Regular readers of my diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's "Hardball With Chris Matthews."
So... "Tell me something I don't know, Dougie."
OK, here it goes:
Month to date, the annualized realized volatility of the S&P Index is 5.2% -- that's the lowest vol in an October in over ninety years.
By means of perspective, the average October volatility, since its been recorded, is 17.0%.
It is interesting that the four other low volatility Octobers all occurred in the 1960s -- a period that preceded a sharp acceleration in inflation and rise in interest rates over the next decade.
I will have more on the subject of volatility tomorrow morning.
I'll give you a response on Facebook. It depends on your timeframe. The Monthly chart does not show that, it's a series of higher highs, higher lows for years. The weekly chart shows a consolidation of the big move up post earnings, and the stock has been going sideways for 2+ months. The daily chart shows a trendless stock (lower highs, higher lows) but mostly sideways, this is not to me a double top formation. If you're trying to guess at it or get out in front, that's the wrong approach. you have to wait for it, because other scenarios can change that narrative.
I was at Yasgurs' farm, too Doug, so let me add my technical two cents.
What I'm seeing on the FANG charts are potential eveningstar-like patterns. These are three-day bearish reversal patterns consisting of a large up day candle, followed by a narrow opening and closing range "doji" candle, and completed by a large down day candle.
Today's session has a long way to go but if these stocks do close near their lows those patterns would be in place. All this said, any candle pattern requires confirming follow-through price action.
This morning JPMorgan updated their thoughts ahead of Allergan's (AGN) third-quarter report.
I have not been in recent contact with AGN -- but, based on this and if I held on to a more optimistic market view -- I would be buying back the shares I sold (at higher prices) .
JPMorgan believes that we will shortly see clarity (and a "clearing event") in the Restasis issue (district court ruling before October 28 and the Saint Regis Mohwak Tribe IPR decision expected after October 20) -- and that clarity could be a share booster. The shares, at only 11.5x their consensus like 2018 EPS forecast appear cheap given the recent dive -- the brokerage is rolling forward its price target a year, moving it to a $300 price target (year end 2018).
3Q should be in line at about $4.04 a share on $4 billion in revenues. Cash flow should be improving sequentially using comparable cash flow conversion rate on higher profits per share.
Full year, JPM is at the midpoint of consensus for Allergan (at $16.18 a share). For 2018 JPMorgan is using $17.29 (revised slightly -$0.40 lower from previous estimates because of lower share repurchases). For 2019 $18.47 seems achievable and in 2020 they have a point estimate of $21.17 (down about $0.90 from their previous forecast).
The positives to the brokerage are a robust core product portfolio (Botox, Fillers, Zeltiq) and recent launches (Vraylar, Linzess) driving +6% top line and +10% bottom line (EPS) growth. In the pipeline are good prospects for oral CGRP programs, an Esmya approval mid next year, phase 3 Abicipar (wet AMD) data a year from now and a 2019 Rapastinel (depression) readiout.
Discounted cash flow value today (using a 9% weighted cost of capital), excluding unapproved pipeline products is $250 a share.
Memo to Bobby, Divine, Tim, Bruce, RevShark and others:
Does this fundamental analyst see a potential $175 "double top" in Facebook FB -- or is this a hallucogenic repetition from the 1960s and my Woodstock days?
Despite a growing consensus that bond rates have finally turned higher -- fixed income is strong today ( (TLT) +$0.70), with yields on the 10-year and 30-year at +4 basis points.
The 10-year looks -- which appeared to be moving easily through 2.32% resistance -- is back down in yield to that level.
Moreover, the 2s/10s spread is three basis points lower (flattening), to 83 basis points.
Financials are weaker, as a result of the fixed-income drop.
This morning, at about 5 a.m., I began to write an opening missive entitled, "The Chances of a Flash Crash Has Risen Exponentially."
Of course, I understand on the face of it (with stocks making a new high again today), that this is an audacious statement that many will conclude as being hyperbolic.
