Sunday, December 14, 2014

Crude Oil - WTI @ $56.50 .... WTF Already ?

It's been awhile, time for a blog post !


Oil's parabolic collapse continues.  While many are negative on crude, particularly in light of the OPEC / Saudi mantra of "we won't cut production" no matter how low oil goes, to me, the drop seems to be vastly overdone ....

While the negative headlines continue to dominate, and high yield spreads widen to dangerous levels (despite almost all E&P companies having no debt or covenant issues at this time, and debt maturities out to 2018 or later), it seems to me the "glut" narrative is more than a bit disingenous.

Yes, there is oversupply in the market, yet worldwide demand is growing and expected to continue growing, and the crash in crude oil pricing is already resulting in supply responses.

Here are a few tidbits that support the idea that perhaps this crude oil crash has gone too far:

- U.S.  E&P companies have been quick and proactive in announcing production budget cuts for 2015, and lowering supply growth expectations from U.S. shale, which will slow down materially.  Spending on drilling in the Eagle Ford, Permian, Bakken, etc.  will decline by 10s of Billions of $, if not more.

- Libyan oil has just gone largely offline due to the ongoing turmoil in that country; force majeure declared at its 2 main ports

http://www.bloomberg.com/news/2014-12-14/libya-imposes-force-majeure-on-2-oil-ports-after-clashes.html

-  Nigerian oil workers are set to strike tomorrow (Monday 12/15) for an indefinite time.

http://www.presstv.ir/detail/2014/12/14/390250/nigerian-oil-workers-to-stage-strike/


It seems to me, that the above could have the effect of rather quickly addressing (at least in part)  the modest oversupply concerns that the headlines harp on every day.  To put it another way, while OPEC ministers (primarily Saudi, Kuwaiti and UAE keep saying "we won't cut"), the supply response in the US, plus sudden "outages" in the Mid East amount to production cuts.  And as far as Mid East outages go, these could turn out to be their way of cutting, without actually saying that they are cutting.  Whether we will start to see a slew of outages is clearly  speculation on my part at this juncture, it is something to keep an eye on.


A couple of other interesting reads that counter the "crude oil is permanently impaired" hysteria can be found here:

http://www.salientpartners.com/epsilontheory/post/2014/12/11/Narrative-Uber-Alles

http://dailyreckoning.com/six-months-now-rolling-money-oil-gains/


Finally, U.S. Oil Production growth thanks to shale oil and other unconventional resources has made the US a top worldwide producer and on the way to energy independence.  American ingenuity in this area has created the best high paying job growth seen in this 5 year "recovery".  We should not be celebrating an oil crash that puts all of that in serious jeopardy.  While consumers will benefit from lower prices at the pump, serious damage will accrue not just to the Energy Sector, but also to the entire economy and banking sectors if this episode devolves into a bust.   That should not be allowed to happen.









Wednesday, January 30, 2013

AMAZON @ $275 -- Someday Never Comes

Like most consumers, I like Amazon.com as a customer.  Unlike many however, its a like, not a love.  I can live with it, or without it.

For too many investors and traders, they love Amazon (AMZN) as a ticker that defies gravity.  To them, and the crooked disingenuous sell-side analysts that relentlessly pump up this stock, Jeff Bezos is a genius, with a master plan for profits "someday" in the distant future that never seem to materialize.

Never mind the fact the Bezos is pretty much a no-show as a CEO these days.  He makes limited public appearances, is typically not involved in earnings conference calls, and seems focused on personal venture capital investments and space ventures.

Is Amazon disruptive to other businesses?  Yes it is.  However, Amazon faces fierce competition on every front, from multiple competitors who are not going away and have learned how to better compete.  Wal-Mart, Target, Apple, Google, Oracle, SaleForce, NetFlix,  Best Buy, Barnes & Noble, Drugstores, Groceries, on and on an on.  To believe that companies and sectors will simply cede the field to Amazon is beyond lunacy.

As state sales tax exemptions for internet companies disappears, Amazon will also lose an important pricing advantage.  Its margins, even if they improve somewhat over time (not a given) will likely remain unimpressive as they compete in many low margin, commodity businesses.

