Archive for June, 2010
Tesla (TSLA) Drives onto the Nasdaq
by Jared Levy on June 29, 2010
Shares of Tesla are expected to hit the public stock market today with a $244 million offering. Tesla will be the first American automaker to be listed on a major exchange since Ford Motor, which went public in 1956. But before you get all excited, be sure you do your homework. Keep in mind that Tesla has yet to turn a profit (since its 2003 inception) and is coming to market amidst some serious global economic headwinds, not to mention a very finicky car-buying public.
As a car NUT myself (and having owned many exotics and regular cars alike), I can tell you that the car business is a tough one to break into. Companies like Ford, GM, Toyota (even with its recent issues), Mazda, Mercedes, BMW, Honda, Subaru, Renault, and many others with similar pedigrees hold a firm grip on the average car buyer these days. These companies are established and producing reliable and sometimes pretty sexy cars with vast networks and marketing machines.
So why, especially in times of economic uncertainly, would anyone want to go out and buy a $100,000+ niche car? Tesla basically has two models available now, both in the six-figure range. They both look like Lotus Exiges, just with electric power plants. Personally, I would rather save $30,000 and buy the Evora.
I did the math and at $2.60 per gallon, with the Evora’s mpg rating, driving 10,000 miles per year (probably much less with a specialty car such as this in reality) would cost about $815 in petrol annually. Heck, even if my gas bill hits $2,000, I could drive the Evora for 15 years for free before the fuel savings would justify the additional $30,000 for the Tesla. Granted, there is a market for cool expensive supercars, which I guess the Tesla fits into, but does a “novelty” car company offer real shareholder value?
Monsanto’s Earnings and Commentary offer a Look into Agro Industry
by Jared Levy on June 28, 2010
Monsanto (NYSE:MON) is always one of my favorite stocks to watch, and I enjoy listening to their earnings conference call even more. Earnings are expected to be announced on June 30. With 15 analysts covering MON, the consensus per-share estimate is $0.80, and the high and low estimates are $0.85 and $0.75, respectively.
Monsanto is a world leader in specialized seed production and was the creator of the glyphosate based herbicide Roundup. This product used to be a rose but appears to have become a thorn in MON’s side, losing market share to cheaper Chinese versions since its patent protection expired. The good news is that the Supreme Court recently lifted a ban on Monsanto’s Genetically Modified Roundup-Resistant Alfalfa seed. The company also announced a three-year, $1 billion share buyback effective July 1, 2010. MON also declared a quarterly dividend of 26.5 cents per share on its common stock. The dividend is payable on July 30, 2010, to shareowners of record on July 9, 2010.
On June 9, MON said they are “working on a revitalized product strategy to bring more choices to farmer customers, offering them the premium opportunity the company’s products create.” With this, they projected mid-teens earnings growth beyond this fiscal year. I’m curious to hear more details on their strategy.
While all of these developments appear promising, the stock has not had such a positive reaction. Since making these announcements, the stock has slipped another 3% lower, down to its current level of about $47.75. Observed 30-day volatility has been on the rise; after hitting a low of 17.7% in mid-April, vol surged to a recent high of 40% and has dropped off a bit in the past week or so to 38% in the at-the-money front month options. Implied volatility ahead of the report has been on the rise, but has not exceeded the historical level…
Anecdotal Evidence: You Could Have Waited to Get Your iPhone
by Jared Levy on June 25, 2010
The question is, why would you want to? Earlier this week I wrote about the man who was camped out in front of the Apple (NASDAQ:AAPL) store for seven days to ensure that he got his new iPhone 4. Well. Mr. Wagoner maybe could have saved himself a bit of heat stroke and heartache in the sweltering Texas sun.
This morning, I took a ride by the Apple store at 10 a.m. to check out the insanity. Lo and behold, the lines had died down to about 12 deep. There was still a fully armed Dallas police officer to keep everyone in line; you know how those Apple users can be rowdy and unruly… 
But in fact, all of the prospective customers who showed up at the Highland Park Apple store yesterday were able to claim their new shiny glass devices and could, in fact, have waited until Friday to claim their phones, as there were still some in stock this morning. According to a very helpful and seemingly knowledgeable rep (called “Geniuses” at the Apple Store, btw), they were beginning to run low.
Earnings, Economic Data, and the Housing Sector: A Fast Money Post-Mortem
by Jared Levy on June 24, 2010
On Wednesday’s episode of Fast Money on CNBC, there were a ton of topics discussed and I wanted to clarify my thoughts and elaborate here (especially for topics I didn’t get to address in full on the air).
With the third-quarter earnings season ahead of us, let’s take a moment to reflect on the second quarter that is wrapping up. During the last reporting period, 480 stocks in the S&P 500 Index had reported as of Tuesday’s close. Out of these, 389 exceeded analysts’ consensus view, with overall net earnings growth of 54.15% year over year. This leaves the S&P index with a trailing price-to-earnings (P/E) ratio of 16.1 and assumes a forward P/E of 13.3, based on analysts’ expectations of $81 in net index earnings by this quarter next year.
