Weakening Wednesday - Can Yellen Save the Day?

SPY 5 MINUTE I told you so!

All of last week, I kept saying the market was only hitting highs because it was being manipulated that way and, by Friday we'd had enough and took our ill-gotten gains off the table once again. This week, it's obvious we're in trouble – but it's a lot harder to sell your stocks when they're already in trouble, isn't it?

It's a very hard discipline to take winners off the table but you should scale out of posiitons on the way up the same way you should scale into them on the way down (and the Strategy Section at Philstockworld has a great article about scaling – also lots of additional commentary in chat below the article).

There's nothing wrong with being in cash. Yesterday, from 1pm until 2:30, we had on of our Live Futures Trading Workshops (replay available here) and our 4 trades made $360 by the close (4pm) for a very nice $100+ per hour salary for just trading a few contracts. Our trade idea from yesterday's morning post (which you can get delivered to you pre-market, every day by SUBSCRIBING HERE) was to short the Nikkei (/NKD) at 14,350 and this morning we hit 14,050 – good for a $1,500 PER CONTRACT profit!

SPX WEEKLY That's one of the things you can do with cash. We also have fun making earnings plays, like the FSLR trade we added to our Short-Term Portfolio yesterday. That trade idea was:

I think it's worth a try at selling 5 July $75 calls for $3 ($1,500) and buying, to cover, 4 Jan $77.50/85 bull call spreads at $2 ($800) for a net credit of $700 – let's do a set of those in the STP.

If FSLR is under $75 (it's about $69 after earnings), we pocket $700 PLUS whatever value remains on the January bull call spread (probably about half). That's against zero cash outlay ($700 credit, in fact) and possibly we'll just take quick money off the table and reload for our next earnings trade.

This morning, ahead of Yellen's 10am speech, we flipped bullish on the Russell Futures (/TF) at 1,105 in our early morning Member Chat and we've already tested 1,110, which is $500 up from that line (though we were more like 1,106 by the time we caught it for +$400 in an hour). We're done with the long ahead of the Productivity Report at 8:30 – which we expect to be disappointing. Also this morning, I reiterated our short entry on oil at $100.20 and we already got a dip back to $100, but our goal is $98.50 after inventories (10:30) though now we'd stop out again over $100.20 and wait for a better entry – so stay tuned!

We've been watching Brent Crude contracts drifting lower and USO (based on WTIC, which is what the /CL Futures reflect) usually tracks it very closely and now Brent is at $107.25, back where it was in early April, when WTIC was under $99. That is pegging our BS meter to 8.5, especially since the Ukraine crisis SHOULD be supportive of Brent – and it isn't. That's a huge red flag for oil bulls (the kind they run into and get skewered).

Speaking of getting skewered: Here's the Productivity report and is SUCKS – down 1.7% for Q1 and, even worse for our Corporate Masters – Unit Labor Costs are up a whopping 4.2%. In other words labor costs are rising and they can't whip the wage slaves any harder than they already are.

There are no cheaper places left to outsource, even CHINA!!! has been dealing with growing labor unrest as it becomes more and more clear that the Communist Party, which was founded to benefit the country's workers and peasants – has become a Billionaire's club for oligarchs – almost as bad as the US (but not quite).

“In China, there is a common saying,” says Lin Dong, of the Labor Dispute Center. “The government doesn’t help the people fix their problems. They fix the people who point out the problems, instead.” Workers who were valued principally as inexpensive production cogs during China’s initial economic flowering are now expected to star as consumers. Consumption accounts for only 35 percent of the Chinese economy, well below the 50 percent-plus characteristic of East Asian countries such as South Korea, which modernized earlier.

“It’s like that old Henry Ford story: I’ve got to pay my workers enough so they can buy my product,” said David Dollar, a former U.S. Treasury Department official in Beijing. “China’s reaching that Henry Ford moment.”

Unfortunately, the US is far from that "Henry Ford Moment," as you can see from the chart above. Let's face it, we're a nation of timid sheep who have just sat back and taken it while our wages have flatlined for 25 years while UK workers (the above example) were given 30% increases. At least the Chinese are smart enough to march – what the hell is wrong with US?

Maybe the rising Unit Labor Costs are finally a sign that US workers are not going to take it anymore. If so, that will be a long-term benefit for the economy but, in the short run, companies that are addicted to low wages like WMT, NKE, MCD, etc. are in for a bit of pain.

