Market Summary 2/16/2012

Highlights

The S&P500 made it biggest move of the year rising 1.1% ongreat news all around.  Starting with theUS, Housing starts came in above the consensus showing that there may be lifein the housing market after all.  Joblessclaims also came in at a much better than expected 348k compared to a consensus365k showing that the labor market it also heating up.  The PPI numbers less food and energy also roseabove the expectations showing that inflation is starting to potential creep inon the supply side.  Lastly from the US,the Philadelphia Fed Survey blew out the estimates following the Empire Statenumber yesterday showing that this market may have much more room to run. 

I think the most important news on the day came on rumor that theEU will give approval to start the Greek debt swap by Monday.  The Euro, which dropped in the high 1.29sfinished the day at 1.313.  There stillis some debate on how an escrow account will collect revenues to make sure thedebt gets paid, but all in all the market loves certainty and as soon as theGreeks "fix" their problems, the better off we will be. 

Equities

Markets rose on the day on good news from around the world.  NASDAQ took the biggest leap of the large indiceswith a 1.5% pop.  In individual names, GMposted its highest profit ever and even though they missed profit estimates,they finished the day up 9% at $27.17. I still think GM is a great buy at theselevels moving forward. Nordstrom's (JWN) profits rose 1.7% as the affluentcustomer continues to spend. This was in line with wall street estimates,however the company issued cautious guidance dropping the shares heavily inafter hours before a recovery in the stock.  

Cabela's (CAB) finished the day up nearly 14% on better thanexpected earnings, revenues and expectations moving forward. Advanced AutoParts (AAP) was another name I would follow as they rose over 8% on the day onpositive earnings results.  I am stillvery bullish on my Ford (F) pick moving forward and the auto sector in general.  In terms of volume, Bank of America was themost active stock with a 4% gain followed by Sprint, Citigroup, and Ford. 

Rates and Fx

In FX news, the Euro finished the day off strong on the Greek news.  I feel the move will continue until at least1.33 on continued progress.  The Yencontinued its decline against the dollar moving towards 78.93.  Other than that, the Dollar finished down tothe majority of currencies on the day. Most notable were the AUD at 1.0755/$, CHF at .9191/$, and the GBP at1.5801. 

In fixed income news, rates sold off across the curve.  The 30 year was off 5.8bp moving to 3.15% andthe 10 year sold off 6.4bp finished at 1.99, still under the 2% mark. I wouldlook at shorting rates especially on news of a Greek resolution as a risk ontrade should push yields higher. 

Commodities

As a potential conflict with Iran becomes closer and closer andthe economy continues to heat up, I would pay close attention to oil.  WTI finished at $102.44 and natural gasfinished at $2.55.  I still in bullishNG, but if a war with Iran sparks, there are predictions of oil crossing the $200mark until we can clear the Strait of Hormuz where some 20% of the world's oilpasses through. Gold rose slightly to finish at $1,733. 

Tomorrow

Major economic news tomorrow includesthe CPI data and a leading indicators number. The CPI should be telling on how the fed will monitor its ratesexpectations.  I think rates will risesooner than we think on continued strength in the US economy and the inevitableinflation on the horizon.  In terms ofmarkets, I am bullish into the weekend as a lot of people missed out on therally and will want to put money to work in hopes that the Greek situation isgetting better.    

After an earnings miss, I still believeCLF is a great buy as they finished the day flat.  At these levels the stock trades at 6xtrailing earnings.  Most importantly,most of the management team bought large amounts of shares showing thatmanagement believes the company has strong prospects moving forward.

Market Summary - 2/14/2012

Highlights

Another day, another Greece headline! I am personally starting to get sick of Greece having such an impact on market prices.  Troubling news on the day was that the Germans seem to be signaling that they wouldn't be all that upset if Greece defaulted and left the Eurozone.  This is apparent in the demands they are insisting as well as the harsh stance they are taking.  However, this evening, the Chinese said that they are going to invest heavily in the Euro and are supportive of a strong Eurozone.  I imagine this plea is due to the reliance upon the US and dollars.  China, wants to diversify its assets and they rely upon the Eurozone heavily for international trade. Part of the drama in the markets today was the rescheduling of the Greece meeting from tomorrow to a phone call and the official meeting has been postponed yet again until Friday.  There was rumor at the end of the day that the Greeks are going to sign a commitment to honor their austerity and the markets rallied.  As cynical as this sounds, what is signing a paper going to do for the Greeks?  Time will tell. 

US markets finished relatively unchanged on the day, but bonds rallied as the flight to safety measure kicked in and inflation expectations were kept at bay.  Retail sales numbers were released and they grew less than expected, but still showed growth of .4% and an even better .6% excluding autos.  Business inventories, a measure of the inventory in dollar amount held by manufacturers, came in at .4%, less than the .5% expected.  This bodes well for the economy moving forward as businesses are managing with very lean levels of inventory and will probably have to restock moving forward.  The last major data point released on the day were the import and export prices.  Import prices dropped .1% and export prices rose .2%, greater than the .1% expected.  However, these numbers are still very low and helped explain the rally in rates today as inflation expectations are being kept at bay.

