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Monday Market Expectations 2/28/2011 - Jeremy Frommer vs Jeremy Klein, The Debate Begins


My old friend, partner, renowned economist, and all around great guy, Jeremy Klein, provided a counter point to my most recent blog “Stock Market Commentary 2/25/2011 – My Advice”

In all fairness and in the interest of thoughtful debate, it is only appropriate to publish it as its own blog.

Three other important points about the distinguished Jeremy Klein

  1. He is a wine connoisseur
  2. He is known at Goldman Sachs as “The one that got away”
  3. He is the winner of HFL pick the year end close on the S&P 2010

His response follows:

Hedge Fund Live - The Battle of The Jeremy's



“To my old friend Jeremy Frommer,

As you know I hold your opinion in the highest regard, you are by far one of the wisest and talented individuals I know, that said, I am not sure I agree with your view. First, crude traded at $85 just prior to Libya. It sold off there, after Egypt calmed down and may do the same when Libya reaches a resolution assuming another major oil producing nation doesn’t fall. Ironically, you argue that consumer is worse off than people think which would imply demand for oil would decrease which would also bring crude back down below $90.

A revised reading on Q4 GDP is not all too relevant as it looks back at chunks of data 5 months old. New Home Sales was disappointing, but much of that was the snap back from the CA tax credit expiring last month. More importantly, the housing sector remains depressed which most everyone agrees with and is priced into market.

Jobless Claims has resumed its downtrend and Thursday’s print was without any seasonal adjustments, so it’s clean. Most

Hedge Fund Live - Frommer Vs Klein



importantly, you ignore the University Michigan number, which now sits on 3-year highs and clearly shows that consumer sentiment is important.

I am also not sure how stocks in general have underperformed the S&P 500 when the latter is an index average.

I am not sure the market is overbought let alone leveraged overbought. The TICK information and open interest in the futures actually imply managers are very nervous and looking to hedge aggressively and quickly at the first sign of trouble. Therefore, we will continue to get sharp 1-3 day sell off such as the one on Jan 28 and this week before grinding back higher as the managers scramble to cover. The increase we have seen in open interest on these sharp down days contradicts greatly what one would expect when coming off 2 1/2 year highs such that we saw panic selling through Thursday afternoon.

Hedge Fund Live - Economist vs Entrepreneur



Finally, what percentage would you put on Saudi Arabia falling into same malaise as Egypt, Libya, and Tunisia? I am no expert on Middle East, but given monarchy is liked much more than Gadaffi, proactively trying to reform, and the U.S. will do anything in its power to aid the nation in keeping pumps flowing, I would put it at 10%. Earnings on the SPX for 2012 are $110. I think that’s a bit of stretch and will use $105. If oil prices continue to rise, I will use $85 as an estimate as energy names (12% of index and rising) will see solid increases. I will use a 14x forward multiple for the former and a 13x for the latter given additional risk premium for geopolitical uncertainty. Using my aforementioned, yet understandably arbitrary, probabilities yield a year-end level of 1435.

Been tuning in a great deal lately, as Hedge Fund Live has become the top ten go to destinations for a real time look at the markets. I really enjoy the content.

I look forward to hearing your response.

All the Best

Jeremy Klein”

Well J. Klein, you will hear from me soon as I have quite a bit to say. For now I hope our members, readers and listeners enjoy our debate.


Warships on the Way to the Suez Canal- Futures Have Barely Sold Off So Far

Morning Notes

- Somewhat lackluster performance overseas
- China came out with some relatively strict property policies geared to curb property speculation- 15 new measures were implemented
- New property measures hurt property stocks in China
- Nonetheless, Shanghai Comp was able to closed in the green, albeit marginally
- Hang Seng, which has less real estate exposure than the Shanghai Comp, closed up 60bps
- Upbeat earnings in Japan helped boost stocks, and the Nikkei closed up 30bps, which actually puts the Nikkei up >6% YTD
- S&P futures are similar to yesterday in the premarket- down about 3.5 handles from FV
- Initial Jobless Claims: 410K vs. 408K; prior revised up to 385K from 383K
- Continuing Claims: up to 3.911M from 3.910M
- Core CPI m/m: +0.2% vs. +0.1%; prior was +0.1%
- CPI m/m: +0.4% vs. +0.3%; prior was +0.4%
- Headlines crossed the tape that an Iran Navy official confirmed that two warships are on the way to the Suez canal
- Futures reacting negatively to this news while brent crude rallied
- European markets are flat to down small
- On the economic calendar for the rest of today: Leading Indicators at 10a; Philly Fed at 10a

Thursday Market Expectations - Reasons why the market doesn’t go down, for now.

