Consumer charts
Category Archives: Trade idea
Deutsche Bank optimistic on coal, Goldman pessimistic
Deutsche Bank says that coal prices will go higher in 2013 because Chinese industry will recover and natural gas prices are to go up.
“We believe that fundamental drivers will improve over the course of 2013 as U.S. gas prices stabilise at a higher level and Chinese economic activity accelerates towards the trend rate of growth in the second half of the year,” Deutsche Bank says.
Nat-gas prices in US should go higher in 2013 which would make the switch to coal, as an alternative, much more attractive says Deutsche Bank.
“Therefore, while the outlook in the next month is ambiguous, the second half of 2013 provides clearer signals for an improvement in thermal coal fundamentals next year,” the bank said.
Goldman Sachs analyst Andre Benjamin, however, says that coal will not return to normal until second half of 2014 instead of Q4 of 2013 as he previously thought.
Benjamin expects demand from China, Europe and Japan to be lower than he previously predicted which will hurt coal producers in US and Australia.
In the coal space, Benjamin likes SunCoke and Consol and has a sell rating on Arch Coal and Walter noting that these have weak fundamentals.
Will Costco pop or drop this week?
Costco (COST) is set to report earnings on Wednesday with expectations in range of $1.31 per share.
As usual, it isn’t just the earnings number that moves the stock but also other things.
With a trailing PE of 28 and a forward of 23, COST is rather expensive so it is the other things and not the actual numbers that will, in all likelihood, move the stock.
On the short term technicals, COST has staged, on Wednesday, a picture perfect bounce just off the 50 DMA and despite dismal trading on Friday the stock looks very much poised for an attack on $103.50 range which it failed to break on September 21.
This bullish set-up can be deceiving for several reasons.
First, is that the nice, straight trend line we can draw on this 4-month run is much steeper than the trend line that COST has established over a 3-year period. In other words, the short-term is too bullish against company’s long-term prospects.
This can be seen nicely on the weekly chart below.
Second, there is a divergence between the daily momentum in the stock and its weekly movement. The daily is suggesting that COST is near the low in the momentum move, while the weekly one is suggesting that COST has topped its momentum and is about to roll over.
We can see this on the daily chart as the MACD divergence with the price, suggesting that the intermediate top in the name is in.
Having said this, there are two trading issues that could be addressed: do we initiate a new trading position on the earnings; and what do we do if the position is a long-term investment.
Technicals as well as some fundamentals suggest that it is better to sit this one out and keep the trading cash for some more favorable set-ups.
Long-term positions in COST may want to take some profits on the run up in the name if it occurs before the earnings report. Taking half-off the long-term position may sound good, but perhaps liquidating more of the holdings, depending on the overall portfolio weight could also be prudent… because, this week, Costo is more likely to drop than pop.
Piles of cash looking to buy coal names, report
Piles of Japanese, Korean and Chinese cash held by the so-called “smart money” is ready on the sidelines to snap up the oversold coal miners in a belief that coal prices have bottomed.
“Overall, what we’re seeing is smart money is coming into the coal sector now because they believe the bottom has been hit,” says Roger Suyama, head of Indonesia corporate and investment coverage at VTB Capital in Singapore.
Some deals have already begun to roll.
Thai state energy company PTT took coal miner Sakari Resources private. Such moves usually occur at the bottom of the cycle because the buyer believes that the company can be sold back to the public for way later.
Deal makers say that huge takeovers are unlikely because sellers expect much higher price that what buyers want to pay. Instead, they see many minority stake movements done primarily by “Chinese, Japanese and Korean steel companies and trading houses”.
Although these possible buyouts are mostly Asia-focused, the fact that they are happening adds to the signals, highlighted earlier in the week on this blog, that coal bottom is in or, at least, the price will stop dropping.
This may provide a possible short-term opportunity trade in coal and/or give little respite to the beating of the rail names whose coal shipments are slicing their profits and their stock prices.
EBay is a monster & coming pullback is a buy
Since its last earnings report, Ebay has had a monster move from under $40 to just shy of $50 and although on short-term chart EBay is ready for a pull back (see why in the chart), this name is by no means, over a long run, done going higher.
EBay story is not that it has ordinary folks reselling items via its web site but that its payment system, PayPal, is not only advancing in the world of finance but its very nature and features are by far more competitive than anything that Visa of MasterCard have to offer… and the only thing to worry is whether EBay can execute this advantage.
The thing that makes EBay a monster is that its PayPal system is so versatile that virtually anybody can use it for anything.
Like Visa and MasterCard, corporations can use PayPal to charge their customers but this is where these two EBay’s competitors stop because Visa and MasterCard are way behind the curve of giving accounts to consumers so they can transact amongst each other, be it they charge or are charged.