Equities

Due to time constraints, I wanted to focus on one stock today.  Zynga reported $311.2 million in revenue but still managed to lose money on the quarter.  This represents a 59% increase YoY in revenue, tremendous growth.  Earnings, however, were a different story.  The company reported a net loss on the quarter of $1.22 / share.  Excluding stock based compensation, the company managed to earn $.05 a share.  More troubling is that this number represents a 24% decline in profits from 2010 even with the stock based compensation removed.  I fear this company could be on my short list within a year if they don't manage to turn profits around.  After hours quotes had the stock down 9% on the report but the stock moved back to even by the close.  

Market Summary - 2/13/2012

Highlights

Finally, at long last, the Greeks decided to pass austerity measures in a 199-70 vote in favor of the cuts.  They lowered minimum wage, cut government labor, and proposed to remove benefits in a sweeping reform that sent markets higher.  I imagined such a day would bring a 2-3% shot up in markets given the down days we have recently experienced.  Instead, the DOW rose a measly 0.57% with the S&P and NASDAQ posting similar gains.  What caused such a muted reaction?  Well, for the Greeks to actually get the €14.5 billion of the €130 billion bailout from the EU and IMF, the Greeks must specify the a portion of the exact cuts to be taken as well as send the EU a written commitment to actually follow the terms of the proposal.  It seems that the Euro zone is finally realizing that money thrown at Greece is likely not to be recovered and it may make better sense to let them default and exit the Euro.  The question remains, is what happens under a defaulting scenario?  Surely people will try and run the banks in fear of their bank being the Lehman of a potential Euro crisis.  The Greek economy will face much more severe contractions and the people will probably revolt, but this time full fledge. It will be interesting to see what the EU and IMF decide come Wednesday.  Beyond this, 100,000 Greeks set Athens ablaze in violent and disruptive protests.  Yes, 100,000, and given that Greece has around 11,000,000 people, this would represent nearly 1% of their population.  This is a staggering number and makes you wonder if the government did all they could if Greece is even able to be saved.  Don't even get me started on Portugal.  They may be the next domino to fall in the chain.  After being pro the Euro recovering as little as a day ago, I now realize that the people may make this not even a possibility.  Here is a nice picture of Athens ablaze last night:

Beyond Greece,  there was little action in the US markets.  There were a few t-bill auctions, but nothing special.  Crude was halted midday on what was labeled a "technical glitch" by the CME.  There is speculation that an algo went wrong and the CME caught this one before we experienced an oil flash crash.  There weren't any crazy earnings reports to note.  Apple did break $500 on the day as there is speculation of a dividend and the iPad 3. 

Equities

Stock markets were relatively boring on the day. Nearly all markets finished close to where they started.  The S&P 500 did close above the psychological barrier of 1350.  The main wonder is whether it can hold it this time as last year the market hit over 1370 before crashing hard over 300 points in all.  The VIX was down and finished at 19, low given the risks in the market.  Priceline (PCLN) was the biggest gainer on the S&P with a 4.8% pop followed by International Paper (IP) and Fastenal (FAST).  Biggest losers on the S&P were First Solar (FSLR) with a -5.0% drop followed by TripAdvisor (TRIP) and Netflix (NFLX).  On the DOW, Bank of America (BAC) continued its hot year with the largest pop at 2.2%. 

Rates and Fx

I am still a treasury bear long term, but short term, risk remains.  Bill Gross added to his position in treasuries as well.  I will be especially curious as to what happens after tomorrow's import/export prices report.  The 30 year finished down 1 bp at 3.11%, same with the 10 year (1.96%), and the 7 year (1.36%).  Somewhat related to rates, but I think extremely telling, individual central banks in the Euro zone are expanding the types of assets they can take as collateral.  This is English for the banks do not have collateral to meet their needs and the Central Banks are helping them out.  I was amazed that the European banks were not just absolutely punished on the news.  If I was long a European bank, I would suggest an exit as the upside does not compensate a 0 on the downside.  In FX news. the Euro was down on the day settling most recently at 1.3161 $/Euro.  The Yen actually sold off heavily as the BOJ announced a surprise asset purchase program enlargement.  Most recently the Yen was quoted at 77.88 Yen/$.  The pound also finished down on the day to settle at 1.5707.

Commodities

As mentioned before, Crude was halted on the day.  WTI Crude finished at $100.53 down $0.38 on the day with Brent at $117.20.  Spot gold finished at $1,716.39, down $6.10. Natural gas continued its descent finishing at $2.44.  This price continues to be unsustainable, but with supply and production well above demand, it's hard to see a short term recovery in prices.  I am still very bullish NG's longer term prospects as the US starts to make use of this energy source in greater quantities.  Coffee futures dropped to $214.60, down 1.29% on the day. 

