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International Game Technologies (IGT) Update

IGT update post the June 12th blog entry Gary and I authored…stock held its 23 support zone noted in that article early in July and has been grinding higher ever since up to today’s $24.75 zone. For first time in a while, call option activity has picked up……almost 3,000 July 24 calls and 2,800 July 25 calls have traded today, along with about 1,000 July 26 calls. As noted in that earlier post, option open interest remains heavily skewed to the call side, in all months out thru October. The stock moved above its downward sloping 20 day SMA at $24.60, but has some more work to do to recapture its 50 day SMA at $25.95. Option players seem confident that is a strong possibility given today’s action.

Is It Soup Yet??

Heavy buying of upside calls in Campbell Soup today, as the stock continues its rebound from the huge drop post earnings in mid May. Continued buyout speculation (KHC most frequently rumored) has played a part in the stock’s rebound, along with a general improvement in the tone of consumer staple stocks (XLP). After hitting a 52 week low of $32.65 on June 7th, the stock is currently at $36.50 as I type this note. The following call options were most notably active today.
>2,000 July 37 calls traded
>3,400 Aug 37 calls traded
>6,000 Aug 38 calls traded
>3,800 Aug 39 calls traded
>5,500 Aug 41 calls traded
Total volume among all call options strikes is >30,000 contracts today.
I bought a position in the July 37 calls at $1.05, with its implied volatility at 28.75, much cheaper than the low to mid 30’s IV on the August calls mentioned above.
Stock volume in CPB is over 10 million shares today, twice its daily average of late of about 5.5 million shares.

First Data (FDC): Last Word

Last post on First Data….just was made aware that the company is hosting an investor conference tomorrow (6-12), which may account for some of the option activity.  Stock has backed off from pre-market levels….$20.30 +$.25 at this writing.

First Data: Follow Up

While I would be the first to admit, that it is hard to decipher the true meaning of most large option block trades (speculation vs hedging vs volatility plays), I do find myself paying extra attention when large volume occurs in names that rarely see any option volume. Such was the case last week when I posted on the buy interest in First Data (FDC) calls in both June, July and August.
Lo and behold….this morning, Goldman Sachs upgrades FDC to buy from neutral and the stock is up $1.00 to $21 (+5%) in the premarket. A coincidence? Perhaps…..but I have been doing this long enough to know that nothing should surprise anyone anymore in terms of uncanny timing.
As we look to expand our blog posts in the coming weeks in conjunction with the pending launch of our new updated website, I will continue to focus readers attention on more such one off type option situations.

Big Numbers In First Data

First Data (FDC), the global payment infrastructure vendor is moving to new 2 year highs (along with a lot of other names) as it crosses the $20 level. Significant option activity has taken place today which is unusual for this name. Over 3,000 July 20 calls have traded around the $.60 level, over 5,000 Oct 20 calls have traded around the $1.50 level and over 11.000 Jan /19 21 calls have traded around the $1.65 zone. Put activity has been almost non existent. This name still has a modest valuation with a below market PE multiple of around 14X. It doesn’t garner near the attention of the more visible consumer payment vendors like PayPal and Square, which have been on fire for quite some time and sport extremely lofty valuations by comparison. FDC is a significant holding for a number of hedge funds, most prominently Omega Adviosrs and Glenview Capital as of their most recent filings. Might be a bit overextended short term, but worth keeping an eye on if it pulls back a bit.

Growling Bears on GE

Amidst a very strong market to start the week, GE continues to fade as it drops below recent support at $14. For the most part, the analyst community remains negative to neutral on the name, with JP Morgan being the most vocal critic. Trading activity today is extremely lopsided to the bearish side, with over 35,000 June 13 puts trading for the most part between $.07-.12. These contracts expire in two weeks. Also, over 28,000 of the July 13 puts have traded around the $.35 level. By contrast the largest volume on the call side is only 12,000 of the June 8th 14 calls, part of which were likely liquidated ahead of their Friday expiration. Hard to say exactly what the motivation is for all the put activity….some appears to be roll downs from higher strike puts that were sold for a profit, some appears to be outright bearish speculation, and some might simply be hedging of stock positions. Whatever the case it is weighing heavily on the name as it trades at $13,80 at the time of this write up.