I failed to complete the analysis and post -- which keys in on market participants' "positioning" -- because its a complex subject, and I couldn't immediately reduce it to an understandable text.
I hope to have the analysis delivered for tomorrow morning -- and it is bound to result in a lot of discussion and debate.
Cleveland Research has lowered its Apple (AAPL) iPhone unit estimate for the December quarter by five million units, citing initial weakness for the 8 and 8 Plus and because of limited availability of iPhone X. At the same time the research firm increased its average selling price (ASP) assumptions modestly, by under $20.
P&G Management Reportedly Wins Showdown With Peltz
It has been reported that Procter & Gamble (PG) management has won the proxy contest against Nelson Peltz's Trian Partners and I have covered today's short at around $90.30 for a $2.40 gain. I have moved back to small in size.
I am hearing from my institutional trading contacts that a large hedgehogger's S&P futures short was just covered, explaining the woosh higher in SPDR S&P 500 (SPY) to over $255 just now.
* FANG's reign, relatively free from regulation and without any obstruction to or inhibition on growth,is likely coming to an end.
As I argued in my three-part "Sell the FANGs," technology has outrun the U.S. legal system.
Until now, companies such as Alphabet (GOOGL) , Apple (AAPL) , Facebook FB , Amazon (AMZN) and others have been free from antitrust, can choose not to cooperate with legal authorities and can broadcast news without the government regulations that are required of the traditional, legacy news outlets.
* This issue began to intensify when Apple refused to help authorities unlock a cryptographically protected iPhone owned by Syed Rizwan Farook, one of the shooters involved in the December 2015 San Bernardino, California, shooting that killed 14 people.
* Recently, the controversy has increased further with the revelations of Russia's election interference by creating fake accounts that purchased political advertisements on Facebook.
The imposition of new regulations and changing interpretation of antitrust law may be some of the few things both Republicans and Democrats can agree upon in a bipartisan effort to provide productive legislation that addresses the monumental advancements in technology.
The era in which FANG is not regulated and can grow willy-nilly is likely over as tech companies will begin to be treated like every other American corporation.
With these changes likely will come rising expenses, lower-than-expected profitability, slower vertical and horizontal growth for FANG constituent companies and, quite possibly, an assault on their valuations as the balance between security and freedom is challenged by a legal system that catches up to the seismic gains in technology over the last two decades.
Position: Long TWTR small; short AMZN small, FB small, AAPL small
My pal Peter Boockvar, chief market analyst with The Lindsey Group, discusses National Federation of Independent Business (NFIB) data, the yuan, the European Central Bank and European data this morning:
The September NFIB small business optimism index fell 2.3 pts to 103 and that is the lowest level since the 7.4 pt jump in December to 105.8 immediately after the election. The positive was that Plans to Hire did rise by 1 pt to 19%, back to where it was in July and matching the highest level since 2003. This was helped by hurricane rebuilding. Also, those that Plan to Increase Inventory was up by 5 pts. But it was softer from there. Capital spending plans fell 5 pts to 27%, matching a 5 month low and comes after rising by 4 pts in August. Those that Expect a Better Economy fell 6 pts to the lowest since November. Those that Expect Higher Sales dropped 12 pts to 15%, also the weakest since the month of the election. Those that said it's a Good Time to Expand dropped 10 pts to 17, also the lowest since November. With respect to filling all those job openings, Positions Not Able to Fill fell 1 pt with "19% of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (unchanged), 2nd only to taxes" and that problem is particularly acute in construction and manufacturing. On earnings, those that expect Positive Earnings Trends held at the weakest level since February. Lastly, the labor cost components were mixed. Current compensation plans fell by 3 pts but future compensation plans rose by 3 pts to match the highest level since December. With broader inflation, those that plan Higher Selling Prices fell 3 pts to 6% and that is right in line with the 6 month average.