Tomorrow

Should be a much more interesting day.  First, Zynga(ZNGA) reports its first earnings since filing for public status.  This should provide light on the health of Facebook before its IPO as Zynga accounts for a large portion of revenues.  Regal (RGC) is another name I would watch for earnings.  In economic news, Retail Sales are going to be a metric for the health of the consumer as well as inventories and import and export prices.  Import and export prices will be one I will especially be watching as the argument for QE3 continues to be brought up.  The only thing I feel that stops this initiative is the potential for inflation picking up.

2/10/2012

I wanted to start today off with a little disclaimer. I am not licensed and not currently a professional in the field. I am a business school student who loves the markets and wants to voice my opinion and track my ideas and investments. I would recommend going to an expert before taking on any of these investments. With that out of the way, here goes:

Highlights
The markets finally slowed down after 5 weeks of gains, finished lower both on Friday and on the week. The major data points released in the US were the University of Michigan Consumer Confidence number and the Trade Deficit. Expectations for the consumer sentiment reading called for 74.3 and the number came in far below at 72.5. The markets obviously took a hit on this announcement, but for all that was going on today, it really wasn't so bad. The S&P 500 finished down 9.3 points to 1,342 (-0.69%), NASDAQ was down 23.35 to 2904 (-0.8%), and the DOW finished down 89 points to finish at 12,801 (-0.69%). Compare this to some 3-4 months ago when a bad data point moved the market some 3-4%. The main figure that exhibits this low volatility environment is the VIX, which today jumped to 21 points. Contrast this to a reading above 45 in October. Here is the chart:

The US trade deficit also widened to -$48.8 B, a billion wider than expected. On top of all of this, remember that Greece was having issues all day hashing out a deal and the Euro tapered down slowly throughout the day finishing at 1.3197 (-0.69%). At the close Papademos announced approval for deeper budget cuts set forth by the EU and IMF to help obtain the much needed bailout funds before a default. This agreement did not come without a price as 5 ministers resigned within 2 hours and protests ran rampart in Athens. Papademos made it clear that people not for the cuts would not fit in with his government.

Equities

Equities finished down on the day with the major averages down 0.7-08%. Alcoa (AA) led the DOW down with a -3.29% move. The only DOW stock up was HD with +.13% gain. One interesting major mover was LinkedIn (LNKD) with a 17.8% gain after a beat and raise performance. The company experienced its 6th quarter of triple digit revenue growth, a feat very hard to accomplish in this low growth market. Barclays (BCS) joined other financials with poor earnings, however, the stock managed to rally some 1.5% throughout the day after starting down. Credit Suisse (CS) also took a surprise loss on a restructuring charge. The stock finished down some 3.7% and announced a large cut in its dividend to help the firm reach its capital requirements moving forward. Alcatel-Lucent (ALU) finished the day up 12.9% on news of a 20% drop in profit. True Religion jeans (TRLG) got hammered some 27.7% on the day.

Today was actually a big sentiment change for many experts. Many are now calling for a correction on the horizon as the recent market rally is at some 20% on the upside and people feel a pullback is in the cards. I disagree if Greece gets a deal done. I also feel that stocks are cheap with the trailing P/E at 15 and the forward estimate at some 12.7. The forward P/E is especially low on a historical standard, but the large risks are keeping markets at bay.

Rates and FX

Rates rallied slightly on the day with the 30 year yield falling 5 bp to 3.14%, the year yield falling 5 bp to 1.99%, and the 7 year yield falling 4.5bp to 1.38%. I am still very much in the camp that the bond market will sell off. I am bearish and reflect this with short call options on the bond futures and outright short future positions. In FX world, the EUR/USD finished down -.67% to 1.3197, the GBP finished down -0.39% to 1.5756, and the Yen finished down -0.06% to 77.61. I am also still a believer in a Euro relief rally on a debt deal. If you have access watch the FX markets on Sunday and be prepared to short the dollar with the Euro on an announcement. This will not be the end of the drama, but a major step forward.

Commodities

Gold finished down on the day at 1725 (-0.91%) as well as silver at 33.604 (-0.92%). Copper was one of the large losers with a -2.93% drop. Copper is largely driven by projected growth as its used in many infrastructure projects. Oil also sold off slightly on the day to $98.67 (-1.17%). Natural Gas finished flat at 2.477, but I still suspect an increase and hold mini contracts for February. Bloomberg reported that a snow storm should hit the Northeast over the weekend bringing in some 2-4 inches of snow. This should cause a spike in the current active NG contract.

As promised, I wanted to mention some other commodities. In particular I want to focus on Orange Juice (OJ) and Feeder Cattle. OJ hit a low in 2009 of $64.6 and rumbled its way up to $226.95. Recent price movement was caused by a Brazilian fungus found in both Pepsi and Coke brands of OJ. This put major pressure on the prices and a large portion of OJ actually is imported from Brazil, not California or Florida as one might suspect.