More Awakening in Consumer Staples?

Additional follow up to my post yesterday on options action in Coca Cola (K).

Yesterday someone purchased 20,000 Proctor and Gamble (PG) Jan 77.5 calls for $2.00 when the stock was trading at $72.65.

That was one of the largest single name equity options trades of the day, and worked out to a not trivial 2 million share commitment for a cash outlay of $4 million.

Some Fizz in Consumer Staples?

No sector has struggled more in recent months than Consumer Staples (XLP). Shifting consumer tastes/brand loyalty, pricing pressures at the retail level, higher interest rates offsetting the dividend yields have all contributed to the malaise.
Perhaps some signs of life yesterday and today, based on option activity in Coca Cola (KO).
Yesterday someone bought 15,000 of the June 44 calls right around $1.00 and today another 15,000 traded around $.80, making this strike the second largest in the name. As of this writing, KO is trading at $41.78 and the market on these options is $.84-.87 with a very modest implied volatility reading of about 14.25.
Someone out there is positioning for a rebound in this sector in the coming weeks.

An Old Scourge Returns

The past few weeks has witnessed the resurfacing of the 3 most dreaded words in the stock market: Audit Committee Investigation.

In plain English, this translates to : Accounting Irregularities and was last seen on a regular basis during the dot com bust of the early 2000’s and the crisis era of 2008-2011 as companies scrambled to protect their business models from a near economic collapse.

Perhaps a “canary in the coal mine” warning about current stock market valuation, 3 large and well known companies have all announced whistle blower allegations of alleged accounting improprieties: Flextronics Ltd. (FLEX, a contract manufacturer for tech companies), Symantec Corp (SYMC, a computer security software vendor) and PPG Industries (PPG, a venerable, old line paint and chemical company).

Naturally, the markets first reaction (and probably rightfully so) is to run first, ask questions later, as FLEX got clobbered by over 20%, SYMC cratered 30%, and PPG lost a more modest 6%. But my experience in such matters gleaned from over 30 years of financial market observation leads me to the likely causes of these (and potentially other) occurrences:

1)The huge (and growing) disparity between GAAP accounting numbers (a.k.a. the true numbers) and Non-GAAP accounting numbers (the make believe, get rid of the bad stuff numbers…often referred to as “Adjusted”). The difference between these two sets of figures is at a historical wide of over 20+%, and in many cases is far greater, as it allows companies to report “earnings” rather than losses. As the pressure builds for companies to “beat” earnings estimates on a quarterly basis, the pressure to cut accounting corners becomes ever so greater. In today’s bull market environment, investors seem to be lulling themselves to sleep accepting Non GAAP accounting as the real thing. It is only when shaken awake by tape bombs mentioned above that perhaps investors might start paying attention to this issue.

2)The merger frenzy (both past and on-going) leads to extensive periods of restructurings, consolidations, write-offs and multiple financial reporting metrics by the newly merged parent company. Again, given the pre-merger talk of “synergies, cost reductions, efficiencies, earnings accretion” etc by company management extolling the virtues of the merger, the pressure to produce those figures must be extraordinary on the CFO’s office. Does that lead to creativity being the order of the day to reach those targets?

Lastly that brings us to the often asked question…are the companies infected by the accounting virus all of a sudden “cheap”? Perhaps, and in today’s world of no news is good news, bad news is good news, and good news is good news, a rebound is theoretically possible in these stocks.

But let me leave you with one sobering reminder: There is no such thing as only one cockroach.

With little information forthcoming from management, it is likely that more bad news is to follow. Remember Equifax (EFX) where the massive data breach is still being unraveled and the company continues to add to the list of compromised information months later as their investigation evolves (meaning lets dribble out the bad news as slowly as possible).

It will be interesting to see if more incidents such as the 3 noted above surface in coming weeks, and the effect (if any) on the overall stock market.

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As Money Managers and Traders, the mission of our Blog and Radio Show is to go on record and further educate our readers and listeners in technical analysis and proper money management across all asset classes.

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Doug & Gary