NFLX - "Is it time to buy?"

Is this the beginning of the small correction I have been looking for?  Probably, but given the fight the bulls put up yesterday, they are not going to back off quietly. One might argue, buy the dips but sell the rallies more aggressively. I do not have the patience for that. I have too many other things to focus on. Either I am right and we will test 1300 in the coming days or I am wrong and we are in a fever driven hyper bull cycle that refuses to be broken.

But why? What are the positive catalysts? An improving economy. Yes things are slowly getting better. Perhaps you believe that there is still a great deal of cash to be put to work. I am not sure I agree with that one. Last I heard hedge funds were at near pre financial crisis levels of leverage and no matter how hard I try I cannot seem to get my credit card bills paid down, it is something that my wife and I are forever battling over. So near term, the catalyst for moving up is simply greed. “It worked yesterday, so I will try again today” seems to be the motto for the bulls.

As I write this it is 7:45am on Thursday and while futures indicate a negative opening on the heals of CSCO’s earnings (CSCO is trading down 10%) AKAM’s earnings (AKAM is trading down11%) TQNT’s earnings (TQNT is trading down 14%), I am amazed that the futures are not down more significantly. We await a weekly jobless claim number that should not move the needle. So here is my thesis, people have very short memories. I for one do not remember what I had for dinner when I came home last night, though I do remember polishing off a bottle of cabernet at the wine bar with a buddy, before I headed home for dinner. For some reason I think it was lasagna, but I really don’t remember. We as a species have short memories. Our memories are even shorter when it comes to recalling pain. Pain is the memory we most often repress, very logical. The traders, investors and financial spectators of the stock market, the greatest arena since the Roman Coliseum have repressed their fear, they trade with abandon as they rip the futures up 5 handles in the last 5 seconds of a day. They ignore the fact that we have not even tested the breakout “psychological levels” as support.

But I believe the time is upon us. The catalysts are not to be ignored. As I said earlier this correction will be a battle between two strong opposing forces. Leverage vs. Common sense. Fear vs. Greed. And finally a battle between the lessons of history vs. a brave new world where there is a new playbook, and perhaps my copy got lost in the mail.

Negative catalysts continue to be those I mentioned in yesterday’s Market Expectation blog. But let me add a few more. Unexpected developments in Ireland and Portugal. Forex spread gouging by major institutions. Bernanke under further attack over QE2. Our municipal bond infrastructure in jeopardy as the ratings agencies were once again, late to the game. I believe yesterday was the first right-handed body blow to the feverish bulls. Today will be a follow up cross to the left side of the jaw, the type where you hear a slight crunch, and tomorrow will be a right hook that will for the first time in months put raging bull to the mat, even if it is short-lived, at least he will remember that lost feeling of pain and markets will have an opportunity to normalize.

By the way my Aunt Beverly called me again last night, she wanted to know if i thought NFLX was cheap, needless to say i will be shorting NFLX.

Finally Some Economic Data to Stir Things Up

Morning Notes

- Notable weakness across the board this morning
- Shanghai is the exception, which closed up 1.6%
- Meanwhile the Hang Seng closed down 2%
- No single catalyst behind this action in China
- European mkts are down, with tech names leading the way to the downside as CSCO got pummeled after earnings last night
- AKAM also hit after earnings after the close yday
- ECB Monthly Report showed interest rates are appropriate and inflation could rise even further (temporarily, however), and is likely to remain above 2% for most of this yr
- BOE kept interest rates unch’d as well as their asset purchase program
- Gold and crude are lower this morning
- Dollar showing a lift
- Finally getting some economic data today
- Initial Jobless Claims: 383K vs. 410K; prior revised up to 419K from 415K
- Continuing Claims fell to 3.888M from 3.935M
- Other items on calendar:
- Wholesale Inventories at 10a
- 30yr bond auction results out at 1p
- Treasury budget statement out at 2p

