MorningWord 2/8/13: World of its Own – $LNKD

by Dan February 8, 2013 9:10 am • Commentary

MorningWord 2/8/13:  Last night LNKD reported Q4 sales and earnings that handily beat Wall Street expectations and raised Q1 guidance which could prove to be conservative if the company maintains current quarter over quarter growth rates. As expected, the shares are up nearly 10% in the pre-market, making new all time highs, and slightly out-performing the 8.5% implied move in the options market.  

We took a hard look at LNKD’s Q4 report in a preview on Wednesday (here) and a Name That Trade post yesterday (here) and decided not to trade as we felt the only real negative on the qualitative side was Valuation, and on the quantitative side the implied move seemed fair.  This is a fairly important point we want to make to readers, we don’t trade for the sake of trading, to be in the game, because when it comes to trading options, particularly with long premium, over time this will most definitely be a losing strategy. We do our best to introduce short premium trades when we have a sense that there is a disconnect btwn fundamental expectations and what options market makers are expecting, we did not feel that way in this situation, we felt a fairly strong likelihood that the stock could be up or down inline with the implied move, but without directional conviction we were left with few trades that made sense.

In yesterday’s Name That Trade post I highlighted the price action in LNKD after its Q3 report in early Nov:

After the company reported their Q3 back in early Nov, the stock gapped up 8%, slightly below the implied move, but the opening print that morning was the high, and the stock spent the rest of the day giving back the initial gains to almost close on the low of the session, virtually unchanged on the day (highlighted by green circle).

[caption id="attachment_22472" align="aligncenter" width="490"]LNKD Nov 2012 chart from Bloomberg LNKD Nov 2012 chart from Bloomberg[/caption]


Given this mornings gap higher to new all time highs, similar to last quarter I think it makes sense to keep an eye on whether or not the stock can hold early gains and if I were a day trader I might take shot on the short side, with a tight stop.   I will note though that the set up today with the SPX above 1500, vs the SPX at 1430 when they reported is a tad more euphoric, and investors are happy to stick with what is working as opposed to 3 months ago when there still appeared to be a bit of uncertainty priced into the market.

Haters of this company for competitive reasons, or investors/traders who think the valuation makes no sense are just gonna have to wait on the short side, this one is in a world of its own, and trying to pick tops is likely to be an expensive endeavor for the time being.  Many of you would expect noted contrarians like ourselves would be drawn to a stock like this on the short side, and frankly we gave up last summer as we came to the conclusion that we would rather press the short once the fundamentals changed than just be contrarian for the sake of it……..many of you may recall that capital preservation is high on our list of successful trading principles!




MorningWord 2/7/13:  With S&P 500 earnings more than two thirds complete for Q4, the data suggests a fairly healthy beat rate by most of the super-sectors in the index.  Yesterday, Bespoke ran a chart showing 64% of the companies that have reported beat on earnings and 63% have beaten on sales (below).  I guess the one obviously cynical caveat is that the expectations that companies have been beating have for the most part been coming down for the better part of the last 4 months.

Bespoke Investment Group   Think BIG   Earnings and Revenue Beat Rates by Sector
Courtesy from Bespoke

With the SPX approaching 5 year highs, my sense is that the next leg of any rally will have to come with meaningful revenue growth from a broad swath of the component companies.  Investors have pointed to stable earnings in an uncertain time, yet most companies have cut costs to the bone with mass layoffs and lower capex, while they have been borrowing money to buy back stock and thus buoy earnings.

While bulls applaud the beat rates, I want to keep a close eye on market leaders whose earnings results were met with immediate excitement, which quickly abated.   The most noteworthy would be IBM, AMZN and DIS.   IBM is of particular importance as it is one of the largest weighted stock in the venerable Dow Jones Industrial Average at 11%.   As the Dow flirts with new all time highs, it largest component has been basing at the low end of its earnings gap and just yesterday started to fill it in.

