Skip to main content

Morning Update

This morning October non-farm payrolls were released, coming in at 171,000. This was better than even the best estimate going into the report. However, the unemployment rate did tick up to 7.9%, in line with expectations. This report sent the market higher with the S&P 500 futures now at their 50-day moving average. Gold on the other hand has fallen over 1% and below the psychologically important 1700 level. Our model for gold suggests there is still more downside for the metal, so our positions remain conservative and tightly hedged.

On September 14th the S&P 500 reached its 2012 peak and is down 3% since then. One stock that has not been dragged down with the broad market is Whirlpool, which is up 20% since Sept. 14th and 111% year to date. Yesterday we saw heavy call buying in the stock, suggesting option traders believe Whirlpool’s rally is not over yet. In total 1491 December 100 calls were bought yesterday for $4.50. This is a bet that WHR will be above 104.50, or 4% higher, at December expiration, which is 49 days away.

Whirlpool’s stock has been on a tear lately due to better than expected earnings. The company reported third quarter earnings on October 23rd that blew away market expectations, and also raised guidance for full year earnings. Investors have been attracted to the stock based on its valuation: it has reasonable debt levels, a P/E below the S&P’s, offers a 2% dividend yield, and generates an 11.6% return on equity. However the stock may not have too much more upside before it becomes fully valued. If the stock trades 104.50 like this option trade predicts, its P/E ratio will be exactly in-line with the S&P 500’s. Also, investors should also note that while quarterly earnings have been beating market expectations, growth is slowing. I like the relative strength this stock has shown in recent weeks but would be cautious to buy here. Instead call options make the most sense for gaining exposure to this name because they keep risk limited while offering the opportunity to profit if the momentum behind this stock continues to drive it upward.


Popular posts from this blog

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…

The market should take Trump seriously this time.

Kim Jung-Un gave the U.S. an unwelcome birthday present as he test launched an ICBM capable of reaching Alaska.  North Korea has made it very clear that their intention is to grow their nuclear capability to be able to reach the Continental United States.  This would destabilize the region, and world overnight.
Now I don’t expect the war drum beating will spill over into mortar shells raining down on Seoul anytime soon.  There has been a choreographed diplomatic dance going on for the past 40 years with North Korea that is likely to continue as follows; North Korea acts out, U.S. gets upset, U.S. sanctions them (with help from China).  North Korea gives up their acting out activity (promises they won’t do it again), a North Korean South Korean gesture of goodwill takes place, such as joint Olympic teams, joint economic projects, North Korea gets to declare victory.
However, this go around seems slightly different.  Now we have a President who has made it very clear in his campaign tha…