Price Action

Apple is scheduled to report earnings on Tuesday April 24th.   Our analysis is simply to try and match the enthusiasm of the recent price movement and fundamental story of Apple in relation to what has happened in the options markets. 

Price action for Apple stock over the past few weeks has been noticeably poor.  Not only has it traded down 10% from its April 9th closing high of $636 to $572 today, but it has led the market several times with somewhat dramatic intraday reversals.  Even so, the options market has not yet expressed this same recent bearish opinion on the stock. 

The top can best be described as a period of discussion. Is the economy sputtering? Will the European contagion effect the US economy? Will the fiscal cliff be realized? And of course, the #1 topic of discussion and the only one that matters: will there be QE3?

Japanese Finance Minister said an IMF funding increase to USD 400bln is "coming into sight", and that he expects the BRIC nations to offer funds to the IMF at the appropriate time. The finance minister sees funding figures to be released as early as tomorrow. (Sources) The IMF looks set to reach or pass that target, with USD 320bln secured yesterday and many of the largest emerging economies still to contribute. ECB’s Knot and EU’s Rehn have said IMF commitments may have to be up to USD 500bln, and expects China to boost resources.  Brazil’s finance minister has said his country is still not ready to give numbers on their IMF contribution. The Indian finance minister has said he will take time to provide an answer to the funding question for the IMF. China also remains undecided on an increased IMF contribution.

Sniffing around the moves in today's market suggest one very strong trend - that of European bank repatriation flows gathering pace. We pointed this out during the day as it occurred but looking back now, and remembering our critical analysis of these same flow patterns back in October of last year as the crisis was surging to crescendo, brings back some concerning memories. Today's cross asset-class price action had five very clear phases with the period around the European close and the afternoon in the US day session most directly evident of the generalized selling of USD-based assets and repatriating EURs in whatever format can be found. A picture paints a thousand words (perhaps more if it's scratch'n'sniff) and this one smells like forced selling - which combined with ECB margin calls and the rapidly worsening EUR-USD basis swap (funding issues) paints a rather concerning picture for (already collateral starved) European banks. As Europe faces bank downgrades (collateral calls) and auctions (real-money needed to bid in the reach-around), we suspect we will see more repatriation of EUR and understanding the flows these movements may cause will help make sense of the markets' movements during the day

If you have been a buyer over the past 8 weeks, you most likely will find your investment underwater.

"All might be well in China, but Europe again is a cause for serious concern. Spain is the victim of the most intense violence – CDS trades to new all-time wides, and local banks sent nearly 5% lower. The hope might have been that once European markets closed, US equities would recoup losses. But there’s no place for hope on Friday the 13th, and stocks close at the low. The post-close price action in futures was even worse as ES1 drops further still. Back below the 50d again. Perhaps spillover from weakness in European financials, but problematic as tech, the other obvious leader of the year’s rally, is also flagging. SPX drops 17 to close 1370 (-1.25%). The DOW drops 137 to close 12850 (1.05%). The NASDAQ drops 44 to close 3011 (-1.45%)."

From the first day of 2012 we predicted, and have done so until we were blue in the face, that 2012 would be a carbon copy of 2011... and thus 2010. Unfortunately when setting the screenplay, the central planners of the world really don't have that much imagination and recycling scripts is the best they can do. And while this forecast will not be glaringly obvious until the debt ceiling fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more people are starting to, as quite often happens, see things our way. We present David Rosenberg who summarizes why 2012 is Deja 2011 all over again.

Heading into the US open, European stock markets are experiencing a mixed session with particular underperformance noted once again in the peripheral IBEX and FTSE MIB indices. The Portuguese banking sector specifically is taking heavy hits following overnight news from Banco Espirito di Santo that they are to issue a large quantity of new shares, prompting fears that further banks may have to recapitalize. The financials sector is also being weighed upon by a downbeat research note published by a major Japanese bank on the Spanish banking sector. Elsewhere, the Italian BTP auction was released in a fragmented fashion showing softer bid/covers and the highest yield since mid-January in the only on-the-run line sold today. Similarly to yesterday’s auction, the sale was not quite as poor as some as feared. Italy sold to the top of the range and as such, the Italian/German 10-yr yield spread is now tighter by 13BPS, currently at 361BPS. From the UK, the DMO sold 20-year gilts with a lower bid/cover ratio and a large yield tail, prompting gilt futures to fall by around 10 ticks after the release. Later in the session, participants will be looking out for US PPI data and the weekly jobless numbers.

Yesterday we predicted it was imminent, and sure enough, adding insult to injury for any muppet who rode the "once in a lifetime" opportunity to buy stocks and sell bonds, Goldman just hit the stop loss on its 10 Year Treasury short, after getting stopped out in its Russell 2000 long two days prior.

