Prince Spaghetti Day
Those of a certain age can easily recall the television commercial. The woman yelling the name "Anthony" out of her window. The boy running through the streets of northern Boston to get home in time for his supper. Why was Anthony in such a hurry to get home? It was Wednesday -- and in his family, Wednesday was "Prince Spaghetti Day."
For most of us, I am willing to bet, today is not Prince Spaghetti Day. It is, however, still Wednesday. And that means it is Fed Day. The FOMC will release their statement on monetary policy this afternoon at 2 p.m. ET. They will almost certainly announce their third increase of one quarter of one percent to their target for the Fed Funds Rate. That will place the FFR in a range of 2% to 2.25%. Traders and investors, alike, have not only priced in this rate hike, but have almost completely priced in a fourth such rate hike for 2018 on December 19.
There are, for those of us who wade into the financial arena on a daily basis with our sabers unsheathed in the hopes of bringing home some income, a few items that have not been, and cannot yet be, fully priced in. We just do not know how strong the message of the official statement will be, or where there may be movement along the FOMC's dot plot.
Then there will be the press conference where the pragmatic meets the unpredictable. What we need to hear, and likely will hear, will be Chair Powell's thoughts on both growth and inflation. This will be where the rubber meets the road. This is where tariffs get more than a mention. Rising input costs are certainly present if not visible yet at the consumer level. Is this the growth killer? Or does tighter policy choke off growth before inflation even makes it necessary.
Some say it was a squadron of biplanes that killed the beast -- but you've heard the man, and so did everyone else. 'Twas beauty that killed this beast.
Speaking of Input Costs
Don't even try to tell me that you have not noticed rising prices for crude, particularly for Brent, of late. Thank Iran. Thank Venezuela. Thank OPEC. You either love it because your energy names have poked their ugly little heads out of their disgusting little holes, or you hate it because you went for that big SUV last time you needed to buy or lease a new vehicle.
Question. What's probably really bad for corporate earnings going forward? Take your time. That's right. Higher energy prices coupled with rising interest expense. What? Corporate debt hit a record $6.3 trillion in the second quarter? Good thing the equity market is strong. At least they haven't been supporting equities with repurchasing programs that themselves were supported with additional corporate debt, or repatriated cash, right?
The velocity of money. Breakaway speed. This is what will save us. Still, one must understand the risks of remaining overwhelmingly long the equity space for the long term. Am I telling you to scram? No, I am not getting out of Dodge, but I am thinking of my escape plan -- and you should be too.
Yes, we likely have a couple of quarters to go on the current era of extraordinary earnings growth, and that really is the final say on market pricing. I will never be all-in, nor will I ever be all-out. For me, it's a matter of naked risk versus hedged risk. That and sleeping at night.
Just be fully cognizant of all possible negative outcomes, and become comfortable with your own tolerance for pain. Understanding the environment provided is the first step in the ability to adapt. We will game-plan the rest as conditions warrant. On my honor, I will never abandon you.
Earlier this year, I purchased for my family a new washer and dryer from General Electric (GE) . Our old ones were nearly twenty years old, and for the most part neither washed nor dried our clothing. The good news is that everyone in the family is very happy with the new appliances. I really am quite surprised at how far washers and driers had come since before the turn of the millennium.
Now, for the bad news. I also bought the stock of GE this summer -- even after it took the risk management effort of my career to turn a profit on a long position in GE held from late 2016 through early 2018. That is, if you call preserving one's principal and maybe adding bus fare "a profit" after more than a year of effort... and financial engineering.
The shares closed down 4% in Tuesday trading, and have retreated a rough 12% in a week's time since problems started showing up for the firm's gas turbines involving the lifespan of single blade components. Uh Oh.
September 20 was also the day that JP Morgan cut its price target for GE from a lofty $11 to just $10. Stephen Tusa, the JP Morgan analyst who just keeps on being right about this firm, cut his 2019 EPS estimate for GE by a nickel, and commented on how little wiggle room the firm has for negative news flow.
Never Leave the Boat
I read somewhere that from 1963 through 1975, fifty U.S. service members were killed by tigers in Vietnam. Encounters with dangerous wildlife are fairly common in the infantry. The man vs. tiger encounter was played upon in the movie "Apocalypse Now", when the character "Chef" leaves the boat and searches the jungle looking for mangoes. Once safely back aboard their "Swift Boat," Chef declares that he will never again leave the perceived safety of that craft.
The same wisdom possibly could have been applied to the idea of investing in General Electric. But that is water under the bridge, at this point. Hence, the time has come to manage another lousy position in GE.
Thankfully, the size of my long in this name is rather pedestrian -- compared to the last time that I let myself realize that I had wandered into a minefield. I really can not complain. My average price is $13.16 for the equity, and factoring in the puts that I have written against this name, my net cost basis is $11.24. At a last sale of $11.27, one might say that I do not yet have a problem.
That said, my short put positions are rising in value and could put me in a position to have to purchase more equity at what might be a disadvantageous price when they expire in December. Obviously, the name is not cheap enough to make further equity purchases attractive, and flattening my options positions now will force my basis considerably higher. So, what now?
It does not take a whole lot of cognitive ability to understand what happened when the downward-sloping trend line met up with the support base. Of course, this event coincided with the recent news cycle, which has been severely negative for the firm.The Pitchfork does suggest that a new level of support could emerge somewhere between $10.75 and $11 within the month of October. That is, assuming no new negative headlines appear -- and you know what happens when we assume.
- The Market's Been More Sloppy and Choppy Than Anything Else
- Bonds at Important Level as Market Awaits Fed Decision
This is the one stock that I both want to buy and short, depending on what time of day it is. I certainly will not consider adding new equity at any price sporting a handle above "ten". I will not give up completely, because yesterday's beat-down in particular did have the scent of capitulation about it.
Maybe. Maybe not. What I would like to do is write some calls against my equity long, but you know what? GE will report their third quarter the morning of Thursday, Oct. 25. There are no options valuations attractive enough at this point to make a sale worthy, at least not to me.
In fact, December $14 calls only paid $0.08 last night. The $13 calls paid a whopping $0.16. Kind of reminds me of an investor with no hope screaming in a place where no one will hear.
The GE "No Hope" Trade Idea (minimal lots)
When expected volatility is so low that making a sale does not make sense, what can one do? That's right. Buy the volatility. That's where the risk/reward is. Good for you. I'm glad that you thought of that on your own. Best part.... this will cost 'but a song.' Lose the whole ball of wax? So what. Taking my family of four out for McDonald's (MCD) would cost me more.
--Purchase one October 26th $12 call (last: $0.18)
--Purchase one October 26th $10.50 put (last: $0.18)
OutcomesShould the shares trade between $10.50 and $12 through the evening post-Flannery's earnings call, the trader is out $36. Big deal. Should the action between now and that call push shares more than $0.75 to $0.80 in either direction by that expiration... well then, we have a ballgame.
Economics (All Times Eastern)
10:00 - New Home Sales (August): Expecting 630K, Last 627K SAAR.
10:30 - Oil Inventories (Weekly): Last -2.057M.
10:30 - Gasoline Stocks (Weekly): Last -1.719M.
14:00 - Federal Reserve: FOMC Policy Decision.
14:00 - Federal Reserve: FOMC Economic Projections.
14:30 - Federal Reserve: Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Editor's Note: This article was updated to note that GE's expected reporting date is Oct. 25, not Oct. 19, and the options trade idea adjusted accordingly.