Skip to main content

Morning Update

This morning US equity futures are unchanged after Asian markets closed in the red and European stock indices are down as well. The key events this week will be US presidential elections, a leadership change in China, and an vote on further austerity measures in the Greek parliament. Current polls suggest Obama will be the most likely winner Tuesday night, though it is far from a sure thing. European credit market have started the week trading with a risk off tone ahead of these key events, with the German 2-yr yield dipping into negative territory this morning. The dollar is stronger against the Euro as well, though gold, silver, and crude oil are little changed.

On Friday Chesapeake Energy Corporation’s stock fell 7.9% after the company admitted its debt reduction targets for 2012 may be pushed into 2013, along with some deal closings. This drove unusually high put trading volume in the stock on Friday. The biggest trade of the day was the purchase of 7,000 Nov. 19 puts for $0.67 and the sale of 7,000 Dec. 17 puts for $0.40. By buying a short dated put this trader expects the stock to continue its slide into November expiration next week. However, by selling a December put this trader has picked a level he is willing to buy the stock at, showing that he is bullish in the long term despite expecting short term weakness.

The bearish case for this stock revolves around Chesapeake’s increasing debt and list of unfulfilled promises to investors. Currently the company has about $16 billion in long term debt, which is up from $11 billion last quarter. On Thursday Chesapeake reported a net loss of $2.1 billion after having to write down the value of some assets due to depressed natural gas prices. The company had previously announced it would reduce its debt to no more than $9.5 billion by Dec. 31st, 2012, but recently announced this was more likely to be accomplished in early 2013. To achieve its debt reduction goals, the company planned to sell up to $14 billion in assets this year, but has seen consistently failed to close the deals on the timeline they gave investors.

The longer term bullish case for the stock is that the company will rebound quickly if natural gas prices continue to come off their recent lows. The company’s profits are highly correlated with natural gas prices, and an increase in energy prices will not only increase revenue and EPS, but also allow them sell their oil and gas fields at higher prices. If the company begins to deliver on its debt reduction promises and closes some deals in early 2013, the stock is likely to be gain interest from value investors seeking to profit from rising energy prices. Chesapeake is already on some high profile investor’s radar; Carl Icahn owns over 50 million shares and Mason Hawkins, whose company Southeastern Asset Management, owns 13.9% of Chesapeake and has said he believes the company is 70% undervalued.

Comments

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…