I am not going to rehash Amazon's poor financial performance in detail here, that information is available all over the financial internet.  However, I do note a few of the many very salient observations below:

First Adopter @FirstAdopter points out via Twitter:

1 yr ago when  was $100 lower street est. for Q4-12 +39% y/y sales growth, GAAP EPS 85c, Non-GAAP EPS $1.23. AMZN reported +22%/21c/46c


Josh Brown (The Reformed Broker) has a piece here:

http://www.thereformedbroker.com/2013/01/30/amazon-com-defying-logic-and-physics-since-1997/


Zero Hedge chimes in with:


Amazon Misses, Growth Slows, Guides Lower, P/E Goes Negative And Stock Soars

The most cartoonish stock of all time just came out with results that can only be characterized as WTF. To wit:
  • Q4 revenue of $21.27 billion missed expectations of $22.23 billion
  • Q1 EPS of $0.21 missed expectations of $0.27;
  • The firm guided top-line lower, seeing Q1 sales of $15-$16 billion, below the estimate of $16.5 billion
  • The firm guided operating income much lower, seeing Q1 op income of ($285)-$65 Million on expectations of $261.4 MM
  • The firm said the its physical books sales had the lowest growth in 17 years
  • Total employees grew by 7,000 in the quarter and 32,200 Y/Y to a record 88,400
  • Worldwide net sales Y/Y growth was the slowest in years at 23%, down from 30% in Q3 and 34% a year ago
  • And, last and certainly least, LTM Net Income is now officially negative, or ($49) meaning as of this moment the firm with the idiotically high PE has an even more idiotic N/M PE.



I see absolutely no reason for AMZN to trade at such ridiculously lofty levels, reflecting a valuation that it almost certainly will never grow in to.  Wall Street is supposed to be a fair and efficient market.  It isn't.  Yes, those in the know can make money participating in the silly momentum games with the stock.

Ultimately, however, the rug gets pulled, and real people lose real money.  Lots of money.  Think of all the mom and pops that own Amazon directly, or indirectly in mutual funds, ETFs and 401ks.  They are being relentlessly and cynically sold on the idea by almost every Wall Street firm that Amazon's tree will grow to the sky.

With that said, here is what could happen to Amazon, sooner than most people think:

1.  The market may finally give Amazon a long overdue valuation adjustment.

2.  It very well could experience a stock price adjustment equal to, or greater than the one Apple experienced - at least a 38% decline from its all time highs.  That would take Amazon's stock price down to $175, perhaps much lower.  Even $175 would be a level that would still be difficult to justify from a valuation standpoint.

3.  Hedge funds and other sophisticated investors will participate in this trade by going LONG Apple, and SHORT Amazon as a pairs trade.  Not only are ALL of Apple's financial metrics vastly superior to Amazon (earnings, cash flow, balance sheet, etc.), but Apple has just experienced a vicious valuation adjustment.  Perhaps Amazon will be next.


Meanwhile, until Someday happens, enjoy the music, courtesy of Credence Clearwater Revival:

Sunday, January 6, 2013


MANIC MARKET MUSING #1 for 2013 - HERBALIFE


PERSHING SQUARE / HERBALIFE SMACKDOWN CREATES EXTREME STOCK PRICE VOLATILITY – AND TRADING OPPORTUNITIES

ANATOMY OF A RISK-REVERSAL OPTIONS TRADE IN HERBALIFE (HLF)

Bill Ackman’s very public assault on Herbalife (HLF) caused a panic selloff, resulting in an almost 50% drop in HLF’s stock price over the course of just a few days.  In addition to the massive apparent gains for short sellers like Ackman (and possibly David Einhorn) and massive losses and panic for HLF longs, many traders, myself included, sensed a new potential trading opportunity.

Regardless of what you think of Ackman’s “its going to zero” presentation and declaration, there are short and long opportunities in HLF that can, did and will present themselves over the days, weeks, and likely month to come.

I had never traded HLF before and knew little about the company.  Thanks to Ackman, the media, and other traders & investors, some of whom I interact with regularly , I know quite a bit more today – but not enough to know what will happen from current price levels (HLF was around $28.25 as I began to write this, it closed at $37 on Jan. 4).



saupload_130103_HLF.png





My initial assessment of the HLF situation was that the magnitude of the HLF sell off, exacerbated by year-end tax issues, was likely overdone, Ackman may or may not have been covering, the Company is highly likely to aggressively fight back (assuming it can fight back - we shall see on Jan. 10), a reversal and/or short squeeze is reasonably likely sometime after year-end (check).  These factors suggested to me that Herbalife presented a potentially potent swing long opportunity. 

