Earnings Trade of the Day (DELL) 2.21.2012

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Unprofitable: This trade is unprofitable if DELL Closes under $16.80 by April 20, 2012. The most I can lose on this trade is the amount the Put Spread can be worth $1 minus the amount I sold it for, $.21 for a total of $.79.

Reason I like this Trade: 

My heart screams AAPL, so it says short DELL, but my wallet says long.  Lets be honest when was the last time you heard someone say, i got this sweet new computer, “Its a Dell.”

We have seen strong earnings from “Old School” tech such as IBM, MSFT, and Intel.  Dell is up 25% YTD while the Nasdaq is only up 13%.  I would rather get long a pullback, 
than jump on a long into earnings.  They have received 5 downgrades in the last 2 days, but still remains very strong.  I think going forward they have issues with the Smart Phone market and their margins are now 22-23% vs historical level of 19%.  The stock has been to strong to buy into earnings, but I can not short into the strength.  I want to get long on a pullback, so I am putting the following trade on:

Monthly Dell has been in a very long drawn-out basing pattern.  After breaking downtrend in early 2011, the $18.50 level seems significant since it was resistance in 2009.  Even though technically overbought it has very near term positive relative strength suggests Dell will hold up and be a strong leader if the S&P remains strong.  
UPDATE 2.23.2012 I talked on Bloomberg that I was willing to get LONG DELL on a pullback and the stock still has not sold off under the $17 strike, so I comfortable with this trade.  Currently this Put Spread is worth $.27, so a small loser, but only a small one, because volatility got crushed so badly.
UPDATE 2.24.2012 With DELL rallying this Put spread is only worth $.25.  I wish this was a March position, but it is until April, so I will have to always keep an eye on this one.
UPDATE 2.29.2012 This spread is still worth $.26, but everyday DELL does not sell off, in theory the less this spread will be worth.  I will leave this trade on.
UPDATE 3.5.2012 This spread is still worth $.28, but I am leaving it on as it seems as if DELL could bounce off this $17 level.
UPDATE 3.9.2012 This spread is worth $.34 and time is on my time.  I might look to Punt this trade once I get a little more bored, lol.  
UPDATE 4.9.2012 This spread is worth $.68, but since I saw paper sell April 16 Puts for $.16, I will leave this trade on until expiration.

Halftime Report 2.21.2012

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After the bell today, Dell reports earnings. Dell is expected to report Quarterly earnings of $.52 and Quarterly Revenue of $16B. Dell made a fresh 52 week high last Thursday at $18.33. Also, WMT, reports earnings after the bell. WMT is expected to report Quarterly earnings of $.46 and Quarterly Revenue of $.24B. WMT made a new 52-week high at $62.64 on February 1st.

Unusual Option Activity:

A customer Bought 20k KKR Jan 2013 17 Calls for $.95, while the stock was trading at $15.12.

A customer Sold 2500 MWW Mar 7 Puts for $.3, while the stock was trading at $7.01.

A customer Bought 4000 CTRP Mar 28 Calls for $.1, stock was trading at $22.6.

We didn’t put on any new positions today as their was no positive order flow. We usually like to take new positions when the risk/reward ratio is attractive.

By: Greg Zimny

Morning Rage 2.21.2012

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ECB officials state on Tuesday, “Greece’s private creditors to take a deeper write-down on the face value of their holdings.” In my opinion, the profitable way to make money in this economic climate is to buy the rumor and sell the news. If the Greeks deal was reached why is the EUR/USD near its lows? Why are European financials selling off and volatility increased? Monday night Reuters released a report that the Greek deal is reached and the EUR/ USD jumped a staggering 105 pips. Once the details regarding the deal were released, the EUR/ USD lost the majority of the Monday night move and is currently flirting with negative territory.

Crude oil is trading higher for the second week in a row as Iranian risk premium is built in to the max.. or is it? JPM hikes its WTI and Brent Crude price forecasts substantially. Gold is trading at the highs of the session at the all important $1750 level. It appears, the best hedge for inflation is still Gold. USD is under pressure this morning and be prepared for higher volatility in US equity markets as investors scramble.

Tuesday, investors await the US 2 YR note auction. Wal-Mart, Macy’s, Dell, and Kraft all report earnings on Tuesday, February 21, 2012.

By Greg Zimny

From the Barbers's Chair 2.21.2012

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First, private bondholders will get a 70%+ haircut, by trading their old Greek bonds for new ones. These new bonds will pay about 3% over a very long term. Once these new bonds hit the open market, what will they sell for? 50% of par? 35%? In other words, the new bonds are likely to be total junk, unless the market believes that getting 3% is a good deal because the EU is backing Greece. However, recent events show the questionable extent of this commitment. Thus way below par may be a good guess, unless future magic tricks by the EU come into play.

This raises another personal question: How can I short the new Greek bonds that will go to private bondholders? There is money to be made here.

Another key issue arises because European governmental entities are apparently able to rid themselves of their bonds at par. Doesn’t this new risk create an interest rate premium on ALL private purchases of sovereign debt in the future? In other words, if the risk to private investors in sovereign debt is far greater than that of government purchasers, shouldn’t the interest rates reflect that?
Specifically, will there be an immediate risk premium in bonds issued by Portugal, Spain, Italy and others?

As Bill Gross tweeted last week, “ECB subordinates all Greek debt holders & in so doing subordinates all holders of Euroland sovereign debt.” This subordination should show its face in a new interest rate premium.

Another important question is, how will the ratings agencies react to the deal? Will they call it a “default?” In last week’s Barber’s Chair, I addressed this issue in depth, concluding that they would. As I stated, “A duck by any other name is still a duck…It is not a daisy or a bluebird or a polar bear with feathers.” In my opinion, the ratings agencies should declare the Greek action a default, and they will.

But if there is a default, this raises another crucial question, How will this effect the credit default swap (CDS) market? A clear “default” would mean that CDS’s have played their proper role in guarding against defaults. But what if European government entities or others claim that the deal is not a “default.” Will CDS issuers try to not pay off? This could result in a decade of litigation, and muddy the entire CDS market. If a CDS will not pay off in the case of a clear default, what good is it? If CDS’s do pay off, how big will the damage be to the CDS issuers? Are we looking at another AIG contagion situation?

In sum, there are many unanswered questions that arise from the Greek debt deal. These questions and others are likely to result in an unclear picture for Europe and the world over the coming weeks and months. Be careful out there!!

Floyd at KOTM please follow me on Twitter @USKOTM