Feeder Cattle finished the day at 153.625 or down -0.98%. You may ask, what is Feeder Cattle? The CME identifies the contract on Feeder Cattle as 50,000 pounds of 650-849 pound grade medium-large #1 and medium-large #1-2. Essentially, younger cattle that still need to be fed before the slaughter, which differentiates them from Live Cattle futures. The Slaughter price forward expectations is the primary driver of the Feeder Cattle prices. Currently, Feeder cattle is well above its 3 year trailing average and has since peaked at a high of $156.20. Current chart technical patterns are very bullish, but the contrarian in me wants to place a short on the contract. the interesting information I found online is that the drive up in price is due to lower input costs of corn. I am not fully aware of why this would happen, but have found this as a causation online in multiple instances. If anyone knows why this is, please comment below as new information is always encouraged.

Next Week

Next week should be interesting as the Greek Parliament should solidify a deal on Sunday. I wouldn't take this as a certainty as Greece has been all over the place as of recent. Also on board are retail sales and inflation data. The Fed is also hosting a series of speakers which could give a better idea of what to expect in terms of rates moving forward. An announcement for further quantitative easing is become more of an expectation as inflation has remained somewhat at bay. Also on the tape is the January jobs reports, jobless claims, and Obama should submit his budget proposal which is expected to show a deficit of $1.33 trillion. Yes, you read that correctly, we are going to spend $1.33 trillion more than the revenue we collect if all goes as planned. After Greece, I feel it's only a matter of time before the US and Japan get found out with our debt problems.

Stock Picks

F - Ford Motors. I already gave an auto dealership in LAD, now I want to recommend one of LAD's drivers. Ford has been on a tear in terms of auto sales and the company has reported profits to prove it. The stock currently trades at a measly 6.6x P/E ratio with an 8.6x forward P/E (they had an unusual circumstance to make their earnings bump in Q4). Most analysts predict an average of 27% growth in EPS over the next 3-5 years, which is astounding. On the soft side, Ford has done an excellent job of ridding underperforming models and reducing the number of models it offers. They now offer the leftover models better and at a lower cost due to some of the strategic moves in the auto construction manufacturing process.

Next, jump on a Bloomberg (I may have told you to do this already) and check the SAAR for auto sales and tell me from 1950- now that you don't see a very distinct and cyclical pattern?! This seems to be a pretty easy buy and a buy that should reap you some handsome rewards.

Market Highlights - 2/09/2012

Highlights

So you should not be surprised at this point at what drove markets on the day, Greece.  They actually reached a deal on something so great news!  Right!?  Well, not really. Luxembourg Prime Minister Jeane-Claude Juncker said, "In short, no disbursement without implementation."  He then went on to set another date for Greece at February 15th.  In plain English, the European finance ministers held back an aid package of some 130 billion Euros in bailout funds as they don't believe what the Greeks say.  Pretty harsh if you ask me, but history agrees with them as Greece has continually failed to meet expectations and basically why will this time be different.  So what next?  Greece really has 2 options.  First, they can draft a new plan by the 15th and receive the money they are expecting.  Second, they can exit the Euro.  Not great options for the Greeks and this issue should be interesting for the markets going forward.  I expect the markets will sell off to some degree on the news.  I am still bullish on the Greeks reaching a deal, but the odds deteriorate every day.  In other news, the markets were basically flat on the news. The S&P 500 rallied 0.15%, the DOW.05%, and NASDAQ was flat. 

When Warren Buffet speaks, people generally listen.  Well today he spoke in his annual letter to shareholders about his views on the markets, gold, and other insights that he had to share.  In general summation, he claims that any "productive asset will prove to be the runaway winner over bonds or gold over any extended period of time."  These are pretty bold statements but he backed them up with some excellent logic.  He said in his letter that bonds should "come with a warning label" as they do not compensate investors enough to deal with inflation and taxes.  He was even more critical of gold calling it a "non-productive asset."  In particular he noted "owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future." He went on to state that bubbles "ultimately pop."  I generally agree and feel that gold, although a great trading asset, is not something to hold much of for the long term. 

Another interesting story on the tape, a deal was reached with big banks and state governments and the terms are going to hurt homeowners who have actually been making the payments on their mortgages instead of "strategically defaulting".  The agreement should be worth some $26 billion will pay those who were involved in fraudulent lending and those whose homes are worth less than the debt they owe (underwater).  In reality, this deal helps those who put little money down and those who decided to stick it to the banks rather than the people who did the right thing.  This deal should help some 1 million of the 75 million homeowners or about 1.3% of homeowners.  Most troubling is that the people who put 40% down and lost a similar amount in their house will get no aid. In other news included that jobless claims came in below the consensus at 358k, but the last month revised number went up by 6k.

Equities

The stock market sold off hard in the morning on the rejecting of the Greek bailout loans.  The markets eventually changed their tones and finished flat to slightly up on the day with the S&P 500 up 0.15%, the DOW up .05%, and NASDAQ flat.  In individual names, DMND finished down big at 37% on the accounting issues mentioned yesterday, Akamai (AKAM) was up 10.51% on a beat in both revenues and earnings.  First Solar (FSLR) rose 7% on increasing demand expectations, and Whole Foods(WFM) was up over 5% on an earnings beat, and Pepsi (PEP) fell some 4% on in Europe.

