Posts Tagged 'SPY'

So Long Vikram, Hope You Had Fun. Say Hi to Sally. Citi.

Citi

I have never owned Citi shares until I began purchasing it in the pre-market today, preferring to root my bank exposure in JPM and BAC.  To me, the appointment of Vikram Pandit as CEO was an extremely poor decision.  What exactly in his background, aside from political savvy – a requirement for ascension in the sell-side world, qualified him to lead what was the world’s largest, most complex financial institution during the worst financial crisis ever seen?  Perhaps it was his ability to sell his mediocre hedge fund, that would subsequently fail, to Citi for nearly a billion dollars? I guess the then BOD valued negotiating skills more than commercial bank experience.

Pandit’s tenure was marked by numerous missteps: the submission of his plan to return capital to shareholders resoundingly rebuffed; the sale of the brokerage arm to Morgan Stanley, consummated for an astounding $4.7 billion less than he had apparently advised the BOD it was worth in the sale – an even more enormous miss when taking into account that the final price was settled at less than $13.5 billion; and what about the stock price – it has lagged all the other major banks and still hovering near its ’09 lows.

John Haven’s picture hangs in the man cave of every block trader who ever traded on Wall Street.  Those who move on from block trading on the sell-side find themselves working at hedge funds, playing golf, or in extreme cases, dispatching taxis.  In fairness, Havens is very bright and did a fine job running the institutional equity department at Morgan Stanley but again, not exactly qualified to run a major commercial bank.

I chuckle at the pundits espousing how surprised everyone was about this move, alleging something nefarious.  Citi just reported their quarter, their financials and disclosures never more current than today.  Given that, it was the best time to make this move.  Of course this took the press and rank and file by surprise; BOD’s don’t hold open meetings.  I applaud Citi’s BOD for their discretion.  As to questions about Pandit’s compensation, we finally get a shareholder base that paid attention to the performance of its stock, aligning CEO’s compensation to shareholders interests.  Let this be a warning shot to other CEOs.  And to those who had questions about Pandit’s stewardship but now bemoan his firing after a “great” quarter –  com’on!  After years of disappointments, expectations were finally reduced to his level of expertise.

On the positive side, both Havens and Pandit punched above their weight but were far less than ideal stewards of Citi’s fate.

Perhaps I’m just jealous.

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Damn! I know That Invite Was Here Somewhere

merci, ben

danke, ben

謝謝你,本

Gracias, Ben

ベン、ありがとうございました

σας ευχαριστώ, ben

شكرا لكم، بن

 

The world over, in every language, from French to Mandarin to Greek to Arabic, the same words are being spoken with incredible enthusiasm, often in a voice that cracks with unbridled emotion and gratitude.  They are 3 simple words: Thank you, Ben.  But there are always the forgotten ones, those who declined the invite. Now, they lay in their beds, pulling their pillows tightly over their heads, cursing the loud music and laughter coming from next door as they hold firm to their righteous beliefs that such frivolity does no one any good, it’s too late, it’s too dangerous, it’s sacrilege, it’s too Keynesian.  Good luck with handling the outflows.

 

Frankly, I don’t care if Keynes is throwing the party, or Bernanke or Draghi.  All I want is to have a good time.  I don’t care if the host pays the caterer after I leave or doesn’t – ain’t my problem, ain’t my job.  And cleaning up – that ain’t my job either, I’ll be long gone before the mess has to be cleaned up.

 

I was in a similar situation once.  I was in college, working weekends at a job that started at 6 AM so I decided to go to bed early. It wasn’t my usual M.O. but I had peaked earlier in the week and was exhausted. With the party in the dorm just getting going, I found myself tossing and turning and cursing out those morons next door.  Finally, I threw off the covers and threw on the jeans and joined in.  Someone else would have to throw the towels in the washer at the tennis club (or I would just fold the dirty ones – who would know? They sweat like pigs anyway).

 

So the bears have a choice: let common sense and a strong belief that what Bernanke is doing is wrong and miss the party or say “what the hell” and join in. If they’re smart, they took the latter route and realized that it’s not their job to debate economic policy and what the long term impact of QE’s will be; it’s their job to make money and when the world over is easing – except for the Chinese who’s contribution is to pay lip service to it – you have to lift the glass.