[caption id="attachment_22447" align="aligncenter" width="490"]IBM 1 Yr chart from Bloomberg IBM 1 Yr chart from Bloomberg[/caption]

The price action yesterday of another large cap Dow component, DIS was also interesting as the stock was trading up 5% in the after hours Tuesday evening after its strong quarterly report, only to see the stock open yesterday morning 2% below those levels and have the opening print be the high of the day while the closing print be nearly the low.

[caption id="attachment_22446" align="aligncenter" width="490"]DIS intra-day Feb 6th, 2013 from Bloomberg DIS intra-day Feb 6th, 2013 from Bloomberg[/caption]


Buyers are getting exhausted as stocks like DIS gap to new all time highs and fail and stocks like IBM attempt to make a run at 52 week highs and can’t muster the steam to do so.  This could be an interesting “tell” for the health of the current rally.

One More thing, last night I saw what I think is the BEST band in the WORLD right now, Mumford & Sons perform at the Barclays Center in Brooklyn.   Here is a clip I took, I Will Wait from their fairly new album Babel.


Here is one more, Holland Road, also off of Babel.


MorningWord 2/6/13:  Since the June 2011 announcement that AAPL’s retail head, Ron Johnson was leaving to become JCP’s CEO, the stock and its investors have been on a wild ride.  The announcement alone sent the shares soaring 20% in a day, only to have investors realize that the job facing Johnson – to turn the beleaguered retailer around -would be a herculean task despite the brilliant job he did with AAPL over the previous decade.  Johnson is facing a similar but opposite challenge that John Sculley faced in the early 80s when he joined AAPL to become CEO.  Sculley found out the hard way that selling high end computers was VERY different than selling sugar water to the masses. Johnson is grappling with the challenge of trying to create a great retail experience focused on what Steve Jobs would likely have called “crappy products”.  To be fair, this is not lost on Johnson, and he is spending a good bit of their restructuring on creating stores within the store featuring brands like Disney, Levi and Lacoste.  

Only time will tell how this strategy goes, but unfortunately time is not on JCP’s side.  Since Johnson took over in late 2011, the stock is down about 35%, and down over 50% from the 52 week highs.  The honeymoon period has been over for some time for Mr. Johnson, and every opportunity the company has to articulate their plans for a turnaround becomes increasingly important.

The stock trades in a fairly manic way, as 80% of the shares outstanding are held by only 10 investment firms, the largest being Bill Ackman of Pershing Square (of HLF fame).  On the flip side, 46% of the shares outstanding are in the hands of short sellers.  There is a battle royale going on here, and it’s not only playing out in the stock.  Options prices are unusually elevated, and while the open interest appears to be fairly matched btwn puts and calls, the large block flow has been decidedly bearish from what I can tell.

The stock was down 6% yesterday morning on rumors of a bond default by JCP, but once CNBC started running promotions that CEO Johnson would be appearing on their air today at 11:30am et, the stock turned around and actually closed up 2.5%.  I guess the assumption is that he would not be going on TV, 3 weeks prior to their Feb 27th Q4 earnings announcement, if he didn’t have something good to say.

Wall Street analysts are overwhelmingly negative on the stock with 3 Buys, 11 Holds and 7 Sells (one coming this morning attached to a $10 price target) with an avg 12 month price target of $19.

Implied volatility is through the roof, with 30 day IV approaching 3 year highs (blue line), which makes a bit of sense when you consider the stock’s realized vol is well above the 3 year avg (white line).

[caption id="attachment_22394" align="aligncenter" width="589"]JCP 30 day IV vs 30 day realized over 3 yrs from Bloomberg JCP 30 day IV vs 30 day realized over 3 yrs from Bloomberg[/caption]

The stock is already trading down 3% in the pre-market, I would expect the stock to continue to be volatile, and frankly wouldn’t be surprised to see the stock move 5% higher or lower after today’s tv interview.   This is definitely a stock we are keeping a close eye on as the situation becomes increasingly binary.