Rates and FX

Watch out for the AUD/USD as the RBA lowered both its growth and inflation on the year.  The AUD/USD sold off to 1.0709 at 11:00 PM Pacific time.  The lowered forecasts came in at 3.5% growth and 3% inflation.  This increased concerns that the RBA would cut rates moving forward and pressured the AUD.  The EUR/USD sold off on the news Greece had preliminarily agreed on terms as the market does not believe Greece will be able to fulfill its promises.  The EUR will continue to be under pressure as uncertainly continues to mount.  The Yuan reached an 18 month high on news that China had imports fall over 15% with a decrease in exports.  This obviously fueled concerns of a global slowdown in growth. The BOE injected some $79.3 billion into the economy to support the recovery.  Another move of quantitative easing in the UK.  The bank left interest rates at a record low of .5%.  The UK economy shrunk at the end of 2011 and the unemployment rate rose to a 17 year high. 

Bonds continued to fall, supporting my recent call of a sell off especially with the longer duration names. The 30 year moved to 3.16%, the ten year settled at 2%, the 7 year moved to 1.38%, and the 5 year settled at 0.82%.  I recommend a long 5s10s30s butterfly (my definition is longing the 10, shorting the 5s and 30s).  

Commodities

Natural Gas storage fell 78 bcf, less than the expected 90 bcf.  This was still semi bullish for NG as the gas has been under pressure due to over supply in the industry.  Gold moved to 1,722 and Oil settled at $99.13.

Monday, I plan on entertaining some less prevalent commodities such as OJ and Cattle Feeder to spice up the report so be prepared!

Tomorrow

Leading US news include the consumer sentiment number at 9:55 ET and Ben Bernanke speaking at 12:50 ET.   China reported that their exports fell .5% and imports fell 15.3% in comparison to last year at this time.  This moved the Chinese trade surplus to a 6 month high of $27.3 billion.  Most economists blame this on the timing of holidays in the country in the data. 

Stock Picks

Bank of America (BAC) - With the good news on a mortgage deal being settled with the big banks, BAC should be a major beneficiary as one of the biggest concern for the bank was the potential litigation and write downs that existed in the future.  From a valuation perspective, the bank trades at a 7.4x forward P/E with very low expectations built in.  In terms of book value, the bank trades at just .39 Price to book.  A large part of this is due to the esoteric nature of the assets on the books and what they are actually worth.  At this point, if you plan to hold BAC for the long term, I feel the bank will come out well positioned in the long run.

I apologize up front for some of the short answers today.  It was both my sister and girlfriend’s birthdays and I wanted to get something down.

Highlights
The markets were again on Greece watch throughout the day. I didn't sleep at all last night waiting to put on an FX position in the EUR/USD. The plan was, and still is, to purchase the Euro on a deal or to short the Euro on a default. Now tread carefully as a "default" is in the cards in both situations, the terms of the deal are going to be important. Favorable terms include very little collateral damage to financial institutions and steps toward less sovereignty in terms of aligning fiscal and monetary policy of the union. Unfortunately, the Greeks managed to push the deadline back once again, thus I will probably lack sleep once again. They did, at least what was "reported", make great strides to hammering out preliminary terms. MITK, my pick (Jim Edwards did the dirty work) from February 3rd, roared over 22% on 151% revenue growth and 90% gross margins. I would take profits on this position and keep a small position moving forward. Currently, I don't feel the valuation justifies the position although I still feel strongly about the company. The 10 year was auctioned today and had mixed to poor results as the yield increased to 2.02% with a 3.05 bid to cover in comparison to a 3.11 average over the last four auctions. This aligns well with my short futures of both the 30 year and 10 year and selling naked calls far out of the money on top.

Equities
The equity markets were flat to slightly up with the S&P up 0.22%, and the DOW up 5 points. In after market headlines, Diamond Foods plunged 41% on news that the company had misrepresented its financial statements. The company reported that it is replacing both its CFO and CEO and restating 2 years of past financial data. Should be interesting to hear how this plays out. If the company can manage, this may be a gem to pick up at a massive discount. Other movers were Apple (AAPL) hitting a $476.68, an all time high, OPEN sold off 12% due to slower growth. Cisco (CSCO) beat earnings and trickled up 1.1%. Sprint (S) beat revenue, but posted another loss due to the iPhone compressing gross margins, deepening the firms concerns moving forward. Groupon posted worse than expected earnings of $.02 (missing by $.01) and sold off 16% in the after hours. Visa (V) was up over 3% in the After Hours as it reported better than expected use driven by an increase in card use. Caesers (CZR) IPO'ed today and from an outsider it seemed to be a great stock to buy. Actually, it was a great stock to buy with a 71% gain. However, the company only floated 1.8 million shares. They are still on deck to issue an additional 120 million+ shares in the coming months making this as close to market manipulation as possible. I am actually not sure how they are managing to get away with this except that I think the people buying have no idea. Interesting results are that the company had $2.25 billion in revenue and a LOSS of $164 million. I would short this stock in about 6 months as supply floods the markets. I am still a believer in the bull moving forward.