 

Thus the only question is how much of a good time is too much?  Can I throw back that lost jelly shot or is it time to hail a cab and head home.  For me, my margin of error is sometime before Rosie O’Donnell starts looking like Kate Upton and when I start talking about how, at 5’8” inches (maybe), I used to be able to dunk a basketball. But having been around long enough, I’m not going to get greedy.  I’ll be back to shorting materials soon but for now I drink the castor oil and am long some of the worst positioned companies I could find: steel and iron ore. I do feel guilty going to the dark side but these are only trades.

 

My favorite quote of the day comes from Home Depot as they announce the closure of 7 big boxes in China:

 

“China is a do-it-for-me market, not a do-it-yourself market, so we have to adjust,” the company said, although the country’s slowing economy is also not helping.

 

Are these really the same people that are going to take over the world?  They can’t even find their Chosen One although I had heard he was spotted in Macau driving a Ferrari with a Pamela Anderson look-alike (circa 1998) in the passenger seat while looking for a role as an extra on The Hangover III.

The European Spring: Why Caution is the Best Market Position

In typical Hollywood fashion, the producers of the successful Arab Spring

have announced the sequel,  The European Spring, starring the people of

France.  In fact, pre-filming has already begun for the 3rd installment in

the series, The US Spring which will be airing the first Tuesday in

November.

The French

The French hosting elections on a Sunday is itself an interesting issue; I

have to assume they value their days off during the work week too much to go

to the polls than they value their leisure time on Sundays.  Logistics

aside, the polls point to a victory by François Hollande and socialism again

taking front and center stage in the City of Lights.  (Why shouldn’t

Parisians leave the lights on – the government is footing the bill.)   Of

course, Sarkozy can pull it out in the final days if he is able to draw in

the fence sitters and Le Pen acolytes; this should not be completely

discounted.  But assuming Hollande wins, I have heard the argument that this

event is already priced into the market. So will the rhetoric about

endangering the EU fade as political campaign promises often do?  Not on

your life.  With legislative elections upcoming on June 10th and June 17th,

the rhetoric is just beginning.  Those arguing against France’s

participation in the bailout fund and austerity as the path to growth will

be emboldened to speak even louder.  That, after all, will be the proven

path to winning a seat in the National Assembly of the Fifth Republic.

The Greeks

The Greeks have their own election on Sunday.  With massive unemployment,

there is hardly a reason to hold their elections on the weekend. Don’t these

people need something to do during the week or is that when the beaches are

less crowded?  From all reports, it looks like the coalition will survive by

the slimmest of margins. The rhetoric here too will build as their exit from

the EU remains the likely end game.  But if the coalition falls apart,

either on Sunday or near term, then the collapse of the EU is an immediate

fait accompli.

The Rhetoric

So the chatter will increase as the citizens of France, the Netherlands,

Italy, etc., continue to question with increasing authority and anger, why

they should labor under austerity programs in order to support the

irresponsible governments of Spain and Greece.  This will continue to

pressure the indices particularly as Spain and Italy continue coming to the

market to roll over their debt. At present, there is no avenue to growth and

Draghi seems unwilling to inject anymore stimulus into the markets until

governments put forth growth initiatives (and maybe, actually do cut

spending).

The Sequel

So this is the sequel to the Arab Spring as the Europeans rise up and say no

mas.  It is a more civilized uprising, as they perhaps torch candles instead

of themselves, but an uprising nonetheless. And then, in November, it will

be our turn.

Add to this the slowing US economy – yes, slowing, not a pause, and the EU

and China continuing to slow, and you have a rather poor outlook for US

equities.  But Brazil is the bright spot, isn’t it?  Nope. China is the

economic delta for Brazil.  We had an earnings season that few had expected

in terms of growth and outlook but the skepticism about the future is what

preys most acutely on the market, and, the economy.  Sure there are bargains

to be had but like most retailers, there is never one clearance price.  And

yes, Treasuries are fully valued and arguably in a bubble, but that’s been

the story for a while too.  I don’t know who is good picking bottoms and

tops so I’m staying low beta and fairly neutral.  There is very little

chance that under this scenario, allocators have a call to arms for

equities.  That will happen but not now. Not perhaps unless there is a

Romney victory and Europe puts forth some plans for growth.  I would

actually support a position that puts Greece in default, cuts back on

austerity in favor of responsible spending for growth  but I’ll leave my

daydreaming for when I’m at the chick flicks my wife occasionally drags me

to.