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Phil

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May 8, 2014 6:48 am

Keurig Green Mountain +6.4% on earnings beat, expanded Smucker deal

Yesterday, 04:33 PM ET · GMCR

Keurig Green Mountain (GMCR) +6.4% AH as FQ2 earnings and revenues beat estimates, buoyed by strong coffee sales and cost cuts.
Sales of single-serve packs rose 13% to $898M, while sales of brewers and accessories rose 8.5%.
FQ2 gross profit increased 10% and gross margin improved to 41.5% from 41.3%.
Sees FY 2014 EPS of $3.63-$3.73 vs $3.72 analyst consensus estimate; sees revenues in the high single digits.
Says it is expanding its partnership with J.M. Smucker (SJM) with a multi-year agreement to make and sell Folgers and other SJM brands in formats that work with new Keurig brewing systems.
Authorizes a new share repurchase program of up to $1B over the next two years.

Tesla’s deliveries, spending to ramp in Q2

Yesterday, 04:22 PM ET · TSLA

Tesla (TSLA) produced 7,535 Model S units in Q1, up from Q4’s 6,587 and above guidance of 7,400. The company delivered 6,457 units, slightly above guidance of 6,400 but below Q4’s 6,892.
Tesla expects to produce 8.5K-9K Model S units in Q2, and to deliver 7,500. Leases are only expected to account for ~200 deliveries due to lead times.
Gross margin was 25.4%, +20 bps Q/Q in spite of a $2M reserve for underbody shield retrofits. GM is expected to improve slightly Q/Q in Q2, and to reach 28% in Q4.
SG&A spend rose 150% Y/Y to $117.6M, R&D spend rose 17% Q/Q and 48% Y/Y to $81.5M. SG&A is expected to grow 15% Q/Q, and R&D 30%.
Operating cash flow was $61M, and capex totaled $141M. The full-year capex forecast is still at $650M-$850M.
The company expects to be “marginally profitable” in Q2; the EPS consensus is at $0.27. Full-year free cash flow is expected to be slightly negative.
Shares -4.9% AH
Q1 results, shareholder letter (.pdf)

Annaly Capital misses by $0.06

Yesterday, 04:21 PM ET · NLY

Annaly Capital (NLY): Q1 EPS of $0.23 misses by $0.06.
Revenue of $530.93M (-4.4% Y/Y)
Shares -2.45%.
Press Release

May 8, 2014 6:50 am

Molycorp, Inc. misses by $0.05, misses on revenue

Yesterday, 04:17 PM ET · MCP

Molycorp, Inc. (MCP): Q1 EPS of -$0.29 misses by $0.05.
Revenue of $118.5M (-18.5% Y/Y) misses by $25.98M.
Shares -8.8%.
Press Release

Core earnings fall at Annaly as interest margin slides

Yesterday, 04:16 PM ET · NLY

Core EPS of $239.7M or $0.23 per share vs. $350.1M and $0.35 in Q4.
Book value per share of $12.30 up from $12.13 after payment of $0.30 dividend.
Interest rate spread of 0.90% tumbles 53 basis points from Q4. CPR of 6% vs. 7% in Q4.
Portfolio: Agency MBS of $77.8B up from $73.4B in Q4 (was $112.2B a year ago). Fixed-rate mortgages make up 93%, adjustable-rate 7%. Total commercial real estate investments of $1.7B, up from $1.6B in Q4.
CC tomorrow at 10 ET
NLY -0.3% AH
Source: Press Release

Precious metals decline; writers search for excuse

Yesterday, 03:11 PM ET · GLD

Generally upbeat economic comments from Janet Yellen make for a convenient excuse for sizable declines in precious metals today, but then how do we explain lower yields at both ends of the interest rate curve? At 2.62% before Yellen sat down in front of Congress, the 10-year Treasury yield is now down to 2.59%, and the December 2015 Eurodollar contract – as good a proxy for worry over rate hikes as exists – has gained five basis points (higher price means lower chance of hike).
Maybe more at work could be chatter about a de-escalation of tensions over Ukraine.
In other news, the China Gold Association reports the country’s total Q1 gold consumption at 322.99 metric tons, up 0.8% from a year ago. Consumption of gold bars, however, fell about 44% to 67.954 tons.
GLD -1.4%, SLV -1.3%
ETFs: GLD, SLV, AGQ, IAU, PHYS, USLV, SIVR, ZSL, SGOL, UGL, DGP, GLL, DZZ, UGLD, GLDI, SLVO, DSLV, DGL, DBS, DGZ, DGLD, AGOL, TBAR, USV, UBG, GYEN, GLDE, GEUR, GLDS, GLDL, GGBP