Now, Visa and MasterCard are monster stocks on their own for simply growing their corporate based transactions (and fees) but lets imagine what EBay can do with PayPal if it just broadens the base of transactions and collects a fee on it from each and every individual. Having a PayPal account can also be seen as indispensable for any consumer to move funds from one individual to another… and that will be a lot of transactions.
The good story does not end there. While Visa and MasterCard have banks beholden to them for issuance, PayPal is not restricted by such sharing. With PayPal banks are out of the transaction loop altogether and therefore banks have no share in PayPal’s earnings.
Sure that at some point in time bank participation may come in but that may be just another platform to grow transactions.
Meanwhile, with forward PE of 18.4 EBay is in line with its competitors. Visa’s is at 18.8 and MasterCard’s at 17.7. But, EBay’s relative value against these two is not just on these imaginary advantages described above but also with the price to book metric: EBay is at 3.3 on price to book, against 3.5 at Visa or 9 at MasterCard.
Price-to-book is a ratio and as the denominator, book, goes higher given growing transactions and prospects, EBay’s numerator, price, would have to go higher just to keep it pegged at 3.3. Suppose we are to give it a higher peg, somewhere between Visa’s and MasterCard’s, than the price of the EBay stock would have to go a lot more higher.
This puts EBay in a $100 category by next year.
Comerica: the good bank?
Banks are almost universally hated but one low-radar Taxas-based finance house that operates in Michigan is showing some technicals that could move the stock back to its old highs of $40 handle.
Based on its deposit base, Comerica (CMA) is ranked 2nd in Michigan and some talk suggests that it may seek to improve this position given that another Michigan operator, Citizens Republic Bancorp, has hired JPMorgan to find them a buyer.
Rumors aside… based on some key metrics CMA is much pricier then the big box bank like Bank of America (BAC): CMA forward PE of 11.5 vs. 8.4 for BAC and price to book of 0.85 vs 0.39 at BAC.
Then again, BAC does not have a 2% dividend yield the CMA does and in times when rates are zero, 2% makes CMA look like a fixed income security.
… nor is CMA saddled with so much of the sub-prime crap like BAC which spends lots of its capital just to rid itself of it.
Having said all this, the price chart on CMA is not something a momentum player would look at: it goes all over the place and it could keep doing that depending what happens (or does not) in Europe.
With bets on forward stability very low it may, as it often does, turn out that such low probability event is what actually happens in which case the price chart for CMA is set up to exploit that stability with a move higher.
There are 2 highly positive things in the price chart:
(1) Bullish divergence between price and momentum/strength metrics
(2) Multi-month price consolidation pattern whose triangular pattern of lower lows is signaling a possible breakout.
The bullish divergence, for reasons beyond this post, often get resolved with an upward move but the fact that such upward move has stalled just under last year’s pre-crash price line of circa $32 should not be discouraging.
What helps the belief that $32 will eventually get retested is the positive accumulation/distribution line (see weekly chart) suggestive that the buyers are holders meaning that at some point in the future there will be shortage of available shares to be traded – a circumstance that is always fixed by moving the price higher.
Now, one can pick and choose their particular entry point depending on the comfort level, time horizon and cash allocation, but with a stop at $28 the anxiety of owning some CMA is eased by the 2% dividend.
Of course, 2% is nowhere nearly as good as my favorites like MO, PM and T, but the price chart of CMA and some fundamental metrics do not look as extended as these three.
Private monetary system unstable, paper
A purely private monetary system is inherently unstable because the privately issued notes would trade on future credit conditions so that the volatility in those beliefs would necessarily impact private currency causing subobtimal economic outcomes, says the latest Fed paper On The Inherent Instability of Private Money authored by Daniel R. Sanches Federal Reserve Bank of Philadelphia.
“As we have shown [in his model], a purely private monetary system is capable of implementing a constrained efficient allocation [stable money]. However, the existence of other equilibria with undesirable properties for initial conditions… implies that such a system is necessarily unstable. These equilibria arise because some beliefs about future credit conditions can adversely affect current and future prices of bank notes,” writes Sanches.
What Sanches is arguing is similar to what can happen in a movie theater: there is one kind of an equilibria as movie goers orderly line up to watch a movie but another (chaos) equilibria if one of the movie goers goes nuts.
The difference with the movie analogy is that private issue of money, sometimes referred to as Free Banking, is that private money issue has self-fulfilling collapses and that is undesirable.
“In some cases, we can observe a self-fulfilling collapse of the banking system in which the balance sheet of each banker persistently shrinks along the equilibrium path. In these equilibria, the amount of bank notes in circulation persistently declines over time as note holders permanently reduce their demand for these notes, adversely affecting real quantities,” says Sanches.