As a result, I decided to establish a long biased position, through options, that would not tie up much of my trading capital and limit my risk.  I started doing this at around $25 / share last week.  If I do this right, and the market and the stock cooperates, I could very quickly create a “free” and ultimately very profitable options trade without taking on too much risk.

Since getting involved, the saga has only gotten more interesting and dynamic.  Bill Ackman has his $1B short, or so he says (did he cover any ? we do not know.).  Whitney Tilson announced at the bottom “me too”, that he was short (many snarks took that as a sign of the bottom being in).  On the long side, Robert Chapman of Chapman Capital weighed in with a claim of putting 35% of his fund long HLF in the $20’s, and John Hempton of Bronte Capital publicly trashed Ackman with a blog post and TV appearance on Ackman’s “truly awful short thesis”  (see http://brontecapital.blogspot.com/2013/01/ackmans-herbalife-thesis-someone-from.html )

Here is where this particular trade stands today in one of my trading accounts – hopefully  you can follow along:

December 24
Buy 5 May1913        $30 call           $4.79   debit              ( $ 2,395.14)
Sell 5 Dec28               $30 call           $0.59   credit                $    294.85
Sell  4 Dec28              $27.50 put     $3.10  credit                 $ 1,239.86  

December 26
Sell  5 Jan1913          $15 put           $0.60  credit                  $  299.85
Sell 2  Jan1913          $32.50 call     $1.95  credit                  $  389.94

December 27
Sell 3  Jan1913          $30 call           $2.45   credit                 $  734.90
Buy 5 Dec28               $30 call           $0.15   debit                 $    (75.14 )

December 28
Sell  3 Jan1913          $22.50 put     $0.70  credit                 $   209.91

December 31
Sell  5 Jan1913          $47.50 call     $0.10  credit                 $     49.85

NET CASH PROCEEDS (COST) =  $ 748.88

My Current Position as of January 4, 2013
Long 5 May 30 calls
Short 2 Jan 32.50 calls
Short 3 Jan 30 calls
Short 5 Jan 15 puts
Short 3 Jan 22.50 puts
Short 5 Jan 47.50 calls

LONG OPPORTUNITY: 

I CAN KEEP WRITING / ROLLING FULLY HEDGED SHORT CALLS THROUGH MAY EXPIRATION - TAKING IN ADDITIONAL PREMIUMS (CASH) AT EACH STEP ALONG THE WAY.  The amount of proceeds that can be generated will vary depending on where HLF trades at the time I decide to roll.

RISKS:

If Hebralife trades to new lows from here between now and January monthly expiration (below $22.50), I may have to buy up to $14,250 in HLF shares that could have a value less than that amount (300 shares @  $22.50, and 500 shares at $15).  However, that seems unlikely now, and there are numerous ways for me to protect against that risk (hedge, buy back the puts, roll them out and/or lower for credits for example); and depending on the price performance of HLF, I can roll put options again and again for additional premiums, or simply let these short put positions expire, and the downside risk will expire with them.  My risk / reward posture to the downside is contained and for me represents an acceptable level of risk -  given my current assessment of the ongoing saga.

I also have some risk if HLF trades above $47.60 by January 19 options expiration (I view this as unlikely).   Above 47.60, I start to give back profits and around $50 per share I could lose money – if I take no other actions.   I have strategies at the ready in the event these levels come into play.


Please note the following:

     1. This trade is a work in progress.  I will likely continue to stay in this trade, with additional option purchases, sales and adjustments for months to come.  At the moment, my trade is “free” (it has actually paid me net cash) although I do have some risk to the downside if HLF were to fall to new lows. I also have some risk to the upside in the event of an extreme and fast, and there are margin requirements on my short put positions.

       2.  There are risks that I took, especially initially, are ones that I am comfortable with within the context of my trading strategies.  Some of these are not for everyone, namely the sale of naked puts at certain price levels to bring in additional cash to help pay for the initial long trade.  Only sophisticated traders with large enough accounts and margin capacity that understand fully the risks involved should consider this type of put sale.  I could reduce the risk by adding spread protection, and still might do so, but I do not at this juncture see the need to do so.
  
