Back on April 5th I debated my Options Action cast mate Mike Khouw when the stock was about $41 as to the merits of the breakout and why the stock should still work given a variation of fundamental and technical factors.

That week I rode Enis’ coattails and bought a June 42/47 Call Spread (read here, closed here as we clearly did not expect the sort of price action to come) to play for further upside.

Again last week on Fast Money responding to a viewers question whether or not to short the stock I had the following to say:

Well here is the deal, the company appears to be hitting on all cylinders, but the stock is practically un-ivestable given the recent run.  Trying to call a top of when this sort of price action will end is a fools errand.  The top 5 holders, including the founder Elon Musk own close to 60% of the shares outstanding, top 10 holders own almost 75% of the shares outstanding, and more than 40% of the total shares are short.

Last night the company priced a 3.39 million share secondary and a convertible note that raised over $1 billion, of which founder Musk purchased himself 1 million shares.

After such a massive run, and the new equity issuance, I would expect the stock to consolidate a bit, but I think the story is far from over.  Despite the fact the future of this company is anything short of cloudy, I would be very surprised given their new found financial footing and the potential for geographic expansion that the story will end anytime soon.  Who knows whether or not $90 will be a good entry point for bulls, but one thing is for sure, the high implied volatility in the stock will offer plenty of trading opportunities for options traders.

MY TRADE: I want to play for near term consolidation, with resistance at that nice round number of $100, and set up to own longer dated calls that will capture the company’s next definable catalyst, Q2 earnings in late July.

TRADE: TSLA ($91.74) Bought June / Sept 100 Call Spread for $5.00

-Sold 1 June 100 call at 5.00

-Bought 1 Sept 100 call for 10.00

Break-Even on June Expiration:  The main goal on June expiration is to have the stock at or near 100 and I will look to sell a higher strike call against the Sept 100 call that I own to play for further upside over the summer.

-If the stock is 100 or below I own the Sept 100 call for 5.00. Above that I will make the difference btwn the option I am short and the one that I am long.  Below 100 I will be out the difference btwn the 2.  But, my max risk is the $5 premium that I paid, see payout diagram below.

Trade Rationale:  Short dated implied vol is through the roof, as the stock has had a massive run in the past month, in a very volatile fashion.  However, after the secondary offering, there is now more potential supply, reducing the likelihood of big rips in the near future, and the secondary signals that there is clear demand from institutions for the stock, so pullbacks are more likely to be bought by those who missed the secondary.  TSLA will remain a more volatile stock than most names, but we are selling June at 71 implied volatility and buying Sept at 61 implied volatility, so plenty of cushion.

Payout Diagram on June expiry:

Approximate Profit or Loss on position if Sept implied volatility remains constant on June21st expiry, Courtesy of Bloomberg

Original Post April 3, 2013:  Chart of the Day – $TSLA Breakout

At first glance I thought the news out of TSLA this morning was a cruel April Fools joke aimed at the 50% short interest in the shares, but the company stated that their Model S sales have exceeded previous expectations, and they actually expect to turn a profit in the first quarter.  The news sent TSLA up more than 20% at one point today, and it’s still up 16% as I write.

I actually had a bullish trade structure on TSLA that I took off last month for a profit when the stock stalled near the $40 resistance level.  My profit was nothing compared to what I would have made if I still held the trade today.  But hindsight is 20/20.  The stock could have been down 20% today and my options would be worthless.

Leaving the past in the past, what’s more important is whether there is a good trade in TSLA going forward.

Here’s the lifetime chart:

Lifetime daily chart of TSLA, Courtesy of Bloomberg

The $40 level (annotated with a red line) was resistance in 2012 and 2013, and it gapped through that resistance level today, on its largest volume since the stock’s IPO (lower panel).  I anticipate that $40 will be important support going forward, as all of those who missed out on buying the breakout will look for an entry in the 40-41 level.  For now, the stock is in unchartered territory, and with on reference points, I have little inclination to initiate a new trade.  But if the stock does offer a pullback opportunity to near breakout support, I’ll be ready to put on another bullish TSLA trade.

It’s a $250 billion market cap company with sales projected to reach more than half a trillion dollars next year, by far the largest single retailer in the world.  But the company known for low prices has a stock price near all-time highs.  What to do with the stock here?  

Here’s a very rudimentary but essential thing to be aware of – in 1999 the S&P finished at 1469, earned 53 bucks per share, and paid out $16 in dividends. These are nominal figures, not adjusted for inflation.

The 2013 S&P 500 is earning double that amount – over $100 per share. The index will also be paying out double the dividend this year, more than $30 per share, and returning even more cash with record-setting share repurchases.

What kind of premium, pray tell, are we paying for double the earnings and twice the dividend yield versus 1999′s market? I’m so glad you asked – turns out we’re not paying any premium at all. We’re paying a discount. 50% off. The current S&P 500 trades for a PE of 14 versus 33 for 1999. So double the fundamentals for half the price.

This to me is one of the obvious reasons that every 1% dip is bought by institutional money managers the world over in 2013.  I am not saying I agree with it, I am just saying that I understand it.

I guess there is one main point I would make about 2013.  The yield on the 10 year treasury is now almost 1/3 of what it was at its height in 1999, which drives the point home of an asset bubble then.  I would agree with Josh, there is no bubble in 1999 terms, and I am no expert on the bond market, but the correlation btwn treasury yield and stock prices as measured by the SPX from 1998 to the start of QE2 in 2010 is uncanny, and then the great disconnect (below).

