Covering American Express and Capital One Shorts Ahead of Earnings

Let me be clear, I am only covering these 2 names - American Express (AXP) and Capital One Financial (COF) due to "earnings risk" i.e. lemming action that can drive stocks +/- 10% in a blink of an eye in a knee jerk reaction to nothing more than a five second glance at a headline. These are two shorts we've held a long time, but I had cut them back to a very small part of the portfolio for about 6-7 weeks. Then last Friday [Jul 17: Bookkeeping - Rebuilding Shorts in American Express and Capital One Financial] I mistakenly thought the stock market had the ability to go down for more than 2 hours and wanted some short exposure.

On a serious note, I forgot this was earnings season, and I don't want to create new positions either long or short ahead of earnings. But since there were 4 days before earnings, I surmised that surely the stock market would have one down day to let me cover after a 7% run the previous week. Not so much.

Now a most likely occurrence is one of these two is going to gap down on its earnings report tomorrow on a "disappointment"; COF is still not projected to make money in either 2009 or 2010, yet trades in the mid $20s. Concerning AXP, I like the business model more, but it's pricey at over 20x forward estimates for 2009. But valuation does not matter in this market and has not for a while... either everything goes up, or down depending on the computers.

I did not go "all in" since my plan was to short more if they continued upward, but with earnings tomorrow, I need to curtail all plans until after the lemmings move. My original intent was as follows with a 5% allocation combined:

Capital One will go at $26.40, looking to fill that gap below $23.50
American Express will go at $28.00, looking to fill that gap down around $24.75

So I've covered COF this morning around $25.85, for a very modest 2.5% gain. I was going for much bigger fish than that - it is now back down to a 0.2% allocation. I'm covering AXP at $28.65 for a modest loss of 2.3%. Effectively we are exiting the 5% stake in the basket for flat. AXP is also back down to a 0.2% stake.

Since the time I put these 2 positions on, I added an index (put) short and a metal stock, so we at least have something; further, I've lightened up on so many long positions that have had huge runs in 6-7 sessions that we don't need as much short exposure to be hedged. We are brimming in cash.

I'll leave the slot machine 50/50 odds of how the crowd will react tomorrow to someone else; my gut says these positions would have made good money very soon. But who ever knows - "news" always trumps "technicals".

Disclosure: Short AXP, COF in fund; no personal position

Comments

[Drew Arnold:]

Good call on covering. In fact, if these companies "surprise" to the upside or find another excuse to shoot higher, there could be an even better opportunity to put on a short position.

Jul 22 06:38 PM

[TraderMark:]

I am hoping one of them pops 20% on earnings ;) exactly for those reasons.

But i doubt it.. just covering my bases.


On Jul 22 06:38 PM Drew Arnold wrote:

> Good call on covering. In fact, if these companies "surprise" to
> the upside or find another excuse to shoot higher, there could be
> an even better opportunity to put on a short position.

Jul 22 08:29 PM

[LoveShorting:]

excellent article, thank you. I am holding my COH short just for the adrenaline rush (and because I am still a small fish and won't lose the farm.... and because I have pared my position and yes, would double up on a pop. ) But I like AXP too much to short them. Too emotional?

Jul 23 10:09 AM

[TraderMark:]

AXP has the transaction network so its sort of a mix between a COF and a V, MA in a way. DIscover as well (i'm long a touch of Discover)

COF on the other hand has its bank but no transaction network. AXP is just expensive to me, we'll soon see. The CEO was also none to optimistic in his last interview on CNBC. But right now the mkt cares less and is taking everything as a green shoot. Well almost everything. I just dont make any bets ahead of earnings because of how reactionary people are. There will be chances to be long or short after the initial reaction.


On Jul 23 10:09 AM LoveShorting wrote:

> excellent article, thank you. I am holding my COH short just for
> the adrenaline rush (and because I am still a small fish and won't
> lose the farm.... and because I have pared my position and yes, would
> double up on a pop. ) But I like AXP too much to short them. Too
> emotional?

Jul 23 12:54 PM