Skip to main content

Morning Update

The earning season continued yesterday with a big beat from Net Flicks and a miss from Apple. Apple is down a little over 10% ahead of the open, which is dragging the NASDAQ 100 futures down 1.5%. But better than expected jobless claims (33K versus 360K expected) has DOWN futures up and S&P futures down 2.5 points. Abroad Japanese trade data showed that exports continued to drop last month, extending the streak to 7 months. The severe decline in Japanese exports comes despite efforts to weaken the Yen as trade with China declines following disputes over territory. In Europe French PMI fell to 1.9 points to 42.7 on expectations of a rise though Germany’s PMI posted a gain. It appears that the European recession is hitting France in full force but has not penetrated the EU’s core to Germany yet. Spanish unemployment was released as well and come in in-line with expectations at a depressionary 26.02%.

Yesterday before the market’s open Coach reported a fourth quarter earnings of $1.18 per share versus $1.28 expected and $1.5 billion in revenue versus $1.6 billion expected. The stock was sold hard on the news and ended the day down 16%. Despite the big move one option trader is betting that the stock will move lower by buying 2250 February 55 puts for $3.50 with the stock at 52.07. This trade will profit if Coach is below 51.50 (1% lower) at February expiration.

There are a few reasons to be bearish on this stock: sales fell during the holiday period despite a 10% increase in the overall handbag and accessories market, and Coach’s market share of the North American handbag market fell too. The company’s biggest product launch of the last decade was the Legacy line, which was aimed to regain market share lost to competitors Kate Spade, Michael Kors, and Ralph Lauren, but it failed to make a difference last December. The bullish case for the stock is that it now trades at a 5.8% discount to the S&P 500 on a PE basis, the lowest in three years. Coach also generated gross margins of 72% last quarter, which are better than the gross margins at Michael Kors and Ralph Lauren.

The company announced that their latest plan for reviving sales is to develop a lifestyle brand that moves across multiple products. This will undoubtedly involve increased marketing expenses and selling lower margin women’s apparel. My money will be on the sidelines while we wait and see if Coach can pull off this turn around. The stock has already dropped 16% and I don’t see it moving down too much more without attracting value investors. At the same time there isn’t a reason to buy the stock until management can deliver results. I would like to see sales and market share increase, even if margins have to decrease slightly. Buying puts to limit further losses in a stock position makes sense, but I will not be buying puts simply to speculate on a further sell off.

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 …