Just last week we highlighted the behavioral bias writ large in the Mega Millions lottery via Dylan Grice's boredom discount concept. The same psychological tendency that overprices lottery tickets (relative to their expected value) seems very evident in the price action of everyone's favorite economy market tech-stock, Apple (and most specifically Apple Options). Since the price of Apple's shares skyrocketed above $500 (around early February), two rather significant (and very concerning) patterns have emerged. The first is the rotation from Apple stock into options as Apple options volumes erupted - almost tripling since the start of the year (from very stable levels for the past few years). Call option volumes have also massively increased relative to Put option volumes. However, while this suggests 'new' entrants lining up to buy their Apple lottery ticket, it is the 'pricing' of these options that is most worrisome as while dropping $1 on a lottery ticket will not break the retirement account - the divergence between Apple Options volatility and the broad market's volatility suggests a huge demand and willingness to overpay. Volatility tends to be the cleanest way to judge demand for options and since late January, the premium for Apple options has exploded (even as its share price rose and rose - breaking the empirical link between the two) as the 'optical cheapness' of Apple options compared to Apple's share price drew in the lottery ticket-buyers. Of course this in no way points to an end to the buying of Apple lottery tickets but the recognition of 'overpaying' - even as Apple's share price reaches all-time highs once again and the overpayment reaches 2008 highs - will eventually slow demand for a levered bet on a new life (but as a bookie market-maker you'd be willing to take that trade bet free-money from punters every day) or maybe covered-call writers will just soak it all up again.

Last Friday saw the release of a below-expected US Non-Farm Payrolls figure, causing flight to safety in particularly thin markets, with equity futures spiking lower and US T-notes making significant gains. Data from this week so far in Asia has shown Chinese CPI is still accelerating, coming in above expectations at 3.6% against an expected 3.4% reading. Looking ahead in the session, there is very little in the way of data due to the reduced Easter session in the US and the European and UK markets closing for Easter Monday.

In a very thin market, the S&P futures came very close to hitting their 50 DMA on Friday. The S&P futures went from a high of 1,418 on Monday, to trade as low as 1,372 on Friday. A 46 point swing is healthy correction at the very least, if not an ominous warning sign of more problems to come. There were 3 key drivers to the negative price action in stocks this week. All 3 of them will continue to dominant issues next week.

We have been warning of the uncomfortable current similarities to last year's (and for that matter cycle after cycle) high-yield credit underperformance / lagging behavior 'canary-in-the-coalmine' relative to the exuberant equity market for a month now. Now, Bank of America provides - in two succinct charts - the fundamental underpinning of this grave concern as across the high-yield credit universe revenues are not catching up with costs - creating significant margin pressures - and at the end of the day, a market that cares more for cash flow sustainability than the latest headline or quarter EPS upgrade from some sell-side pen-pusher is waving a red-flag as margins are the lowest they have been since March 2009 and is falling at a much faster clip than in the fall of 2008 as the reality of money-printing comes home to roost. And just to add salt to this fundamental wound, technicals are starting to hurt as supply picks up and 'opportunistic' issuance turns notably heavy - perhaps helping to explain how the ongoing inflows have been unable to push prices further up in the US. Lastly European high yield is trading tick-for-tick with sovereign risk still - as it has since the middle of last year and so as LTRO-funded carry fades, we would expect it to underperform - especially as austerity slows growth.

Today's otherwise key news event - the ECB rate announcement (which just printed at unchanged as expected) and press conference, will be trivial. As such, everyone is set to ignore the latest update from Mario Draghi, who courtesy of a $1.3 trillion liquidity injection since December has now largely wasted all his liquidity dry powder, at least until Spanish and Italian bonds are trading back at 7%, some time in the next few months. The result is that people like Citi's Steven Englander are saying to ignore the ECB, and to focus solely on the ADP (which has a horrendous predictive track record of the actual NFP print) report, to be released at 8:15 am, as it may be the only tradable hint ahead of the NFP report which as noted before is coming out on Friday, which is an equity holiday, although futures and bonds will be trading at the time of the release. More importantly, since the Fed now responds to economic data points in real time, a big miss to the consensus print of 206K will likely set the market surging as it will mean the Fed doves are back in control. Paradoxically, a meat or big beat, will be very market negative, as it will justify the withdrawal of liquidity support for at least 3-4 months, when the election fight will be in full swing, and Obama would be quite happy for another boost to the S&P in advance of November, and the repeat of the debt ceiling fiasco.

European cash equities are seen mixed as the market heads into the US session, with the DAX index the only bourse to trade higher at the midpoint of the European session. European markets were seeing some gains following the open after the weekend release of better than expected Chinese manufacturing data, however the main price action of the day occurred after some European press reports that the Bundesbank had stopped accepting sovereign bonds as collateral from Portugal, Ireland and Greece garnered attention, however the Bundesbank were quick to deny reports and state that it continues to accept all Eurozone sovereign bonds. Following the denial, participants witnessed a slight bounceback, but failed to push most markets into the green.  Data releases from Europe so far have been varied, with outperformance seen in the UK Manufacturing PMI, beating expectations and recording its highest reading since May of 2011. However, the French manufacturing PMI came in below expectations, weighing on the CAC index as the session progresses. A further release from the Eurozone has shown February unemployment coming in alongside expectations recording a slight increase from January to 10.8%.