SPX vs 10yr Treasury Yield from 1998 to present from Bloomberg

Obviously, low rates are a result of a series of factors including, the Fed’s QE, a mostly deflationary cycle rather than inflationary and a massive flight to safety. The bond vigilantes never came. Stocks are making new highs and are bought on every dip.  We are clearly in uncharted territory,  and my take away from Josh’s piece is that those looking to poke holes in the current bull run may need to start looking elsewhere for comparisons.

The real signal that low rates are telling you is that investors expect low returns on future investments.  Or else, companies would be deploying much more cash into investment expenditures, there would be more opportunities for banks to make favorable loans, and there wouldn’t be so much cash parked in interest instruments earning practically nothing.

This is not just a U.S. phenomenon.  The fact that rates around the globe are near zero is a sign that the entire world is looking for ways to employ excess capacity for profitable returns, but with little demand for building out more capacity.  That’s a much, much different environment than we have seen at any point in the past 50 years.

So historical comparisons to 1999 are certainly nonsense.  But the current global environment for asset prices is unprecedented in many ways from times past.  There is a big difference between a “cheap” 15 P/E and a “cheap” 10 P/E (33% difference in fact).  And global rates are sending some distressing signals about what future asset returns may be.  In that sense, it might not be 1999, but it doesn’t feel like the time to throw caution to the wind either.

MorningWord 5/16/13:  Last night CSCO reported their fiscal Q3 results that exceeded street expectations on almost every metric while displaying a level of execution, especially relative to its peers that has not been apparent of late.  In a quarter that has seen fairly dramatic disappointments by telecom equipment vendors like JNPR, FFIV & ARUN, and high profile misses by enterprise tech behemoths like IBM & ORCL, CSCO’s results and guidance stick out like a sore thumb in an IT spending environment that can be described as tepid at best.

We took a close look at CSCO heading into their print (preview here) as I was long an at the money in straddle playing for a large move one way or the other heading into the report**, but given its lack of movement I made the following conclusion:

CSCO’s lack of participation of late would make me a tad worried if I were long the stock here as a I don’t see a heck of a lot of difference btwn INTC and CSCO from a value investor standpoint or for those looking to pick up laggards.  Something has to give here, and frankly I am not exactly sure what that is.

I closed the long straddle yesterday prior to the results (here) as I had no level of conviction that the stock would have an outsized move.

What I find most interesting about CSCO’s 13% pre-market pop this morning is the fact that it was there for the taking, all you had to do yesterday afternoon is do exactly what Fed Chairman Bernanke wanted you to do, reach for yield.  For some reason the investment community left this steady grower, strong yielding, cyclical laggard behind as they rushed into names like IBM, INTC & MSFT since their fairly lackluster Q1 results.  So in this raging bull market, why were investors so leery of  this stock that had been stuck in a 10% range for all of 2013?

For some odd reason, CSCO nearly 3 year perpetual re-structuring has taken its toll on tech investors who are usually fixated on growth.  Hindsight is hindsight, and this morning many analyst will be calling for a “re-rating”of the stock’s multiple as they have been able to manage costs, take market-share and continue to grow, despite what CEO John Chambers cited as expected continued weakness in China and Southern Europe.

CSCO just went on most PMs buy-lists, especially those who have been underweight old tech.  I am not sure jumping right in at  20 months highs on an earnings gap is the appropriate spot, but I would consider taking a shot that ORCL will fill in their earnings gap from March as CSCO’s commentary about enterprise spending should give some comfort.

With a quick look at the 5 yr chart below of CSCO, $22 will clearly become very staunch support and a level that longs will likely hold near and dear to their hearts for quarters to come.

CSCO 5yr chart from Bloomberg

MorningWord 5/15/13:  The SPX is in a raging bull market, up almost 23% from the November lows, and up 30% from the 52 week lows, this is undeniable.  The largest peak to trough draw-down came last Sept to Nov (down almost 9%) when investors became worried about the timing of the Fed’s continuation of QE.  And here we are at the all time highs, with the Fed hinting for the first time at “Tapering” their historic bond buying and the investment would is in UNIVERSAL AGREEMENT that it won’t matter, that we are going higher and it could be a violent melt up, so strap it on.

Looking back at the performance of the SPX since 1990, it is apparent that multi-year bull runs are far more prevalent than protracted bear markets.  What sticks out to me like a sore thumb is the 1995 to 1999 period where the average return over that 5 year period was ~26%.

From the lows in 1990, to the highs in March 2000, the SPX rallied over 400%, despite having our share of crises in the back half of the decade.  Could we be off to the races sure, I guess what I hate the most is the very quickly changing “universally” bullish sentiment.   I am very confident that if we do correct soon and it turns out to be something protracted then we will look back on the following and say; how the hell did we miss these signs of a top??

1. BitCoin Mania

2. Short Squeeze stocks like TSLA, GMCR, FSLR etc.

3. Warren Buffet debating famed short seller Doug Kass at his shareholder meeting

4. The U.S. dollar strength despite the Fed’s printing press (read Enis’ MacroWrap on $ here)

5. Global economic data showing significant weakness on multiple fronts, from manufacturing, to trade, to commodity prices.

