Wild Wednesday

Celebrate, run for cover, rejoice, panic, buy, sell! Must be a Fed day… There is certainly lots of reason to celebrate – Oracle, as expected, made it back-to-back great quarters as it turns out things are great in Techland (but shhh – it’s supposed to be a stealth rally!). Asia was strangely mixed after the Oracle news with the Nikkei pulling back and the Hang Seng surging ahead. The Thai markets are closed for a coup but India and Pakistan also seem to have no problem with it as their markets gain a point. TM is, of course, concerned about sales in Thailand, as they are number one pretty much everywhere, but I am now looking to buy TM on any dip until they do something silly like buy out GM or Ford. Since TM seems determined to crawl along it’s 200 dma as it slowly takes over the world, I’m accumulating the Nov $110s for $2.50 or less and the pre-roll Jan $115s for $2.50 or less. Fun Fact: This is Thailand’s 18th coup since 1932! Europe is in a merrier mood in despite DCX troubles as the EU clears Toshiba to buy Westinghouse (a deal which has good fallout for GE). Get it, fallout! That was a good one… We are back to looking for breakouts and today and I will not be too excited if we don’t hit some new levels. Fed days are very, very scary and we have plenty of time to buy if we start heading up. I’m a lot more worried about a downside than I am about missing out on something. Lets look for Dow 11,600, S&P 1,325, NYSE 8,400 and Nasdaq 2,250. Oracle alone added $10Bn in market cap in the overnights, this money has to come from somewhere so expect some real leadership movements today. Oil continued down in foreign trading as an extensive interview with Iran’s Ahmadinejad allowed him to come across as a fairly reasonable fellow. Oil may test $60 today on another inventory build but this will not stop some people from buying oil companies “on the dips” so let’s keep a look out for bargains among our usual suspects. Quote of the day: “The market can stay irrational longer than you can stay solvent.‘” Gold has no reason to go up and there will be continued demand for dollars which should keep pressure on all commodities but beware a swift resolution in Thailand, along with a gentle Fed, squelching demand for dollars. ===================================== I really am not keen on taking new positions ahead of the Fed and, as evidenced by yesterday’s extensive list, we still need to lighten up so I’m going to be trading some tired horsed for fresh ones as we rally around the far turn of this market. ===================================== MS had blowout earnings yet again! Bad for me but good for the markets but they say “economic conditions are challenging.” Not enough for me to hang my hat on but I still say nay! The quarter ended August 31st – Amaranth’s quarter ended August 31st and they reported $9.2Bn in assets on that day, a 22% return on the year… Perhaps I am being Quixotic about this but I just can’t believe that they are making this kind of money in a risk-free environment. In my quest for overvalued oil companies, I came across KMI and this chart and I was ready to pounce before I remembered they were being taken private. That’s right, this pipeline company is being bought out for $14.56Bn, only $1Bn above their all-time high and a 25% premium to where they were prior to the May announcement. Should this company have been bought at what may be “the peak”? More importantly, who is crazy enough to make a play like this? Must be someone with way too much money… Turns out it’s our buddies at GS! But Kinder is more than just a bloated energy disributor, they also have $7Bn in long-term debt and a negative 2005 cash flow! So Goldman is getting help from AIG and the ubiquitous Carlyle Group to make this massive LBO work. CW is so strong that this deal is a go (and it does seem to be) that the Jan ’08 $105 puts are trading at $1.90 and I’m going to take just a few on the off-chance somebody sobers up and either offers a little less or breaks the deal. At this point, it is unlikely to happen and the option may expire worthless, but it’s a 10:1 bet and, if I’m lucky, I can exit without too much damage if the deal firms up over the next 6 months. I’m using this bet to cover my new income producing play of shorting GS and selling the Nov $160 puts for $4.10 as the thing I am most worried about (as a shorter) is that they stop making deals like this! More importantly though, my main point is that this is what investment houses like GS are doing with all that money they have sloshing around – paying 350% of book value for a company. Now you can argue that it’s hard to use book value to judge an energy company, I would also point out the 3.2 debt/equity ratio (pre-buyout expenses) vs. say, XOM’s debt/equity ratio of .07. SU’s? 1.2. VLO – .3, RIG – .2, TPP – 1.3… you get the idea… This is the kind of out-of-control commodity spending