Wednesday, July 3, 2013

Markets Are Falling

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The European economy showed some signs of life this morning, as manufacturing reports from around the Eurozone came in stronger than expected.

But the mood is negative markets-wise.

Japan is getting smooshed, and European markets are down.

The DAX is off over 1%.

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Why Wall Street's Just Not That Into Facebook Anymore

Below is a summary of what I will be discussing tonight on Options Action on CNBC at 5:30pm:

From FB’s May highs on the 2nd to the lows this past Wednesday, the stock nearly entered official bear market mode, down almost 20%, before bouncing after receiving a couple ratings upgrades yesterday by Jeffries and BMO   (here).

FB 1 month daily chart from Bloomberg

On Tuesday, I took a look at the technical set up for FB in the MorningWord, and concluded that the stock was approaching a fairly dire support level, which it ended up breaking the next day.  Given yesterday’s bounce back above the all important $24 level, I would suggest that after being rejected this morning at its 200 day moving average,  the stock needs to stabilize at or above this level.

FB 1 yr chart from Bloomberg FB 1 yr chart from Bloomberg

The next couple trading days will be very interesting for this stock to see if in fact it can stabilize above support or it just resumes the downtrend.  One of the big reasons in my mind for the stock’s under-performance this year vs the broad market and its peers has a lot to do with the sentiment towards the products and possibly a lack of understanding by investors as to how FB will increase user engagement with their services, whether they be on their computers, tablets or smartphone.  It is my opinion that to date as a public company, FB management has done a poor job of introducing products like Social Graph and most recently Home whereby they tried to take a page out of Steve Jobs playbook by announcing a media event and roll out the founder for the big splash………but in Facebook’s case, it almost every major product announcement had the least bit of “Wow Factor attached”.  Zuck risks being the “boy who cried wolf” with too many product misfires.

As a market participant, a business owner and an individual, I can tell you that FB serves very few purposes for my business or me individually, and I don’t see a huge future for the existing product offerings without some major tweaks that coincide with a quickly changing user demographic and online behavior.  That being said, watching Jim Cramer of CNBC’s Mad Money describe some of the issues facing the stock near term (below), got me thinking that with sentiment so poor, the next identifiable catalyst (Q2 earnings in late July) could set the stage for a rally on the slightest bit of good news.  The comment that stuck out to me was that in a market where insiders are selling,  ”shorts have a free fire zone in the stock because there’s no buyback, insider selling, no dividend, no clarity.”   While FB the company is trying to find its way in a very competitive space, the stock is trading with one arm tied behind its back from an investor standpoint as there are few incremental buyers and it lacks some of the characteristics (buybacks, dividends etc) that seem to be a pillar of the long case for many large cap tech stocks.

Screen Shot 2013-05-31 at 1.27.28 PM

Cramer Quick Take: Long Look at Facebook

SO while I remain very mixed on the company and their products, if the stock could stabilize in this $24-$26 area over the next couple months and establish a new base, the stock could set up for a re-test of the $30 level following a better than expected Q2.

I want to create a structure that affords me the opportunity to hang around for such an event without having to take much delta or vol risk.

Break-Even on July Expiration:

Barring major shifts in implied vol between the months or a massive move up or down this structure will not do a heck of a lot in the near-term. Where it does really well is around 25 in the stock as we get closer to July expiration. July will decay quickly at that point while August, which catches earnings should stay bid.  Max risk is .58

Payout Diagram:

The payout diagram illustrates that the ideal scenario for this trade is for FB to hang around the 25 level until July expiry.  Given the overhead supply from the last 6 months, we don’t plenty of sellers keeping FB from moving much higher in the near-term.  Last summer and fall, the 20 to 24 area contained a lot of trading, so those who missed the winter run higher are probably happy to buy the stock back down here.  That’s why we like targeting the 25 area for the calendar.

Screen Shot 2013-05-31 at 1.34.16 PM from TradeMonster

Trade Rationale:  Rather than buying the stock in front of what could be a a volatile period as the stock looks to stabilize at support, or getting long outright premium on a directional basis, the calendar spread which has little delta exposure offers me the opportunity to spread the August calls after July expiration to further reduce my break-even into what may be a very important Q2 report.


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US PMI BEATS EXPECTATIONS, RISES TO 52.3

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Markit's PMI survey results for the month of May are out.

The headline index rose to 52.3 from the flash estimate of 51.9 published earlier this month and 52.1 in April.

The consensus estimate was for a smaller tick up to 52.0.

Markit's Purchasing Managers Index is a measure of American manufacturing activity. Any reading above 50 on the index indicates expansionary conditions, whereas any number below 50 indicates contraction.

So, today's 52.3 reading on the index suggests a slight acceleration in the expansion of American manufacturing in May.

Below is a summary of the data from the release:

Modest increases in both output and new ordersWeakest rise in employment since last NovemberRate of input price inflation quickens, but remains slower than series average

Summary

The final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) signalled a further improvement in manufacturing business conditions in May. However, at 52.3, up slightly from a six-month low of 52.1 in April and higher than the earlier flash estimate of 51.9, the PMI was consistent with only a modest rate of growth.

