New Trade – $BA Humbug

by Dan July 10, 2015 1:51 pm • Commentary

U.S. multinationals have had no shortage of headwinds over the last year with the volatility of currencies and commodities being s constant push and pull on earnings. Now the uncertainty regarding the health of the global economy and the recent volatility in Chinese equity markets is weighing heavy on sectors with heavy international exposure, despite the S&P 500 (SPX) just 3% from its all time highs in May and up 1% on the year.

For those who are skeptical of this late week bounce in the SPX as Chinese markets stabilized and deal potentially in motion for Greece, it makes sense to look to fade the recent bounce in U.S. multinationals. Those stocks could offer weak forward guidance in the coming weeks as result of continued dollar pressure and the potential for weakness in China. Yesterday, we did just that in Proctor & Gamble (PG), read here, and today we want to look at another industrial stock (Boeing). BA gets more than half their revenue exposure outside the U.S, a little more than a quarter comes from Asia, and about 15% from China.

BA’s next identifiable catalyst will be their Q2 earnings scheduled for July 22nd before the open. BA’s price action in 2015 has been fascinating. At one point in February the stock was up 20%, having made new all time highs and up 20% on the year.  Since those highs the stock is down about 8.5%, but still up 11% on the year, massively outperforming the S&P500.

The two year chart of BA shows the stock’s epic breakout earlier this year, and the steady downtrend since February:

BA 2yr chart from Bloomberg
BA 2yr chart from Bloomberg

The stock has now re-tested the downtrend, and it is my view that a failure here would mean a re-test of the breakout level just below $140 and possibly put $130 back in the cards, round-tripping the entire one year move.

It is my belief that the recent bounce in Chinese equities does not mean the end of the sell off, and that rallies should be sold. It is also my belief that that while some large U.S. multinationals may incorporate some of this negative sentiment regarding the health of the Chinese market. Obviously, it’s important to separate the stock market from the economy.  But if we see lower lows in the stock market that could easily cause problems for the economy as the wealth effect reverses. Obviously, retail consumers with online trading accounts don’t buy 787s but a sentiment shift about returns from investment trickles down into the real economy, including travel.

If BA  management hints at slowing growth in emerging regions like China on their Q2 call then I suspect the stock goes back to unchanged on the year.  So here is the trade:

TRADE: BA ($144.50)  Buy to Open Sept 140 / 130 Put Spread for 2.20

-Buy to Open 1 Sept 140 Put for 3.40

-Sell to Open 1 Sept 130 Put at 1.20

Break-Even on Sept Expiration:

Profits: up to 7.80 between 137.80 and 130, with max gain of 7.80 at 130 or lower

Losses: up to 2.20 between 137.80 and 140, with max loss of 2.20 at 140 or higher

Rationale:  This trade is not only targeting the earnings event, but also the company’s exposure to global growth, which I suspect will become a theme amongst investors if Chinese stocks are unable to stabilize.