Skip to main content

Morning Update



Early this morning ECB president Mario Draghi said “Within our mandate, the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough”. This implies that the ECB will buy sovereign debt from countries such as Spain and Italy who are struggling to issue debt at reasonable interest rates. This has pushed US futures up sharply and the US Dollar down. Ten-year Spanish government bond yields fell 31 basis points to 7.1 percent, five-year Spanish yields fell below the 7 percent danger mark to 6.82 percent, and two-year bond yields eased 60 basis points to 5.66 percent (Bloomberg). Lower yields indicate improved confidence that Spain will not default on its obligations. The VIX, a measure of fear in US equity markets, will likely be down sharply on this news.

US economic data released this morning came in better than expected, helping to fuel the pre-market rally. Durable goods new orders came in at 1.6% versus 0.6% consensus and new jobless claims were 353,000, 27,000 less than expected. Continuing claims also showed strength, down 35,000. The four-week moving average of new claims fell to 367,250. Because jobless claims can be so volatile the four-week moving average is the best way to determine the overall trend of claims.

Notable earnings yesterday after the close included Visa, Western Digital, and Zynga. Visa posted a loss of $1.8B on an increase in litigation costs (Washington Post). Excluding provisions for litigation net income came to $1.56 per share. Revenue was up 20%. However, Visa did report that the volume of transactions worldwide fell 1% in the US, suggesting consumers are spending less due to economic uncertainty.

In contrast, Zynga delivered a disappointing quarter, missing on EPS and revenue. This has sent social media shares down sharply, including Facebook. Facebook is set to deliver its first quarterly results as a company today after the bell.

3M reported earnings yesterday of $1.66 per share, up $0.06 Y/Y though revenue fell 2% to $7.53B (MSNBC). The company did not revise its previous guidance, but did mention it expects currency appreciation to reduce foreign sales by about 3% this year. We remain bullish on this stock going forward.

Comments

Popular posts from this blog

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."


Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…