The table below shows the various sub-components of the index:


Click here for the full release >

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ART CASHIN: 'Hours Worked' Will Be The Most Important Detail In Friday's Jobs Report

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Enter your email address and zip code to set up customized email alerts.You have successfully emailed the post. Sam Ro | Jun. 3, 2013, 9:55 AM | 69 | One of the big questions on everyone's mind lately is when the Federal Reserve will taper quantitative easing (QE), or the Fed's effort to stimulate the economy by buying bonds and lowering interest rates.

Traders and economists believe this week's jobs report will have a big impact on the Fed's decision to taper soon versus later.

But UBS's Art Cashin notes that traders won't be looking at just the number of jobs added.  Rather, they will be paying close attention to hours worked.

From Cashin:

Everyone and their sibling will be zeroing in on Friday's Payroll Data as the magic answer on the recent tapering debate.  That seems strange given the rather random nature of those figures and their frequent revisions.  Traders will measure changes in payrolls versus hours worked.  Recently, as new hirings were made, the hours worked decreased.  Initially, traders thought that was new workers deceasing the overtime of existing staff.  Now there is watering hole speculation that employers are cutting "hours worked" to make workers look more temporary and slip under Obamacare taxation.  It's any interesting arbitrage that we may explore further.

From the start of 2014, employers with more than 50 employees will be fined $2,000 per employee, if they fail to offer full-time employees health insurance. Workers are considered to be full-time if they work over 30 hours a week.  This is a trend that Capital Economics' Paul Ashworth recently addressed in a note to clients.

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112 Dead In Fire At Poultry Plant In China

At least 112 people were killed in a fire at a poultry processing plant in northeastern China on Monday, local officials said, in what appeared to be the country's worst blaze for 12 years.

More than 300 workers were at the Baoyuan poultry plant at Dehui in Jilin province when the fire broke out and emergency workers searching for survivors were uncertain how many remained trapped inside, Xinhua news agency said.

"As of 3:20 pm, altogether 112 people had died," the Jilin provincial government information office said on its Weibo account, a service akin to Twitter.

The latest post did not say how many were injured, but an earlier one had put the number at at least 54.

It is the country's worst fire for more than a decade, according to listings on Baidu, an Internet portal. On December 25, 2000, a blaze at a shopping centre in Luoyang, in the central province of Henan, killed 309 people.

The slaughterhouse gate was locked when the fire broke out but about 100 workers escaped, Xinhua added. The facility had a "complicated interior structure" and narrow exits which were slowing the rescue work, it said.

The cause of the blaze was not immediately clear, but state broadcaster CCTV said eyewitnesses had heard a blast and suspected a leak of liquid ammonia.

CCTV also said on its Weibo account that the blaze might have started with an electric spark in the plant.

Six hours after the fire broke out around 6:00 am it had largely been brought under control, CCTV said, but Xinhua added that firefighters were still working to extinguish it entirely.

A dramatic photo taken earlier in the day from an unnamed Weibo account and posted on a Hong Kong-based online news portal showed dense clouds of black smoke several times higher than the low-slung plant.

A bright blaze could be seen inside a row of windows in one part of the processing plant.

The image could not be independently verified, although the building looked similar to the one shown by CCTV.

Photos from Xinhua showed charred walls and rooftops at the plant, with a row of fire engines standing by.

The Jilin Baoyuanfeng Poultry Company, which began operations in 2009, employs 1,200 people and produces 67,000 tonnes of chicken products per year, Xinhua said.

China News Service said that as of the end of 2010 it had sales of 230 million yuan ($38 million).

Workplace safety standards can be poor in China, where fatal accidents happen regularly at mines and factories, with some blaming lax enforcement of rules.

But loss of life is rarely on such a scale as the Jilin fire.

A major blaze at a Shanghai apartment building in 2010 left 58 people dead, and one at a shopping mall in Jilin killed 53 people in 2004.

In some cases owners or company officials have been arrested as a result of workplace accidents.

It was not clear whether poor standards were to blame for the blaze in Dehui.

No arrests were immediately reported, and Xinhua said an investigation into the cause had begun.

Company representatives could not be reached for comment.


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ISM: AMERICAN MANUFACTURING UNEXPECTEDLY ENTERS CONTRACTION

ISM's monthly manufacturing report is out.

The headline index unexpectedly fell to 49.0 from 50.7 last month, marking the lowest reading since June 2009.

Economists were looking for an increase to 51.0.

Any reading below 50 on the index indicates contraction. Today's ISM release suggests that the American manufacturing sector entered into contraction for the first time since November 2012.

Below is a snapshot of the changes in the various sub-components of the index in May:

Below is what survey respondents are saying:

"Customers are anticipating resin price decreases and holding back orders." (Plastics & Rubber Products)"Slight uptick in overall business but not substantial." (Textile Mills)"Government spending has tightened, which has moved out program awards and caused some reduction in force." (Computer & Electronic Products)"Market outlook is relatively flat, with some promise of raw materials inflation relaxing." (Electrical Equipment, Appliances & Components)"General economy seems sluggish and pensive. Buyers are not buying much beyond lead times." (Fabricated Metal Products)"Downturn in European and Chinese markets is having a negative effect on our business." (Machinery)"We are having a difficult time hiring skilled employees." (Transportation Equipment)"Business continues to increase, but over the past 20 days we have seen the trend flatten." (Furniture & Related Products)"Market was holding strong until mid-month — then softened." (Wood Products)"Decline in sales for FYQ2 over same period a year ago due to softer demand [in] both domestic and exports." (Chemical Products)

Click here for the full release >

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