New Trade – TIF: Weakness at Tiffany’s

by Enis August 14, 2012 1:29 pm • Commentary

Dan had a great post on Tiffany’s stock back on May 24th, when the stock first convincingly broke the $60 support level after an earnings miss and weaker guidance for the balance of the year, mentioning both weakness in Asia (35% of TIF revenues) as well as some weakness on the East Coast of the U.S.  Here is an excerpt of what he wrote almost 3 months ago:

Taking a longer view, the chart shows some fairly important breaches of important technical levels: 1) today broke a huge support level (~$60) that has been intact since late 2010, and only broke that level for short periods in severe times of stress, 2) in the weeks prior to today’s earnings gap, the stock broke a massive uptrend line that had been intact since the market lows of mid 2009, and lastly, 3) the series of lower highs and lower lows since the top made after the more than 50% mid 2011 rally, signals that this stock has most likely found a new trading range below $60.

3 yr TIF chart from Bloomberg

One more chart stuck out to me, the 20 year.  There have been 2 rapid $40 dollar rallies in TIF in the past 20 years, the first led by the growth of the U.S. consumer in 1999, and the second led by the growth of the Chinese consumer in 2010-2011.  After the strong rally in 1999, the stock stalled out as U.S. growth slowed after the tech bubble, and I envision a similar scenario developing today in TIF, as Chinese growth slows after their fixed investment bubble over the next few years.


2o yr TIF chart from Bloomberg


The stock is within 1% of the important $60 level today, rallying on the strong retail sales number.  This is the retracement that Dan and I have been watching for a potential chance to enter into a bearish bet on TIF after that earnings miss almost 3 months ago.  TIF will be reporting earnings in about 2 weeks, and while analyst expectations have been lowered after the last earnings report, the stock has almost recovered to the same spot prior to that earnings report.  [private]

Asian economic weakness continues to be a theme on which we have built increased conviction.  Dan’s trade on YUM on Aug 10th was focused on Chinese growth concerns, and I have a current FXI long Sept put spread that I initiated with the same thesis.  Price signals emanating from China confirm continued weakness there, as evidenced by both the Shanghai Composite, as well as Dr. Copper, the most frequently traded industrial commodity with the exception of crude oil.

On the subject of Copper, Ft Alphaville had another piece today illustrating the longstanding elevated copper inventories throughout China.  Those elevated inventories are a much clearer signal of lack of demand in China than any economic releases.

So with TIF near $60, and reliant on Asian demand for growth, I think the entry is right for a play back to the downside.  I want to give myself a few months for this trade to play out, so I chose November expiry:


TRADE: TIF ($59.45) Bought the Nov 55 / 50 Put Spread for $1.21

-Bought 1 Nov 55 put at 2.28

-Sold 1 Nov 50 put at 1.07

Break-Even on Aug Expiration:

-Gains below 53.79, max gain of 3.79 at 50 or below on Nov expiry

-Losses between 53.79 and 55, max loss of 1.21 at 55 or above on Nov expiry

-I bid 1.21 with the bid/ask of 1.15 at 1.24, and I got filled, so there is some room for better execution.


Trade Rationale: I chose November because it gives me 3 months for a renewed market downturn.  At the same time, I chose the 55 / 50 spread because the 50 level is basically the low of the year that TIF registered in late June.