The 10-year US note yield, as expected, is weakening (by three basis points) -- and now stands below the support line of 2.32%.
I have further expanded my financial shorts - - by adding to short positions in Metropolitan Life (MET) , Lincoln National (LNC) , Bank of America (BAC) , Morgan Stanley (MS) and Goldman Sachs (GS) .
These are all medium sized.
After selling the balance of Radian Group (RDN) and with a very large long Wells Fargo (WFC) -- to be clear, I have moved into a reasonably large net short exposure in financials today.
Position: long WFC large; Short MS GS BAC LNC MET TLT
The proximate cause for the banks' share price weakness -- post this morning's EPS reports -- is the larger-than-expected loan loss reserve build taken in 3Q2017.
Citigroup (C) specifically cited that there has been a sooner-than-expected uptick in loan losses.
I will have more on the reported quarters in the next day or two.
Peter Boockvar expands his discussion on the yield curve:
I mentioned the yield curve this morning, specifically the spread between 2s/10s. Looking at the 5s/30s after the good 30 yr auction just announced has it at just 92 bps. Another 1 bp and it will be at the lowest level since late November 2007. On the day of the Trump tax announcement it stood at 96 bps. The day after the election it got as wide as 137 bps. I'll say again, If only the yield curve could talk.
As Radian (RDN) has begun to approach my $20-$21 year-end price target, I have been reducing the size of this position.
Trading at a multimonth high now (over $19) -- and given my market concerns -- I am eliminating the position.
For those who are more positive on the markets, I would retain the position -- I still have a mid-$20s year-end 2018 target (and as such, I am maintaining the stock on my Best Ideas List.
I sold out the balance of my Twitter (TWTR) holdings at $18.47.
As mentioned earlier, while I believe in the long-term attractiveness of this investment (and am maintaining the stock on my Best Ideas List), I expect the shares to be range-bound ($17 to $19) over the next few months.
Oooh, Oooh, That Smell; Can't You Smell That Smell?
With a number of marijuana farms being burned in the California fires, it is no wonder that stocks have made all-time highs this week and have decoupled from the numerous economic (and other) uncertainties!
07:46 FB Facebook faces lack of trust, law of large numbers - Pivotal Research remains cautious (Sell) ahead of Q3 results on November 1 (172.74 )
Pivotal notes the series of errors and flaws in the co's ad products which have come to light over the past year will eventually have negative effects because of commercial friction and regulatory costs that follow from a lack of trust among key constituents. There are top-line growth risks investors are not general considering 1) increasing awareness among marketers of all sizes that Facebook video ads have a significant viewability problem. And then there are regulatory risks, such as with GDPR and ePrivacy in Europe, which could constrain available inventory for sale. There are also significant costs ahead for more human monitoring of content and ads. Mindful of all of these factors, they think Facebook can still continue to thrive because its properties have such vast reach and usage, although their model anticipates slower revenue growth over the next few years vs. consensus, and lower margins, too. With relatively insignificant changes to their model, they maintain $140 price target.
My good friend Peter Boockvar, chief market analyst with The Lindsey Group, wishes the yield curve could talk:If only the yield curve could talk and tell us what it's really thinking. The 2s/10s spread was 100 bps on election day November 8th. It peaked out 6 months later at 135 bps. On September 27th, the day the Trump Administration unveiled its tax plan it closed at 84 bps, up 4 that day. On Monday it was 85 bps and today it sits at just below 82. Below 75 bps would be a 9 year low.
Following the extreme bullishness and dearth of bears in yesterday's II data, today's AAII index of individual investors which is much more volatile week to week saw bulls rise to 39.8 from 35.6. The recent high was last month at 41.3 which was the most since January. Bears fell 5.9 pts to 26.9. Last month it got as low as 22 which was the lowest since last November after the election. Last week, the CNN Fear/Greed index touched 97 intraday (can't go above 100) and closed yesterday at 83. For those not familiar with how the CNN index is calculated, it is measuring what market participants are actually doing rather than how they are feeling which all the others measure. Here are the 7 indicators, 1)S&P 500 vs its 125 day moving average, 2)# of stocks hitting 52 week highs and lows on NYSE, 3)volume of shares trading in stocks on the rise vs those declining, 4)put/call ratio, 5)credit spread between investment grade and junk bonds, 6)the VIX, 7)difference in returns for stocks vs treasuries.
