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Friday Flip Flop – Five Fed Speakers and Trade Progress Finish the Week Strong

Williams (twice!), Clarida, Harker and Bullard.

We knew on Tuesday that the Fed expected the market would need saving on Friday and despite the Dow being up 100 points pre-market this morning, at 25,926 we're still below Tuedsay's highs though well off yesterday's lows – which was 25,762.  On Wednesday we talked about the importance of the Russell 2000 and the 1,600 line and, at 1,581.50 – we're no closer today than we were on Tuesday, but off our lows at 1,570, which was a $700 per contract gain from our shorting line (you're welcome!).  

Fortunately, Kraft Foods (now KHC) was dropped from the Dow back in 2012 or we'd be red this morning anyway as that company is down 25% pre-market as the merged company (with Heinz) catches 5 downgrades this morning after their accounting methods are being questioned by the SEC (which is actually not a big deal) and the company is writing down $15Bn in "Goodwill", which is a big deal as it indicates they dramatically overstated the value of their balance sheet BUT – it's only 10% of their total assets so a 25% drop is still a bit of an over-reaction.

If you want to capitalize on this event, you can, of course, go long KHC (who also cut their dividend) or you can short Berkshire Hathaway (BRK-B), who are taking a $3Bn hit on their KHC holdings – the day before Buffett's annual letter to his shareholders comes out.  Berkshire is not a company you would usually short but they own a lot of the kind of companys that have "Goodwill" as a major asset and KHC's situation will calll all Goodwill Assets into question – all $3Tn of them that are declared in the S&P 500 – $80Bn of which is Berkshire! 

BRK-B was at $205 this morning but is already indicating a $5 drop but a $3Bn hit is 20% of their quarterly income and Buffett doesn't sugar-coat things so they could drop further and the March $195 puts are $2 and could be a fun play there.  As to KHC – We'll be taking a hit on the spread we have in our Long-Term Portfolio and I won't be quick to add, as we'll wait for the downgrade police to be done with them but selling the 2021 $40 puts for $9 gives you a net $31 entry (now $35) and I simply don't see another 10% drop sticking.  

With $3Tn of Goodwill maaking up about 10% of the S&P's total assets and asset write-downs impacting companies ability to borrow and Corporate Borrowing at record highs – I don't see how this S&P or Dow rally can stick – despite all the Fed cheerleading.  We still like the 1,584 line for shorting the Russell (on the way down, not up) with stops over 1,590 and S&P (/ES) 2,785 is a good shorting line – but VERY tight stops above that.


It's going to be a crazy day, with the Fed speakers come at 10:15, 1:30 (3) and 5:30 and the last is Williams' 2nd speech of the day so I'd bet the reaction to his 10:15 speech will likely stick.

Have a great weekend,

- Phil


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  1. Good Morning…Phil!  ;)

  2. stjeanluc 
    February 22nd, 2019 at 9:27 am | PermalinkTweet thisIgnore this user

    Did Phil fall back to sleep?

    Maybe he was trying the product…;-)

  3. Phil & Yodi,

    Thx for the detailed feedback on BX and T. Helps validate my understanding of such trading strategies.

  4. Phil/BRK.B

    what is the symbol to get the option chain?


  5. Going to need some Ketchup for the KHC roll

  6. RB/Phil- March expiring next week is at 1.61 and April is at 1.77. Any play here? Thx

  7. BRK B

  8. Good morning! 

    Sorry for the late post, was up at 5 after falling asleep at 2, did some work and then fell back to sleep.  

    And no Jabob, NY meetings are with Trade Exchange and Judgment Search Network, New Age is my March Trip to CA and Hemp Boca (new one) is CBD, not THC and that's Sunday.  You can see how I get sleepy though…

    Today I"m here until 1 and then flying home – hopefully it's not too eventful.

    You're welcome, RS.  

    BRK/Pat – In TOS it's BRK/B.  So far bouncing off $200 – just a fun bet that Buffett flat-out says the whole portfolio could be subject to such write-downs.  He might do it just because he hasn't found anything to buy for the last 3 years so he may as well drive down his own stock and buy that.

