Large Cap Tech LEAPS on August 31

The following is a list of the current base prices of AAPL, GOOG, MSFT and a few others for comparison including a possibly interesting play with HPQ as well followed by various January 2014 calls.

The mathematical dissection of which options have the best value compared to expected volatility I don’t think gives much of an incremental advantage in selection.  I’ve chosen for example 100 point increments in the strike prices of similarly priced GOOG and AAPL which demonstrates a bit more expected volatility in Apple than Google.

Apple, Google and Microsoft are in the very unusual situation of having immensely strong technological positions and insane amounts of cash.  Hewlett Packard anyone else with a scent of exposure to the PC market (DELL obviously) is also trading at historically low P/E ratios.  It is hard to imagine situations outside the more dire macroeconomic scenarios where both of these companies emerge as big losers (though a re-elected Obama administration that steps up taxation and doesn’t enable a repatriation of foreign cash holdings is sufficiently dire for them to wildly appreciate.)  The asymetric upside is good growth and increasing P/Es could lead to one or both doubling.

Of the three I would feel most comfortable with GOOG as a buy-and-forget play now which is of course an option.  Their market lock in feels strongest with the most innovative (most productive?  We’ll see) R&D and promising new fields to come.

One another play would simply be to get NASDAQ 100 calls.  The grossly undervalued large caps included the above named as well as CSCO and QCOM add up to approximately 50% of the index, though you get BIDU and WYNN and other plays that are not as salient to the thesis: do you feel lonely in the QQQ, Kraft Foods?   There are a number of companies in the index such as Amazon (3.5% of the index and IMHO grossly overvalued) The QQQ closed at 68.16 today; this idea train has already left the station this year but probably plenty of track ahead:

Chart for PowerShares QQQ (QQQ)

This looks a touch ahead of itself going into a volatile September; still, QQQ Jan 14 LEAPS now:

70 – 5.92

80 – 2.29

90 – 0.63

100 – 0.13

This strategy would have fallen short in companies like Microsoft and Oracle and others in the lost decade of stocks 2002-2012 but as the economy generally picks up and if Europe were to return from the brink would pay off big.  For my current positions short S&P if there is a steep downturn in September I would pull the trigger on a strategy such as this.

Position Update August 30

Well as feared the Russians were coming, and wiped out my short grain position.  A pretty bad loss whose saving virtue was sticking to stop loss plan and indeed getting short the S&P at 1406 which I’m ahead on, and even going long — though a smaller number of contracts of soybeans at 1733 which is now up a solid 1%.

I added this morning to it at 1746 which knock wood appears to be the low of the morning and moved up a stop to 1736.xx.  This is an awfully tight stop but the soybean supply/demand situation is not as bearish as with wheat or even corn with murmurs of $25 soybeans.   They look really good right now, and the thesis is after all is to trade into breakouts and let it ride:

I have also added a small position in Live Cattle at 125.575.  Here is the six month chart.  Barron’s wrote about Live Cattle in late January and I’ve kept my eye on it since, with another brief small trade earlier, and appears to be poised for a robust technical formation (similar to Cotton right now at 77 which I may nibble in as well)

I feel comfortable even if just slightly ahead on soybeans & S&P but is this an internal trading signal that there is little consternation or just a false hope generated from relief after the surge in wheat and soybeans that knocked me for a loop?

On the stock side, large cap tech and ZNGA under 3 among others still looks insanely cheap but I am waiting for a downswing or the S&P at least to head back to 141x before putting on a position like that.

The SPX topping out?

Doug Kass at theStreet.com put up two contrasting files showing specific points where lows in the VIX signaled forthcoming drops in the SPX, five times in the last two years.  He was on CNBC with the same message two weeks ago — the market effectively unchanged since then.

Bespoke Investment Group has a compelling chart that the gains of late in large caps have been mostly low volume gains which is technically ominous.

Some “Triple Top” talk evidence seems specious to me — Business Insider cites this as a possible “Triple Top”:

chart of the day, s&p 500 three spikes, august 2012

But had been warning about the same thing in September 2011

s&p futures head and shoulders

In short the S&P does appear posed to this rube technician at a decisive moment which possibly suggests a downward bias, that is also seasonal and will fluctuate with the election.  It is notionally cheap but facing huge European headwinds putting the smaller cap Russells in the unusual position of being a slightly better equity safe haven.  Few ports would be safe in that storm however.

Apple (AAPL) is 5% of the S&P and 13% of the NASDAQ 100 Capitalization-weighted indexes and so a meaningful short term up move (likely) in this one name could pull the entire index higher.

Grain Complex and Positions August 29 Evening

There have been volitile moves since Sunday night — Apple was a whole lot of anticipation for a four point loss (in 677 out 673) finding better opportunities to double down elsewhere and likewise got out of Gold breakeven.  Both of those I’ll return to at some point.

(small) Short position in ZN near the close at 133 ‘295 — I could immediately unwind this for reasons below but think there are a few points to be had after it spiked up then regressed today

I added to the anti grain position by shorting ZS; and traded it very poorly today, taking a loss and going long on a head fake surge up only to see that too reverse — I think I got obsessed with too very short term of movements, my classic error and again got short at 1714 – only to see it rise again but long term perspective within what really should be described as a range.  The evening movement taunts the highs, I set a stop loss at 1740 and will let it lie.  A stop there risks another tweak at the top of the range only to return lower but given the extreme weather conditions to move it higher risks too much of a loss; I could take a 1.5% total loss and willing to give 10 more points from the 1730 it is trading at in the evening :

I remain short ZW, profitably but moved down the stop loss in case the market turns want to lock in that profit: stop at 891 with the Dec contract at 879 now.

The grains are going to bounce around, there is Russian poli-agicultural risk but by in large this market looks headed down after several attempts to break out.  Here are the continuous month contracts of the three major grains:

If I get stopped out, unless the S&P breaks out over 1420, I will likely move straight into a short S&P trade which I think will be good after this week which is a typically seasonally strong one for stocks the effect of which may be magnified by any GOP poll bumps.

UPDATE 1:25 AM: evening moves up in both ZS & ZW are disturbing enough for me to monitor but I’m not freaked out; I fear evening thin volumes could touch my stops and I’m going to go ahead and move them up to 896.25 and 1746.25 respectively; these are losses far higher than I would like but I also want to avoid the worst case scenario of another whipsaw followed by the precipitous dive that I think is very possible and profitable.

Triple Threat for Total Return in Forbes September 10 2012

“Triple Threat for Total Return” by John Buckingham in Forbes reviewed long term performance data from 1926 to present (this data set will be the good subject of post one day) to conclude small caps, dividend payers, and value stocks outperform.  Therefore, quod erat demonstrandum, investors should look for all three today.  Give me a good large growth non dividend payer anytime but I’m an investing child of the nineties.

He recommends three stocks that would fit this screen (not, necessarily three stocks from a screen – an important difference but his method is not specifically expressed in the article):

Lexmark LXK @ 18 (in article, 21.62 at close today)

Nash Finch NAFC @19

Navios Maritime Holdings NM @3.58

I would not touch any Greek Shipping short of a reincarnated Themistocles.

Bust of Temistocles

Buckingham says they are at 35% of book value.  Perhaps but we can find safer values elsewhere and there is little to gain from deep research here that would benefit other stocks.  Dry bulk shipping is in a sour mood; there are other ways to play that rebound.   If you’re really into shipping of another sort, perhaps one of those ways is Nash Finch but that is too low growth low margin for my tastes.

Lexmark maybe a Kodak or Xerox in the making but with an ever-so-slightly safer chart (where “safe” means I at least know where I’d get out — a return under say 18) with very solid revenue and cash on hand, I think is a more interesting play.

Chart for Lexmark International Inc. (LXK)

The gap between 18 and 21.xx may be attributed to the announcement of a $100m buyback and that they’ll dump the inkjet business.  They acquired Perceptive Software in 2010 and claim it too will be profitable next year.  They have a 6% dividend yield.  Should have gotten my Forbes in the mail sooner.

“Hunger Games” in Forbes September 10 2012

In the Forbes print article “Hunger Games” by Steve Schaefer five stocks were recommended playing on the theme of drought:

Agrium (AGU) @ 100.37

CF Industries (CF) @ 216.09

Market Vectors Agribusiness ETF (MOO) $50.79

Tractor Supply (TSCO) @ 92.28

Tyson Foods (TSN) @ 15.26

Aside from a dire quote from perennial bear Jeremy Grantham about a “chronic global food crisis unlikely to fade for many decades” there isn’t much support for the described trend.  If it holds, the picks themselves may be good.  Tyson is probably questionable since feed costs will rise — one source of their current laggardry.  The fertilizer stocks go in and out of vogue and have had quite a run this year and this summer.  Chart for Agrium Inc. (AGU)

Chyanne Fickes of the Stone Agribusiness Fund is quoted these stock remain “extremely cheap” which strikes me as suspect: Agrium is up 10x since 2003 and had not moved much from 1995-2003.   This fund the article notes has $10 million under management — which one might have prefaced by saying puny.   Their results at least as expressed in (Canadian) dollars per share is not remarkable (were there large dividend distributions?):

Chart forSTONE AGRIBUSINESS FUND (HAY-UN.TO)

Guess one could have just bought Agrium.

AltaCorp Capital analyst John Chu says farmers are planting more corn than say soybeans which requires seven times more fertilizer which is a compelling point that can be matched against actual acreage planted.  In this earlier estimate on Seeking Alpha, Corn was indeed at “a 75 year high” but only a 4% acreage gain over last year in the US versus a 1% drop in Soybeans to 73.9m acres.  Does that move the needle?  The grain complex moves together; all else being equal one might suggest more Soybeans next year if there are lower fertilizer crops.

Deere (DE – 73.81) and Caterpillar (CAT – 86.01) were notable absences from the list of recommendations which if anything earns points for freshness.  In crops that’s paramount but will put their quotes here for comparative measure.

Positions August 26 Sunday Evening

Short Dec ZW at 896

Long Dec GC at 1678

Long Sep ZN at 133 ‘180

The ZN position I will not be keeping for long; I believe the trade is asymmetric with any bad news from Europe driving it higher; stop at ‘140 which is just below lows earlier in evening.  Long term I want to be short ZN and may flip this position in short order.  ZW traded up, then flat, then up when trading opened at 6 pm eastern, pretty much following Soybeans which are breaking out but Wheat looks like it wants to go down.  Gold is a long and short term disposition that is a position right now.  Short wheat into a purportedly bullish ProFarmer report wasn’t too comfortable this weekend but news had been issued throughout the week.  Rains in the southern united states should bode well for a short Wheat position.  If Corn, Wheat and Soybeans all were breaking out definitely would go long.

Looking possibly to play Apple long and Las Vegas Sands short tomorrow.

UPDATE 1:15 am – indeed traded out of ZN at 133 ‘215 after it started drifting down from ‘240, a nice small gain and driven by Apple opening at 677- just at highs but only 7,000 shares traded.  More on Apple another time.  Not sure where to set a stop loss but not too worried about it.

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