IG18 at 85 and Apple at 600 are Mutually Exclusive
I remain confused at these levels. I continue to look at the various markets and come away without a strong opinion. Over the course of the year I have had strong opinions. They have worked out, though I got short too early and long too early, the trades worked well. So not having a strong opinion is unusual.
The two exceptions are when I look at CDS and when I look at Apple, but my conclusions there come out completely contradictory.
IG18 at 85
I’ve written about this many times and have been right. I even managed to call the bounce off of 98 back to 102 (it went to 103.5) and back tighter. I find the reasons for that call to continue to play out, and as we approach the September roll and the often disappointing September new issue calendar there are more reasons for this tightening to continue. The problem is that it will not tighten if Apple weakens significantly.
Apple is a Macro Asset Class
We seem to be in one of those periods where Apple has transcended just being a single company, and is an asset class of its own. This isn’t just because it is such a big portion of U.S. indices, though that is a part of the story. What I’m seeing is bears buying into Apple to cover some of their shorts. They are getting hurt on shorts in virtually every area. They hate the market and the economy, but the pain on shorts is too much so they have to cover. Many can’t bring themselves to buy anything since the stench of slow growth, failing Europe, fiscal cliff, etc., is so overpowering, except in the case of Apple. They can bring themselves to buy Apple. It is loved, has done well, investors don’t look at you like you have 4 eyes if you say you own Apple.
So yes, the Samsung verdict was good, i-phone5 is coming, minis, and tv’s too, but the only new thing is Samsung, and that doesn’t completely explain the move from 620 to 675 in two weeks. With 937 million shares outstanding that is a big move in market cap.
The entire analyst community is bullish with 49 buys, 6 holds, and 2 sells. Every price increase in Apple seems to bring out revisions to price targets. Virtually none of the analysts are saying, hey, I thought 650, now I have to switch to hold. They all just crank out a new higher number, which to me is a sign of exuberance.
So, I am not comfortable with this stock, and unfortunately it is the driver of the U.S. indices – particularly NASDAQ. How do I reconcile that with my view that credit, CDS in particular should do well?
IBEX 6500 or IBEX 8000?
We can look at Italy or other countries or the bonds, but IBEX has become a personal favorite. So what is the next move here? It has traded as lowed as 5956 this year, and as high as 8902. That is a big range, and we seem poised for another 5 to 10% move.
I lean towards Europe doing enough that the IBEX heads towards 8,000. There is a real risk that the EU manages to mess things up, and they tend to get bad advice, and barely follow through anyways, but I don’t think that happens this time.
My most likely scenario is they do something that sounds okay, but disappoints the market briefly. But then they go into “first step mode” and “more to come threats” and the market runs with it. That would impact Spain, Italy, and banks the most.
Again, I think we wind up at 8,000 but in my “most likely” scenario there is a potentially better buying opportunity.
US Money Center Banks/Brokers
For the first time, their balance sheets are more of a help than a problem. From the data coming in on the housing front, we should see additional loan loss reserve releases. The core balance sheet seems to be chugging along fine.
The problem here is that volumes have plummeted. Any of the banks that rely heavily on investment banking have to be experiencing a huge slowdown. With volumes low and volatility low, the sales and trading businesses are all struggling this quarter. The M&A activity doesn’t seem like it has picked up the slack. There is hope that volumes will pick up in September, but I think there is more than just a summer slowdown going on and think volumes will remain disappointing.
Then there is LIBOR for the LIBOR banks. That headline risk has been pushed off the front page, but the risk remains. I don’t it will be devastating to all the banks, but there are a few that I wouldn’t touch here just because of LIBOR. For others, it is more a question of valuation.
So Morgan Stanley and Goldman avoid the LIBOR issue, but get the least balance sheet benefit while being hit full in the face with trading volume declines. Citi strikes me as most at risk from a big LIBOR problem. Wells Fargo avoids LIBOR, has the balance sheet, isn’t that focused on trading, but the stock reflects that.
So What to Do?
Core long in fixed income, with high yield, leveraged loans, and CDS as the main vehicles. It would not be big, and on the CDS side, probably need to be nimble as it will go wider on any weakness in stocks.
Am flat on European stocks here, as I think there will be better buying opportunities, but will only trade from the long side for now. Nothing too aggressive, but nibbling on weakness.
On US banks, JPM has become a focus for me. But here we are in no man’s land, though closer to a buy than a sell. At $36 I like it, at $40 I hate it.
I will trade Nasdaq from the short end only here. I think this index has popped too far, plays on my concerns about Apple and will be hurt as attention focuses away from Europe and on our own problems.
I will maintain a position in S&P September puts, and will trade S&P around from small long to small short.
So my bias here is about 25% in credit and 25% to -50% net in stocks. It is much more of a range trading environment, and even then, the ranges aren’t that big.