Of Margin Calls and Rebel Yells

Daily State of the Markets
Thursday, December 6, 2012

Good Morning. Once again, stocks started off on the right foot (well for the bulls anyway) yesterday morning. The Chinese markets had rebounded strongly on word that the new leadership was talking about goosing the economy a bit and the European bourses were modestly green on the back of a largely better than expected Services PMI report. And just before the opening bell rang at the corner of Broad and Wall, things were looking up.

As usual, the pre-open futures rightly predicted the direction stocks would take at the open of trading on the NYSE. Well, for the first seven minutes anyway. While there was no real news from across the pond, nothing yet out of D.C., and the Dow was enjoying a nice open, suddenly things started to weaken – for no apparent reason.

One of my colleagues pinged me, suggesting that it was Citi’s (C) announcement of more than 11,000 layoffs that triggered the quick retreat. However, as I pointed out, the timing wasn’t right for that. But then a quick scan of my screens gave me a big clue. Although there was nothing weird happening in the dollar, the euro, the banks, or the semis, the lone stock that I keep on my “market” screen was diving – Apple.

I quickly typed “AAPL” into my news provider’s search engine and boom – there it was. COR Clearing had upped the margin requirement for positions in AAPL from 30% to 60%. Amazing as it sounds, COR had decided that suddenly investors who were long the world’s largest company needed to buck up double the amount of capital in order to keep the stock on margin.

When the clearing houses upped the margin requirement on Greek bonds last year, it made sense. And the corresponding increases in just about anything related to the European debt mess weren’t surprising. But a firm doubling the margin requirement on one of the world’s most widely held stocks? Wow.

If you were a hedge fund manager that held AAPL on margin at COR, you got a call yesterday and you had a choice to make. You could either put up more cash or sell off stock in order to meet the new margin requirement. And based on the action in AAPL after the announcement as well as the action in the last hour (when the automatic margin selling would occur) it looks like an awful lot of folks decided to let the margin clerks sell off shares of AAPL in order to meet the new requirement. In addition, anyone on margin at the bigger name firms may have decided to get ahead of the curve and dump shares. Oh, and then there is the simple fact that the chart action in AAPL has been ugly this week – and the algos know what to do with that (“sell, sell, sell”).

So, if you were at all curious yesterday as to why the market opened higher and then quickly moved into the red, you’ve got your answer. It wasn’t the President’s talk in front of the Business Roundtable, or anything new from Speaker Boehner. Nope, it was another strange internal “game” playing out on Wall Street.

However, at about 11:00 am eastern, things started to improve. While AAPL didn’t really participate, suddenly the S&P and DJIA were rocketing higher. Sure enough, this time it was the news relating to the Cliff as House Majority Leader Eric Cantor had announced that the 112th Congress would stick around until a deal to avoid the Cliff was done. And given that the market had spent a fair amount of time this week worrying about the lack of progress in the negotiations, this was a welcome surprise.

Then things really got rockin’ when news hit the wires that a group of 40 “rebel” Republicans had signed a letter supporting consideration of all options in deficit-reduction deal. Frankly, I’m not entirely sure why Billy Idol’s Rebel Yell started streaming across my brain, but as the Dow reached a gain on the day of +150 points, I probably wasn’t the only person long the equity market who was humming the refrain.

So there you have it. Wednesday, December 5, was a tale of margin calls and rebel yells. Here’s hoping that the rebels can surprise us by doing the right thing for the country and getting this deal done sooner rather than later – so that the stock market can get back to focusing on fundamentals instead of being driven by headline-reading algorithms.

Turning to this morning… Although there have been a fair number of headlines from overseas markets (Eurozone GDP, German Factory Orders, BOE and ECB rate decisions) the futures in the U.S. aren’t budging as it appears all eyes remain on Washington and the state of the fiscal cliff negotiations.

On the Economic front… We will get Challenger Job Cuts, Weekly Jobless Claims, and Bloomberg Consumer Comfort this morning (and don’t forget about the Big Kahuna – the Jobs report tomorrow).

Thought for the day… It is the mark of an educated mind to be able to entertain a thought without accepting it. -Aristotle

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

Major Foreign Markets:

• Shanghai: -0.14%
• Hong Kong: -0.09%
• Japan: +0.80%
• France: +0.24%
• Germany: +0.95%
• Italy: -1.01%
• Spain: +0.09%
• London: +0.32%

Crude Oil Futures: -$0.23 to $87.65 !========>!========>