Weakness in the Pre, Particularly in Asia

Morning Notes

- Looks like the leaked China CPI number from yesterday was spot on: +4.6%, in line with expectations
- China GDP and Industrial Production beat expectations
- China’s gov’t stressed that inflation would stay high, at least in first half of yr
- Rumors that PBOC may take action before Feb. 3 (Chinese New Year)
- All of the above weighed down Chinese stocks- Shanghai closed down nearly 3%
- Notable weakness across Asia: Hang Seng closed down 1.7% and Nikkei closed down 1.1%
- European markets trading slightly lower as well
- German PPI came in higher than expected, suggesting slight inflation
- Commodities lower in the o/n
- Initial Claims: 404K vs. 420K; prior revised down to 441K
- Continuing Claims: down 3.861M from 3.887M prior
- Remaining on the economic calendar for today: Existing Home Sales at 10a; Philly Fed at 10a
- S&P futures opening on no pivot signal, trades between S3 and R3 pivots

Global News Providing Small Amount of Action This Morning

Morning Notes

- Global markets recap: Asian markets closed up, in a bit of catch up mode following yesterday’s rally in the U.S. market; Nikkei hit a new 8 month high
- In Japan, Machine Orders came in weaker than expected
- S.Korea raised interest rates by 25bps, which was not widely expected
- Bond auctions, ECB rate decision, Trichet press conference will be in focus today in Europe particularly
- In the overnight, Spain came out with decent bond auction results
- FTSE is down small, weakness attributed to some weak earnings from retail names

Trichet Press Conference

- Light volume so far and commodities are quiet as well
- 30 yr bond auction results out at 1p ET today
- Bernanke speech at FDIC forum at 1p as well, not expecting anything new or any reaction in the mkt
- BOE left rates unch’d at 50bps and left its asset repurchase program unch’d as well, expected
- Dollar seeing some pressure this morning again; has been on a three day down streak
- Initial Jobless Claims: 445K vs. 406K; prior revised up to 410K from 409K
- Continuing Claims: 3.879M down from 4.127M
- December Core PPI: +0.2% vs. +0.2%; prior was +0.3%
- December PPI: +1.1% vs. +0.8%; prior was +0.8%
- November Trade Balance: -$38.3B vs. -$41.0B; prior revised up to -$38.4B from -$38.7B
- Futures pulling in following latest batch of economic releases
- Trichet saying he sees evidence of short term upward pressure on inflation but expects them to remain contained, rates remain appropriate
- Also Moody’s comments out last night urging US, UK, France, and Germany to control spending to keep debt loads stable

Light Volumes + No Pivot Signal Generated = Indecision

Morning Notes
- Light volumes in the overnight
- Hang Seng down the most, closed -1.3%, on concerns over monetary policy measures (Shanghai Comp down 50bps)

Indecision in the Market

- China and Hong Kong upgraded (Asian mkts were closed already when the announcement was made)
- German and Eurozone Manufacturing PMI came in better than expected
- UK raised 2011 inflation forecast, as expected
- Commodities have been fairly quiet this morning
- FDX reported an earnings miss this morning, pulling in the futures as well
- S&P futures traded right up against R3 just before FDX earnings
- S&P futures not on a pivot signal this morning, trading between S3/R3
- Initial Jobless Claims: 420K vs. 425K; prior revised up to 423K from 421K
- Continuing Claims: 4.135M from 4.113M
- November Building Permits: 530K vs. 560K; m/m chg: -4.0%
- November Housing Starts: 555K vs. 545K; m/m chg: +3.9%
- Futures not reacting to data releases
- Philly Fed number out at 10a ET

Jobless Claims Picture Appears to be Improving- Futures Push Higher

Morning Notes
- Overseas markets are mostly up this morning save for the Shanghai Comp, which is down about 1.3%
- Weakness in China attributed to rate hike rumors (again) potentially to come this weekend
- China canceled its 3-yr bond auction that was scheduled for today
- In Japan, Q3 GDP was revised; meanwhile,