    KHC/Coulter – We should have guessed they were in trouble when they introduced this abomination:

    Image result for ketchup mayo mix

    Well, the LTP was up almost 150% as of yesterday's close but KHC is going to sting.

    Long Call 2021 15-JAN 45.00 CALL [KHC @ $48.18 $0.00] 15 11/21/2018 (693) $13,950 $9.30 $-2.85 $13.92     $6.45 - $-4,275 -30.6% $9,675
    Short Call 2021 15-JAN 60.00 CALL [KHC @ $48.18 $0.00] -15 11/21/2018 (693) $-4,725 $3.15 $-1.50     $1.65 $-0.02 $2,250 47.6% $-2,475
    Short Put 2021 15-JAN 50.00 PUT [KHC @ $48.18 $0.00] -15 1/22/2019 (693) $-13,080 $8.72 $-0.42     $8.30 - $630 4.8% $-12,450

    $35 holding so far but we'll see.  The $50 puts are $16.50 and we just roll the $8 loss down to the $40 puts at $9 and then we've effectively sold the $40 puts for $0 and the $45 calls are down to $2 and the $35 calls are $7 and the $25 calls are $11, so $35 would be our roll and that puts us in those for net $14.30 and we need about $50 to get even but we can buy back the short $60s for 0.65 and, hopefully, at some point we can sell the $50s for $3 (now $1.25) and that drops our basis to $11.30 but might be too much work just to get even and I"m not sure how easily they'll recover so, if I don't decide I like them enough to DD – we might just end up taking the loss on this.

    As a new trade in the OOP, however, it's a very different story since we can sell 5 of the KHC 2021 $35 puts for $6 ($3,000) and the margin is $3,500 but should calm down and we can buy 10 of the 2021 $30 calls for $7.25 ($7,250) and sell 5 of the $40 calls for $3.20 ($1,600) and that's net $2,650 but we can always sell 5 more calls though my intent is to sell short-term calls as they recover.  It's a $10,000+ spread that's $5,000 in the money – sounds like an opportunity to me! 

    /RB/Ravi – I don't arb the spreads – too risky.  The high roll costs, however, indicate more traders will look to sell rather than roll so possibly look for a good short on /RB.  We caught one yesterday around here and I would have jumped all over 1.625 if I hadn't been starting at KHC this morning.

  9. do you think we can expect oil to pull back next week

  10. Oil/Tommy – I think it’s toppy here but no particular notion about next week in particular. /RB was obviously too high this morning but I’m up for taking the money and running, not risking things over the weekend     

  11. OLED and TTD on fire.

  12. Six People Fall Into Extreme Poverty in This Nation Every Minute

  13. How New York Is Preparing for Legal Weed

  14. From Briefing Trader :


    Seeing a note passed around this morning from one of the biggest prime brokers saying that yesterday was "the largest short add day of 2019" on Stock Loan balances at the firm. The dynamic was present through major ETFs and across most sectors.

    A very over crowded trade.  But at some point they'll be right.

  15. Looks like we're busting higher.  Williams couldn't have been more doveish:

    New York Fed's Williams urges vigilance on inflation expectations

    • Federal Reserve Bank of New York President John Williams says policymakers can't take for granted that inflation expectations will remain well-anchored.
    • Anchored inflation expectations provide one explanation of why inflation hasn't surged as labor markets have tightened. Recently, inflation has been running under the Fed's target of 2% even as the unemployment rate stays unexpectedly low.
    • "We must not be complacent about inflation expectations becoming unmoored, whether at too high or too low a level," he said in a speech at U.S. Monetary Policy Forum in New York City.
    • He notes that there's still a chance that "very tight labor markets could eventually lead to a resurgence of inflation and unmoor expectations, as in the 1960s. I concur that we must remain vigilant regarding a sustained takeoff in inflation."
    • Inflation at too low a level, though, limits the ability of central banks to combat economic downturns when interest rates are already low.
    • "The risk of the inflation expectations anchor slipping toward shore calls for a reassessment of the dominant inflation targeting framework," he said, adding that the Fed is reviewing its policy framework this year.
    • Previously: Fed's Williams: Change needed before rate hikes can resume (Feb. 19)
    • ETFs: RINF

    Three-month delay to Brexit?