MorningWord 2/5/13:  All that talk of last week of fresh highs in the Dow Jones Industrial Average was bit silly to me, the Dow, Really??  1960 called, they want their stock index back.  The Dow consists of 30 of the safest well owned equities the world over and let’s be honest, if AAPL was in the index over the last few years there would have been material out-performance resulting in new all time highs last year while the world was still focused on such blase topics like European Austerity, Blue & Red States, and Fiscal Cliffs.  Because the Dow is price weighted, AAPL would have made up well over 25% of the index at any point last year, compared to IBM’s current ~11% weighting………traders on the NYSE would have been dusting off those Dow 20k hats they had printed back in early 2000.  Quoting the Dow is a fairly meaningless endeavor and I am not really sure why the financial media continues to do so, 99% of U.S. equity traders I know stare at the SPX or corresponding futures for the better part of the day as it is a much clearer indication of breadth even though the top 10% of the index make up 50% of the weighting.  

No matter how you slice it though, when you look at the all maximum price history of either the venerable Dow, or the SPX, the near term set up does not look great from a technical perspective. Where the hell do these charts go from here.  The first chart below of the Dow from 1980 to present shows the near breach of the 2007 all time highs, which is most likely coming to a theater near you in the first half of 2013, but where from there? Uncharted territory??

[caption id="attachment_22321" align="aligncenter" width="589"]Dow Jones Industrial Avg 1980 to Present from Bloomberg Dow Jones Industrial Avg 1980 to Present from Bloomberg[/caption]


The Chart below shows the SPX from 1980 to the present which is now about 5% from the all time highs.  While I think there is a good shot we test those levels, we will need a heck of a lot of things to go right from here to have the SPX close 2013 above these levels, especially when you consider ytd gains of almost 5%.

[caption id="attachment_22320" align="aligncenter" width="589"]SPX 1980 to Present from Bloomberg SPX 1980 to Present from Bloomberg[/caption]


I don’t bring all this up because I am particularly bearish, I  merely think that 14k in the Down and 1500 in the SPX are HORRIBLE entry points for new money earmarked for equities.  Obviously there is nothing scientific here, just a couple observations, complacency seems very high, which appears dangerous at nosebleed levels.  Those 2 charts look like the mother of all double and triple tops, I’m just sayin…….

Yesterday’s 3% decline in the Euro Stoxx 50 (SX5E ), capping a near 5% decline from the 52 week highs, should serve as a healthy warning that equities can decline when we least except them too.





MorningWord 2/4/13:   As a trader, I make my fair share of mistakes, usually not the same one over and over again, but often times it takes a few attempts to break a bad habit   A week ago Friday, while Bill Ackman and Carl Icahn were duking it out on CNBC (below) over their opposing views/positioning on HLF (among other things), my sense was that the spike in short dated implied volatility offered an opportunity to sell Feb to own options in March expiration that would include HLF’s next quarterly report.  I bought a Feb/March 40 Put calendar when the stock was ~$44.50, and my play was that the stock would remain btwn the high 30s and the mid to low 40s btwn then and Feb expiration.

And here is the mistake, using options to get too cute trading a potentially binary event where the timing is uncertain……….this morning, the NY Post is reporting that the FTC is looking into HLF’s sales practices, which is a main tenet of the Ackman’s short thesis.   My cynical predisposition and Ackman’s very public accusations against HLF led me to side with his bearish argument, yet the fact that Ackman is short nearly 25% of the float made me nervous to commit capital to an outright short position. Outright put purchases would have been very profitable in hindsight.  IN the  trade that I put on, I sold the Feb 40 Put at 1.20 to buy the March 40 Puts for 2.70.  The Feb 40 Puts closed Friday at 5.50 and they will be worth a heck of a lot more this morning with the stock trading ~$32 in the pre-market.

Hindsight is obviously 20/20 and if I had thought the stock had the potential to drop 30% like a rock in less than 2 weeks,  I would have obviously bought puts or put spreads, or sold call spreads, and for the most part the trade that I chose offered a much higher probability of success.  I have said it before in this space, trading is hard, and sometimes those of us who use derivatives of the underlying make it harder than it needs to be, but the longer I do this the more interesting the trading opportunities become, aside from just being long or short.  Stay tuned for a trade update on how I manage this trade.


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