I continue to be short global cyclical stocks such as materials.  I hate

beta, except perhaps on the short side and bunting instead of the long ball.

As my favorite metals and mining analyst, Pete Ward, said to me yesterday,

“steel has very high barriers of exit.”

During your market respite, you may want to read an excellent new book: The Big Win.

http://www.amazon.com/The-Big-Win-Learning-Successful/dp/0470916109

The Perfectly Written FOMC Statement For Stock Pickers

The concerns supporting a bear view on U.S. indices issues prior to yesterday’s FOMC press release were clear:

1)      “I’m negative on the market because the economy is not recovering.”

2)      “The Fed is killing us by keeping interest rates so low.  Savings accounts are a negative carry, hurting the household.”

3)      “The QE’s were a disaster and did nothing but we’ll take another serving.”

4)      “The banks can’t make money with a flat yield curve.”

5)      “Inflation is an issue.”

6)      “Europe and China will take us down.”

In my view, the FOMC press release was perfectly turned out for everyone except for those misguided souls staying too long at the bond party.  To paraphrase the statement:  the economy is recovering but we’re going to keep rates low until the end of 2014.  Instead of driving the markets lower, investors should do a hosanna, take a breath and start picking stocks – not any stocks, but those more dependent on the U.S. economy.   The rising tide lifting all stocks is ebbing making this a great environment for stock picking.

 

By not hinting at a QE3 while paying homage to an improving economy and labor market – I trust the Fed’s mark-to-market much more so than their forecasts –  a large part of the bear case for US equities was served a debilitating blow.  After a short period of adjustment the market will continue its assent.  Yes, markets do rise as the Fed tightens as long as monetary policy remains fairly accommodative.  But all is not lost as to the Fed and monetary policy.  As with a recovering addict in rehab who has been mainlining heroin courtesy of a benevolent pusher, the Fed will not force us to go cold turkey so I look for a modest bridge to higher rates upon the expiration of Operation Twist in June.

The focus of naysayers will now increase on the purported impact a slowing global economy may have upon the U.S.  and, ultimately, our equities.  What has resonated so loudly is silence on the fact that the U.S.  still has largest economy in the world and that while not entirely self-sustainable, we can drive decent growth given that our reliance on the EU and China as markets for our goods is small relative to our internal consumption.

Banks, already on the upswing from improving credit, upward trending existing home sales, and being the beneficiaries of distressed European banks’ need to sell non-distressed assets at distressed prices, will soon be able to make money on a steepening yield curve.  This environment should be panacea for U.S. banks providing they remain disciplined in feeding out their inventory of homes to an improving market.

Inflationary pressures caused by a weaker dollar will abate, not that the Fed ever saw them as anything more than transitory, pressuring gold but helping the consumer as will higher yielding bank accounts but pity the fool who doesn’t see major principal loss in much small moves in yield.

I continue to like the market primarily because I anticipate upside in this reporting season relative to expectations, laboring under the belief that businesses and individuals are stronger.  I like the USD long versus the Euro short.  I hate the Aussie dollar and added to my short; China is a drag on their export and minerals economy and they have extremely high rates that have to come down.  I am long domestically focused equities.  Technology continues to play an important part in my portfolio, the issue with SNDK specific to their business model (I bought today).  I am opportunistically shorting steel, copper and coal on a trading basis.

Go U-S-A.  U-S-A.  U-S-A.

——————————————————————————————————————————————————–

The market of the last two days reminds me of my grandfather, Phil.  He was a surly guy and had his voice been disassociated from his body, one would have envisioned a much more stout individual than he actually was. Gravity had taken its toll as he advanced into his 90’s, shrinking his frame to little more than five feet two on his tallest days.  The often inverse correlation of age to patience took its toll and his gruff and demanding personality continued to overshadow a diminutive frame, expanding to a size that would better fit someone sporting the physique of Ray Lewis or Vitali Klitcshko.  Phil was never indecisive in his demands but increasingly, he never wanted what he asked for.   The following true story provides an example and a parallel to today’s market.