Again, I am no economist, and certainly no macro specialist, but it appears that despite some “green shoots” in the U.S. economy the most underlying positive attributes to investing in anything U.S. is the Fed put and the notion that we are the best house on a bad block.  Europe is in a recession and emerging markets show no signs of a re-acceleration of growth for the balance of the year, so at what point does the SPX’s near 16% ytd gains discount a stronger global economy in the 2nd half of 2013??

I have no clue what’s going to happen, I am cognizant of the fact that we could just keep going up. Perhaps data starts to reflect the market rather that the market starting to reflect the data. In the meantime we will do what we do best, analyze individual stories, use our multi-discipline process to find trading opportunities in individual names and use simple option strategies to manage risk of underlying equities/etf, add yield, use for leverage or merely express a directional view with defined risk in individual names.

MorningWord 5/14/13:  In case you missed it yesterday, our very own Macro Editor, Enis Taner was a panelist on a new online show hosted by CNBC and Yahoo Finance called Talking Numbers, which will air every weekday around 3pm at http://finance.yahoo.com/topics/talking-numbers/

Watching Enis dance around the above chart got my a little geeked up to find a real time example of a potential Head and Shoulder formation that we can track over the coming weeks. In my daily charting, FXI (the iShares China etf) stuck out like a sore thumb as a potential candidate.

FXI 1 Year chart from Bloomberg

Chinese markets have been massive underperformers so far in 2013, with the Shanghai Composite actually down 2.3% on the year, and the Hang Seng only up 1.2%.  Commodity price weakness is another sign that Chinese growth is in serious trouble.  Overnight, JPM reduced their economic growth forecasts for China, the latest in a string of analyst downgrades as growth has not materialized as quickly as most expected after the leadership transition this winter.

It’s been funny to watch a global market totally fixated on China from 2003 to 2010 gradually shift to completely ignoring the second biggest economy in the world.  I know, I know, Japan the U.S. are all the rage now.  But the end of the Chinese miracle of economic growth has wider implications than just a head and shoulders pattern on a chart.

MorningWord 5/13/13:   As  a trader, one of the most frequent mistakes that I make on losing trades is not anticipating what the reason will be for a reversal in direction.  Let’s take BBRY for an example, I have not liked this company or their products for 10 years.  Obviously I have been wrong for a good portion of that time, and if I had stayed short during that period’s eye-popping gains, I would not be alive today to write this post.  Back in the middle part of last decade the story was about their first mover advantage and the secular trend  towards smartphones that led to a near monopoly of the space.  The last 5 years the story has been about declining market share and the lack of innovation.  Many market participants, including myself, have written them off for dead (most recent post below), which is evident by the short interest in the stock that sits a few percent from all time highs at ~37% of the BBRY float (per Bloomberg).

While I am not short the stock, I do have a negative bias on their current business and product portfolio and have a slightly short biased range bound calendar structure (below) on. But, this weekend in Barron’s I read something that could cause me to be a tad more open minded.  But first, let’s talk about the set up in the stock and why I am not short.  The company has an ~$8 billion market cap, which is about 40% less than their expected sales in their current fiscal year.  Despite the horrific earnings collapse of the last few years (from over $6 in fiscal 2011 to a loss last year), the company has about 33% of their market cap in cash, with no debt.  In a market where investors are looking to play some catch up, I am surprised that this high short interest name (that also has a heavy concentration of long holders, the 10 hold almost 38% of the float) has not joined the “short squeeze” party with its freaky friends TSLA, GMCR & FSLR, all of which share similar concentrations in holders and high short interest.

Back to the mention in Barron’s this weekend, one of the most interesting comments was the least sexy in a smartphone landscape dominated by retina displays, app stores with gazillions of titles and lightning fast data speeds.  As Barron’s referred to it, they are calling it BBRY’s “Plan B” their push to proliferate their BES “Blackberry Exchange Server” to manage other device platform’s email traffic and security.  Barron’s:

If even a fraction of enterprises take up BES and the NOC, bulls think it could boost the stock. Peter Misek, who follows BlackBerry for Jefferies & Co., and rates its shares Buy, doesn’t expect BlackBerry will win the smartphone wars. But with perhaps 500 million corporate users of email on mobile devices, worldwide, Misek reasons that if just 10% of them were to take up BlackBerry’s offer to use the NOC, and if each one paid $100 per year, the result would be a steady $5 billion in revenue for BlackBerry annually.

Put a 42% operating margin on that, and you could be looking at $2.50 per share in earnings, for a stock worth $30 at a P/E multiple of 12. With a steady $5 billion in security revenue, BlackBerry could be attractive to an acquirer, he thinks. For example, Misek speculates that Microsoft might want to boost its standing in mobile by buying the company.

So the net of it is,while others and I could continue to focus on what most agree on are their weak product portfolio and continued market share declines, if the company is to succeed in the ever increasing commoditized mobile world, it will likely be leveraging its existing strengths rather than trying to pull a PALM by attempting to unseat the champs.

For months now since BBRY established a new range above $10, my take has been that the sum of the parts look very interesting btwn $10-$12, but not so attractive in the high teens, yet the stock has been range bound, and now sits in the middle of the 2013 range.  If I were short this stock I would very much worry about some form of development that has nothing to do with a smartphone that is branded with the BBRY logo and be far more worried about the “bring your own device” trend that could once again make BBRY a household name.