May 8, 2014 6:52 am

Lawsuit against AmEx can proceed

Yesterday, 02:47 PM ET · AXP

The antitrust suit was brought by the DOJ and several states in 2010, charging American Express (AXP +1.8%) with setting rules preventing merchants from offering discounts/incentives to customers using less expensive (to the merchants) forms of payment.
In requesting dismissal, AmEx argued the government could not prove the card company had significant market power, but the judge ruled the government didn’t have to prove this, but instead could show AmEx’s conduct had an “adverse effect on competition.”
Visa and MasterCard were also sued over this, but settled immediately.

FireEye triggers security stock rout; lockup expiration looms

Yesterday, 02:24 PM ET · FEYE

FireEye (FEYE -26.2%) has crashed to new post-IPO lows after offering light EPS guidance to go with a revenue beat, and has sparked a sharp selloff in IT security stocks on (another) down day for momentum plays. PANW -10.2%. IMPV -7.1%. PFPT -6.8%. QLYS -8.7%. FTNT -3.3%.
Citi is worried about a lack of “opacity” for FireEye’s top-line numbers following the Mandiant deal. “Management noted ‘bookings’ for both FireEye and Mandiant grew >50% Y/Y. With FY13 growth of near 100% this leaves an outstanding question of whether or not business decelerated meaningfully on an organic basis.”
Others are more positive. Wells Fargo (Outperform) is still confident about its forecast for 50%+ revenue growth over the next 3 years, and the “disruptive nature” of FireEye’s business model (integrated threat-prevention hardware/software/services). Goldman (Neutral, but with a $58 PT) thinks organic growth is good enough, and expects a flurry of new products to provide a boost.
FBN (Outperform) is still bullish long-term, but also notes product revenue was below consensus, and is on edge over a May 21 lockup expiration that will lead 68% of shares to become eligible for sale.

Chatter picks up on Crocs’ comings and goings

Yesterday, 02:20 PM ET · CROX

Shares of Crocs (CROX -1.2%) get a jolt off of chatter indicating the company has canceled an appearance at a conference.
The retailer is expected to participate at the Stifel Nicolaus Consumer Conference in June.

Patton Boggs settles with Chevron in Ecuador dispute, agrees to pay $15M

Yesterday, 02:12 PM ET · CVX

Chevron (CVX +1.1%) and Patton Boggs reach a proposed settlement in which the D.C. law firm, which had represented the Ecuadorean plaintiffs in the disputed $9.5B environmental verdict, would pay CVX $15M.
For a law firm of Patton Boggs’ heft, the settlement is highly unusual: It agrees to cease efforts to enforce the judgment against CVX and withdraw from related litigation, it promises to turn over to the company any profits from the case, and agrees to cooperate with discovery efforts by CVX, which is waging a global effort to undermine the Ecuador verdict.

May 8, 2014 6:54 am

Vietnam Index hits three month low

Yesterday, 01:16 PM ET · VNM

“We have been very busy buying stocks these days,” says Andy Ho, CIO at VinaCapital, as the decline in Vietnamese stocks has brought valuations low relative to the rest of Southeast Asia. The best performer in Asia through late March, the VN Index has tumbled 8.6% since, bringing its P/E ratio to 13.3x vs. 16x in Thailand, 20x in the Philippines, and 22x in Indonesia.
There are rising tensions with China over disputed waters and macro worries like Ukraine also find their way into markets there, but the economy is still expected to grow a robust 5.8% this year and inflation should be stable in the 6% range.
VNM +1.2% today

Alberta crude price breakout spells danger for Keystone XL

Yesterday, 12:41 PM ET · TRP

The price of crude from Alberta’s oil sands has surged nearly 60% since November, as new pipelines connect producers with refineries on the U.S. Gulf coast, meaning Canadian producers can begin to see a better return on investment while U.S. refineries can lessen their reliance on oil from Mexico and Venezuela.
It also lessens the importance of the Keystone XL pipeline (TRP), WSJ‘s Ben Winkley writes, making it that much easier for the White House to delay a decision to clear the project.
Traders say the current price gap of ~$20 between Alberta crude and benchmark WTI is about right, so with just a handful of refineries set up to receive tar sands crude, more transport capacity may not be needed, Winkley suggests.
ETFs: USO, OIL, UCO, SCO, DTO, DBO, CRUD, USL, DNO, UWTI, DWTI, SZO, OLO, OLEM, TWTI

