In what has become a year-long theme in trying to drill home a point from several different angles, I am going to try again because I was questioned a lot about this yesterday. The example I kept using in dialogue I had with people was this: imagine in high school or college taking a multiple choice mid-term and scoring a 91 on it…without studying! You’d feel like you got away with something, but intrinsically know that there’s no way that if you tried to pull the same stunt on the all essay final exam) that you’d get away with the same results. So, you’d be happy, but nervous. Certainly in my case, I wouldn’t understand how I did well either although there could be a deeper reason (maybe I got lucky to maybe I listened in class and really soaked in the material). Well, this is how it is with the stock market. I am constantly seeing apt pieces from analysts such as one from an acquaintance of mine (Nick Kalivas): “Not sure you have been following, but the 10 year and 30 year swap rates are below that of their corresponding treasury. The 7 year swap spread is at 3.81 bps. The swap market has already downgraded US debt to AA at the long end. I did not think it was possible a few months back, but it is starting to look like the whole swap curve will have a yield below that of the treasury curve. Only 12 bps at 2 years. This is going to be interesting to watch, and will catch the attention of rating agencies. Add to the mix the China issues, the Greek issues which have been discussed in detail in this space, the euro travails, and now a terrible bond auction yesterday and it adds up to problems. You have to understand- in the words of my roommate of five years and a former business partner (Paul Matthews), “For those who don't understand swaps, essentially the market is now lending money to high quality institutions via the London Interbank Market at LOWER RATES than they are willing to lend to the US Government.” Furthermore, “it could also be a function of uncertainty surrounding what will happen at month end when the Fed's Quantitative Easing (QE) is allegedly going to end. (although with those lovely home sales numbers (Tuesday) morning and the $8,000 tax credit coming to an end next month, I don't see how they can allow mortgage rates to free float without triggering a spike in mortgage rates resulting in a subsequent decline in home prices. Then we would be back to square one---into the vicious cycle of banks needing to raise even more equity to pay for deteriorating mortgage books---essentially what we saw in the late summer/fall of 2008.)” The net of all of this is that longer-dated US Treasuries are now trading above some corporate issues out there (Berkshire, Johnson & Johnson, etc.) in terms of yield making Warren Buffett’s paper more intrinsically valuable than Uncle Sam’s paper. Paul and Nick will both likely be right…eventually. A mortgage rate spike could appear early next month (although everyone is aware of the issue), the euro crisis could worsen, and so forth (i.e. the final exam discussed above). But as day traders, we must be weary of all of these factors, but also have a deep understanding of other phenomena which are apt in the immediate-term. For instance, as written before, it makes all the sense in the world for a bank to get an interest-free loan from Uncle Sam and sell it back to him for an increasing margin of profit as the rate is above 0% (and going up). This perhaps explains why ban stocks traded higher yesterday. Thus, you must be aware of the myriad of problems which will be needed to dealt with at some point…but we just don’t know when that final exam will come…so prepare for it, but don’t let all of the worrying keep you from focusing what may happen in the coming minutes/hours rather than the coming months/years.
Markets in Asia were mixed, but generally lower with the Hang Seng notably down 1% on more bellicose talks over Sino-American relations regarding the yuan peg. However, the trend shifted in Europe with the bourses up 0.7% on average on more positive buzz about the Greek situation. Commodites are bouncing back with gold recouping about ¾% and oil up 1/3%. The euro has taken a baby step back up with the pound notably stronger finally. And futures- well, at this point, futures indicate a complete recoupment of all of yesterday’s losses. The mood right now is a bit more electric…with the currency and commodity markets wilder, equities are poised to make a relatively major move shortly it’d seem. For today, with everything being shaken off, look for a total rebound from yesterday. If the euro is stable, the rally is going to grow; that particular currency right now is the key to the day.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
RDN, MBI, PMI- closed near highs amid positive buzz from BAC lowering payments owed by subprime borrowers
CBPO- closed near a high after posting good earnings
BEE, FCH- among the smaller REIT’s with significant short covering yesterday; closed near highs
DRI- closed near a high after posting earnings
GOOG- major reversal in closing near a high
GENT- closed near a high after positive Defibrotide results
PAYX- decent earnings
TRIT- good earnings
SCLN- European approval of ondansetron RapidFilm announced for 16 EU countries; the drug is used to treat nausea from things like chemotherapy
SLXP- Xifaxan OK’ed by FDA for use in liver failure disorder
ETM- featured on “Mad Money” last night
GIII- good earnings
CAAS- good earnings
LULU- good earnings
FSLR- upgraded by Kaufman
NIV- great earnings
BBY- great earnings
Bad-The following stocks have bad news and/or a weak technical pattern
ESE- closed near a low on fears of competition for a smart meter contract
ADBE- near island reversal in closing near a low despite posting great earnings
GENZ- closed near a low on expectation of FDA action at a troubled plant
RIMM- closed near a low
ZOOM- near island reversal in closing near a low despite announcing a deal with a Chinese entity in tapping the China market
RHT- poor earnings despite announcing significant stock buyback
MELA- received questions from FDA regarding its melanoma treatment
ORRF- closed near a low after announcing a 1.4 million share offering at 27 to Sandler O’Neill
AUTC- closed near a low after announcing a 2 million share offering at 35
WHI- closed near a low
CALX- closed near a low on its first day of trading as an IPO
Earnings:
THURS MAR 25 BEFORE
BBY CAAS CAG
LULU
THURS MAR 25 AFTER
ACN FINL ORCL
TIBX
Good luck today.
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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