       3. In particular, the short put trade at the $27.50 weekly strike for a $3.20 per contract credit.  This created a risk to me of getting long HLF at a net cost of $24.40, which I decided at the time was a reasonable risk to take.  If HLF kept (or keeps) falling, my perspective on risk may change.  This trade, however, turned out to be a 100% winner, as the puts expired worthless on Dec. 28.  This was key to my trade as it provided the backdrop for a “free” long trade and further gains.

    4.  Because of my unfamiliarity with Herbalife, I determined to keep the size of this trade small, at least initially.   If Herbalife was a “go to” name for me, I might have gotten involved in a larger way.  In hindsight, given the 50% + up move in the stock, a more aggressive long posture would have been warranted, and would have been highly profitable.  In this case, I decided to play small due to my being new to the name, which was also a measure of risk control.   

      5. I expect that when this trade is over, that my profit could easily be in the $3,000-5000 range (remember, I have 4 months of additional fully hedged option sales ahead of me).  Overall this is a very small trade for me, but is one I make to a) be involved in a high profile, dynamic situation with minimal risk, and b) to further test and hone my options strategies for these type of situations and hopefully profit nicely while doing so.  


          
          Comments are welcome -- @CapCube












     Disclaimer:  This post is for educational purposes only and is not to be construed as trading advice.  The author currently has trading positions in HLF as described above and other positions that are not the subject of this blog post.  Any and all positions are subject to change at any time and will not likely be the subject of public discussion.



























Saturday, January 5, 2013

HELLO 2013 ! (and whatever happened to 2012 ?)

I only just now realized that I have not posted ANYTHING here during 2012.   It's like the year never happened !

Well, 2012 did happen, and it was just fine.  I won't bore you with a recap.

I'll just move right on into 2013.  I even have a blog post to kick off the year, coming soon.

I think that I will also have to update the blogroll - suggestions welcome.

Let's have a great year !

Saturday, December 31, 2011

Goodbye 2011 - A Wild & Crazy Year

Oh, and a nicely profitable year as well !

Here is what I will remember about 2011

S$P 500 closes at 1257.60 --- 0.0% flat (actually down by 0.04 points, or 0.0032%, while trading in a wild & wide range of 1074 - 1370)

My trading accounts did substantially better ... if I posted the number, you probably would not believe me (hint: think John Paulson in reverse ...).

Despite my good fortune in the markets, I still made too many mistakes, some very costly.
This needs to improve.

Important events of 2011 included:

- Osama bin Laden killed by US Special Forces ... putting in a market top.
- QE 2 ending, taking away the crack cocaine that drove the market relentlessly higher since Sept. 2010 thru the bin Laden top & until it ended in June 2011.
- The ongoing Democrat/Republican/Obama skirmishes regarding out of control government spending & debt, culminating in the debt ceiling summer drama, which led to ...
- S&P downgrading the United States Credit rating in August, which precipitated ...
- A massive stock market correction in August & September and market volatility through year end, which was exacerbated by ...
- Europe ... which, as hard as it is to believe, is actually worse off than we are, with all sorts of sovereign and bank problems, a troubled currency union, a recession, austerity, etc. etc.

Which takes us to 2012, a presidential election year (and also the year that the Mayan calendar apparently ends, along with the world according to some).

What will be in 2012 ? Nobody knows, but it is likely that the European drama will continue to play out, there will be more sovereign debt rating excitement and market volatility.

In the U.S., the political gridlock will only intensify as the election cycle kicks in to high gear.

We should also keep an eye on the BRIC countries, as India is slowing, China is probably slowing, Brazil too. And Russia is a mess. Finally, will the US stabilize and grow, or will we slip back into recession.

My goal is to remain extremely flexible regarding my overall approach to markets and market conditions, and continue to try to be well hedged, while focusing on short and medium term profit opportunities.

If you care to learn more about my 2011 trading performance and the strategies that helped achieve them, feel free to get in touch.

Finally, here is what I will remember most about 2011:

My Green Bay Packers winning Super Bowl XLV !

Followed by a 14-1 start heading into 2012, the final week and the playoffs, and hopefully back-to-back titles !

Happy New Year & Good Luck in 2012.


Monday, December 12, 2011

A Broken System ?