that took down Amaranth, only it’s happening in slow motion at the investment houses. Here is an excellent article by Trader Mike on the Amaranth deal, which I maintain is a microcosm of in industry gone wild. According to the Times, “funds operated by Morgan Stanley, Credit Suisse, Bank of New York, Deutsche Bank and Man Investments all had stakes in Amaranth, as of June 30, the most recent figures available. Those holdings, which ranged from 4 percent to 7 percent of the assets of the funds, are worth far less now than their stated values in June.” 4-7%. What’s 4% of $9Bn? $360,000,0000, what’s 4% of $4.5Bn? $180,000,000. How much did MS make last quarter? $1.9Bn (not bad!). It will be a very interesting earnings report! Gee, I hope they weren’t the ones with 7%… “Officials at those funds declined to comment yesterday.” I wonder if this will come up at MS’s press conference? I’ll be holding my puts until then! ==================================== When did the newspaper business get so uncool (said the web blogger)? GCI has gone straight down for 2 years and looks beyond dreadful. They are expected to be down 10% from last Q3 on 10/11 with an anemic $1.12 in earnings. 3 Buys (all old, I think they just forgot to change them) 15 holds and 1 sell among the analysts but a market cap of $12Bn just seems kind of low for a company generating $1.4Bn in cash. They think so too as they’ve used $1.8Bn of that cash to buy back shares the past 2 years. These guys own Captivate, which any city dweller knows and loves (well not loves but it beats staring at the wall for 3 minutes) and PointRoll, which shows me they are on top of transitioning to the Web – no surprise for the guys who came up with the first good on-line paper (USA Today, no longer that good). I like their p/e of 11 vs. NYT at 18 and DJ at 20 and I think they may have a beat up their sleeves. Since they are resting just above the 50 dma of $54.50 I have an easy exit point on the Jan $60s at .85 but there’s also a nice calendar spread to be had between the Jan ’08 $55s for $6.40 and the Jan ’07 $55s for $2.85 but I would also take the Jan $65s for .35 as protection. ==================================== If RAI has trouble breaking $65, it’s a long way to the 200 dma at $54! Expectations are high for Q3 (45% beat on last year against same sales) and I think analysts may have outthought themselves on this one. The stock is up 66% in 12 months but has been losing momentum. Nov $62.50 puts for $1.30 can be entered slowly as we may test $65 and we can always play other brackets depending on the movement. This is a vote Democrat kind of play as even the Republicans are getting tired of supporting big tobacco. Fun fact: Altria spent $13.6M on lobbying in 2005, that’s about $20K for each and every member of the House and Senate. Who says you can’t buy good government? ==================================== COF has low-bar earnings at $1.79 vs. $1.81 last year and they have been beaten up all year as they try to digest NFB and this is another one of those deals where no one knows how to read an earnings report as the company took $79M in charges to build up reserves and write down servicing income in the UK operation. I think the amount they are saving by cutting back on commercials alone is enough to put Q3 over the top so I like the $80s for $.65 and the Dec $80s as a pre-roll for $2.05. They have a test of the inverted 50 dma at $77 coming up so accumulate with caution, if they bounce back down it’s a whole new ballgame. As to NFB – you try buying a house in their market, there is no major slowdown in NY Metro to date and an upside surprise from North Fork could also boost Capital One. ===================================== AFL has nice low-bar earnings in a good environment. Analysts have been flipping up on them all year but the stock is still dogging its sector by a wide margin. I like the Oct $45s for $.60 because I don’t want to be tempted to hold them for earnings (10/24) anyway. ===================================== According to many comments I’ve been getting this week, it is OK for XOM to charge “whatever the market dictates” because it’s the American way but HRB gets raked over the coals just because there were “a few hidden fees.” I’m betting that they probably shouldn’t have lost $3Bn in value and that sometime between now and April some savvy investor will notice it’s tax season again so I’m looking at the Apr $22.50s for $1.55. You can sell the Jan $22.50s for $1.05 for a very cheap calendar spread but I’d wait until it tests the 50 dma at $22.25, if at all. ====================================== Wow, I have no play on HD or LOW anymore! HD is a better company in a better spot with the Nov $37.50s at $1.55 but LOW Jan $31.25s are not so bad at $1.20. We get a ride to the low-bar earnings in early November but watch the HBs for a sell signal. Remember, there still might be a hurricane!