Shooting from the hip - topical, informed and opinionated posts each & every day!
It may not be too surprising to learn that the brief of this particular Spreadbet Magazine blog given the routing of the tech sector this last month, is to look for beaten down stock opportunities in this arena. This of course flies in the face of current “wisdom” as applied by the financial media and many City analysts, and is precisely why we are doing it!
While it does not always pay to be contrarian, it can very often be the case that when the herd thinks that the market is going one way, the canny speculator has an opportunity to make money. Take a look at this blog here for example which was another “tour de force” by our dear founder and now Titan head – Richard Jennings - http://www.spreadbetmagazine.com/blog/titan-has-the-bear-finally-begun-to-growl.html.
The title of the blog actually misleads as he concluded with – “We highly suspect that on this occasion, certainly in Japan, that this is a bear trap that will prove to be a false break,” and “we would argue one can hardly find a better proposition in global markets today than Japan… With the above in mind we are staying the course on our Japanese exposure”. Moral of the blog? Listen to Mr Jennings and his convictions and always know when to bet against the so called “experts” and the crowd.
Those who have been following the performance in recent months of the Titan funds will realise that these blogs are most certainly ones to read.
Anyways, I start off with the first of the three possible recovery plays and what could be regarded as a somewhat eccentric choice. This comes in the form of FarmVille owner Zynga (ZNGA) where the rebound from the 2012 meltdown in the shares continues in what could be described as a three steps up / two steps down fashion.
What is appealing about the latest set up here is that from a technical perspective, the 30% decline from March peaks towards $6 has quite a geometric look to it. Indeed, the shares fell almost as quickly from early March as they rose in February. But the buy triggers that I am interested in currently centre around the rebound we have just seen from a combination of the floor of a rising trend channel in place on the daily chart since June and the 200 day moving average around $3.88.
The real attraction here from a chartist’s perspective though would be if a near-term low has been put in place. This is because we would possibly have a double buy signal both off the floor of the rising price channel from last year and also as a failed gap fill of the two unfilled gaps to the upside is seen at the end of January. What we tend to see time and time again is that stocks (or markets), that are too strong to fill the floor of a gap to the upside then deliver ultra strong rebounds from these type of conditions. This may seem a rather optimistic perspective with Zynga, but at least as things stand near the rising 200 day moving average, it is not difficult to anticipate at least a modest dead cat bounce.
As far as Cisco Systems (CSCO) is concerned, I have chosen another slightly “left of field” tech play, if only on the basis that when you think of Dotcom Bubble 2, that this is perhaps not the company that first comes to mind. Nevertheless, there has been quite a pullback from the dizzy heights of September last year and the $26 plus territory.
What is attractive to me is that in the recent past the shares have been attempting to clear a still falling 200 day moving average at $23.02 having come off the back of a golden cross buy signal between the 20 day and 50 day moving averages. If you add in the way that the RSI trace has just bounced off neutral 50 to stand at 57, then we appear to have a reasonably non volatile entry point for the shares of the networking equipment giant to target the 2012 price channel top towards $28 over the early summer.
To finish, if there is any company which reminds us of the heady days of the Dotcom Bubble, it would have to be internet giant Yahoo! (YHOO). What can be seen here on the daily chart is that following a double top for the stock during March in the $40 zone, that there was then quite a sharp pullback that became more evident along with the sharply declining 10, 20, and 50 day moving average’s.
In fact, the triple dead cross between these lines at the end of last month took the shares back towards the still rising 200 day moving average at $34.21. Nevertheless, the way that the 200 day line is still rising means that one would have been looking to buy the dip in the stock, and it could very well be that in the wake of the latest well received Q1 update that the shares are able to build renewed upside momentum. The big technical buy trigger here would of course be an end of day close back above the $40 main resistance, to target as high as July’s $50 resistance line projection on a 1-2 month timeframe following the break.
No doubt Kyle Bass (arch Japan bear and well known hedgie) and many other hedge fund managers over the last 15 years would answer the question in the title of this article with a resounding “No!” Not for no reason is the short JGB trade known as “the widowmaker”…
With everyone anticipating a prolonged BOJ intervention program what with the perpetual bid for JGB’s by the BoJ at present, many fear that reselling bonds could become virtually impossible to cover any short positions. However, in an interesting piece of research released a few days ago, Barclays Research pointed out what they perceive to be a massive disconnect between the fundamentals and the current pricing of Japanese bonds and which, they reason, cannot last forever. Let us take a closer look at their observations…
Barclays believes that the current macroeconomic policy and the latest economic data are not reflected in the long end of the Japanese yield curve. In other words, the massive reflation policies being pursued by the BoJ under the economic program known as ‘Abenomics’ is not currently reflected in certain parts of the yield curve, in particular the 5yr + part and where yields present something of a conundrum. The peculiar position is that IF the Abenomics policies are successful, then yields at the long end are presently too depressed and must, by default, rise. Thus a unique opportunity to short bonds is now presented.
The forward rate 5yr benchmark yield has in fact been declining since 2004. What with the massive purchase of government bonds by the BOJ in recent years, this has contributed to a generalised advance in bond prices (and hence the opposite effect on bond yields). At the same time, this massive buying has also helped contribute towards pushing consumer prices higher and further, policy is set on a further increase in the CPI towards 2%.