Sony’s Spider-Man makes the most out of ducking Godzilla

Yesterday, 12:21 PM ET · SNE

The Amazing-Spider Man 2 crossed over the $100M in sales for its first seven days following its U.S. release and is up over the $420M globally.
The box office haul trails some estimates and adds some weight to the theory that Spider-Man is a bit played out to U.S. audiences.
Studio execs at Sony (SNE) are getting high marks for the timing of the film’s release. A head-to-head confrontation with Godzilla would not have gone smoothly, according to Hollywood buzz.

May 8, 2014 6:56 am

Investigation of banks’ Asian hiring practices expands

Yesterday, 12:11 PM ET · JPM

It started late last year amid a report of JPMorgan’s (JPM +1.3%) practice of hiring children of well-connected Chinese, but the WSJ reports the SEC is seeking information from a host of banks – including Credit Suisse (CS -0.3%), Goldman Sachs (GS +0.8%), Morgan Stanley (MS), Citigroup (C +0.5%), and UBS – about their Asian hiring. Fortunately, this sort of thing never happens in the U.S.
At issue are possible violations of the Foreign Corrupt Practices Act which bars U.S. companies from anything that could resemble a bribe to foreign officials. The probe has rattled bankers in the region, says the Journal, with some choosing to walk away from potential deals which could come under scrutiny at some point.

SEC reportedly probing brokers over HFT

Yesterday, 10:58 AM ET · AMTD

Now getting investigatory direction from popular books, the SEC has reportedly sent out subpoenas and record demands from a number of brokerage companies as it looks into the way retail customer orders are routed, executed, and filled.
It’s unclear which firms have received the requests, but a guess of TD Ameritrade (AMTD -1.2%), Schwab (SCHW -0.9%), and E*Trade (ETFC -1.5%) – all of whom bank coin selling customer orders – wouldn’t be a bad one. Also maybe on the list: Fidelity and Interactive Brokers (IBKR -2.6%).
The SEC probe comes amid the the high-profile launch of Michael Lewis’ latest, Flash Boys.

May 8, 2014 6:58 am

Chipotle: Buy Before It Gets Expensive

03:47 AM ET | by Gemstone Equity Research Includes: cmg

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SolarCity Earnings: Great Growth, Funny Math

02:54 AM ET | by Casual Analyst Includes: scty

Annaly Remains A Top Income Stock

12:21 AM ET | by Seeking Profits Includes: nly

May 8, 2014 7:00 am

Tesla: Wait For $140-150 To Buy

Yesterday, 09:25 PM ET | by Seeking Profits Includes: tsla

Burrben

Member

May 8, 2014 7:14 am

Phil – Is there anyway to post all the news under a different user name? Such as PhilsNews? While I might not be the majority opinion, I find all the news posts repetitive to my news feed and time consuming to filter through, looking for you're comments in the morning. It's much more pronounced on a mobile device which doesn't auto refresh.

If you posted under a different user, we could choose for ourselves to ignore or read the posts. Just my 2c as a long time member.

denlundy

May 8, 2014 7:18 am

Phil. See the market at a very pivotal point. This is the third time this in last 6 months the RUT is challenging the 1,100 line, Dec & Feb being the prior assaults. With the RUT & NAS both below their 50 day average and RUT below 200,the question is whether this is the precursor to a larger overall market decline or we now bounce back and the RUT and NAS recover. OVER THE SHORT TERM, I can't see the tech heavy NAS recovering, but am keeping my options play open to a big move in either direction. A critical turn is near is only point that's clear.

May 8, 2014 7:21 am

/cl climbing from 100.35 to 100.70… not sure where she stops.

sibe14

May 8, 2014 7:26 am

Phil,

I hold NLY – 500 shares and -10 Jan 16 $10 Puts. I am thinking of selling calls on the poor earnings news. Your recommendation would be appreciated.

deano

May 8, 2014 7:46 am

Phil & Burr – I like the idea of the news postings under a separate username as well. Coming in for a short stop to catch up should be much easier if there were a way to filter to just Phil's comments and later catch up with the news. Good idea IMHO.

jabobeast

May 8, 2014 7:48 am

pcln before the open..weird

jjennings

Completely agree on the dump of news.