    • Current Brexit discussions suggest Theresa May will ask the EU for a three-month delay to the March 29 Brexit deadline, on the assumption that when she brings a renegotiated deal back to Britain, lawmakers pass it.
    • Anything longer than this would put the U.K. under pressure to take part in European elections on May 23-26, something that both sides are keen to avoid.
    • FTSE 100 +0.3%; Sterling -0.2% to $1.3019.

    Barrick Gold confirms 'review' of possible merger with Newmont Mining

    • Barrick Gold (GOLD -1.4%) acknowledges it has reviewed the possibility of a mergerwith Newmont Mining (NEM +2.3%) in an all-stock transaction, confirming an earlier Bloomberg report.
    • The chief executives of the two miners and Newcrest Mining (OTCPK:NCMGY), which was mentioned as a potential partner in a merger deal, all will be in Florida next week for a BMO Capital Markets mining conference; "the timing is interesting," says BMO analyst Andrew Kaip.
    • Barrick and Newmont have come close to merging before, as talks in 2014 broke down over disagreements on deal terms; the tow companies also have discussed a joint venture for their Nevada operations.
    • Goldcorp (NYSE:GG), which is being bought by Newmont, opens -2.9%.
    • If the deal is nixed, Newmont would be entitled to a $350M break fee and Goldcorp would be entitled to a $650M break fee.

    Wheaton Precious Metals reports 2018 estimated production higher than expected

    • Wheaton Precious Metals (WPM +0.7%expects gold production of 373,239 ounces for 2018, higher than guidance of 355,000 ounces primarily due to stronger than expected production from Salobo and Stillwater mines, partially offset by weaker production from Peñasquito.
    • 2018 silver and Palladium production is expected to be 24.4M ounces and 14,686 ounces
    • For FY19, the company estimates gold production of ~365,000 ounces lower than in 2018, as a result of lower grades at Salobo due to mine sequencing; silver production is expected to reach 24.5M ounces and 22,000 ounces of palladium
    • Average annual gold equivalent production over the next 5 years is expected to reach 750,000 ounces primarily due to production growth from Peñasquito, Constancia and Stillwater as well as the commencement of Voisey's Bay stream in 2021.

    AutoNation CEO unloads on Tesla

    • Outgoing AutoNation (NYSE:AN) CEO Mike Jackson took some shots at Tesla (NASDAQ:TSLA) and Elon Musk during a post-earnings appearance on CNBC.
    • "I think he is overpromising on autonomous vehicles in an almost unethical way," stated Jackson.
    • He also took Tesla to task for the way it takes down Model 3 orders and then delivers a different variety of the EV. "There's not another retailer in America that could get away with that bait and switch," slammed Jackson.
    • While Jackson is one of the most outspoken execs in the automobile industry, today's rhetoric was ratcheted up a notch. Jackson took the whacks at Musk after AutoNation reported disappointing earnings and slipped by over 4% in premarket trading. Tesla is up 1% in the early session after disclosing that Model 3 deliveries have started in China.

    Analyst shock at KHC news; Will The Oracle buy the dip?

    • via Arash Massoudi at the FT:
    • Lex: "This was the moment zero-based budgeting added up to a lot less than zero."
    • JPMorgan: "We thus think it is more than fair to ask if any fundamental value for KHC has been created since the Kraft Heinz (NASDAQ:KHC) merger. We also think that between KHC’s and ABI’s (Anheuser-Busch) struggles in recent years, it is reasonable to question the entire 3G strategy. Investors for years have asked if 3G’s extreme belt-tightening model ultimately would result in brand equity erosion. We think the answer arguably came yesterday in the form of a $15B (!) intangible asset write-down for the Kraft+ Oscar Mayer brands."

