AAPL strikes again!
In last Wednesday's Webcast (Our Top Picks for 2014), I noted that AAPL was once again going to be my pick of the year (it was our top pick for 2013 too) because, once again, not only was it cheap but BECAUSE we could construct a ridiculously cheap option spread for it that can once again deliver a massive return of 500% or more.
Last year's trade idea for AAPL was to buy the Jan 2014 $400/500 bull call spread at $52.50 and sell the 2015 $350 puts for $38.50, for a net $14 entry on the spread. Today that spread is net $91.20, up 551% in less than a year – beating the S&P by 20x!
This year's spread (see Wednesday's post for details) is a bit more ambitious with the 2015 $500/650 bull call spread at $44.30, offset by the sale of the 2016 $400 puts for $30 for a net $13.30 entry on the $150 spread with 949% of potential upside. Well, it's off to a great start as AAPL popped back to $570 this morning (up 4%) as their deal with CHL is finalized. That's getting the Futures very excited as AAPL is 20% of the Nasdaq and the Nasdaq is up 0.75% on the news and the other indexes are lagging a bit, but generally moving higher as well.
That's going to send our indexes all the way to VERY overbought, if Friday's action on Dave Fry's NYSE McClellan Oscillator is any indication. Even if today adds less than Friday's 25 points, we're still going to be well above that 40 line but, once again, we don't really care – because we are mainly in CASH!!
And why are we in cash in such an exciting market? Here's a sobering snippet from the Consumer Metrics Institute's Analysis of the Economy:
For the past two months we have wondered how the BEA's latest growth estimates might impact the Federal Reserve's stance on monetary policy — and particularly the duration and size of QE. At face value the new headline growth rate of 4.12% qualifies as "healthy economic growth," and places the US among the fastest growing developed countries. In fact, a growth rate above 4% would argue for far more than a modest $10 billion per month taper — if not a return to more historically normal interest rates.
Then why such a modest monetary response?
The Federal Reserve clearly understands that the headline 4.12% is neither real nor sustainable:
— The vast majority of the economy (consumer spending — nearly 70% of GDP) was growing at a paltry 1.35%.
— Over 40% of the headline number came from growing inventories. Conventional wisdom has this component reversing itself in future quarters — reverting to a long term net zero gain or loss. In fact, since 2006 the average annualized real contribution from inventories has been essentially zero (-0.02%). Bloated inventories have a tendency to normalize, and in coming quarters we can expect production cuts to accomplish just that.
— Employment numbers, while technically improving, are still weak by historic "full employment" standards. And it is increasingly obvious that the modest improvement in the unemployment numbers is an artifact of a major deformation of the work force — with fewer people choosing to look for work and more being forced to accept multiple part time jobs.
— Real per capita disposable income is still down -0.85% year-to-date. And if households continue to normalize their savings rates over the next few quarters (just as they have over the past two quarters while attempting to move back towards the savings level "comfort zone" seen prior to the January FICA increase), those increased savings will have to come from reduced spending.
— The aggregate numbers continue to mask an ongoing shift in income distribution: although the average per capita income data has grown some 3.3% since October 2008 (per the BEA), the median household income has shrunk some 7% over that same time span (per Sentier Research). Thus whatever growth the BEA is reporting is not likely to shared by the vast majority of the electorate.
Arguably, the "healthy economic growth" implied in the 4.12% headline growth rate might be considered a tad delusional. And apparently the Federal Reserve knows that only too well.
This is no surprise to PSW Members, I've been pointing these defects out as the data was releasted but we all know what happens when the party hats come off and people take the time to actually read this kind of analysis. So, we took an early exit into the uncertainty – it's not like we're going to miss much if the S&P is going to go up another 27% next year because we can, once again, outperform it by 20x with simple trades like our AAPL spread (and we put up 15 more like it for our Members last week!).
Today, it's a holiday week – certainly nothing to take seriously, and we're amusing ourselves with the usual oil shorts (/CL) off the $99 line and we'll be long on gold (/YG) at $1,195, both with tight stops, of course. The Dollar is lower, 80.60, but nothing significant and the Nikkei, which we're watching closely, is right on the 16,000 line – also a nice short below there with VERY tight stops above.
As you can see from Dave's EWJ chart (we're short), an optimist could certainly argue that the Japan is consolidating for a major breakout but a Realist (I don't consider myself a pessimist) would point out that the BOJ has only accomplished this "rally" by stimulating to the tune of 15% of the GDP while Abe's Government is projecting the largest budget deficit in Japanese history – including WWII!
Public debt in Japan is already 220% of GDP and debt service alone is now $220Bn a year, or over 23% of Abes $921Bn budget. With $232Bn of new debt added this year alone, the IMF projects Japan's debt will be 242% of GDP in 2014.
China is a whole other catastrophe as overnight interbank lending rates were over 8% last night – numbers we haven't seen since the Libor crisis took down the Global markets in 2008. This is, I will remind you, WITH intervention by the PBOC already in progress as they stepped in TWICE last week to provide liquidity and STILL it's not working. If this were not an unshortable market, we'd certainly like a short position on Chinese Financials but, as it is, we like our CASH!
By the way, if you want to beat the S&P next year, SPY is at $181.56 and you can buy the Jan $175/180 bull call spread for $3.19 and sell the $130 puts for $1.80 for net $1.39 on the $5 spread. Your worst case to the downside is you are long SPY at net $131.39 (27.6% off) but, of course, you would miss all those losses on the way down. To the upside, if the S&P holds 1,800, you make $3.61, which is a 259% gain on your cash and I very much doubt the S&P will do better than that next year.
There are, of course, much more interesting offsetting short puts than the SPY puts (see Tuesday and Wednesday's posts for many ideas on that). Even selling a single AAPL short 2016 $400 puts for $30 pays for 10 of the long SPY spreads that return $5,000. Find 10 stocks you REALLY want to buy when the market dips and you can add $50,000 worth of upside fro when it doesn't!
Of course, 1,800 on the S&P makes for an easy stop line, so there's not too much risk if you stop out on a downturn. But if, like the market mavens suggest, there will never be a downturn ever again – then it's going to be good to have a few aggressivly bullish trades in our toolbox for 2014!