While P/E ratios seem to be in a relatively neutral-to-low state looking forward, there are still issues to contend with, namely housing and unemployment.
According to a Fitch report from earlier this month:
- May Residential Mortgage Backed Securities (RMBS) delinquencies declined for the second straight month, following a steady four-year increase; this is a positive.
- For subprime: 44.8%, down from 45.2%
- For Alt-A (borrowers with less than full documentation and lower credit scores) 33.9% percent, down from 34.1%
- They did note, however, that “approximately nine percent of performing Alt-A loans and 37 percent of performing subprime loans are modified and have a substantial risk of re-default.” This is still a negative sign.
This week, we got the following data:
What to Make of Tuesday’s Late-Day Selloff?
by Jared Levy on June 23, 2010
The S&P 500 Index has been chugging along to the upside since hitting its most recent low of 1,042 on June 8. At the time, that low was exactly at the lower two-standard-deviation Bollinger band, possibly indicative of an oversold condition. As of Tuesday’s close, we were trading in the middle of these bands.
Since the June 8 low, the broad market ETFs such as the SPY and the DIA have been moving higher on lower and lower volume, which could mean a lack of conviction on the part of market participants. That weakness is maybe beginning to rear its ugly head in the past two days’ price action.
When the SPX began moving lower back on April 26, the price of the index shifted lower during the last 30 minutes of the trading day, accelerating the moves south from early in the day and confirming direction. From June 8 until Monday, the prominent market action was to move higher in the last 30 minutes of the day, leading the market to a net gain in that period. But that trend may be changing yet again and the reluctance of traders to hold positions overnight could be one cause of this.
I remember as a market maker and specialist, one of the main ways…
A Derivative of Apple’s (NASDAQ:AAPL) Success?
by Jared Levy on June 22nd, 2010
So after the market closed yesterday, I took a ride down the street to my dentist’s office for my every-six-months hour of fun and excitement with the hygienist. On my way home, I decided to take a different route that took me right past the Highland Park Apple Store, about a block away from my home. I had heard a rumor about a guy who had been camping out since last Friday for the new iPhone 4 and I had to check this out. Sure enough, with tent, Bunsen burner, lawn chairs, and an endless supply of water (it’s 103 degrees today, with not a cloud in sight), I saw him.
Justin Wagoner is a local celebrity and maybe a bit crazy for waiting in the 100+ degree endless summer solstice sun. According to him, he has been the first in line for the all of the iPhone releases at this store.
He was greeted with some honking by passing Dallas-ites during the three minutes I was there, but many just think he is crazy, according to local blogs and articles. I would call him determined and passionate to say the least. I mean, you can’t get a iPhone 4 right now, so maybe he’s not so nuts. They did pre-sell 600,000 in one day.
But this story isn’t about Justin or his fellow crazed Apple fans braving ridiculous weather conditions alone to get the iPhone 4, it’s about the slew of 3Gs and 3GSs that will be hitting the secondary market, namely by way of places like eBay, craigslist and Gazelle.com, who has received a record number of iPhone trades. By my estimates, there are more than 49 million 3Gs and 3GSs in the hands of folks around the world. When Apple rolled out the 3GS, a large amount of legacy owners upgraded their phones, and that change was largely to do with speed rather than the phone itself.
Planning for the Week Ahead
by Jared Levy on June 21, 2010
Any successful trader or business man (woman), knows that planning ahead and preparing for upcoming events and potential threats to your investments is key to preventing catastrophe. The first thing every investor needs to do is to maintain a general awareness of upcoming events that are already announced. In a world full of uncertainty, at least we get to know a little bit about the future. First off, major economic data coming up this week includes:
- Existing home sales Tuesday (Expectations for 6.23 million)
- New Home Sales, FOMC statement and rate decision Wednesday (Expectations for 435k homes and minimal verbiage change from the FED with no move in interest rates, respectively.)
- Core Durable Goods and Unemployment claims out Thursday (Expectations for a 1.1% rise in durable goods orders and 461,000 in weekly initial unemployment claims.)
- Friday brings the final reading on quarterly GDP as well as the University of Michigan’s consumer sentiments revisions. Both numbers are expected to be unrevised from their last readings.
As I mentioned early last week, earnings season is upon us, but will not be coming full force until the second week of July. I also mentioned early Friday that expiration Friday (quadruple witching) has really been a non-event as of late. This was confirmed by the modest bullish moves we saw on Friday.