  16. 26,023, 2,792, 7,095 and 1,589.6 are all good but Brexit kicked down the road 3 months, Fed super-doveish and China deal looking good and this is it?  It's not that good of a sign….

  17. MAGA:

    The Trump administration is putting into effect its plan to stop giving work permits to spouses of high-skilled visa holders, likely to be a tremendous blow to the tech industry.

    I am trying to think of a plan that would do more damage to the country than this administration current program. I am sure Putin has some other potential good ideas.

  18. BRK/B March $195 puts at $2.20 still, they topped out at $2.75 so we'll have to see what happens but, like I said, just a fun trade.

    KHC seems to be stabilizing at $35 but that could mean consolidating for the next 25% down?  The weakness in my valuation model is when companies misstate their financials – that throws the premise out the window but usually too late.  The SEC thing is about misdating some charges – no big deal but people think it is but the devaluing of their Brand implies lower future earnings.  We never thought it was a growth stocks but we did think they could hold on to what they have (how often is ketchup not Heinz?).

    In its third quarter presentation Kraft-Heinz claims that the dramatic fall in profits we have seen is what they call a transitory one-off event, which will not be repeated beyond 2018. If this is indeed true, and perhaps we may even see some positive trends such as lower oil prices helping to reduce some operating costs, such as packaging and transportation, there is a strong case to be made for Kraft-Heinz stock having a solid year.

    Year End 30th Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 0.000 6,240 10,922 18,338 26,487 26,232 26,245 26,300 26,406 +43.2%
    Operating Profit $m 0.000 -8.00 1,568 2,639 6,142 6,773 5,462      
    Net Profit $m -77.0 657 634 3,632 10,999 -10,229 10,382 4,440 4,546  
    EPS Reported $ -0.94 -0.053 -0.22 2.82 3.26 -8.32 2.82      
    EPS Normalised $ 0.000 -0.85 -0.053 -0.22 3.43 3.55 3.14 3.60 3.68  
    EPS Growth %           +3.6 -11.6 +1.22 +2.42  
    PE Ratio x           13.6 15.3 13.4 13.1  
    PEG x           11.1 12.5 5.54 3.43

    In its earnings report Thursday, Kraft Heinz revealed a multitude of concerns:

    • Fourth-quarter results came in much lighter than expected. On an adjusted basis, the company claimed earnings of 84 cents a share, down from 90 cents a share and lower than the average analyst estimate of 94 cents a share. Revenue rose to $6.89 billion from $6.84 billion, but still came in below the consensus estimate of $6.94 billion, according to FactSet.

    • Without adjustments, that bottom line looks much worse. Kraft Heinz reported quarterly losses of $12.61 billion, or $10.34 a share, thanks to a write-down of more than $15 billion related to a declining valuation of several of its businesses, most notably the Kraft and Oscar Mayer trademarks.


    • The company slashed its dividend by more than a third, to a quarterly rate of 40 cents a share from 62.5 cents a share.

    • Oh, there is also an investigation into Kraft Heinz’s accounting that resulted in a subpoena from the Securities and Exchange Commission that the company disclosed in its announcement.

    Executives did not say that the problems would be solved in 2019, either. In fact, they pointed toward 2020 while predicting an adjusted Ebitda profit total of $6.3 billion to $6.5 billion for this year, down from $7.08 billion in 2018 and well lower than the average analyst estimate of $7.5 billion, according to FactSet.

    “While we expect to take a step backwards in 2019, we remain confident in delivering consistent profit growth from 2020 onwards, driven by fully leveraging our advantage brands, cost structures and capabilities,” Chief Financial Officer David Knopf said in a conference call Thursday afternoon.

    Kraft Heinz did not offer any more specific numbers for its 2019 forecast, as is typical for the company. The Ebitda forecast was out of character for a company that typically does not provide specific guidance.

    Knopf also revealed that the company is evaluating the sale of unnamed businesses this year to pay down debt. Kraft Heinz has already announced two planneddivestitures, and said proceeds from those sales would also go toward restructuring the debt load.

