Skip to main content

Morning Update

Yesterday a week of big tech earnings was kicked off with Google, who beat expectations and is seeing its shares higher by 5%. IBM is also higher by 5% after a solid fourth quarter. Today after the close Apple will report, the outcome of which could reveal the stock’s trend for the coming months. Beside this traders will be watching for news that Congress will pass a bill to raise the debt ceiling until May. The deal would be tied to a provision that will suspend the pay of lawmakers if a budget deal is not reached by April 15th. This deal would move much of the risk in the market out to the April options cycle and would likely be accompanied by a selloff in February and March VIX as hedges roll into April option positions.

Yesterday Verizon reported a fourth quarter earnings miss but showed strong revenue growth on the wireless side. Vodafone, who owns a 45% interest in Verizon Wireless, saw bullish option activity ahead of its own earnings as a result. The biggest trade of the day was the purchase of 912 July 27 calls for $0.70 with the stock at 25.88. This is a bullish bet that will profit if Vodafone is above 27.70 (7% higher) by July expiration.

Vodafone’s stock had a lackluster 2012, closing nearly unchanged on the year. However, at current levels the stock pays a hefty 6% dividend, which is a higher yield than both AT&T and Verizon. Vodafone trades at a discount to AT&T and Verizon because of its exposure to the recession in Europe as well as a $2.2 billion tax dispute in India. But Europe appears to have the worst behind it and the company looks close to settling the tax dispute with the Indian government. Once the uncertainty around the tax dispute is settled shares are likely to rise as they will have a big burden lifted off them.

The very aspect about Vodafone that has caused it to lag other major Telecom firms is therefore exactly what could drive its share price higher in the future. By being exposed to emerging markets like India and a recovering Europe, not to mention owning 45% of Verizon Wireless in America, Vodafone will be able to profit from an expanding global economy.

The 45% stake in Verizon Wireless alone should drive price appreciation in Vodafone. Verizon Wireless posted a 9.5% increase in revenue last quarter to $20 billion. Vodafone receives 45% of this revenue and can use it as it sees fit. In the past Vodafone has used it to pay special dividends but last November announced it would use it to buy back shares. Since then the stock has rallied 4% off of its 2012 low around 25.

The risks to owning Vodafone remain sluggish European growth. Though it looks like the worst may be behind Europe, Vodafone continues to lose money in Italy, Spain, and Greece. The company continues to implement cost saving measures but there is no guarantee those arms of the company will return to profitability in 2013. Therefore the way to play Vodafone is to buy longer dated upside calls. This keeps risk fixed and allows you to participate in the appreciation of the shares. If, come July expiration, the company’s European operations have continued to improve and there is a fair settlement in the Indian tax dispute, the calls are likely to be in the money and can be exercised into stock and held for their solid dividend and growth potential.

Comments

Popular posts from this blog

FED Rate Hikes Could Cause Unintended Volatility Shock

Last week the Federal Open Market Committee surprised no one when they raised rates 0.25 basis points to increase rates to between 1% and 1.25%.  What did surprise the market, was the revelation that the FED is committed to normalize rates, even if inflation does not meet their target.  This was reiterated this week in a speech by William Dudley, President of the Federal Reserve Bank of New York, who stated he feels the FED needs to raise rates, despite low inflation, to be ready to act if the economy does slow down.
The market has been quick to respond, and nothing was hit harder by a reduction in inflation expectations than commodities.  Gold, since the announcement, is lower by 2.39%, and oil is down -3.18%.  Crude futures have broken their upward trend line and appear poised to test the previous low of $39.56.
While, oil has been under pressure all year, the S&P 500 does not seem to care, as it continues to make all-time highs.  Oil is down 23% year to date, while the S&P…

Gold and Treasuries Say “RISK OFF”, But VIX Says "RISK ON"

Today we are seeing a modest rebound in the market after yesterday’s small selloff.  Volatility remains extremely low, with the VIX hovering around 10.  It’s important for traders to recognize how low the VIX has been lately.  Since 2010, the VIX has only closed below 10 five times, and each of those five times has come in the last month.                   However, the market is not without risks right now.  Gold has rallied 6.5% since May 9th.  Treasuries have rallied, pushing rates to below 2.15.  So, the market is currently in a risk off mode while equities are in a period of historically low risk.  The VVIX (the VIX of the VIX), for its part, is not sounding the all clear signal, 87 is in the medium range for VIX volatility.  Tomorrow we have a potential market moving event with James Comey’s testimony to Congress.  The last time Comey’s name was in the news, we saw the VIX move from 10.5 to over 15 in one trading day (a 50% increase) on a day where the market was down over 2%.  …

Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this …