Rates and FX
The JPY is currently sitting at 77.20/$ and I continue to believe the Yen will sell off.  The AUD is still a currency I am targeting to strengthen to 1.10 as the country continues to export massive amounts of natural resources.  The 30 year yield finished the day at 3.15.  CNBC posted an article on the 10 year auction - http://www.cnbc.com/id/46301729 which yielded 2.02% and a bid to cover of 3.05 compared to 3.11 showing less demand than expected. The Fed was in full force today and bought $1.8 billion in bonds in its “Operation Twist”. 

Other good news on the rates side showed that the index for mortgage purchase application came in at 7.5% vs. a projected drop of 2.9%.  This is pro bullish housing.

Tomorrow
Jobless claims are on the ticker for tomorrow.  Traders will be glued to this number as it is probably the most relevant.  The treasury is also issuing a 30 year bond auction tomorrow. On the commodities side, the EIA is releasing their regular natural gas report. Of course Greece is the headline to look out for.

Stock Picks
Long ARW – Arrow Electronics is a value play.  The company specializes in technology more specifically competitive services and supply chain management.  Their primary line of business has very tight margins and they compete with the likes of Avnet.  However, Arrow has acquired a ton of small high growth service companies, companies that are generating much greater margins and growth than Arrow currently has.  The company trades at 8x trailing and a 5.8 EV/EBITDA multiple.  I feel this is a classic LBO pick as the company has the ability to manipulate their cash flows to best benefit themselves.

Short GRPN – Groupon showed today that the company cannot both grow revenue and even somewhat profitable.  I feel that the business of discounting is just too competitive and easy to enter.  They trade at some $15 billion market cap but hardly make any money and I don’t see how they can grow enough to justify the multiple or create the proper margins.  Ask Amazon.com how that business is going for them…

Euro roars...Market set to continue bull

Highlights

Another day, another Greek drama.  The Greek people are again protesting in the streets and austerity is going wild, yet the Euro rallies 1.06%?  Why might you ask?  Well, at this point, with banks now well capitalized, the downside is relatively limited even on a default. This is a debatable stance. At the current stage, people expect a 70% loss on their product plus a yield reduction to 3% coupons. So worst case, they lose 30% more and some coupons, but that won't happen due to the interest of the countries involved and the interest of Greece's future ability to do business with its neighbors. This means that regardless the situation, this should not be a Lehman type event.  Further, The German's need the weak countries in the Union so they can benefit from a weaker currency, helping drive their export driven economy. The Euro will probably be okay at least in the short term.  I feel an aligned fiscal and monetary policy, plus a Euro-bond backed by the Union is necessary for longer term stability.  Thus, I would take a long position in the Euro moving forward.  I currently have a micro-futures, which is more of a longer term play, but am going to push into the large contract on the announcement of a deal which is my catalyst.

Equities

The equity markets were quiet today.  The S&P 500 started down due to concern that Greece was not going to figure out a deal, but finished up slightly at 1347 or 0.2% on news Greece had a preliminary agreement.  If this goes through, I expect the S&P 500 to roar at least in the near term. However, I would watch for whispers of Portugal wanting similar treatment on its debt.  I fear that the Euro crisis is far from over and will appear again in the coming weeks. I do think that they are starting to figure out how to handle the situation. 

In company news, BWLD (Buffalo Wild Wings) was up 16% in after hour trading after crushing profit and raising guidance.  Recent laggard, OPEN (Opentable.com) also spiked 4% in the AH after better than expected revenue and profit.  The stock breached $118 earlier this year and now trades at just $51.45 at today's close.  I prefer value stocks, but OPEN, with a 40x P/E, has tremendous growth and may be a nice pick up here as a high beta stock as management is proving they can deliver.  DIS (Disney) reported better than expected profits, but missed on revenue and the shares slid. They reported that Theme Park attendance was up as well as ad revenues, but ratings for its programming slid causing concerns.  The shares were down 2% in the AH.  I feel this rating hit was mainly driven by ESPN and the NBA being in a lockout.  I would look to pick up Disney anywhere under $40.  Recent stock pick MITK crushed earnings beating EPS by .02 and experiencing revenue growth of 151%. The stock was up to 9.33 (+7.0%) in AH and should continue to have momentum on the upside.  