Jobless Claims Picture Appears to be Improving

there are concerns of contraction for Q4
- Also, machine orders in Japan came in solidly
- ECB monthly bulletin came out, noting new there though
- BOE kept benchmark interest rates unch’d at 0.50%, expected
- Fitch downgraded Ireland
- Euro showing weakness this morning
- Strong jobs data out of Australia (came in more than double the consensus)
- Treasuries recovering a bit today after a few days of weakness
- Wholesale Inventories is the only item left on the economic data calendar today, to be released at 10a ET
- 30-yr bond auction results out at 1p
- S&P futures up small ahead of claims data
- Initial Jobless Claims: 421K vs. 425K, prior revised up to 438K from 436K
- Continuing Claims: 4.086M down from 4.427M
- Futures push higher off claims number
- S&P futures are now up 6 handles from FV, trading on the R4 buy pivot signal

Jobless Claims Fall To Best Levels Since 2008

Initial jobless claims today came in much better than expected. The jobless claims for the week ending November 20, 2010 was 407K vs. 435K expected. This number marks a 34K decrease from the prior week’s revision of 441K. Continuing claims also came in better than expected: 4.182M vs. 4.275M expected. This figure was 142K less than the prior week’s revision of 4.324M.

The 407K number is the lowest level since July 2008. It appears that the noticeable drop was a result of fewer layoffs primarily in the construction industry. California saw the largest decline w/w, down 5,044, and the comments supplied by the state attributed the drop to a shorter workweek and fewer layoffs in the service industry. Two other states that saw a decline of more than 1,000, TX and NJ, also commented that a shorter workweek brought down the number of claims. The seasonally adjusted number should account for the shortened week, however.

Below are charts of the initial jobless claims and continuing claims since January 2005 plotted against the S&P cash index.

There aren’t many in depth analyses on jobless claims data out there, and rightfully so as I don’t believe they should be read into so much. First of all, the weekly claims data are volatile and choppy, as you can tell from the chart above. Also, claims tend to be a lagging indicator so they do not have much predictive value. From a larger perspective though, we are seeing that the trend has been down over the past few weeks. So again, I don’t like to read too much into these numbers as they can swing up or down week to week and also because they lag the wider market.

Bernanke Must Be Feeling Damn Good Right About Now

There you have it.  It looks like Mr. Ben Bernanke achieved the effect he wanted on the equity market after announcing the $600B purchase of longer term treasuries yesterday.  We are officially in a new market, at least for me.  Today the market rallied, really rallied, to two year highs.  The S&P busted through, with hardly any trouble at all, the April highs that so many were eyeing.  We also pierced through the 200 weekly moving average in the S&P.  It seems like just yesterday the entire street was worrying about whether the market would be able to sustain a break above “that red line” that is the 200 day moving average and whether the “third time would be the charm.”  So we without a doubt have been in a market rally since September, but today truly marks the clear start of a powerful market dominated by the bulls.  Today’s action allowed the MACD on the daily S&P chart to move back above the signal line, triggering a buy signal (although I would not give too much credence to this indicator just yet).  In addition to the aforementioned technicals, we are past a couple of daunting economy-impacting events.  Namely, the QE2 and Midterm Election clouds have come and gone.  And now, it feels all we can see is green from here.  But since I always err on the side of caution, I’ll reiterate what I said in a - markets can’t go up forever.  Failing to understand that point is the amateur trader’s mistake.

In any case, it is a new market environment for me.  My first time on a trading desk was April 1, 2010.  I was able to catch the tail end of the rally at that time, but what the hell did I know during my first month on the desk at this firm?  The market we have been seeing lately (I’d call it since late September when we felt more assured that we would not plummet back below the 200 day moving average in the S&P) is a different animal to me.  It’s one in which economic numbers don’t push the market in a certain direction.  In the market that I am used to (that is, the roller coaster ride that commenced in late April and only recently ended), all eyes were on almost every economic data release on the calendar.  A weaker than expected ISM or Durable Goods number could fiercely sell off the market.  Thursday, when Jobless Claims are out, used to be THE day of the week to watch.  But look at the market today- jobless claims came in worse than expected and the prior number was revised up.  The market did not even budge; in fact, it went a little higher after the number.  The market will find any excuse to rally when it wants to, just as it will find any excuse to sell off when it wants to.