Skip to main content

Morning Update

On Friday shares of Navistar closed up 11% to cap off an impressive 46% gain on the week. Thursday the truck and engine company reported fourth quarter earnings loss that was not as bad as expected. The company also announced a management shake-up and declared “our return to profitability is in clear sight.” Carl Icahn, who owns 11.8 million shares and has been lobbying for a management change, has been quick to endorse former COO and incoming CEO Troy Clarke, and the stock was upgraded to “overweight” at JPM and reiterated as a buy at Jefferies. However, option trading Friday was less optimistic, with the biggest trade being the purchase of 1,000 July 30/20 put spreads for a net debit of $2.00. This is a bearish trade that will profit if the stock is below 28.00, 20% lower, at July expiration.

This trade was most likely done to protect gains from a long stock position instead of as an outright bearish bet. After a 45% rally in a week, protecting gains with a fixed risk spread like this is smart. This spread keeps risk/reward on your side and keeps the potential for upside gains in a stock position unlimited while the downside between 20 and 30 is completely mitigated. Analysts have a $5 price target for Navistar, which suggests that it is still inexpensive even after last week’s pop. The key to watch going forward for Navistar will be its market share. Last year the company’s diesel engines were found to violate the EPA’s emissions standards, which lead Navistar to scrap their 15L models and use engines from rival Cummins. Now that the turnaround pace at Navistar is accelerating I will be looking for the company to regain market share from Cummins as it shifts back to being a competitor instead of a customer.

Comments

Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

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…