Flash Crash

The May 6th "flash crash" has caused people to question whether the markets have become too computer driven. Ever since, people have blamed a large computer-based trade to have caused a series of other trades, that in total caused the market to drop severely and rebound minutes later. Federal regulators released a report on Friday outlining their findings, including that a large order to sell futures by Waddell & Reed had started the flash crash. Traders at the company used a computer algorithm to sell 75,000 S&P 500 E-Mini futures, betting that the overall market would decline. Although a large amount of contracts, it was not unusual. Earlier in the year, Waddell executed a similar trade, however, the difference is that it took five hours to execute compared to 20 minutes on May 6. Other high-frequency traders started buying and then immediately selling the contracts. Waddell's algorithm increased selling because of the increase in volume, further putting pressure on the markets.

Economic Data

A bunch of data has come out this week:

Personal income increased 1.0% over the past quarter compared to a 0.9% growth in the first quarter.

Chain/retail store sales dropped 1.8% compared to the week earlier, however year-over-year sales growth increased at an annual rate of 3.3%.

New housing starts increased 11% in August compared to July. Although a welcome sign, housing starts are at historical lows.

http://www.economy.com/dismal/pro/lastweek.asp

The FOMC met this week, but didn't change much of their outlook. The fed funds rate will remain low for an "extended period of time." Inflation is below the target level, and with high unemployment, there is few to no inflationary pressures.

Mortgage applications remain low and weak despite record low rates. Refinancing had a small run, but has been declining over the past three weeks.

Initial claims for unemployment benefits increased last week. Although this may cause concern over a double dip, most economists believe it is just a sign of the continuously weak labor market.

Conference Board Leading Indicators was up 0.3% in August, reaffirming the slow growth that we will see in the near future.

Durable goods orders fell 1.3%, led by a drop in transportation. Inventories increased 0.4%, the 8th consecutive increase.

New home sales disappointed. Although higher vs. July, sales were below expectations and remain historically low.

APPL & AMZN at new highs

Apple (AAPL) has broken through the trend and is now trading at historic highs ($284 per share). The average price target of all the analyst firms covering Apple is $340. I am not that optimistic yet – my 12 month price target is $315.

Also, Amazon (AMZN) is now trading at historic highs. The company reported Q2 results on June 23, after which the share declined by $14.15. It is somewhat ironic that since the dissapointing results the share has gained about 45%.

M&A activity

M&A activity is picking up in the U.S. and the reason for that is too much free money. This chart illustrates liquid assets of nonfinancial companies as a percentage of the market value of all U.S stocks. Liquid assets (mainly cash and money-market securities) totaled $1.85 trillion as of June 30, a jump of 1.9 percentage points from three months earlier.

The graph below shows the volume of M&A deals for the past five years (quarterly data).

RIMM

To add to this, RIMM's short interest was 31.1 milljon shares on August 31 (this is 2x more than on August 15). This means that more and more people are betting on RIMM's price fall. The company reports Q2 results today after the market close. Consensus expects EPS $1.36 and revenues of $4.48 billion. If the results exceed analyst's expectations we may see a short squeeze - people will liquidate their short positions, which means that the stock price will climb. If not, we may see a decline.

RIM falling off the earth??

Reasearch in Motion (RIM), the maker of once-beloved Blackberry smartphones is continuing to lose its battle against faster adopting rivals. For the past few years, RIM has been battling Apple's IPhone, not only as a fashion phone but also as a corporate phone. The Blackberry introduced us to email on the go and expected to be the premier corporate phone of choice. However, the company didn't adapt to threats by the IPhone, separating itself by the idea that IPhones are for younger, non-professional people needing basic, web-based e-mail. RIM's expectations didn't play out correctly as professionals sought the cool, trendy IPhones as their company phones, causing RIM to lose marketshare. Today, a new competitor looms for both the IPhone and Blackberrys--Google-based Android smartphones. A number of companies are producing new smartphones using the Android OS. The greatest advantage to the Android phones is that it has a user interface similar to IPhones (touch-screen, fast processor, 3G and Wi-Fi capabilities), but are available on just about any carrier.

RIM and the Blackberry brand still have plenty of corporate backers, who mainly value RIM's security features like strong encryption and the ability to remotely wipe data off of the device. But the firm is losing market share rapidly. Sanford Bernstein's survey of 200 companies shows that about 75% have adopted phones other than Blackberrys.

(More info can be found in Thursday's WSJ on page B6)

Trade

From time to time, I'll also let you guys know what I am keeping my eye on. In the end of august I purchased TBT call options with a strike price of $31, maturity Oct 15 (look at the graph below). This is basically means that I bet on the increase in treasury yields. It has definitely been one my most profitable trades this year. I'll talk a little more about that position during tomorrow's meeting.