Rates and FX

In the rates and FX markets, beyond the Euro, the RBA kept rates at 4.25%.  This was a surprise to the market as it was expecting a cut.  This drove the AUD/USD higher .78%.  Currently, the spot was around the 1.08 dollar per Aussie and the chartists are predicting a near term move to 1.09.  The micro contract trades at a .005 discount and may be a nice play especially on the assumption that the markets are picking up steam.  I would also look into shorting the long bond futures and the 10 year note futures.  The prices on longer maturity government bonds are being artificially driven higher due to the Fed intervening with operation twist and the overall "Safe Haven" play.  I feel that the market will no longer accept these low rates (Bill Gross may finally have his bond short after all!)  Proof of less appetite for these securities was exhibited in today's 3-year note auction drawing a bid to cover of 3.3 after averaging 3.52 recently, showing that the low rates are starting to push investors out.  Further, the "safe haven" play may be less relevant going forward as the yields imply a loss of real buying power given inflation is between 2-3%. Currently, The 30 year yields only 3.14% and the 10 year is trading at 1.97%.  Both of these could imply negative real returns depending on inflation and could sell off given the potential for the recovery to be picking up steam.  The downside is that rates move to say 1.5% on the 10 year on further intervention and crisis, the upside is that rates push back towards their longer term average of the 5-6% range (probably 3-4% with our growth) which would reap tremendous profits given the large amount of duration on these securities.   

Commodities

WTI Oil rose to $98.73 and Brent crude rose to $116.23. Factors moving the market included a 5% decrease in year over year US demand and hopes for a stronger than expected recovery.  Further, Iran is still threatening to impose a ban on oil to the EU by July 1st unless sanctions are lifted. A weaker dollar drove up commodities in general and Oil reaped some of these gains. There was also an unplanned outage in a Canadian oil sand plant, which will continue to be closed for an estimated 2-3 weeks.  With Canada as our biggest supplier of Oil, this could help keep oil elevated in the short term.  There is a technical nature to the Brent -WTI spread hitting $20.  Traders came in and started to pull the spread tighter.  I expect this spread to tighten once Iran settles down.  As near as 2010, the spread sat at parity and it started its large widening with the Arab Spring uprisings.  As the situation in the Middle East continues to calm (minus Syria), this spread should continue to collapse. If you want to play oil, but do not want to pick a direction, a spread trade should work in an up or down market.

Gold and Silver both rose as the dollar denominated assets gained on dollar weakness. Natural Gas sold off bucking this trend.  There are two large near term catalysts for Natural Gas, which I think is pricing in a worst case scenario. Currently, the markets are in free fall due to excess supply from fracking and warmer than average temperatures.  The "curve" on the NG contract does show expectations for an increase in price, with the June contract selling near $3, compared to the current active contract selling at $2.50 or a 17% discount.  First, there is a weather report tomorrow which traders should be paying attention too.  The temperatures in the US east coast have also been much more mild than normal, lowering demand significantly.  With roughly 23% of all natural gas being consumed by residential heating, these warm temperatures recently created a perfect storm of greater supply and lower demand.  From the chart below, you can see the dramatic drop from $5 to a low of $2.21 in the NG contract.   Second, supply has gone up substantially with cheaper means to extract the gas due to fracking.  To counter this, Chesapeake recently lowered supply due to it not being worthwhile to continue to produce at these lower prices. If other competitors decide to follow suit, you could see supply start to pull back.  Further, there are initiatives which should drive prices in the longer term including the President mentioning in the state of the union the need to develop Natural Gas alternative uses.  I recommend a buy here as the market has baked in expectations for the worst. This is an upside downside play.  I would get in today around $2.45-$2.50.  I would set a stop at $2.25 (Near the recent low), and placing a trailing $0.20 limit order on the upside should it run.  My target is $3.00 leaving you 2:1 gain not factoring in how much it runs beyond $3 with a trailer attached.  Here is the chart:

Bernanke speech

A few highlights from the speech:

He hasn't changed his opinion even with the strong jobs report

He feels that inaction in Congress could hurt the economy moving forward

He expects inflation to be 2% or lower over the next 2 years and emphasized the dual mandate of balancing inflation and employment

He mentioned entitlement programs are mathematically making the US go broke and that either higher taxes, less entitlement, or more than likely a combination of both will be needed to control the deficit.

He noted the progress of Europe and feels the US is headed in that direction unless hard decisions are made now

He predicted the EU recession will not affect positive growth projections in the US

He said the 8.3% number highly understated the weakness in the labor market due to how the number is presented.

Tomorrow

I expect the markets to hear some clarification from Greece tonight.  If you have access to futures, I would buy an S&P 500 contract on the announcement of a deal.  I would also closely watch the AUD and the EUR looking for entry points.  I would look to short both the 10 year and 30 year US Bond futures contracts.  Gold and Natural Gas should have some near term upside.  I am less bullish on Gold as fear sometimes drives the asset along with the dollar and am more bullish Natural Gas.  MITK should be added to on the equity side under $9.25 with a short term play to $10. 