Original Post May 6th, 2013:  New Trade $BBRY – Canadian Bacon

When I think about BBRY, the products, their competition, their management and their challenges to regain a path towards profitability and revenue growth I can’t help but think they will eventually go the way of PALM, MOT, or NOK.  While the old management, which consisted of the company’s founders presided over the rise and fall of a near monopoly, the new management appears to be equally challenged when it comes to anticipating the future of mobile computing when you read recent quotes like this from CEO Thorsten Heins in a Bloomberg interview on April 30th, 2013:

“In five years I don’t think there’ll be a reason to have a tablet anymore,”

Right, this guy is seeing something that AAPL and Samsung are not, both of which are risking cannibalizing a huge chunk of their existing PC and Mobile phones revenue mix to bet on the category.

The stock will obviously have its fits and starts – just ask the shorts who were playing for the equity to trade at cash last year (whoops).

While I do not think the stock is invest-able at current levels given all of the product and competitive uncertainties, I have been on the record and continue to believe that there is a price (probably closer to conservative sum of the parts valuations around $10) that the risk/reward of being long is skewed to the long side.

In preparation for a Bull / Bear Debate tonight on Fast Money on CNBC at 5pm, I thought I would jot down a few notes as I am facing the fearsome Guy Adami (friend of the site):  

1. BB10 phones Z10 and Q10 have met less than stellar customer reviews and higher than expected returns for the Z10.

2. Q10 demand (the qwerty keyboard phones) appear to be better than the touchscreen models which is a surprise, but doesn’t bode well for their ability to compete with new Samsung Galaxy or iOS

3. The real question for the stock is whether the dramatic earnings decline can be halted with increased margins from new phones??  

4. In my opinion stock has serious valuation support on a sum of the parts btwn $10 and $12, but high teens seems a bit stretched.  Main value is the company’s approx 75mil users of which at most 25% are enterprises users where the company charges service fees.  Bring your own device options at large businesses is seriously challenged.

5. Almost a third of the market cap in cash, so if company can stop burning cash and stem customer defections than than they maybe able to remain standalone , if they can continue to compete on the high end.

6.  I think very unlikely the company can succeed against iOS and Android as a standalone given margin pressure and secular changes in enterprise mobility.

1 year BBRY daily chart, Courtesy of Bloomberg

The 50 day ma (pink) flat-lining around 14.50 is indicative of a range-bound name, and there are no major catalysts until the June 28th earnings report.  (AAPL has its WWDC on June 10th, announcing its new OS, but at this point the BBRY story is really dependent on what BBRY does, not the competition.)

This setup lends itself to a similar trade structure to last quarter, where we had success trading a calendar spread heading into the earnings event.  Our thought was that the options that captured the earnings event would remain well bid, while options that expired prior to the event would decay much quicker.  Given the stock’s rally to near 16, no clear catalyst prior to earnings, and a rangebound technical situation, we like a similar trade once again:

TRADE: Bought the BBRY ($15.72) June 22nd / July 14 Put Calendar for $.55

-Sold 1 June 22nd 14 put at $ .65

-Bought 1 July 14 put for $1.20

Break-Even on June Expiration:

-If the stock is above 14.00 the June puts will expire worthless and I will be long the July 14 puts for .55, which catch earnings and at that point I will look to spread.

Payout Diagram:

from TradeMonster

As you can see from the diagram, not much will happen with this position in the near term (thin line) but as we get closer to June expiration any downside movement is profitable as long as it doesn’t go too far through the 14 strike. The short june option will decay at a faster rate than the long july option on a percentage basis with that percentage increasing as expiration approaches.

Trade Rationale:  This trade structure will hold its value quite well as long as BBRY stays within the 12 to 18 range.  The ideal scenario is that the stock leaks down towards $14 over the next 6 weeks, and is around there prior to earnings.  In any case, the structure will gradually appreciate in my favor if the stock stays within a few bucks of the $14 level, and I can re-assess my options prior to earnings.

 

But consumer staples and utilities are another story.  These are defensive sectors where almost all of the stocks look overvalued, on a relative and historical basis.  Here is a very quick run through of current P/E, dividend yield, and projected earnings growth of 10 of the largest names by market cap among these 2 sectors:

1. PG - 20 P/E, 6% EPS growth, 3% dividend
2. KO - 21 P/E, 8% EPS growth, 2.6% dividend
3. PM - 18 P/E, 10% EPS growth, 3.5% dividend
4. WMT - 15.5 P/E, 8% EPS growth, 2.4% dividend
5. PEP - 20 P/E, 8% EPS growth, 2.7% dividend
6. MO - 16 P/E, 8% EPS growth, 4.7% dividend
7. CL –  23 P/E, 8% EPS growth, 2.2% dividend
8. DUK - 17 P/E, 3% EPS growth, 4.3% dividend
9. SO - 17 P/E, 3% EPS growth, 4.4% dividend
10. D - 20 P/E, 8% EPS growth, 3.7% dividend

So for the most part, this is a 20 P/E environment for these stocks, mostly growing EPS 5-10% per year, paying a dividend of 2.5-5%.

The problem is that at 20 P/E, these stocks are starting to become mostly risk, without much reward.  Multiple appreciation has been a general tailwind for these stocks for the past 2 years, and while psychology might get more excited with them for the simple reason that the prices are rising, the fundamental earnings power has not changed much in that period.

Obviously, I’m painting with a very broad bush.  But on a purely quantitative basis, of the stocks above, WMT and MO are the only 2 that are reasonably priced in my view.  The rest are lackluster investments at best, and significantly overpriced at worst.  The utilities are especially poor long-term propositions, given that they rarely grow EPS 10% in any given year, but can see earnings contract in a bad year.  Their 4% dividend is simply not enough compensation for the risk.

