Skip to main content

Morning Update

This week market focus is likely to be on US earnings, with many large, widely held company’s reporting. Tomorrow Apple will report after the close in what will be one of the most closely watched and anticipated earnings report of the quarter. Google will be reporting today after the close. Option traders are currently pricing in a 5.5% move this week. On average GOOG has moved 5.8% over the last 2 years following earnings. The largest move was 13% and the largest downside move was 8%.

Friday morning Morgan Stanley released fourth quarter earnings that sent the stock soaring 7.9%. EPS came in at $0.45 versus $0.27 expected, and revenue increased 23% to $6.97 billion. The report and conference call were bullish from many standpoints, and encouraged option traders to step into long positions in the stock. One of the biggest trades of the day was the purchase of 29400 April 24 calls for $0.70 with the stock at 22.30. This is a bullish bet that MS will be above 24.70, 11% higher, at April expiration.

Morgan Stanley finally looks to be done cleaning house and can now focus on running its business as normal. CEO James Gorman has said that the dirty work is done, meaning that the layoffs are over. He is comfortable with the company as it now stands, at about 6,000 employees or 10% fewer than last year. The company’s profitability in the fourth quarter is not all due to cost cutting initiates though: pre-tax income from the wealth management has more than doubled since 2011 and net margins are up to 17% from 7% in the third quarter. The company’s institutional services division was also strong along with fixed-income and commodities sales and trading which was up year over year but down since the third quarter.

Going forward the big question investors have is can Morgan Stanley sustain its current momentum? The large buyer of out of the money calls on Friday would argue yes, and for good reason. Morgan Stanley has completed a series of difficult cost cutting initiates that it will now reap the benefits of. They have also shifted focus away from the risky, capital intensive, and highly regulated business of fixed-income trading towards wealth management. The company’s wealth management division shows the most promise for strong, stable future profits and high margins. CEO Gorman also said that the “overwhelming amount” of capital freed up from the transition away from sales and trading will be “returned to shareholders as soon as is practical.”

Buying out of the money calls on this stock is a good way to keep risk and outlay of capital to a minimum. The stock has nearly doubled in the last 6 months and could therefore see some volatility as investors take profits. Last week the stock broke through resistance at 21.20, the highs of 2012. The next level of resistance looks to be 24.50 which is a swing high from mid-2011.


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…