May 8, 2014 7:49 am

Good morning! ECB and BOE rate decisions and more Yellen talk today (9:30) is keeping the balls in the air.

German Industrial Output was -0.5% with year/year output at 3% from 4.7% on last reading. That's shockingly bad – and they had nice weather!

Not going to cash in the LTP has already cost us 1.5% ($7,500), so I'm certainly not inclined to think we're missing something on this bounce yet. The Income Portfolio, which is 90% cash, is still up 7% vs now 9.7% in the LTP. It's actually nice to have a control portfolio like this to compare to.

Oil just went back over $100.50, so a stop out on /CL until it gets back below with a small profit.

Solar Roadways/Fig – Cool! I'm glad to see someone is doing it already. A little too soon, I think, a couple of more generations of cell efficiency (5 years) and I can see the economics kicking in.

Mauldin/StJ – Yes, I'm surprised he said that but I guess he's just saying what Rich said.

TSLA/Wombat – Sales are off. That's a bad thing when you only sell 6,000 cars a quarter! They made 7,500 cars and sold 6,500 cars so they can't blame production constraints. It's possible that 2,000 cars are on boats to China and Norway and technically not sold yet – they didn't have an international pipeline filled with cars before so filling it can cause sales dislocations. I'm not sure if that's the case but, if it's not – they've got some major problems as the Model S may already be peaking in sales. I also find it very disturbing that SG&A went up 150% (+$70M) from last year – that's a lot just to sell a few more cars, especially for a $200 stock that's HOPING to make $1 a share this year.

All in all, TSLA did just what we thought they'd do and they are worth just what we thought they are worth ($100-$130) but the new models will keep hopes alive and they are probably going to stay over $150 unless the overall market crashes – then they might get reasonable.

Big Chart – Nas and RUT may be telling the real story but we have to respect the NYSE and say maybe it's just rotation to large caps. As StJ notes, it was a year ago that we moved our lines, figuring 1,800 would be the top of the S&P in 2013 and 1,850 this year. I still think 1,850 is a reasonable target for the end of this year, after a correction.

News/Burr – That's a good suggestion, I'll have Greg and Matt look into it. Any idea for a news color or is blue good?

Critical/Den – Or we could establish a solid floor if we take off from here. If we do hold this AND make new highs, THEN I will finally redraw the big chart lines. Not holding my breath, though.

Oil/Burr – Small victory on the conviction short and now we re-load below $100.50 or back at $101. We expected to stay high into Nat Gas inventories, which should be a small build due to pool openings.

NLY/Sibe – Book value ROSE from $12.13 to $12.30, you can't put too much value on the quarterly income numbers as there are a lot of factors – it's like randomly going to the beach, looking at where the tide is at any given moment and saying "this is absolutely where the water always is." The rate spread tightened during the quarter and it takes them time to adjust it (kind of like how grocery stores and restaurants are being squeezed by increasing food costs before they can pass it through).

When the tide goes back out, they can benefit from the other side. I'd expect them to turn up this morning during the 10am conference call. Unfortunately, the "analysts" who follow REITs tend to understand them as poorly as the people who invest in them. The reason I like NLY is they have a smart management team who can ride out all sorts of market conditions and, in Q1, they've been cutting their leverage to position themselves for increasing interest rates down the road – something I very much believe in – but, at the same time, rates fell this Q, so they got squeezed a bit. If they are right, and rates go up, they will be better positioned than the REITs who focus on quarterly profits to take full advantage of the better spreads.

So, let's wait for the CC and see where they are – probably $11.50 end of day. For future reference – you need to play this game with yourself BEFORE earnings and say "what will I do if they miss?" If you were unwilling to ride out a 5% dip in the stock – you should have sold calls AHEAD of earnings, when you would have gotten a better price. Of course, as I'm sure you've noticed, I almost always sell calls because I'm not greedy and I'd rather have the protection in place – just in case I'm wrong. When you buy a stock and sell the puts but not the calls, then you are levering your risk with no protection – I'd be nervous too!

PCLN bucking like a bronco.

Gotta work!

advill

May 8, 2014 8:03 am

News and comments / Phil

Perhaps now that you are asking, having a number in each comment could help to go more directly, sometimes comments comes from something that was written 1 hour before with many other comments in the middle.