It will be easy to cite the hurricanes for the confidence decline but the NFIB President said "that is not consistent with our data. Small business owners across the country were measurably less enthusiastic last month." Bill Dunkelberg, the Chief Economist, followed by saying "Small business owners still expect policy changes from Washington on health care and taxes, and while they don't know what those changes will look like, they expect them to be an improvement. But the frothy expectations they've had in the previous few months clearly slipped in September."
This number is never market moving and confidence figures again only measure the direction of change not the degree. After all, this particular index sat at 94.9 in October, touched 105.9 in December and closed August at 103. What has GDP averaged from Q4 thru Q2, 2%, the same mediocre pace. We will have to see though if the September drop in confidence is a sign of fatigue on the part of small business in waiting for major healthcare and tax reform. On the regulatory front however, they are definitely happy.
For a 2nd straight day, the Chinese yuan is rallying sharply to a 3 week high after comments from the head of the PBOC. He said in an interview that "There isn't a single country in the world that can achieve an open economy with strict foreign exchange controls...The time window is very important for reforms, an appropriate window must be seized. Once missed, the cost of reform will be higher in the future." Part of this reform will also be in opening up further of their financial system to foreign investors. These comments of course come just before the 19th Communist Party Congress. The Chinese continue to be on this tightrope of trying to slow the growth of credit and leverage at the same time they want to grow 6.5% with hopes here and there of liberalizing parts of their economy further. The Shanghai comp closed up by .3% as did the H share index. I'm a big time long term bull on China but I'm back and forth in the short term as they walk that tightrope.
Not surprisingly two weeks before the ECB meeting, a German ECB Executive Board member Sabine Lautenschlager said "My opinion is clear: we should begin to scale back our bond purchases at the beginning of next year." She also cited the law of diminishing returns by saying while "low interest rates are justified, they have side effects. And these side effects grow over time, while the intended effects of expansive monetary policy wear off. The same is true of the bond purchases." I estimate that on a very conservative taper process where they go to 40b euros in Q1 and cut that by 10b each quarter to get to zero by December, that would be 420b euros (or $500b) of less purchases in 2018 off the current run rate. Add to that $450b of QT from this month to year end 2018. I'll argue again, that is the recipe for multiple compression that faster earnings growth better make up just for markets to stand still.
After seeing upside surprises in German factory orders and industrial production over the past week today we saw that August exports were higher by 3.1% m/o/m, well above the estimate of up 1.1% and in euros reached an all time record high notwithstanding the stronger euro because much of the improvement was within the eurozone. Imports also exceeded expectations but grew less than exports and thus the trade surplus rose. The euro is bouncing in response to the strong export number as the dollar just can't gain any sustainable traction and follow thru after the counter trend rally that began when the yuan softened on the PBOC policy change last month. Gold in turn is bouncing for a 2nd day and getting back close to $1300.
It's not moving inflation expectations or German bunds but something to note on the German wage front which the ECB watches closely in their hopes for higher inflation. The large and highly influential IG Metall union which happens to be the biggest labor union in Europe wants a 6% rise in wages in the upcoming negotiations with employers. The leader of the union said "There is no reason to hold back." Something to watch. Talks will start in mid November.
Also of note out of Europe was a disappointing industrial production figure out of France where the manufacturing component fell m/o/m led by a 2.7% drop in autos. Positively, Italian IP was well above expected in August with a 1.2% m/o/m rise vs the estimate of up .1%. The y/o/y gain of 5.7% is the 2nd best since 2010. Even the Italian economy is helping to contribute to the economic rebound in Europe with the estimate for growth in 2017 at 1.5%. You know who also is, Greece. Industrial production in Greece in August jumped 5.6% y/o/y and marks the 11th month in a row of y/o/y gains. Lastly in Europe, IP in the UK in August did beat expectations slightly within manufacturing. In Q3, IP in the UK will likely be up modestly. Construction output in the UK in August also was better than expected. As all this data is from August, markets aren't responding at all. Catalonia continues to dominate the European news. The Catalan regional president is giving a speech today.