“I’ll take the sirloin,” he grumbled.

“Of course, sir.  How would you like it prepared?”

“Medium” he groused in response.

The kitchen turned it out perfectly medium but his rote response, his knee jerk reaction, was to send it back.

“This is raw,” he said, misconstruing pink for red.  “It needs more fire.  I don’t want to see any pink.  I want it well-done,” he barked, clearly contradicting his original order although he didn’t see it that way.

The waiter did as he was told and again delivered the steak perfectly prepared to order; well-done, not charred.  My grandfather’s rebuke was even more harsh.

“This is burnt,” he said, chastising the defenseless waiter.

And so it went.  I left significant compensatory damages behind, padding my grandfather’s meager tips, hoping to assuage my embarrassment and to maintain my good standing with the service establishment in New York City.

The moral: .   While you can hardly compare ordering a steak to positioning a portfolio but if Phil had not pre-judged the result, determined to return the slab of meat even if it came out perfectly cooked, perhaps he would have been able to profit from a good result.

News Flash: Loch Ness Monster Ensnared In SEC Sting on Quarter End Mark Ups

The simple and stark truth is that the phenomenon of a quarter end mark up in equities is a myth.

First the statistical evidence.  I reviewed the last eight quarter endings, taking note of the closing prices of the SPY’s  on the two days prior to month end, the preceding pattern and the first two days of the new quarter as well as the ensuing days of activity.  It would be reasonable to expect that the market would sell off on the first couple of trading days of the new quarter if it were being marked up at prior month end window dress a portfolio but that occurred in only 2 out of the last 8 quarters, one of those events being immaterial and the other a move from 113.15 to 109.93; this occurred in 3Q 2011.  The next trading, 10/4, saw almost a full recovery to month ending levels.  Furthermore, in 7 of the 8 periods, the uptrend of the first 2 trading days of the new quarter continued over the next week or so.

Now, the empirical evidence.   Long only funds generally run with low cash levels as mandated either by asset allocators or charter.  Hedge funds, that is the good funds, the professional funds, could care less about supposed month end markups, preferring to stay disciplined and loyal to their strategies.  After all, that is how they became successful.  In fact, I can’t say I know of any investors, big or small, that is willing to make an investment decision based upon what they believe a bunch of insignificant players may or may not do into month or quarter end.  That would essentially be ceding the management of their funds to those individuals and that is not about to happen.  Furthermore, transparency has increased dramatically with most funds.  I know how I would feel as an investor if the fund I was invested in told me they were 40% net long on the 25th of the month because of their assessment of the market and opportunities and then were all of a sudden 60% net long – or higher – as the month drew to a close when the investment case was unlikely to justify such an increase in exposure.   I don’t invest with managers who play those games because they are too hard to play.

Of course, there is the possibility that specific, illiquid issues could be manipulated higher into quarter end – I’m not naïve – but I do believe that this activity is insignificant and in a more highly regulated industry, where penalties have actually become very harsh for doing so and the reward paling in comparison to the risk, is much less common than it was years ago.  But we need not debate the quarter end mark up issue since the facts make a compelling case that it doesn’t happen.  Sure, conspiracy theories are fun to talk about and a convenient excuse as to why a fund manager is under invested but until they actually find the loch ness monster, I’m not a believer.  I’ll just chalk it up to people trying to sound smart.

Oh, and this is a helluva a mark up the last two days.  Nuff said.

Europe Falls Short Again: What’s Next for Commodities and Stocks

“I could not have been more clear, I specifically asked for a bazooka and all I got was this little long range pea shooter,” said Mr. Market, clearly dejected.

Europe has done it again, taken the markets to the brink of despair, then sweet talked investors off the edge.  Frau Merkel has proven herself to be as alluring as the mythological Greek Sirens, her sweet songs of a stronger European Union with tighter budgetary controls enticing enough to convince unsuspecting traders to increase their risk.  But like a pimply faced teenager stuck at first base, they too will feel unsatisfied and longing for more.