USD/JPY exhange rate will increase? Doubtful

Bank of Japan (BOJ) announced today that after a few years of break, they will intervene in the currency markets and sell a part of their yen holdings. This means that the value of the dollar should increase in terms of yen (USD/JPY exchange rate rallied 3% today). Mitsubishi UFJ Asset Management, however, thinks that this will not cause a significant decline for yen.

Well, if you take a look at the graph below you will find out why. In 2003, BOJ sold 20.4 trillion yen and in early 2004 they sold another 14.8 trillion yen (look at the graph, and you will see exactly when it happened). Now, look what happened to the USD/JPY exchange rate when BOJ intervened - it stabilized, but didn't fall. In fact, Mitsubishi UFJ USD/JPY target for FY2010 is $78.

Best Buy

Best Buy, a company very dear to me since I currently work there, announced a 61% jump in quarterly earnings. This is huge, because it shows that consumers are spending money in things they don't have to buy. One of the hottest sellers? You guessed it: Apple IPad's. Best Buy will now sell IPads at all locations, and has recently started selling "grab-and-go" fitness equipment (mats, pedometers, excercise videos.. you get the idea) in stores while greatly expanding "Online Only" selections of Home & Appliance electronics. One problem that Best Buy will need to overcome is the forecasted decrease in the sales of TVs and Computers.

Dollar Drops

The dollar is breaking out of its recent trading range of $1.26-$1.28 and has weakened to $1.30 vs. the Euro. Speculation that the Fed will buy more Treasury securities to further decrease medium-to-long term interest rates. Further, this would signal that the Fed has mixed feelings about the U.S. economy and wants interest rates to remain low to try and propel the economy. Traders and speculators moved into gold, francs and yen. Some are speculating that the Chinese yuan will continue to appreciate as well.

S&P 500

Very simple graph of the S&P 500 (period 6 months) to show where the markets are at the moment.

These charts can be accessed through stockcharts.com

Auto sector targets lowered by DB

"Deutsche Bank lowers targets on Auto and Auto Part stocks.

Deutsche Bank has updated their sales and production forecasts to reflect a somewhat more conservative trajectory of U.S. recovery. They elieve these changes have been well flagged. Firm says there are modest adjustments to their earnings estimates and targets but no changes to their ratings. Firm lowers their Johnson Controls (JCI) tgt to $33.50 from $36, TRW Automotive (TRW) to $38 from $40 and Autoliv (ALV) tgt to $65 from $67"

Bank Failures

Who said that bank failures were a hot topic only in 2008 and 2009? If we look at the FDIC data that was published this weekend, we see that the bankruptcy of financial institutions is still a hot topic. 

Mutual Fund Flows

Pragcap.com is writing about mutual fund lows. The percentage of liquid assets (cash) of total assets was 3.4% in july 2010. This is the lowest percentage level since 2007 when stock markets peaked. Looking at the historical trend (if you consider mutual fund lows as an indicator), this implies a downtrend.

Pacific Gas & Electric Co

You have probably heard about this this, but there was a gas pipe explosion in California (about 6 miles from San Francisco). The company that owned the pipe is Pacific Gas & Electric Co. Personally, I would keep an eye on that stock. I have also attached a 5-day interday price graph below.

Model security analysis

Ok, this is an example of how SMIF students compose stock reports.

You can take a look at this from any school computer. The address is file://netfiles/users/k/kk4fm/outbox/Finance%20Society

Lower growth forecast = lower price targets

As some of you (who read the Wall Street Journal) may know, the US GDP 2H 2010 growth outlook have been lowered by many research firms in recent weeks. For example, on September 2, Morgan Stanley downgraded their outlook for second-half US real growth to 2 to 2.5% from 3 to 3.5% previously.

Largely as a result of lower growth forecast for the US economy, we are beggining to see downgrades to S&P 500 year-end targets (was about time, because the targets have so far been extremely bullish). On Tuesday, Oppenheimer lowered their price target for the end of 2010 from 1,300 to 1,225. Adjustments were also made in Barclays – their year-end target for the index stands now at 1,120 vs. previous 1,210 points. I have also mapped the targets on the graph of S&P 500 below. 

Macro news for 09/09/2010

Ok, I’ll start this blog off with some important macro news for tomorrow.

At 8:30 AM we get the initial claims and continuing claims figures. Consensus expects initial claims to increase from 472,000 to 475,000 for the week ending Sept. 4. The continuing claims are expected to fall from 4456K to 4450K for the week ending Aug. 28. There is a graph below that shows the four week average of initial unemployment claims – the recent uptick has certainly made people worried. Remember, for a fall in unemployment, the initial claims must fall to a considerably lower level.