Rolls Royce Silver Cloud I 1957, Spirit of Ecstasy (hood ornament); Above photo by Christian Jansky, Wikipedia, Public Domain Image
On the Securities Action of Thursday, February 5, 2015
“EUPHORIA & ECSTASY ON WALL STREET!”
BROAD BASED EUPHORIC RALLY ON WALL STREET! Thursday saw most major U.S. stock indices increase by about one percent across the board. The U.S. major stock indices also turned positive YTD today. Volatility, as measured by the VIX imploded by -8.07% to 16.85. The S&P500 finished +21.01 points or +1.03% to 2,062.52, the DJIA was up +211.86 points or +1.20% to 17,884.88. The S&PMidCap400 increased by +14.60 points or +0.99% to 1482.04; the S&PMidCap400 also reached a new all time high today! In fixed income, Treasuries traded lower, while high yield Sovereigns and high yield corporates rallied strongly, by about +0.50% today. I believe the major U.S. stock indices will soon plow through previous all time highs, by three to four percent, before taking a few steps back, before making another advance higher. I continue to remain bullish, and I believe energy shares and crude oil will trade in a volatile range, but will trade higher given a month or two or more, which I believe will lift all major U.S. Stock Indices to new highs.
Feb. 5, 2015, Major U.S. Stock Indices
[http://finance.yahoo.com/futures Click here for an energy prices update] Tuesday saw USO an etf of West Texas Intermediate increase by +4.10% to 19.03; USO is now -51.75% off its peak of the past 12 months; I believe reached in late June ’14. I believe oil will remain very volatile, perhaps an options strategy called an at-the-money straddle using two week out expirations could prove to be very lucrative; On Thursday light sweet crude oil traded higher by +5.10% or 2.47 per barrel to $50.92. Higher oil likely sent the Russian stock market (as measured by the etf RSX) up by +5.33% to 15.82; RSX now stands -42.39% off its peak of the past 12 months.
Select Quotes of Interest, Feb. 5, 2015
In the Fixed income markets, see the graphic above to see how Treasury etfs traded (ZROZ, TLT, IEF, TIP) and how high yield etfs traded (U.S. dollar denominated high yield sovereigns being etfs EMB and PCY) (as well as high yield corporate fixed income being etfs HYG, JNK, and QLTC). The 30 year Treasury Bond yield closed at 2.42, and the 10 year Treasury Note yield closed at 1.83 [data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield. I continue to believe, and will reiterate, that if oil can stabilize in a trading range, or start to appreciate, that there will be some major opportunities in the energy sector in equities, and in their high yield fixed income; Also I continue to believe that when oil stabilizes (or begins to appreciate) that there will be some major opportunities in high yield fixed income funds, such as the ones listed above, EMB, PCY, HYG, JNK, and QLTC. When higher energy prices materialize in the future, inflation could pick up as measured by the CPI-U, which may or could send e.g. Treasury Security yields higher.
The US Dollar traded lower versus the Ruble and the Euro on Thursday; the Euro gained approximately +0.84%, as measured by the etf FXE. I continue to believe the Ruble and the Euro are still too high, and will further deteriorate, making the dollar stronger. The U.S. Dollar can now be exchanged for a Euro at a cost of approximately $1.1478, and also can now be exchanged for 66.7570 Rubles, which is about 1.10 Rubles less than yesterday’s exchange rate. [http://finance.yahoo.com/currency-investing Go here for an update on all major cross rates.]
I believe the catalysts for today’s stock market were the labor force figures of ADP coming in strong earlier this week and then thus in anticipation of the likely good labor market figures which will be released Friday morning; Additionally, higher oil prices lifted the energy sector and fueled a rally across the board; Lastly, shares in Greece gained as pessimism dissipated. Consequently, an etf of Greek stocks (etf ticker GREK) increased by +4.27% to 12.42.
Economic data releases on Thursday the 5th saw the Trade Balance come in at -46.6 billion, likely due to a stronger dollar. More imports at cheaper prices “imports inflation,” increasing our quality of living due to a strong dollar; since more goods & services for the same cost is great for U.S. Dollar consumers. Friday’s economic releases will include at 7:30amCT Payrolls, the Unemployment Rate, Hourly Earnings, Average Workweek, and at 2:00pmCT Consumer Credit economic data releases. I would expect the labor force figures will rock the pre-market trading activity as well as Futures vs. Fair value (and the implied open). Labor Force figures are due for release at 7:30amCT Friday; [Click here for updates on Futures vs. Fair value, http://www.cnbc.com/id/17689937]. The report is widely expected to be strong. Perhaps expectations have risen too high for this report as of late? We’ll see Friday morning.