Such circumstance could cause a “currency famine”, a situation tantamount to a deflationary spiral.
“We have shown that all of these equilibria are necessarily inefficient, which naturally gives rise to the formulation of welfare-improving government policies,” concludes Sanches.
Implicit in this model is that the “free” bank will be under obligation to redeem its issued note and that the “banker’s willingness to redeem any previously issued note today will depend on the value attached to his business, given that the punishment for reneging on his liabilities is the loss of his note-issuing privileges.”
But what is the banker obligated to redeem those notes into remains, throughout the paper, a mute point.
One would, of course, presume that the redemption would be notes for gold and the allusion to that presumption is fed by multiple reference to Friedman and Schwartz.
This paper, whose narrow focus on multiple equilibria of which 1 is good and 2 are bad, necessarily forces us to venture on to what Friedman and Schwartz may have had to say about the private money issue.
In a highly readable Has Government Any Role in Money? Friedman and Schwartz start from the premise that it would be good to remove government from issuing money but such scheme, tried in various places, has eventually devolved for many reasons that can be read in the paper.
Of particular interest is lack of any historical evidence of private money that is purely fiduciary (fiat) so in case of a removal of government monopoly on money issue, idea that the presidential candidate Ron Paul advocates, private issuers would not ”be likely to compete successfully-especially in producing a ‘pure fiduciary’ money.”
“As already noted,” write Friedman and Schwartz “there is no historical precedent. Historical experience suggests that the only plausible alternative to a government issued fiduciary currency is a commodity currency, with private issuers producing inside money convertible into the commodity. And we believe that even that outcome is highly unlikely unless there is a major collapse of national currencies-something approximating hyperinflation on a worldwide scale.”
Part of the run on gold, to be sure, has been this belief in this global monetary armageddon – yet the fact that central banks have been crowding the gold trade in these post-Lehman days maybe more suggestive of the gold’s price top rather then the development of the negative equilibria where nations are scrambling to augment their currency fiat with the metal due to any sentiment that the currency maybe irreparably eroded.
This paper, as many others, still reassure that banking, for all of the talk of sound money, is ultimately just the business of trust.
Is ARM Holdings ready for takeoff
For past 16 month, ARM Holdings (ARMH) has been going sideways zigzagging between $22 and $32, but this range is narrowing as of late warranting a closer monitoring of this stock.
In the past 5 months, ARMH price oscillation has narrowed between $25 and $29 and any positive turn in momentum on the MACD chart could trigger a monster rally in this name.
Based on the technicals, ARMH could potentially have a $15 on the upside with a potential target of $47.
ARMH is set to report earnings on April 29 with estimates ranging around 14 cents per share so some traders may hold until then.
Does this mean that ARMH will move on earnings or catapult higher for sure?
Nothing is for sure, but the probability favors an upside move. Narrowing trading range, higher lows and a turn in the longer term momentum metric places ARMH on a trading screen.
What is rising margin debt signaling about stocks
Margin debt is the fuel of any rally that sows the seeds of equities demise. At the end of March, some concern has been expressed that the margin debt, the amount traders borrow in order to speculate, is edging higher while net free credit, trader’s net worth, is going negative.
Towards the end of March, WSJ voiced these concerns by noting that trading on margin amplifies losses because if stocks decline and a trader does not have more cash to pump into the account to offset the loss then the broker’s margin call can turn into forced selling of the securities held.
“A wave of margin calls can worsen selling pressure on stocks and was seen as partly to blame for the market’s woes during the financial crisis,” politely reminded WSJ’s John Kell and by implication alluding to the dangerous fact that margin debt has been on a rise.
Nor is there any magic number on the margin debt that would signal that the equities are about to nosedive. Some assign $300 billion as a general worrisome plateau but as the chart below indicates, there were times when the equities tanked on less than that.
For example, the stock market rout in 2010, the highlighted region, corresponds to peak margin debt of $261,859 billion reached in April.
One can argue that we are passed that figure although others may note that margin debt expansion, which we are in right now lasts longer then 3-4 months.
One can draw own conclusion about that yet another interesting feature of margin debt and stock market sell offs is that margin debt typically peaks in the month prior to the market rout and typically takes off just before the sell off is done with.
The problem is that NYSE reports this data a month later which is, of course, too late to be of any forecasting use.
Finally, during market sell-offs the net credit typically shrinks, meaning traders go more liquid while the expansion of net credit is typically associated with bullish equity runs.
Net Credit = Free Credit Cash + Credit Balances – Margin Debt
Nor is net credit a particularly good indicator as to where the equities are going. For example, in the immediate aftermath of the March of 2008 lows net credit kept shrinking even though stocks were bouncing higher. Net credit swelled up to a much larger size prior to the 2011 sell off even though the 2010 sell off, which had smaller net credit expansion, was longer.
