The T Report: Have We Obottomed?

Posted by on Nov 16, 2012 in The T-Report | No Comments

A Post Election Drubbing

Romney at least made it close, for the markets it has been a drubbing since election night. S&P 500 down 75 points or 5%. IG19 is out 17 bps, a huge move. Dividend stocks have been hammered and closed end fixed income funds have wiped out years of gains.

PHK remains the poster child for that train wreck. It started the year at $12.04. It got to $14.23 on October 5th in post QE Eternity frenzy. It will pay $1.4625 in dividends for the year. The stock closed at $10.15. Almost 3 years of “dividends” gone in 6 weeks. I never understood buying funds at massive premiums, let alone ones that were leveraged in bonds whose primary quality was that they offered big coupons.

The move in closed end funds has hit the rest of the market. Rarely can you look at that relatively small niche in the fixed income markets and point to it as a driving force, but it is this time. With most funds now trading close to NAV and some at a discount, expect to see some stability there.

Now is not the time, but I cannot figure out how the market missed the Obama win and potential consequences by this much. The polls showed Obama winning. In-trade had Obama winning. An Obama win would put the fiscal cliff debate focus on tax hikes. It seems like it should have been obvious, but apparently it wasn’t. This is a bigger issue for the markets that needs to be explored. Many of us joke that the market can only focus on one or two things at a time, but this seems ridiculous. So maybe the market was just way more optimistic that Romney would win (a possibility) or we react to media and price action only and ignore longer term issues?

We Had Every Excuse to Sell-Off Yesterday, But Didn’t

We wound up lower yesterday, but in spite of several attempts to sell off hard, we only had small losses. We had signs of inflation, high initial jobless claims, weak Empire manufacturing, and an abysmal Philadelphia Fed. They were all bad, yet the market held in.

It has taken some time, but the market now seems bearishly positioned. I obviously underestimated how long people were as I turned constructive too soon after the election, but have largely sat on that small position. Too stubborn to change my view, too scared to add much risk. I am slowly adding now.

I think yesterday had some signs of capitulation in investment grade CDS. The closed end funds seem to have run their course. A CLO is pricing today, and I do not see an immediate deterioration in the economy that causes companies default likelihood to increase much, so think we will see the chase for yield in the credit space resume.

I now think the market is thinking things will turn out okay, but positioned in case they don’t. It took time, and maybe isn’t completely done correcting yet, but I think it will take actual bad news to drive us much lower from here.

Apple Lost the Greek GDP in 2 Months

Okay, Apple’s market cap has only dropped $170 billion since September 21st, so not quite the GDP of Greece, but a lot. I’m only mentioning Apple here because it ties into some of the thoughts that are percolating about how the market trades.

At $650 on the way up, Apple could have announced iExcrement and added $10 billion of market cap. The media was filled with analyst after analyst making the bullish case. I mentioned a couple of times on air (Bloomberg and RT TV) my concerns about Apple, but only as a side topic, and often to raised eyebrows. The social media or “twittersphere” was alive with Apple bulls. Anything negative found a tiny bit of support, but was quickly drowned out by the bulls. I can’t remember who was the most obnoxious about it, but the Yahoo finance people were right up there.

Now here we are and everything apple does is now excrement, and even slapping an I in front of it doesn’t do any good. It is hard to find anyone out their hyping Apple now. In fact the analysts who even talk about it resort to mentioning that they own it a much lower cost basis. What a load of malarkey. Funds own it at yesterday’s mark and in any case will report this month’s numbers based on how it did versus the start of this month.

I have nibbled at Apple here. I have been wrong. I don’t think they are the greatest company in the world who can do no wrong, but they have a pile of cash, are still selling lots of products and will continue to design some decent good ones in the future. If it wasn’t for the big cash pile that seems like an interesting wildcard I would be more concerned. It is a tiny position and will remain so.

My main question is how did a company so well followed get mispriced by so much. No matter how you look at it, $175 billion is a huge swing in market cap, let alone over a 2 month period, for one company, where no material new information came out. It isn’t like they developed a cure for cancer, or got sued because they have been killing people for years. Nothing that I have seen in the past 6 months seems new or unexpected, yet this huge swing. It certainly fits with the idea that price and media influence future price. Anyways, trying to think about this phenomena more, and maybe I’m wrong, but I really think there was a daily parade of Apple bulls at $650 and almost no one out there now stating the Apple bull case at $525.