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.