In baseball when a pitcher throws a high fastball for a strike, baseball aficionados' in the press boxes, drinking champagne, call it the "high cheese." Those less fortunate souls, in the nickel seats, drinking beer, call it the "high stinking cheese." I believe that the blocks on June 15 were the high fastballs. Metaphorically speaking; they are strike one and two; and strike three is already on its way. It is time to short this issue. Be advised that the Ex Div Date is June 27.
Kraft Foods Inc. (KFT) has been trading in a sideways range bound pattern and I believe that pattern will continue. That is to say: I believe there will be a short term reversal in this issue from the top of the range ($39.50 to $40.00), to the bottom of the range ($36.50 to $37.00).
This will be in conjunction with a pull-back that I anticipate is coming within the next few weeks. Although I do not believe the pullback will be dramatic I believe it will appear dramatic, because of the Dow Divisor. I have commented on the divisor in previous articles. For those of you who do not know to what I am referring, here is as brief an explanation as I can offer:
The Dow average is not calculated simply by adding the prices of the thirty issues together to make the point total of the Dow. After the total number of points is added together, there is a number called the Dow Divisor, which is divided into the total number of Dow points in order to derive as what we know as the computed Dow average.
When the Index was first constructed back in the 1930's and the Dow Divisor was a number greater than 1. Through the replacement of Dow components and stock splits in the individual Dow issues, the divisor has been whittled away over time. The impact the shrinkage of the Divisor is having on the index is even more apparent when one considers that a 4 point move in (NYSE:IBM) is equivalent to a 40 point move in the Dow average. This is analogous to a car accelerator or braking system that is over sensitive to the touch.
The result is that it is much easier for the Designated Market Makers to manipulate the index. It is now a much more sensitive tool to create large price swings in the index, without doing very much at all. Obviously, it is a purposeful manipulation of prices to cause investors to respond to changes in the index. It is rising prices that create demand.
The DOW Divisor is set at 0.132129493. By contrast in the early 1990's the Dow Divisor was set at .7. If the point total of the Dow components was 1600 today, the computed Dow would be 12,109.33; whereas, in 1990 if the point total of the Dow components was 1600, the computed Dow would be at 2,285.71.
On the Basis of the foregoing these are my views and observations:
I recommend establishing a short position in Kraft Foods. Open your position with only 1/4 of whatever capital you intend to commit to Kraft Foods at $39.25. Purchase the remaining 3/4 of the position at $42.39 and stop out at $44.05. Do not post your stop out. I have said it before but it is so important that at the risk of being redundant and in an abundance of caution I will say it again. It is too easy for the Designated Market Maker to cash investors out by moving the price above or below your stop out and move the price right back down or up again. In addition, when a stop out is triggered it converts into a market order and that could be disastrous if the Designated Market Maker decides to really take advantage. Remember the "Flash Crash?" I would be looking to exit the trade at a downside price target of $36.85. Do not allow this position to exceed 5% of your overall portfolio. You should seriously consider writing puts to re-establishing your position to the long side, if and when you see additional blocks. If the stock is put to you, then the premium will bring the cost basis down and if not then the premium is money in your pocket.
There is always the possibility that the trade may not work out.
There Is Never A Sure Thing (particularly on a short)
Investors must realize and recognize that there is never a sure thing. Sometimes events that have a low probability of occurring bring forth very serious consequences should they come into being. Investors must judiciously consider what the inherent practical limits are and how much they stand to gain in relation to the risks involved in establishing any position.
In addition, persistence can become desperate folly by allowing a losing position to become a viable argument for deciding on a new position. Rather, such decisions should be based on the current and soon-to-be circumstances.
Any position in which one unexpected factor has a significant impact on your portfolio is the result of poor planning. It is a fault most commonly associated with people who want to explain away their losses. SUN TZU -Art of War "Use an attack to exploit a victory, never use an attack to rescue a defeat."
If you follow the process recommended and the trade does not work, the overall loss in this model is $3,000.00. That amounts to .003 of the overall portfolio (theoretically valued at $1,000,000).
And finally, never be a brave and brainless investor because a fool and his money are soon parted.
A portfolio of $1,000,000 should position size in the following manner.
This is a trade, not an investment. Be ever vigilant.
That's it for now ... Have a nice day.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in KFT over the next 72 hours.