At least they got smart about one thing, or so they believe, extending the deadline for the seminal announcement until March.  After the last two short window lead ins, they realized it takes months, or more, to craft a plan rather than a fortnight.  They will still come up short as each country realizes what Britain did which is they have no interest in being governed by the same country they had major problems with, well actually not exactly problems, more like out and out war.  However, even if reasonable  minds say that was then and this is now, the cultural divide between each country will prey upon this agreement.  But even if it does pass – it has not been officially ratified – and the countries needing approval from their broader government secures their assent, the very core of the agreement is flawed.  Let me see if I get this right: a country fails to either establish or enforce a budget in line with the requirements of the EU so the EU will then assess heavy sanctions upon the profligate nation.  Yup, that will work.

Candidly, as to my kids, I was not much of a disciplinarian. “If you do that again…,” I would say, both they and I knowing they would do it again and I would say that again.  Thankfully they turned out great.  Not so with Greece.  Without moral hazard, countries will continue to do what is in their politicians’ best interests.  Greece lied their way into the EU and the EU is responding with bailout after bailout.  I still believe allowing them to fail would be the best result.

This is the fifth bite of the apple for Europe and they continue to come up short, lagging a step behind.  Still no ring-fence, still no plan to save the banks, still nothing of substance; just words.  They are behind in everything, even video games.  The Mario Brothers went out of style a long time ago and the Italian version – Monti and Draghi – are not showing themselves to be Super Marios at all.  Draghi can get there if he opens the purse strings with a massive liquidity push, buying even more bonds than the ECB has in the past,  but despite two easings, he is still prone to alligator arms like the clients I used to wine and dine from my perch at Lehman;  his hands don’t reach the bottom of his pockets.   And with the most recent cut in rates being the result of a divided vote, it may get tougher for him to cut further given the European single mandate.  However, as the global economy slows and the USD strengthens, inflationary pressures will ease providing cover more rate cuts.

The banks still need $153 billion in new capital which I don’t see how they can raise without nationalizing some of the banks. But Santander does have a solution: they will just lower the risk level on their assets. Yup, that worked for Lehman.  So much for paying heed to the EU.  And should there ever be  a default and the CDS insurance kicks in, the global financial system will see a bigger meltdown than a forty-year old Japanese reactor.

The AAA ratings in Europe will be a relic of the past, no question as they are in virtually everyone’s mind, the only unknown is whether this will mark a near term bottom.  These ratings agencies continue to be an embarrassment, always multiple steps  behind.  Rumor has it that S&P management is urging their employees to contribute to the Herman Cain campaign for President.

Meanwhile, China continues to be slowing and I believe there is little they can do, or want to do, about the real estate bubble popping.  This bodes poorly for commodities.  With construction slowing, China has enough stockpiles of needed commodities to wait for a further decline in prices.  This is what they have always done when able and this is what makes them great traders.  They are like a private company, not worried about quarter to quarter earnings, taking a long-term view.  They were Warren Buffett before Warren Buffett became Warren Buffett, buying when others are fearful.  But with their primary end market, Europe,  going into a recession, possibly depression, the Chinese are limited in terms of what they can do to drive growth.  They would rather look for defaults and then step in and buy Greece or maybe even Hungary – its time to move on now that Taiwan seems under control.  India, though, not so much. The slowing in their economy, while not a complete surprise, is not welcome nonetheless.

This slowing will also hurt crude.  If Iran were not in the mix, we would already be trading in the 80’s to low 90’s.  Inventory figures have not been very good.

Euro short/ dollar long continues to be my favorite position.  As to stocks: I remain very light in exposure and tilted toward defensive.  Commodities look cheap but they always look cheap on the way to the bottom. I can be patient.  There has been too much beta chasing recently, in stocks such as X, that has to unwind.

The strengthening of the dollar will be as much a result of the strengthening US economy as well as the crumbling European economy.

So where can I go wrong?  The only way out of this is for massive stimulus by the ECB.   IMF rescues haven’t necessarily helped in the past. I am again inserting these charts I borrowed from JP Morgan:

IMF


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