    Knopf also further addressed the SEC investigation in Thursday’s conference call.

    “The company was notified by the SEC regarding an investigation into the company’s procurement area. Following this, we conducted a very thorough internal investigation with the support of an independent law firm and accounting firm, and we determined that we should’ve reported $25 million in prior periods which we booked in Q4 2018,” Knopf said. ”To put it into context how that compares, overall procurement was over $11 billion, which excludes Big Four commodity spend. So this misstatement was not material to our current or prior year financial statements, and finally, we did implement several improvements to internal controls and took remedial measures to mitigate the likelihood that this happens again.”

    Not worry free but not panic-inducing either.  $35 is $42.5Bn and, though $7Bn may be "disappointing" guidance, it's still gives them a p/e of 7 – which is silly.   That's the kind of stock I do like to be in for the long haul so, at the moment, I'm leaning towards a double-down roll on our LTP spread, 

    Not a big hit to the LTP thanks to the rally, we're at $1,233,906, down about $13,000 from this morning and it's all KHC, of course, now down about $20K on that position:

    Long Call 2021 15-JAN 45.00 CALL [KHC @ $34.57 $-13.62] 15 11/21/2018 (693) $13,950 $9.30 $-7.25 $13.92     $2.05 $-4.40 $-10,875 -78.0% $3,075
    Short Call 2021 15-JAN 60.00 CALL [KHC @ $34.57 $-13.62] -15 11/21/2018 (693) $-4,725 $3.15 $-2.58     $0.58 $-1.08 $3,863 81.7% $-863
    Short Put 2021 15-JAN 50.00 PUT [KHC @ $34.57 $-13.62] -15 1/22/2019 (693) $-13,080 $8.72 $8.08     $16.80 $8.40 $-12,120 -92.7% $-25,200

    In the LTP, we will roll the puts to 20 of the 2021 $40 puts at $9 ($18,000), which costs us about $7,000 but we collected $13,080 on the original sale so still a $6,080 credit ($3 per short put) to net us in at $37 on that side.  On the bull spread, I would not sell the long 45s as they have two years to recover and it's not like we need $3,000 but I would buy back the short calls to clear the deck ($863) and then buy 30 of the 2021 $30s for $7.70 ($23,100) and no short call sales for not.  That puts us in 30 of the 2021 $30 calls with 20 $40 puts for net net $34,818 as fortunately we started with a $3,855 credit.   That means we paid net $11.60 for the $30 calls and hopefully we cover with the $45s, now $2.30 for $4 at some point and then we're net $7.60 and if we get $4 for our own $45s, that's net $5.60 and we're back in business on the $45 spread.  Need a little bit of luck but not too much...

    Wait, breaking news, Robert Kraft (NE Patriots owner) charged with soliciting prostitution (on video) in Jupiter Florida (200 people were charged in a sting).  Damn, you would think a guy that rich could have it delivered! 

  19. Visas/StJ – Wow, that's insane.  It is literally as if they said "how can we make the US non-competitive in hiring the people they need to compete globally" and someone said "How about if we don't allow them to see their families if they work here – look how well it worked at the border!"   Also, this disproportionately affects the bottom 99% of companies – who can't simply move a needed person into their overseas offices – more benefits for the Oligarchs! 

    Image result for trump oligarchs

    Image result for trump oligarchs

  20. Oh, by the way on KHC, since we have 30 $15 spreads (notionally) and still 15 $45 calls, we could sell 15 April $35s at $1.75 for $2,625 using just 55 of our 693 days.   I don't want to sell yet but it's a clear chance of collecting another $20,000 against our spread, which is what caused me to lean towards doubling down rather than bailing with a $20,000 loss.  

  21. IQ – Up big.

    Large increase in subscribing members.