In notable eps reports BWLD reported eps Thursday after the close, and is now trading higher by +10.21 per share or +5.66% to 190.50 in afterhours trading. LNKD also reported eps after the Thursday’s close, and is trading higher by about +18.43 per share or +7.74% to 256.40. NGTR released its eps after the close as well and is trading lower by -4.68 per share or -13.49% to 30.01. P reported eps after the close Thursday and is trading lower by -3.59 per share or -19.50% to 14.82. YELP also reported eps after the close Thursday and is now trading lower by -5.96 per share or -10.37% to 51.51. Four letter tickers are like four letter words to me!
I would suggest that perhaps a long bull call ratio back spread with net credit characteristics may be lucrative; Especially if also combined with a long bear put ratio back spread with net credit characteristics on any particular “hype stock” just before eps are released; Placing the trade just a minute or two before the close (3:00PM Central Time) on its earnings release date. It certainly is amusing to see what happens to hype stocks just after their eps releases in the aftermarkets and on the first full day of trading post eps. “Hype stocks” to me would be e.g. GOOGL, TSLA, PCLN, FB, AAPL, LNKD, AMZN, EBAY, NFLX, TWTR, BABA, GPRO, and also what I would describe as “Big Momentum Players” such as e.g. CMG, GMCR, AZO, V, and MA etc. (a sub group of hype to me). This list of Hype and Big Momentum Players is just off the top of my head, and is in no particular order, nor is it any particular science for choosing these types of volatile securities. RSX, GREK, TUR, FXI, EWZ, and CUBA are also very volatile etfs surrounded in places worldwide with high geopolitical risks. West Texas Intermediate matched by the etf USO is also a very volatile etf to trade.
I will reiterate that I’m currently bullish on the major U.S. stock indices. I believe a theme of higher crude oil prices will potentially materialize over the next few weeks, if not becoming more of a longer term theme, for the next year, if not longer. I also believe and would reiterate that the geopolitical risks involving Greece’s sovereign debt and interest payments will be resolved, and also that Russia may stop sabre rattling soon. This will bring about higher prices for stocks, and for all major U.S. stock indices, which could reach new all time highs very soon. I also think that investors may begin selling longer duration and longer maturity fixed income of all kinds, and with the proceeds they may purchase stocks, resulting in higher yields on fixed income, and also higher stock prices. Higher energy prices may bring about higher monthly CPI-U inflation figures, resulting in a fixed income sell off, and higher interest rates, over the next 6 to 12 months. Interestingly, I believe that the higher credit quality fixed income may sell off more than the lower credit quality fixed income. I would base this upon the unprecedented sovereign yields worldwide and in the USA. High yield fixed income yields are not at all time lows, but e.g. Treasury yields are at nearly all time lows. To me, this means that Treasuries at the long end, may suffer greater losses on a percentage basis versus their high yield counterparts of similar maturities. For 2015 I am most bullish on equities and the S&PMidCap400, the S&P500, as well as the DJIA. The DJIA has the lowest PE Multiple among all the major U.S. Indices currently. I am also bullish on Financials, REITs, and the “Big Tobacco” sectors; In fixed income I like high yield etfs e.g. EMB, PCY, JNK, HYG, and QLTC. I’d likely trade deep in the money calls on stock indices, combined with very high allocations to high yield fixed income. If the JPM EMBI is good enough for the fixed income of the Yale and Harvard Endowment funds (and other large time institutional entities) then why trade Treasury Securities? I think people (or any entity) who buy Treasuries are “ripping themselves off!” Happy trading! All high yield fixed income indices (which are BB rated) have, over the long run, always closed at a new all time high every 18 rolling month period. Consequently, every or any time that high yield fixed income indices are trading well off their all time highs, I’d view it as a major buying opportunity. Another trend developing (since 1945) is that the Defense Sector seems to continuously have a steady and growing stream annually of income, revenue, and pricing power and consequently defense contractors have seemingly higher and higher stock prices (supported by never ending consistent eps growth)- Thanks to generous outlays from the U.S. Government. Another sector of the economy with major pricing power, and a steady stream of income and revenue (and consistent growth of eps) is the entire healthcare sector, (supported by patients, tax revenues, federal government subsidies, and insurance company payments to the whole sector) which could bode well for investments in that field.
By Andrew G. Bernhardt
Bernhardt Capital Management LLC 