It's not exactly where the BoJ wants the inflation to show up but it's a start. Japanese PPI for September rose .2% m/o/m and 3% y/o/y as expected but that y/o/y gain is the quickest in 9 years if we take out the VAT induced jump in 2014. The caveat though is it is off a really easy comparison as PPI was negative every single month last year. Also, much of the gain was driven by commodity prices. The question now is whether this rise in PPI gets passed on or not to consumers. There was no market response in JGB's as the 10 yr yield was unchanged and the 40 yr yield was down 1 bp. The yen also is little changed and the Nikkei rallied for a 7th straight day. The 10 yr Japanese inflation breakeven was flat at .43% but still at a 3 month high. I'm stating the obvious to everyone but most central bankers and have said this before, considering where global interest rates lie, just imagine if central banks are successful in generating higher inflation.
Industrial production for the euro area in August rose 1.4% m/o/m which was better than the forecast of up .6% and July was revised up by 2 tenths. The y/o/y gain of 3.8% was the 2nd best since 2011 pre Greek crisis. Even Greece contributed to the growth as IP there rose 3% m/o/m and Germany was solid too. The number is somewhat dated and we've seen already a bunch of the individual country reports so it's not market moving. The euro is pretty much flat as are European sovereign yields while the Euro STOXX 600 is down slightly. We know Europe is seeing its best growth in many years of around 2% this year.
This headline from BN: *BARNIER SAYS BREXIT TALKS HAVE REACHED DEADLOCK sent the pound to the lows of the day but while the comment was then followed by this, *BARNIER SAYS DECISIVE PROGRESS IS POSSIBLE IN NEXT 2 MONTHS, the pound focused on the first one from Michel Barnier, the EU's Brexit negotiator. One has to wonder what the Brexit vote would be if held again today. That said, the UK economy has held in much better than what the fear mongers proclaimed in their estimates last summer.
As for the dollar generally today, the euro heavy index is up a hair while gold is knocking on $1300 again (its 50 day moving average). I remain a pound the table bull on gold and silver.
I have been waiting patiently for an opportunity to expand my financial shorts.
For some time I have had small financial shorts coupled with a very large Wells Fargo (WFC) long; I was very slightly net long banks.
I have moved from small shorts in JPMorgan Chase (JPM) (at about $97.40) and Citigroup (C) (at about $75.20) to medium in size in premarket trading after slight earnings and revenues beats by the money-center banks. This action is based on the following:
* The yield on the 10-year U.S. note has risen from a recent low of 2.03% back to resistance at 2.32%-2.33%. Given my economic views, I expect the rate rise to stop at around these levels.
* The 2s/10s curve has not rallied. At 83 basis points, it is down from 135 basis points following the Trump election. It is only seven basis points away from a decade low. This, too, signals a deceleration in the rate of domestic economic growth.
* Loan growth remains tepid and capital markets activity is growing ever more competititve and will deteriorate in a market retracement.
* Bank stocks have risen by nearly 10% in the last five weeks. According to the data, they have gone from under-owned to over-owned in the last six months. Profit taking might be in order.
* Based on my analysis, reward vs. risk is now unattractive. At current prices, I see about 2 times more downside than upside in most bank stocks (save Wells Fargo).
Position: Long WFC large; short TLT, JPM, C, GS small, MS small, BAC small
On that score, an email from my pal Whitney Tilson reminded me that low-probability events do happen:
It's been so long since I can recall any true outlier events in this complacent stock market that I turn to sports to remind us that low-probability events can still happen - in the last few days, TWO events that were only 7% likely both occurred: a) The Yankees won three games in a row against the mighty Indians (winners of 22 straight only weeks ago) to win their division series (even a lifelong Red Sox fan like me says: "Go Yankees!); and b) the U.S. men's soccer team failed to qualify for the World Cup by losing to lowly Trinidad & Tobago AND Panama upset Costa Rica AND Honduras upset Mexico (even a draw in any of these three matches and the U.S. would have advanced; here's a minute-by-minute account of what happened). The lesson: never forget that low-probability events DO happen!
in response to Doug's opener above: at a time when the stock market is shaking off anything and everything and volatility continues to move to new lows virtually every day regardless of what comes out in the news, seasoned investors who have lived through several longer-term boom and bust cycles would likely tell you that when an article comes out explaining how a once-modest retail store manager is crushing the market by shorting volatility 10 years into a bull market with volatility at all-time lows, that it might be time to reconsider going against the grain. That article was from Business Insider: You don't have to be a professional investor to make a killing in the volatility market. Just ask Seth M. Golden, who previously worked as a logistics manager at a Target store. The 40-year-old, who lives in a suburb of Ocala, Florida, says he's grown his net worth from $500,000 to $12 million in five years by shorting the CBOE Volatility Index - or VIX - according to a report from Dealbook. bottom line: looking for a catalyst, look no further than shorting the VIX as a potential market crusher just like "portfolio insurance" in 1987. (some insurance)
Guggenheim downgrades Disney (DIS) to neutral, citing pay TV trends. Price target lowered from $122 to $105. As mentioned yesterday in "Takeaways," Disney technicals and fundamentals are both eroding.