  22. Well, gotta run – hopefully we don't give up too much of the gains into the close. 

    Have a great weekend,

    - Phil

  23. Phil what do you think of STMP for a position?

  24. GE News – Any thoughts on holding the options play?

    General Electric Company (GE) has announced a spinoff distribution of its subsidiary Transportation Systems Holdings Inc. (“Spinco”). Immediately following the spinoff, Spinco will merge with a subsidiary of Wabtec Corporation (WAB). When the spinoff and merger transactions are completed, General Electric Company shareholders will receive approximately 0.005403 of a WAB share for each GE share held. Cash will be paid in lieu of fractional shares.

    You are receiving this email because you currently hold a GE option position. Before the market opens on Tuesday, February 26, GE options will be changed to GE1 non-standard options. The new non-standard option will deliver 100 shares of GE plus cash in lieu of the fractional WAB share. Please be aware when these adjustments happen, the markets typically widen for the non-standard options due to less liquidity. And because the strike doesn’t change, it becomes less obvious whether or not your options are in- or out-of-the-money. You should take this into account when deciding whether or not to hold the position through the corporate action.

    What do this mean?  "And because the strike doesn’t change, it becomes less obvious whether or not your options are in- or out-of-the-money."

    Thank you

  25. How does it become less obvious – I am not tracking this comment.   Thanks in advance!

  26. Invest In Reality

  27. Hello Yodi.  I have been studying your "arm chair" plays on SIG and others you have mentioned.  This plays are buying the stock and selling the ATM Short Strangle. 


    The return on SIG is awesome at around 6% per month over the 5 months.   I have looked at others like T, IBM, OIL but don't really see any that have those juicy returns like SIG.  The best i found was T for 90 days out contract for around a 3.54% return per month of 11% for the 90 days.  

    Do you have a good way to "screen" for these type of plays?  Is it something we can program TOS to check on?  Lastly, do you see a lot of these type of trades where you can get 3% per month or are stocks like SIG rare?  3% per month is 36% annualized which in my opinion is awesome for these "low" risk type trades.  Thanks as always for your comments.  Have a great weekend.

  28. GE – I’m inclined to cash out and buy the new shares.  

    What a crazy close.   

    Bad day for things named Kraft…

  29. Words of wisdom from the Oracle: Berkshire Hathaway's annual letter.


    The fact is that the annual change in Berkshire’s book value – which makes its farewell appearance on page 2 – is a metric that has lost the relevance it once had. Three circumstances have made that so.

    In future tabulations of our financial results, we expect to focus on Berkshire’s market price. Markets can be extremely capricious: Just look at the 54-year history laid out on page 2. Over time, however, Berkshire’s stock price will provide the best measure of business performance. ********

    Berkshire will forever remain a financial fortress.

  30. More:

     Obviously, repurchases should be price-sensitive: Blindly buying an overpriced stock is valuedestructive, a fact lost on many promotional or ever-optimistic CEOs.

    I believe Berkshire’s intrinsic value can be approximated by summing the values of our four asset-laden groves and then subtracting an appropriate amount for taxes eventually payable on the sale of marketable securities. 

    Over the years, Charlie and I have seen all sorts of bad corporate behavior, both accounting and operational, induced by the desire of management to meet Wall Street expectations. What starts as an “innocent” fudge in order to not disappoint “the Street” – say, trade-loading at quarter-end, turning a blind eye to rising insurance losses, or drawing down a “cookie-jar” reserve – can become the first step toward full-fledged fraud. Playing with the numbers “just this once” may well be the CEO’s intent; it’s seldom the end result. And if it’s okay for the boss to cheat a little, it’s easy for subordinates to rationalize similar behavior.

    That record is no accident: Disciplined risk evaluation is the daily focus of our insurance managers, who know that the benefits of float can be drowned by poor underwriting results. All insurers give that message lip service. At Berkshire it is a religion, Old Testament style. **

  31. Warren Buffett’s Letter: Big Stock Losses, the U.S. Budget Deficit and Jokes

  32. It Was the Hottest Oscar Night Party. What Happened?

  33. Trump Vents Frustration With Trade Czar as China Talks Continue

  34. Q4 Retail Earnings Season: A Cheat Sheet

  35. Profiles of a divided country

  36. Inside the race to replace farmworkers with robots

  37. GO GE!