom-up earnings picture where upward-revisions as a percentage of total revisions has plunged - as stocks make new highs. With correlations rising as managers chase performance, it is worth reflecting on the very recent ramp in outlooks as stocks levitate (and analysts flip-flop one more time) - which came first, the market or the economy?

There was a time when getting a stable, lucrative financial job meant working for a hedge fund, preferably in the risk department. It still does: the biggest and most profitable hedge fund of all - the Federal Reserve - as well as its various adjunct "all P no L" offices, and judging by the spike in recent job wanted posting by said hedge fund et al, things are looking up for those who want to manage taxpayer funded "risk." For the job seekers our there disillusioned with a 2 and 20 model that no longer works in the new central planning normal, get involved. As for why the Fed would suddenly be fascinated with risk now, after its DV01 is well over $2 billion, we have no ready answers.

Just remember what the market was telling investors at the October, 2007 market top when it hit an all time high (SP500 1576.09) and just prior to cratering over 50% in 2008.