So where are we in the margin debt cycle right now?
Hard to tell but if a bull run on equities follows previous patterns of 10-11 month bullish runs, then the market sell off we are in right now may look like a mini flash crash of March 2011 which did nothing to shrink the margin debt… which brings us to a possibility that the Dow could sink below 12,500, if not to wipe off margin debt, but at least to kill the complacency.
2011, in quotes
“Apple denies that its correct name is Apple, Inc. The correct name of Respondent is Apple Inc.” — Apple’s response to an HTC complaint.
“There are two types of companies: those that work hard to charge customers more, and those that work hard to charge customers less. Both approaches can work. We are firmly in the second camp.” — Amazon CEO Jeff Bezos on the new Kindle Fire’s price.
“He thought it was safe to smoke because it said so on the Internet.” — Tonya Rice, mother of Westmoreland County teen Brandon Rice, who died Oct. 27, commented on the effects of lung damage from smoking synthetic marijuana.
“It’s like Elizabeth Taylor and husbands. That has to be unprecedented.” — Beano Cook, ESPN analyst, on Pitt having Dave Wannstedt, Mike Haywood, Phil Bennett, Todd Graham and Keith Patterson as coaches in a one-year period. Dec. 14.
“Our assessment is that the Egyptian government is stable.” – Hillary Clinton on the stability of Mubarak’s Egypt 18 days before he stepped down.
“Egypt is free!” – Editorial, The Register-Guard, Eugene, Oregon.
“I love Chinese food, but I don’t want to live in it.” – Jill Wirtz, a neighbor of 99 Ranch Market in Rancho Cucamonga, testifying at an Air Quality Management Board hearing in May on cooking smells allegedly emanating from the market. The Asian supermarket installed odor-control equipment.
“RAPEST.” – Misspelled word forcibly tattooed onto the forehead of a mentally impaired Oklahoma City man in April. Stetson Johnson had a bar code tattooed over the word to hide it. His attackers also bound him, beat him, shocked him with a stun gun and tattooed “I like little boys” onto his chest.
Verizon to charge $2 convenience fee – Verizon.
“Occupy Wallstreeters are 0.00001% of people claiming they are 99%” – unknown message board.
“But one mustn’t forget that a banker is always at risk, the minute he lends money.” – Former Deutsche Bank CEO Hilmar Kopper.
“The more you spend the more you save.” – TV ad.
“It’s a hill … get over it,” written on a shirt of a high school cross country runner.
“The best things in life aren’t things … ,” bumper sticker.
“They had no intention of winning the game…They did what they set out to do.” – US soccer star Donovan, after the Galaxy’s 1-1 draw against the Revolution on March 20.
“The bar owner owns the air within the building, and we are saying the county is trying to claim de facto public easement in the air. That’s a taking of property.” — Muncie attorney Bruce Munson, July 28, after filing a lawsuit on behalf of bar owners to stop the county’s new prohibition on cigarette smoking in taverns.
“I think one of the real challenges was not knowing what the challenges were going to be… So, it requires a lot of new solutions that no one has never thought up.” – Mat Marquis, principal designer, The Boston Globe, discussing the paper’s “responsive redesign” project with RWW’s Dan Rowinski, September 14, 2011.
“They…say, ‘clock,’ but they mispronounce it. They drop the ‘l’ from it. I don’t want to react because I don’t want them to know it’s a bad word, but I want to encourage them to talk so I’m like, ‘That’s good!’” - Jerry O’Connell, on the unexpected joys of raising his 2-year-old twin daughters Dolly and Charlie, on Rachel Ray Show.
“When they ask me, ‘Who is the president of Ubeki-beki-beki-beki-stan-stan?’ I’m going to say, ‘You know, I don’t know. Do you know?’ “ – former GOP presidential candidate Herman Cain who is eyeing Defense Department Post!
“I should tell my story. I’m also unemployed.” – Mitt Romney, whose net worth is around $200 million, speaking to unemployed workers in Florida.
“The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.” – Jeremy Grantham, hedge fund manager and Chief Investment Strategist of GMO Capital echoes Irving Fisher’s quip, three days before the 1929 crash, that “Stock prices have reached what looks like a permanently high plateau.”
“In his early activist days, Barack Obama the community organizer sued banks to ease their lending practices. Now his administration is suing banks for issuing risky mortgages.” - Jim Hoft.
“Juarez is reported to be the most dangerous city in America.” — Rick Perry.
”The president, he put us in Libya. He is now putting us in Africa.” – Michele Bachmann, unaware that Libya is in Africa.