I have not tried to short any stocks in either of these sectors at any point this year, and I won’t attempt a short entry here.  While I’m fundamentally bearish on many of them, price action has not shown enough weakness for me to get involved.  However, if sellers do start to take control in the coming months, my radar is on high alert for short opportunities.  The “safety-buying” is close to over in my view.  Long-term investors are unloading these shares in search of better opportunities elsewhere, while performance chasers are left with the fumes.

1. CSCO - May calls dominated volumes, with the weekly 24 strike call the most active single stock option in the market today, average price of $0.15.  CSCO traded at its highest point since 2010.
   
2. YHOO - Very active call volumes.  The Oct 29 and Jan14 30 calls both traded 30k times, both initiated in early March at 0.35 and 0.40 respectively.
3. EMC - Weekly 24 calls traded over 50k as CSCO’s strength led to a bid in the whole enterprise sector.
4. GRPN - Weekly 7 calls traded over 22k at an average price of 0.25, though GRPN still closed below 7 and was unable to fill its August gap at 7.55 for the second straight day.
5. MU - Someone rolled their calls from the Oct 12 line to the Oct 13 line.  16k of the Oct 12 calls traded at 0.88, and 25k of the Oct 13 calls traded at 0.57, likely a premium neutral roll.  MU made a new 2 year high.

Krispy Kreme has risen from the dead in the past year, after being in the doldrums for 4 years after its 2008 crash.  The stock almost tripled from June 2012 to March 2013, but it looks like their strong run is likely over.

First chart is the 1 year daily chart, which shows that KKD broke its steep uptrend last month, and has since broken below its multi-month support level around 13.50.  That bodes poorly for the stock in the short-term:

1 year daily chart of KKD, Courtesy of Bloomberg

In the long-run, major support for the stock is around the $10 level. The 5 year weekly chart shows that  the stock made an important breakout above the $10 level to start 2013.  That is the first area where I might get interested on the long side:

5 year weekly chart of KKD, Courtesy of Bloomberg

But the fundamental outlook for KKD is not exciting overall, as it’s projected to earn 0.60-0.75 by 2014, hardly an exciting proposition for a stock trading around $13 (around a 20 P/E), especially since earnings growth is expected to slow in the next 2 years.  I really would stay away from this name on either side of the ledger.

Implied volatility for most major currency crosses is now above the 52 week average, the first time that has happened in 2013.  The Aussie Dollar saw the biggest jump in implied volatility after its large move lower this week.

Here is this week’s Vol Around the World snapshot, courtesy of Bloomberg:

VCA Snapshot 051613, Courtesy of Bloomberg

The global macro world is starting to see a more volatile backdrop than the first quarter of 2013, but equity-only traders likely have not noticed.  Volatility first showed up in the commodity complex, when precious metals, oil, copper, and grains all made big moves lower in March and April.  It has now started to show up in the currency world as the dollar starts to rally more violently vs. other currencies.  My trade yesterday is betting that it will eventually spread to the equity world as well.

ORCL is interesting to me because it has lagged since disappointing across the board on their fiscal Q4 back in mid March.  While analysts were pointing to continued weak hardware sales in their Sun Microsystems division run by former HPQ CEO Mark Hurd, the company blamed the short fall largely on miss-execution on the sales front letting some large deals push into the current quarter.  Bulls on the stock like to point out that their fiscal Q4 is the period where they try to wrap up as many deals as possible to make the full year look as possible, but in the times where they don’t do so (as happened in March) they usually see a bounce in Q1 and it is a good time to buy.

Much like CSCO heading into last night’s print, ORCL has badly under-performed its large cap tech peers up less than 3.5% on the year.  Today stocks like EMC, IBM,JNPR and CIEN are getting a lift in sympathy with CSCO, yet ORCL is up less than 1.5%.

Despite hating the idea of getting long exposure in any stock with the SPX at all time highs, I like the idea of playing for ORCL to fill in their March earnings gap by the time they are set to report fiscal Q1 in mid to late June (date has not been confirmed yet, IR site) and I like the idea of pairing this against my IBM bearish trade for the time being.  Here is the 1 year daily chart with the gap fill highlighted in green:

1 year daily chart of ORCL, Courtesy of Bloomberg

The ideal entry point for this trade is around the 33-33.50 area, where both the 50 and 200 day moving averages should act as support.  I will likely look to define my risk with a call or call spread as at the money vol in June and July is marginally above the 30 day realized volatility.

MorningWord 5/16/13:  Last night CSCO reported their fiscal Q3 results that exceeded street expectations on almost every metric while displaying a level of execution, especially relative to its peers that has not been apparent of late.  In a quarter that has seen fairly dramatic disappointments by telecom equipment vendors like JNPR, FFIV & ARUN, and high profile misses by enterprise tech behemoths like IBM & ORCL, CSCO’s results and guidance stick out like a sore thumb in an IT spending environment that can be described as tepid at best.

We took a close look at CSCO heading into their print (preview here) as I was long an at the money in straddle playing for a large move one way or the other heading into the report**, but given its lack of movement I made the following conclusion:

CSCO’s lack of participation of late would make me a tad worried if I were long the stock here as a I don’t see a heck of a lot of difference btwn INTC and CSCO from a value investor standpoint or for those looking to pick up laggards.  Something has to give here, and frankly I am not exactly sure what that is.

