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:
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:
