MorningWord 7/27/12: SBUX Trade Post-Mortem

by Dan July 27, 2012 8:28 am • Commentary

MorningWord 7/27/12: As I was short yesterday, I really can’t stomach going through the play by play of yesterday’s price action so rather we will do a little “trade school”.

At about 2:30pm yesterday an hour and a half before SBUX was set to report earnings I closed what was a winning short position in the Aug expiration in the stock.  Back on June 29th, when the stock was $53.10, I paid .85 for the Aug 50/45 put spread, which at the time seemed like a decent risk/reward given my bearish thesis about consumer discretionary names like SBUX, my overall bearish thesis on the market, the time that I had for this thesis to play out, and last but not least the fact that Aug expiration would catch their earnings event.

So with the stock at about $52, and the spread worth a little less than $1, I made the decision to close the spread for a small gain before what I felt could be somewhat of a binary event, either the stock’s reaction could be like NKE’s in late June, or like WFM yesterday.  As a trader we are emotional beings, and it can be hard to ignore the most immediate price action right in front of our faces. The broad market’s explosive rally and the 11% gain in WFM yesterday led me to believe that I was either going to have a decent winner or an all out loser on my hands following SBUX ‘s results.

Obviously in hindsight with SBUX down about 10% this morning after lowering their out quarter guidance, it was the wrong decision and as I had answered a reader’s email earlier in the week, “I had this position right where I wanted it”, I should have stuck to my guns and kept at least a half position on as I did in AXP.

I guess the main point is, as traders, we make lots of decisions everyday, hopefully we make more good than bad, but the truth is, and not to sound defensive, it is best to make the bad decisions that don’t cost you money.  Make no mistake about it, I am annoyed, if I had not touched my position, I would have likely had my biggest winner of the week, and one of the biggest one day single postion gains in a while. No point crying over spilled coffee, I just thought some of you would appreciate the thought process behind yesterday’s decision.  That’s it for now, I gotta run out and grab my vente half caff skimmed latte at SBUX.

MorningWord 7/26/12:  The real news of the morning is that the ECB chief Mario Draghi is back from vacation since his trip to Brussels in late June and decided with the equties of European banks making 25 year lows and the sovereign yields of Italy and Spain making record highs that it was time to jawbone the markets a bit.  These headlines from a speech in London caused the massive reversal in European equities and our S&P futures, and the Spanish and Italian 10 yr yields to get creamed (for now):


More of the same from where we sit, but the price action is very clear that investors/traders are nervous to be short, and plain scared to miss a rally.  We don’t think this is a very astute way to invest/trade, but we recognize that many prefer to be told what to do in the markets as opposed to forming their own opinion (I of course just listen to Enis).

Lets see how long this move lasts, the big money geniuses may try to run them into Quarter end which also coincides with the start of the FOMC meeting Aug 1st where the trial balloon has already been floated by the fed through their main man at the WSJ Tuesday afternoon.  The thought of mutual funds underperforming  a down market is too much for most portfolio managers to bear in a month that as of yesterday’s close had the SPX down 1.78%, why not attempt a month end mark up.

As Enis wrote in his MacroWrap this morning, there are no quick fixes to any of the messes the global economy and thus markets face, so a few headlines from an institution that has been caught off guard for at least 2 years on a crisis that has been brewing right under their noses for years does not instill confidence on our part, and  Draghi just asked us to “believe him”, that what they are prepared to do will be “Enough” to “Preserve the Euro”.




MorningWord 7/25/12:  In this space yesterday I spoke about how the “Fever” surrounding AAPL as a stock, at least from an anecdotal standpoint, was in the process of “Breaking” so to speak.    The stock’s overnight reaction (-5%) to a miss of expectations in their fiscal Q3 and their weaker than expected fQ4 guidance in some ways appears to be a tad muted given the fact that the options market was implying a little over a 5% move, which was in line with the 4 qtr average of about the same.

As we digest the report, and the expected reaction, I think it would be a bit premature to assume that this morning’s opening in the stock will be “the move”.  Lets not forget, AAPL is (was) a $562billion company, and it takes a bit more than some day traders and hedge funders in after-hours/pre-market trading to move the stock in a meaningful way, so the real action will happen after the open, and could become the beginning of a trend for days/weeks to come.  

As of yesterday’s close AAPL was up over 48% ytd, and has been the source of a good bit of ytd gains for many fund managers and retail investors alike.  AAPL management, whether they know it or not, sounded the least confident about their “road ahead” than they have in sometime.  I have listened to their quarterly conference calls for years and have rarely heard them as defensive and basically flat-footed as they were on last night’s call.  If they had an iPad “mini” in the works, their guidance and the nature of their commentary did not in any way reflect any sort of guarded confidence that the weak trends in Q3 were set to abate prior to new iPhone launch in the fall.  On the call the CFO actually mentioned that the “rumors” of a new iPhone likely hurt demand, REALLY?  For a company that does respond to market rumors, that seemed like an extremely lame defensive of iPhone underperformance in the period just ended.

Also the back and forth about inventory re-shuffling, channel inventory, geographic mix etc etc on the call regarding iPhone units sounded a whole heck of lot like the crap we used to hear from the managements of MOT, PALM and RIMM as they were shifting from the rapid success or adoption of a product and moving into a more mature phase of said product (think RAZR, ROKR, PRE & Torch).   While AAPL is certainly not, and never will be  remotely similar to any of those crappy companies, they will not be immune to some of the same headwinds as it relates to the unavoidable commidization of their mobile products, which will result in the eventual pricing pressures that will ultimately cause margin degradation.

The company mentioned on their call that the U.S. and China remained good sources of growth while Europe, Brazil, Australia and Canada were weak in the quarter……with the sort of miss to expectations for Q4, the guidance could actually prove aggressive if we were to see a material slowdown in the U.S. and China as many other high end consumer companies have hinted to already.

With no real catalyst in sight until the expected Sept announcement of an Oct iPhone5 release, the stock could be dead money for a bit as investors with large ytd gains look to lock them in as we sit and wait for the next big thing.   Frankly we are very surprised that the stock is only down 5%, but as we said above, the big boys havn’t joined the party.  If the shares rally after the open we will look to buy either July weekly Put Spreads, or Aug.  We think the stock tests $550 in the days to come. We will look for the best risk/reward opportunities to “press the short” on a rally.



MorningWord 7/24/12:  As  many readers know we have a little love/ hate thing going with AAPL for the last 9 months or so, the love is mostly reserved for the products and the company’s near flawless execution, and the hate primarily for the hype around the stock, which to be fair the company has little control over. (CC- editor’s note – Wha?! Hype is their biggest product)

To be contrarian  for the sake of being contrarian in a stock like AAPL could have been near fatal for the last 3 years as a trader, so we have tried to pick our spots.    In many ways the story and the price action of late has become far more rational since the stock declined about 17% from the blow-off top and all time highs made in early April, as the stock has settled down a bit at the mid-point of the 4 month range.

1 yr AAPl chart from Bloomberg


While the fever has broken a bit from a price action perspective, the hype in the media has also cooled down a bit, as it appears the financial press and the Wall Street analyst community have gotten a bit used to the company’s methodical product release schedules (ie. iPad release April and iPhone release Oct) and they find refreshes to iMacs/Macbooks/iPods as an added bonus.  I will mention that the blow-off top in April did correspond with the fever-pitch speculation about AAPL introducing an iTV by Christmas and it seems once that talk subsided, so did the irrational price-action.

On another note, I have graced the screens of CNBC on that nearly award winning program Options Action since April 2009, and I think that this past Friday’s show might be the very first show prior to AAPL’s quarterly earnings report that we did not preview the event in that time period.  Additionally on my weekly fly-by on CNBC’s Fast Money program the AAPL chatter has probably decreased  80-90% on any given day in the last few months from the prior few quarters.  MAKE NO MISTAKE ABOUT IT, THIS IS BULLISH FOR THE STOCK, OR MIGHT I SAY LESS BEARISH IF THE COMPANY DOES HIT A ROADBLOCK IN THE NEAR FUTURE.

None of the above comments constitute a bullish posture on my part, just some quick anecdotal observations of the sentiment surrounding the stock, from a guy who has recently loved to hate the euphoria in the name.  The Fever has Broken, and maybe just maybe the stock may trade like a mere mortal in the months, years to come and cynical guys like me could actually own it without fear of joining the mania.

Please stay tuned for a detailed quarterly preview, and commentary around trades that we are considering on Quick Hits throughout the day.