I closed the long straddle yesterday prior to the results (here) as I had no level of conviction that the stock would have an outsized move.

What I find most interesting about CSCO’s 13% pre-market pop this morning is the fact that it was there for the taking, all you had to do yesterday afternoon is do exactly what Fed Chairman Bernanke wanted you to do, reach for yield.  For some reason the investment community left this steady grower, strong yielding, cyclical laggard behind as they rushed into names like IBM, INTC & MSFT since their fairly lackluster Q1 results.  So in this raging bull market, why were investors so leery of  this stock that had been stuck in a 10% range for all of 2013?

For some odd reason, CSCO nearly 3 year perpetual re-structuring has taken its toll on tech investors who are usually fixated on growth.  Hindsight is hindsight, and this morning many analyst will be calling for a “re-rating”of the stock’s multiple as they have been able to manage costs, take market-share and continue to grow, despite what CEO John Chambers cited as expected continued weakness in China and Southern Europe.

CSCO just went on most PMs buy-lists, especially those who have been underweight old tech.  I am not sure jumping right in at  20 months highs on an earnings gap is the appropriate spot, but I would consider taking a shot that ORCL will fill in their earnings gap from March as CSCO’s commentary about enterprise spending should give some comfort.

With a quick look at the 5 yr chart below of CSCO, $22 will clearly become very staunch support and a level that longs will likely hold near and dear to their hearts for quarters to come.

CSCO 5yr chart from Bloomberg

1.  Rates Have Converged to 0.  Would you rather earn 3-4% with your money in Malaysia, the Philippines, or Thailand, or 2% with your money in the U.S.?  Would you rather earn 1.6% with your money in the Eurozone, or 2% in the U.S.?  Would you rather earn 1% with your money in Japan, or 2% in the U.S.?All of a sudden, the U.S. dollar is not looking too shabby.
2. The Federal Reserve’s next step is more likely to be taking the foot off the gas rather than pushing further down on the pedal.   But most importantly, the U.S. dollar has been able to rally this year even with the Fed in full QE mode.  In my mind, any hints at reducing QE by the Fed would just add rocket boosters to a trend that is already in force
3. Outperformance of U.S. assets.   In the past couple years, we have seen the pendulum swing back towards the developed world, as emerging market stocks and commodities have underperformed as investments.  That has significantly reduced the appeal of emerging market assets, and is leading to a shift back into growth investments in the U.S. (which is still the envy of the developed world in terms of financial market depth and performance).

In that context, the Canadian dollar has actually held up quite well relative to other developed market currencies this year, primarily because of its ties to the stronger U.S. economy.  However, Canada is still quite exposed to the energy and mining sectors, and it also has a potential housing slowdown on its hands to boot.

On a technical basis, the USD/CAD cross has been much ado about nothing for 3 years now.  But it has built a very long-term base, and it looks like it might be on the cusp of an important breakout.  Here is the 5 year weekly chart:

5 year weekly chart of USD/CAD, Courtesy of Bloomberg

It has formed a wedge over the past 2 years, with lower highs and higher lows.  But it is trading above its 200 week moving average (black line) for the first time in that period.  The break lower in the Aussie dollar this week could portend an imminent break lower in the Canadian dollar as well (which would mean a break up in the USD/CAD cross above).  Both are commodity currencies that have enjoyed safe haven status for several years now, but with overheated housing markets and much lower rate differentials than in the past.

So what’s the structure?  

We took a close look at CSCO heading into their print (preview here) as I was long an at the money in straddle playing for a large move one way or the other heading into the report**, but given its lack of movement I made the following conclusion:

CSCO’s lack of participation of late would make me a tad worried if I were long the stock here as a I don’t see a heck of a lot of difference btwn INTC and CSCO from a value investor standpoint or for those looking to pick up laggards.  Something has to give here, and frankly I am not exactly sure what that is.

I closed the long straddle yesterday prior to the results (here) as I had no level of conviction that the stock would have an outsized move.

What I find most interesting about CSCO’s 13% pre-market pop this morning is the fact that it was there for the taking, all you had to do yesterday afternoon is do exactly what Fed Chairman Bernanke wanted you to do, reach for yield.  For some reason the investment community left this steady grower, strong yielding, cyclical laggard behind as they rushed into names like IBM, INTC & MSFT since their fairly lackluster Q1 results.  So in this raging bull market, why were investors so leery of  this stock that had been stuck in a 10% range for all of 2013?

For some odd reason, CSCO nearly 3 year perpetual re-structuring has taken its toll on tech investors who are usually fixated on growth.  Hindsight is hindsight, and this morning many analyst will be calling for a “re-rating”of the stock’s multiple as they have been able to manage costs, take market-share and continue to grow, despite what CEO John Chambers cited as expected continued weakness in China and Southern Europe.

CSCO just went on most PMs buy-lists, especially those who have been underweight old tech.  I am not sure jumping right in at  20 months highs on an earnings gap is the appropriate spot, but I would consider taking a shot that ORCL will fill in their earnings gap from March as CSCO’s commentary about enterprise spending should give some comfort.

With a quick look at the 5 yr chart below of CSCO, $22 will clearly become very staunch support and a level that longs will likely hold near and dear to their hearts for quarters to come.