Quadruple Witching – What is it?
by Jared Levy on June 18, 2010
Don’t worry, the wicked witches from each nautical direction aren’t going to come swooping down on their broomstick, although it may feel like that now. Quadruple witching happens on the third Friday at the end of each quarter – March, June, September, and December. Most of us are familiar with regular equity options expiration, which occurs on the third Friday of every month. Quadruple witching is simply the simultaneous expiration of four different financial vehicles:
1. Equity options
2. Stock index futures
3. Stock index options
4. Single stock futures (note: not many of these trade)
I have written on this topic in the past and I thought it was necessary to address the quad-witching fear out in the blogosphere. Going through some financial blogs and even mainstream articles out there, it seems folks are blaming expiration for a major potential move in the markets.
We have been trained by the media to use the words “volatile” and “choppy” when describing options expiration (and especially triple and quadruple witching). Bloggers and people who know little about what is actually happening tend to exacerbate this misconception.
I agree that there was a time where quadruple witching and even regular options expiration was a stressful and sometimes more volatile event. Back in the early days of options trading, expiration may have played a larger role as less liquidity (lower stock and options volume and fewer market participants), embryonic technology, and the lack of communication caused abnormal movements in certain stocks and indexes.
Using Options to Trade Boeing (NYSE:BA) News
by Jared Levy on June 17, 2010
Boeing (NYSE:BA) has announced plans to ramp up production of its ever-popular narrow-body 737 jet. BA currently completes 31.5 jets per month and will be aiming to increase that number to 35 by the end of 2012. There seems to be a sense of urgency within Boeing as this is the company’s second increase in production in a month’s time. There is currently a backlog of more than 2,000 of their best-selling plane, according to the Wall Street Journal. Executives at Boeing noted increased demand for new planes as well as the exercise of existing options already held by carriers. The bottom line is that this increased demand and subsequent increase in production could be a sign of global economic improvement (or at least stabilization within the air travel space).
Airbus also finds itself in a similar situation with its Airbus A320, which competes with the 737. Airbus will also be increasing its production from 34 planes to 36 per month to meet its backlog of more than 2,300 planes. The dance between the two will be somewhat in sync as neither wants to find itself standing alone in a tightly woven, highly competitive sector that has some new players entering the space with jets that compete directly with the 737 and A320. Canadian equipment manufacturer Bombardier, for example, is nipping at the heels of the world’s largest commercial jet makers.
According to its website, Bombardier’s CSeries jet will seat 100-149 passengers and utilize the Pratt & Whitney PurePower PW1000G high-efficiency engine. Bombardier calls the engine “game-changing.” The plane’s unique design will supposedly operate with 15% less cost and use 20% less fuel than a comparable sized jet. The vehicles also boast wider seats and windows than comparable models in production.
Of course, BA and EADS (the parent company of Airbus) are looking to revamp their most popular lines as well, with industry experts not expecting a total revamp until after 2020. Much of the decision lies with a real “game-changer” engine design. It would cost billions for both manufacturers to design, test and successfully release a completely new aircraft. In the meantime, the two major players can incorporate a more efficient engine into the current design to increase efficiency and noise reduction, though there could be negative ramifications as for as the backlogs on their current models. Last week, Airbus COO John Leahy hinted that an A320 replacement may not come until 2027.
Regardless, if demand looks and remains strong and carriers such as American Airlines look to replace their fleets of aging MD-8Xs (American has 272 of them) and other aircraft, this could bode well for BA. American operates an all-Boeing Jet Fleet at present.
United, on the other hand, replaced its older 737s with A320s and they may be replacing their last 737s with the CSeries jets, which is a bonus for Bombardier.
There are dozens and dozens of airlines globally, all with different needs, route maps, and budgets. Ultimately, it is extremely difficult to know who will come out on top. Boeing is one of two major manufacturers of large jets and if global demand increases (causing production to continue to rise), BA could experience an earnings boost. Boeing believes that their customers will remain loyal and will be looking to Boeing to lead with new products.
Here Come the Earnings…
by Jared Levy on June 16, 2010
It’s the broken record that we traders love to play again and again. While the process is the same, the outcome is almost always different. Earnings season is often a catalyst for change in a stock’s direction, volatility, and even sentiment. It can also simply accelerate a trajectory or cause a stock to do nothing at all, but regardless, just about every investor needs to be hyper-aware of earnings dates, especially the ones that involve your stocks or their peers.
Alcoa (NYSE:AA) is the supposed grand marshal of this quarterly parade, but even though there are some stocks that will report sooner, the aluminum giant’s reporting date should be noted, as the weeks following Alcoa’s report is when the bulk of S&P 500 companies report.
Sectors and their leading stocks tend to report in clumps within a short time frame of one to three days. So if you know a large retailer is reporting, chances are that a comparable peer’s report is not far away. Peers can obviously have an effect on each other’s stock price and more often than not, a negative report by one stock in a sector will have a negative effect on the others and vice-versa. Some traders call this phenomenon “falling in sympathy.”
As an options trader, there are pros and cons to this heightened awareness and potential volatility. It really depends on your positions going into an earnings report and the type of strategies you plan to employ.