Stock Picks:

CLF - Cliff Natural resources.  This is both a value and a macro play. From the value side, they trade at 6.4 times CFO which is a discount of 70% to its peers (competition trades at roughly 24x). They also trade at a P/E of 7.3x trailing and 6.3x forecasted earnings.  On the macro side, they hold the asset China needs, iron ore.  China imports over 70% of its demand placing Cliff in a favorable position in the near and long term.  Also, there was a major merger in the space with Glencore and Cliff could become a near term target at these favorable valuations.  A more in depth article from Bloomberg today:

http://www.bloomberg.com/news/2012-02-07/cliffs-becomes-easy-target-with-cheapest-mining-value-in-america-real-m-a.html

Market Summary - February 6th, 2012

The markets fought hard today, and I think the bull market is fully intact.  I expect momentum to continue in the short term.  The S&P 500 finished basically flat on the day after opening .5% lower.  Throughout the day you saw strength in the markets even with the Iran and Greek headwinds.  The yield curve slightly tightened today with the 30 year rallying 2.3 bp, the 10 year 1.6.  In commodity news, Oil is a good choice to pick up right now as the US put new sanctions on Iran today in freezing all real estate assets owned by Iran in the US.  I also think that continued strength in the US should drive prices higher.  China and India, although slowing, are still heavily increasing their appetite for oil as well.  I think the natural gas contract is cheap as well and should rally into the storage number being reported on Thursday.  One option is to load heavy now, and close it Wednesday night or early Thursday morning, the other is to buy a small portion now, either make money on a lower storage number, or add on an excess number.  Either way, I think we will all look back and wonder why we didn't get in on NG as it trades around $2.50.  Gold sold off today as the dollar denominated asset struggled as the dollar strengthened.  I think this will reverse on positive news with Greece.  Oats were also a big mover increasing 4.06% on the day.

I was excited to see the jobs number last Friday, but after further viewing, I am somewhat concerned.  It was great to see the increase, but how the number is calculated makes me question how accurate it was.  Further, the "drop" in unemployment is largely due to the 1.2 million people who have stopped looking, a staggering number.  Don't get me wrong, I am excited to see jobs being created, and I speak only on what investments I plan to make.  I am personally going to ride this jobs number into the next report as I expect the markets to rally, but when the next number is going to be printed, I am going to hedge with some short term puts.  This of course all depends on the implied vol baked into the pricing.  I think the 17 reading that we have right now on the VIX is low and makes for some cheap hedging against headwinds going forward.  With that being said, the markets are emotional and as the old adage goes "The trend is your friend."  So don't fight it!

First, I think Greece will get aid and the markets will rally.  On top of this, I think anywhere around here is a good time to consider a Euro position.  Germany needs the Euro right now.  They benefit greatly from having these weaker countries as they are an exporter and the currency would be strong without all the concerns.  This makes them more competitive than they would be otherwise (without the Euro).  I would get in slowly though, because I agree with speculation that Portugal is next up and could drag the Euro lower short term.  If you want to take a spot, I would recommend slowly adding to a position.

Stock Picks:
LAD: Oregon micro cap dealership and auto repair company.  They are in the auto business and if you look at the SAAR on a Bloomberg terminal since 1950, you will notice well defined and large trends.  We are escaping a trough in the trend and I expect F and GM to continue to report blowout numbers.  LAD also isn't heavily reliant upon only auto sales as they obtain a good portion of profit from their auto body business. With that being said, autos are selling at record high price, which is favorable for dealerships with inventory.  From a valuation standpoint, the company trades at 13.8x trailing and 11.8x forward earnings.  On top of that, they are growing dealerships and revenue while managing costs.  They also yield 1.12%, which is over half the 10 year treasury.

Great day in the markets

The S&P 500 roared 1.46% on an incredible jobs report.  Consensus called for 135,000 jobs added. Actual number: 243,000!  Unemployment dropped to 8.3% and it looks like the recovery is moving ahead full steam.  The prior number of 200,000 was also revised up to 203,000, a number which most people thought would be revised down.  Total November and December revisions totaled a whopping 60,000, another surprise from the back end.  On top of this, the ISM non manufacturing index roared with a reading of 56.8 from a consensus of 53.3.  December was also revised up .4 points following the employment survey.  Factory orders also rose 1.1% with inventories rising only .1%, and a .7% rise factory orders and a 1.4% rise in backlog order.

Rates on 30 year bonds sold off 11.6 bp to rise to 3.12% and the 10 year rates rose 10.1 bp to 1.92% causing a slight steepening of the curve.  If employment continues to heat up, the fed may have to rethink policy of not raising rates until the end of 2014 if inflation picks up.  Generally, the best predictor of inflation is caused from wage inflation, which is directly correlated with the unemployment rate. Next week should be interesting as the Greek situation winds down.  The EUR/USD should strengthen and I recommend picking up the micro futures contract as a play on this.  I would sell into the rumor as once a deal is done as Portugal may be the next player to have issues and potentially need a deal similar to Greece.  The real question is how well the financial system and levered banks can manage such a shock as a haircut on two sovereigns.  I still think the system is unsustainable in the long run and this will be an issue we revisit sooner rather than later. 

Stock's picked up and on the radar:

MITK - Company allows you take a picture of a check and deposit it instantly.  Think checks are gone? How do you pay your rent? How about your mortgage?

LIFE: Life is a play off the recent bid from Roche for Illumina.  Life, a more diversified biotech, should be priced fairly at $60 on a takeover given the premium that was placed on Illumina.