CSCO 5yr chart from Bloomberg

MorningWord 5/15/13:  The SPX is in a raging bull market, up almost 23% from the November lows, and up 30% from the 52 week lows, this is undeniable.  The largest peak to trough draw-down came last Sept to Nov (down almost 9%) when investors became worried about the timing of the Fed’s continuation of QE.  And here we are at the all time highs, with the Fed hinting for the first time at “Tapering” their historic bond buying and the investment would is in UNIVERSAL AGREEMENT that it won’t matter, that we are going higher and it could be a violent melt up, so strap it on.

Looking back at the performance of the SPX since 1990, it is apparent that multi-year bull runs are far more prevalent than protracted bear markets.  What sticks out to me like a sore thumb is the 1995 to 1999 period where the average return over that 5 year period was ~26%.

From the lows in 1990, to the highs in March 2000, the SPX rallied over 400%, despite having our share of crises in the back half of the decade.  Could we be off to the races sure, I guess what I hate the most is the very quickly changing “universally” bullish sentiment.   I am very confident that if we do correct soon and it turns out to be something protracted then we will look back on the following and say; how the hell did we miss these signs of a top??

1. BitCoin Mania

2. Short Squeeze stocks like TSLA, GMCR, FSLR etc.

3. Warren Buffet debating famed short seller Doug Kass at his shareholder meeting

4. The U.S. dollar strength despite the Fed’s printing press (read Enis’ MacroWrap on $ here)

5. Global economic data showing significant weakness on multiple fronts, from manufacturing, to trade, to commodity prices.

Again, I am no economist, and certainly no macro specialist, but it appears that despite some “green shoots” in the U.S. economy the most underlying positive attributes to investing in anything U.S. is the Fed put and the notion that we are the best house on a bad block.  Europe is in a recession and emerging markets show no signs of a re-acceleration of growth for the balance of the year, so at what point does the SPX’s near 16% ytd gains discount a stronger global economy in the 2nd half of 2013??

I have no clue what’s going to happen, I am cognizant of the fact that we could just keep going up. Perhaps data starts to reflect the market rather that the market starting to reflect the data. In the meantime we will do what we do best, analyze individual stories, use our multi-discipline process to find trading opportunities in individual names and use simple option strategies to manage risk of underlying equities/etf, add yield, use for leverage or merely express a directional view with defined risk in individual names.

MorningWord 5/14/13:  In case you missed it yesterday, our very own Macro Editor, Enis Taner was a panelist on a new online show hosted by CNBC and Yahoo Finance called Talking Numbers, which will air every weekday around 3pm at http://finance.yahoo.com/topics/talking-numbers/

Watching Enis dance around the above chart got my a little geeked up to find a real time example of a potential Head and Shoulder formation that we can track over the coming weeks. In my daily charting, FXI (the iShares China etf) stuck out like a sore thumb as a potential candidate.

FXI 1 Year chart from Bloomberg

Chinese markets have been massive underperformers so far in 2013, with the Shanghai Composite actually down 2.3% on the year, and the Hang Seng only up 1.2%.  Commodity price weakness is another sign that Chinese growth is in serious trouble.  Overnight, JPM reduced their economic growth forecasts for China, the latest in a string of analyst downgrades as growth has not materialized as quickly as most expected after the leadership transition this winter.

It’s been funny to watch a global market totally fixated on China from 2003 to 2010 gradually shift to completely ignoring the second biggest economy in the world.  I know, I know, Japan the U.S. are all the rage now.  But the end of the Chinese miracle of economic growth has wider implications than just a head and shoulders pattern on a chart.

MorningWord 5/13/13:   As  a trader, one of the most frequent mistakes that I make on losing trades is not anticipating what the reason will be for a reversal in direction.  Let’s take BBRY for an example, I have not liked this company or their products for 10 years.  Obviously I have been wrong for a good portion of that time, and if I had stayed short during that period’s eye-popping gains, I would not be alive today to write this post.  Back in the middle part of last decade the story was about their first mover advantage and the secular trend  towards smartphones that led to a near monopoly of the space.  The last 5 years the story has been about declining market share and the lack of innovation.  Many market participants, including myself, have written them off for dead (most recent post below), which is evident by the short interest in the stock that sits a few percent from all time highs at ~37% of the BBRY float (per Bloomberg).

While I am not short the stock, I do have a negative bias on their current business and product portfolio and have a slightly short biased range bound calendar structure (below) on. But, this weekend in Barron’s I read something that could cause me to be a tad more open minded.  But first, let’s talk about the set up in the stock and why I am not short.  The company has an ~$8 billion market cap, which is about 40% less than their expected sales in their current fiscal year.  Despite the horrific earnings collapse of the last few years (from over $6 in fiscal 2011 to a loss last year), the company has about 33% of their market cap in cash, with no debt.  In a market where investors are looking to play some catch up, I am surprised that this high short interest name (that also has a heavy concentration of long holders, the 10 hold almost 38% of the float) has not joined the “short squeeze” party with its freaky friends TSLA, GMCR & FSLR, all of which share similar concentrations in holders and high short interest.