Although I trade the markets every day, I can not escape the feeling that our financial system is fundamentally damaged, if not broken, due to an accumulation of factors.

Simply put, our markets, despite Dow 12,000 or S&P 1,235 are very unhealthy.

The markets are sick, just like our political system is. The President is MIA on a golf course somewhere or campaigning (maybe its better with him out of the way) and Congress only makes things worse by whatever it is that they do (think Dodd Frank) and that they don't do (think MF Global and Congressional Insider Trading).

Rather than go chapter & verse, here are a few well thought out summaries:

Peter L. Brandt on MF Global & Congress:



How You Can Get Involved to Stop Insider Trading by Congress


ETF Digest: Slow Motion Crash Developing http://www.etfdigest.com/index.php


FLECK: “Corzine appears to have been able to have lobbied the regulators to get away with what appears to be some sort of an in house repo. That looks like it might have been what happened to customer funds. I should say we don’t really know what they did exactly and we don’t know how much has been lost.


But I think they have certainly undermined confidence as it pertains to people feeling like brokerage firms are creditworthy. Now there is all of this angst over hypothecation, rehypothecation. I don’t know that it will change the credibility of the stock market, that’s been a slow leaking boat for some time, but I think they are going to have to pass some laws about what these financial entities can do.


Congress is completely incompetent. What needs to happen is financial institutions, whether they are banks or brokerage firms or whatever, they need to make the directors and officers personally responsible for losses. Directors in Switzerland face that, they now face it in Brazil and it used to be that way in our country.


If these financial institutions, if the directors and officers faced personal losses, do you think anyone would have been leveraged up 40 to 1 in the last go around? You think any of this crap could happen? There’s not a chance. Congress is so stupid, they pass Sarbanes-Oxley, did that prevent anything in the last real estate bubble, any of these financial entities from blowing up? No.


Now they’ve passed this Dodd-Frank Bill. It’s just garbage. There are so many intelligent solutions to a lot of our problems and yet all they do is make the situation worse. It’s pathetic.


I’ve been rather vocal, as have others, about how useless financial statements are for financial entities for over a decade and nothing ever changes.”

Monday, December 5, 2011

The Bernanke Song: Don't Stop Me Now

(apologies to Freddie Mercury & Queen)

The Helicopter Ben Song

Tonight I'm gonna have myself a real good time

I feel alive and the world it's blowing up Yeah!

I'm floating around in ecstasy

So don't stop me now don't stop me

'Cause I'm having a good time having a good time

I'm a shooting star leaping through the skies

With Timmy Geithner, defying the laws of gravity

I'm a racing car telling lies to the Congress

I'm gonna print print print

There's no stopping me

I'm burning through the skies Yeah!

Two hundred degrees

That's why they call me Helicopter Ben

I'm trav'ling at the speed of light

I wanna make a Euro man of Sarkozy

Don't stop me now I'm having such a good time

I'm having a ball. Don't stop me now

If you wanna get a Bail Out just give me a call

Don't stop me now (I'm wrecking the Economy, its a good time)

Don't stop me now (I'm debasing the Dollar)

I don't want to stop at all

I'm a rocket ship on my way to Mars

On a collision course

I am a maniac I'm out of control

I run the printing press, ready to reload

Before all the Banks

Oh oh oh oh oh explode

I'm burning through the skies Yeah!

Two hundred degrees

That's why they call me Helicopter Ben

I'm trav'ling at the speed of light

I wanna make a supersonic woman out of Merkel

Don't stop me don't stop me don't stop me

Hey hey hey!

Don't stop me don't stop me

Ooh ooh ooh (I like it)

Don't stop me print more dollars, what a good time good time

Don't stop me don't stop me

Ooh ooh Alright

I'm burning through the skies Yeah!

Two hundred degrees

That's why they call me Helicopter Ben

I'm trav'ling at the speed of light

I wanna make a supersonic woman of Merkel

Don't stop me now I'm having such a good time

I'm having a ball don't stop me now

If you wanna get a Bail Out

Just give me a call

Don't stop me now ('Cause I'm killing the Dollar)

Don't stop me now (Yes I'm causing Inflation)

I don't wanna stop at all

La la la la laaaa

La la la la

La la laa laa laa laaa

La la laa la la la la la laaa hey!!....