The latest data reveal that notwithstanding the recent new consumer tax rise, the Japanese economy is now improving. After more than 20 years of stop-start deflation, the bold Abenomics policies implemented so far have in fact succeeded in pushing prices above the key 1% level and the unemployment rate down to 3.6%. While the Japanese central bank’s intervention is depressing short-term bond yields, it should in fact be pushing the long end of the curve higher as improved economic conditions mixed with rising inflation expectations logically has a positive impact on long-term yields (that is raises them).
What with the unemployment rate currently sitting at just 3.6%, the supply side of the labour market is becoming tighter and which means it is more exposed to wage pressures which, economic theory dictates, translates into inflation pressures for the near future. At the same time, many analysts expect the BOJ to extend the current 60-70 trillion p.a yen QE package at the next meeting scheduled for the end of this month and which will so create further inflation pressures.
Remember the principal goal behind the Abenomics policies is aimed at reflating the Japanese economy and currently they appear unwavering in pursuing this goal. With forward rates on a declining trend for almost 10 years now, and, amazingly, at a level below those seen during the worst of the deflationary period, Barclays just may be onto something here. At some point the market will have to catch up with the fundamentals and even if some, so badly burned of old, believe it to be too risky to short JGB, it at least may be a good idea to stop buying them. It is a trade opportunity we are watching closely…
The last few weeks have been brutal in “hedge fund hotel” world with serious bloodletting for many of the revered names in the industry. As we relayed here - http://www.spreadbetmagazine.com/blog/top-bottom-hedge-funds-during-1q-2014.html - some of the largest funds are now down nearly 20% (and probably more in recent days as these stats were only to the end of Q1) for the year. Ouch!
The ongoing liquidity withdrawal by Ms Yellen and the effective reversal of 6 years of ultra-loose monetary policy are being blamed for the takwdown with the more speculative areas of the market like the biotech and the technology arena’s being hit the worst. With QE ending, “risk” is now being re-priced.
At the beginning of the year, the VIX (volatility measure) was hovering around 14 but, in recent days, it has risen quite sharply and, although not breaching the key 20 level as it has done on previous shakeouts during the last few years, had risen to over 17 last Friday. During the current month, we have in fact seen the Nasdaq 100 index decline 3.1pc on the 10th and 2.6pc on the 4th – declines of a magnitude that have not been seen for a couple of years and which are significant drops for single sessions. The market even extended its declines in following trading sessions – classic bear market onset signs.
While hedge funds collectively continue to search in vain for the coveted “alpha”, as detailed in this blog here - http://www.spreadbetmagazine.com/blog/hedge-funds-and-the-lopsided-boat.html in which we revealed the massive headlong pile into the so called “momo” stocks, this is now really biting them in the backside with names like FB, CFLX & TWTR down 30 – near 50% from their New Year highs – a situation that we also pointed out as being ripe for unwinding here - http://www.spreadbetmagazine.com/blog/titan-investment-partners-why-we-have-moved-to-a-maximum-net.html. It seems that many of these funds have been massively unwinding their positions, and leverage, particularly to growth stocks and rotating into value plays. Yet again we were ahead of the pack with this blog here - http://www.spreadbetmagazine.com/blog/titan-investment-partners-why-were-backing-the-mining-sector.html. It seems also this poor sentiment is now spilling over to the wider public with some mutual funds experiencing significant redemptions lately, something that also happened in the aftermath of the tech bubble bursting at the turn of the millennium.
Of course, we are now in a different situation to 2000 as valuations aren’t as extreme as they were back then when many equities, with no track record of a single profit, were seemingly worth billions. Still, price ratios are still high and at similar levels to the pre-2007 crisis. It is true that the rise in VIX from 14 to 17 is not an extreme move and that credit spreads have in fact improved this year, in particular in Southern European countries. It is also true that the “risk-on” trade is still intact evidenced by the dollar and gold not rising dramatically – typical harbingers of further stock market falls. But the cracks are well and truly beginning to show now… We expected a sharp rebound this week as detailed here - http://www.spreadbetmagazine.com/blog/titan-has-the-bear-finally-begun-to-growl.html and so it has come to pass, but we do believe the 5 year bull market is slowly morphing into a bear one.
Companies have also been engaging in a massive share buyback policy. By reducing the amount of shares outstanding they have been able to act as a suppressant on PE ratios rising too fast (through flattering earnings). That is one of the biggest differences from the late 90s. But even if a major bubble is now being deflated in the tech arena, it is unarguable that stocks are on the expensive side and so it is the wrong time in the investing cycle, in our opinion, to go all in on equities as many of these hedge funds had until the last few weeks. Companies will eventually stop buying back their stock and, with their profit margins at record highs, they will also likely experience a declining profit growth profile in the near term. The joint effect of these 2 issues will probably further dent price appreciation potential for the wider market.
For now, hedge funds are seeing an increase in risk and are also on the defensive. They will probably continue to unwind positions to avoid the worst, namely redemptions. We will look out for opportunities in some of the better tech names in the sessions ahead to, as ever, take advantage of the markets collective over reaction.