Back to the mention in Barron’s this weekend, one of the most interesting comments was the least sexy in a smartphone landscape dominated by retina displays, app stores with gazillions of titles and lightning fast data speeds.  As Barron’s referred to it, they are calling it BBRY’s “Plan B” their push to proliferate their BES “Blackberry Exchange Server” to manage other device platform’s email traffic and security.  Barron’s:

If even a fraction of enterprises take up BES and the NOC, bulls think it could boost the stock. Peter Misek, who follows BlackBerry for Jefferies & Co., and rates its shares Buy, doesn’t expect BlackBerry will win the smartphone wars. But with perhaps 500 million corporate users of email on mobile devices, worldwide, Misek reasons that if just 10% of them were to take up BlackBerry’s offer to use the NOC, and if each one paid $100 per year, the result would be a steady $5 billion in revenue for BlackBerry annually.

Put a 42% operating margin on that, and you could be looking at $2.50 per share in earnings, for a stock worth $30 at a P/E multiple of 12. With a steady $5 billion in security revenue, BlackBerry could be attractive to an acquirer, he thinks. For example, Misek speculates that Microsoft might want to boost its standing in mobile by buying the company.

So the net of it is,while others and I could continue to focus on what most agree on are their weak product portfolio and continued market share declines, if the company is to succeed in the ever increasing commoditized mobile world, it will likely be leveraging its existing strengths rather than trying to pull a PALM by attempting to unseat the champs.

For months now since BBRY established a new range above $10, my take has been that the sum of the parts look very interesting btwn $10-$12, but not so attractive in the high teens, yet the stock has been range bound, and now sits in the middle of the 2013 range.  If I were short this stock I would very much worry about some form of development that has nothing to do with a smartphone that is branded with the BBRY logo and be far more worried about the “bring your own device” trend that could once again make BBRY a household name.

Original Post May 6th, 2013:  New Trade $BBRY – Canadian Bacon

When I think about BBRY, the products, their competition, their management and their challenges to regain a path towards profitability and revenue growth I can’t help but think they will eventually go the way of PALM, MOT, or NOK.  While the old management, which consisted of the company’s founders presided over the rise and fall of a near monopoly, the new management appears to be equally challenged when it comes to anticipating the future of mobile computing when you read recent quotes like this from CEO Thorsten Heins in a Bloomberg interview on April 30th, 2013:

“In five years I don’t think there’ll be a reason to have a tablet anymore,”

Right, this guy is seeing something that AAPL and Samsung are not, both of which are risking cannibalizing a huge chunk of their existing PC and Mobile phones revenue mix to bet on the category.

The stock will obviously have its fits and starts – just ask the shorts who were playing for the equity to trade at cash last year (whoops).

While I do not think the stock is invest-able at current levels given all of the product and competitive uncertainties, I have been on the record and continue to believe that there is a price (probably closer to conservative sum of the parts valuations around $10) that the risk/reward of being long is skewed to the long side.

In preparation for a Bull / Bear Debate tonight on Fast Money on CNBC at 5pm, I thought I would jot down a few notes as I am facing the fearsome Guy Adami (friend of the site):  

1. BB10 phones Z10 and Q10 have met less than stellar customer reviews and higher than expected returns for the Z10.

2. Q10 demand (the qwerty keyboard phones) appear to be better than the touchscreen models which is a surprise, but doesn’t bode well for their ability to compete with new Samsung Galaxy or iOS

3. The real question for the stock is whether the dramatic earnings decline can be halted with increased margins from new phones??  

4. In my opinion stock has serious valuation support on a sum of the parts btwn $10 and $12, but high teens seems a bit stretched.  Main value is the company’s approx 75mil users of which at most 25% are enterprises users where the company charges service fees.  Bring your own device options at large businesses is seriously challenged.

5. Almost a third of the market cap in cash, so if company can stop burning cash and stem customer defections than than they maybe able to remain standalone , if they can continue to compete on the high end.

6.  I think very unlikely the company can succeed against iOS and Android as a standalone given margin pressure and secular changes in enterprise mobility.

1 year BBRY daily chart, Courtesy of Bloomberg

The 50 day ma (pink) flat-lining around 14.50 is indicative of a range-bound name, and there are no major catalysts until the June 28th earnings report.  (AAPL has its WWDC on June 10th, announcing its new OS, but at this point the BBRY story is really dependent on what BBRY does, not the competition.)

This setup lends itself to a similar trade structure to last quarter, where we had success trading a calendar spread heading into the earnings event.  Our thought was that the options that captured the earnings event would remain well bid, while options that expired prior to the event would decay much quicker.  Given the stock’s rally to near 16, no clear catalyst prior to earnings, and a rangebound technical situation, we like a similar trade once again:

TRADE: Bought the BBRY ($15.72) June 22nd / July 14 Put Calendar for $.55

-Sold 1 June 22nd 14 put at $ .65

-Bought 1 July 14 put for $1.20

Break-Even on June Expiration:

-If the stock is above 14.00 the June puts will expire worthless and I will be long the July 14 puts for .55, which catch earnings and at that point I will look to spread.

Payout Diagram:

from TradeMonster

As you can see from the diagram, not much will happen with this position in the near term (thin line) but as we get closer to June expiration any downside movement is profitable as long as it doesn’t go too far through the 14 strike. The short june option will decay at a faster rate than the long july option on a percentage basis with that percentage increasing as expiration approaches.

Trade Rationale:  This trade structure will hold its value quite well as long as BBRY stays within the 12 to 18 range.  The ideal scenario is that the stock leaks down towards $14 over the next 6 weeks, and is around there prior to earnings.  In any case, the structure will gradually appreciate in my favor if the stock stays within a few bucks of the $14 level, and I can re-assess my options prior to earnings.