December 4 Post

Hi Again,

On 11/13/17, the best options and one of the best stock market analyst stated, “The best analyst on Wall Street is not the one we know as analysts; it is Oprah Winfrey”. For the past few years I have been noticing that everything or everyone Oprah touch, turns to gold.  In 2015, Weight Watchers (WTW) was at $4 and everyone stated that it was headed towards insolvency as now people are using internet based tools to lose weight and so on. On 10/19/15 morning Oprah purchased a 10% stake in for $6 per share for a total cost of $43MM. Within 8 hours of her purchase, she had a gain over $50MM on that investment! Assuming it rose too fast within a short period of time I purchased a put option to short sell but it was like standing in front of a freight train! I learned not to bet against Oprah. On 8/6/17, the share price was at $47 so I am not surprised for all the accolades Oprah Is receiving. That is close to a $300MM gain on Oprah’s 10/19/15 gain in just 2 years with a $43MM investment!!

Now let us consider some technical analysis. Major stock market indexes touched all-time highs again this week. But even as the bull continues to run, a few new warning signs have popped up recently. Nothing says the rally is over, but once again we have to consider easing back on the gas pedal. This week, we have another bump. While not big enough to say the bull market it over, or even that a correction is at hand, a second round of warnings cannot be ignored. Let’s start with the S&P 500. This benchmark index is quite overbought in weekly and monthly time frames and sports a bearish setup in the daily time frame. Price made new highs as indicators made lower highs. An overbought or overextended condition is not reason enough to sell. Yet when the market makes new highs, as it has been doing, and momentum readings start to fade, it does tell us the bulls are getting tired. Put another way, they are fully invested—leaving little cash left to buy more stocks.(Michael Kahn, Getting Technical, 11/9/17)

GE-The call buying, some of which is clearly a hedge against bearish positions, suggests that pressure is now even more intense for GE’s management team. The Street is telegraphing what it wants GE’s team to say. Already, GE’s options are priced as if the annual dividend will be cut from 96 cents to about 50 cents. Rather than treating GE (ticker: GE) as dead money until Monday’s investor-day gathering, investors are buying loads of bullish call options as they debate how much GE is worth if management breaks up the company. Stephen Tusa, J.P. Morgan’s GE analyst, said GE’s management sparked the sum-of-the-parts valuation debate by saying “everything is on the table.” Over the past 52 weeks, GE has ranged from $19.63 to $32.38. This has prompted many investors to come up valuations that price GE’s stock in the high $20s. Shares were trading at $19.94 in mid-morning trading, almost a percentage point down from Wednesday’s close.

The events of next week will determine if the stock plummets into a new lower trading range. So far this year, GE’s stock is down about 36%.(Steven M Sears, Striking Price, 11/9/17). Since Monday’s investor day meeting, GE’s stock (ticker: GE) has wiped out whatever support it had around $20, and the stock chart suggests the decline is not yet over. Rather than giving credit to GE for releasing so much bad news at once—something investors regularly interpret as an opportunity to buy stock in anticipation of a rebound—investors are braced for more bad news. JPMorgan’s Stephen Tusa told investors that the investor day meeting had the feeling of an “all hope is lost” event. His price target remains $17. Shares were trading at $18.14 Wednesday morning.

In the options market, where it’s often possible to anticipate the future price of stocks based on trading patterns, investors are aggressively positioned for the stock to keep falling. They are buying bearish puts, which increase in value when stock prices decline.(Steven M Sears, Striking Price, 11/15/17) I disagree with this assessment as when pessimism rises, it is really bullish for the stock. Even a small surprise to the upside can make short sellers run to buy the stocks to cover their shorts. CNBC had a long discussion if GE should be kicked out of the Dow 30. GE is the only company from the original Dow that is still there. I too purchased a little bit of call options on GE (expiry date: 12/15/17, strike price $21 when GE was at $20) on 11/8/17. The market was $0.41 asking and selling at $0.45 but I placed a limit order at $0.35 and got it. If this expires worthless by 12/16/17, then it becomes a tax deduction. As Sears stated above, if GE moves up to high $20s on dividend cut news by 11/18/17, my call option would go up from 35 cents to the range of $5 to $9. The gain could be astronomical while the potential loss is very limited. What happened on 11/13/17? CEO announced a 50% cut on the dividend and projected a 50% reduction in earnings for 2018 so the share price dropped by 7%. If the price go below $17, we should buy more and get ready for a gain in 2019. Surprisingly 40% of all shareholders of GE are retail. Per Barron’s on 11/22/17, “James S. Tisch, chief executive of Loews and a General Electric director, bought 3 million shares of GE on the open market on Tuesday for $53.7 million. Tisch has stepped in while other investors have exercised caution around GE. He purchased stock ranging in average value from $17.82 to $17.99—close to the multiyear-low of $17.46 set last week. Tisch now owns the 3 million GE shares through Loews and 540,000 shares through a trust.”(Ed Lin, Inside Scoop 11/22/17). Flannery was willing to get back to basics on the conference call, and early in his remarks even questioned GE’s raison d’etre by asking, “Why do we exist?” Should the head of a 125-year-old company be asking such things? If you were a GE director, that wasn’t the most unnerving thing Flannery said. The CEO also noted that half the current board would be leaving; currently there are 18 directors and the roundtable will be reduced to 12 seats, and three directors will be new. In the days after the call, directors have stepped up to buy stock on the open market. Qualcomm (QCOM) CEO Steven M. Mollenkopf, an independent GE director, chipped in $100,000 to buy 5,500 GE shares on Nov. 16. Mollenkopf has only been on the board for a year, so his relatively smaller buy is understandable. Flannery himself paid $1.1 million for 60,000 more GE shares on Nov. 15 for his personal account, following his August purchase of $2.7 million in shares for his 401(k) plan.(Ed Lin, Inside Scoop, 11/29/17)

Have a great month

Fernando