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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Playing Coach For A Volatility Squeeze

    While waiting patiently for Coach (NYSE:COH) management to execute on their turnaround plan, I notice that the stock has stabilized and looks like a set-up for a volatility squeeze after 2Q FY 2015 earnings are reported. Here's a chart, with Bollinger Bands on a 13 week interval.

    (click to enlarge)

    Please note that the bands have closed in for the past quarter. This pattern usually ends in an increase of volatility, a widening of the gap between the bands, and a relatively rapid move. In this case, it's about guessing the direction.

    Earnings for the quarter ending 12/31 are expected the week of 1/20/2015. The previous quarter was an upward surprise, which appears to have stabilized the downward slide. Shares are edging up a bit since the last report, shown by the "E" on the chart.

    I'm guessing that a beat is more likely than a miss. I also think low expectations will limit the downside on a miss, and accentuate the upside on a beat. So risk/reward is good, by that line of thinking.

    Options Strategy

    I like a version of the bullish reversal here. Monday I plan to sell COH May 2015 35 puts, and use the proceeds to buy 3 times the number of COH May 2015 38/41 vertical call spreads. Based on prices over the weekend, it should be possible to do this as a wash or a small credit on the premiums.

    Possible Outcomes

    If the stock is between $35 and $38 at expiration in May, both positions expire worthless, and there will be little if any profit or loss on the trade. Under $35, I will be the proud owner of some additional shares, which I'm willing to hold since I think the stock is likely to recover within the next two years.

    Between $38 and $41 at expiration, the trade makes pretty good money. I'm already long the Jan 2016 30 calls, so I might react to an upside move by selling the 38 calls, which would pick up some time premium, and leaving the 41 calls covered by the 30 LEAPS. Never a dull moment.

    Tags: COH, Options
    Dec 21 12:36 PM | Link | 2 Comments
  • Gauging Financial Stress In The Wake Of The Oil Crash

    We've seen some fairly alarmist articles, loaded with emotional words, prophesying dire consequences from the oil crash, with contagion extending throughout the economy. Let's take a look at the St. Louis Financial Stress Index:

    (click to enlarge)

    So far, financial stress remains at well below average levels. Bear in mind, it is presented in standard deviations, so that a level of -1.075 shows that stress is well below average, which would be 0.0. Just eyeballing the stress levels at the onset of the last two recessions, it would need to be in the +1 area before real trouble starts to develop.

    Next Question - Market Level

    (click to enlarge)

    I did the work a while ago, and won't update it. However, you get the general idea. The lower stress, the higher the market. The market level is estimated by using a ratio of S&P 500 to GDP, assuming it is normally distributed, and scaling it in standard deviations, for comparability to the STLFSI.

    As you can see, it includes a broad brush projection, that stress would go down, and the market up, in the same general proportion, which is what has happened. Of course it ends badly, in due course, but that's still a way down the road.

    Before panicking at any point over the next six months, it would be a good idea to check the STLFSI, which is updated weekly. Here's the link.

    Tags: SPY, OIL, USO, Energy
    Dec 14 8:27 AM | Link | 2 Comments
  • Buying California Resources

    As a holder of Occidental (NYSE:OXY), I am now the proud owner of .40 shares of California Resources (NYSE:CRC) for every Occidental share. It is trading in the under $6 area. It seems like nobody wants any, because of the shale, the EIA flip-flop on the Monterey Shale, the regulatory climate in the Golden State, the plunging price of crude, etc.

    By way of forming an opinion, I looked at the prospectus for the spin-off, Morningstar's analysis, and the 10-Q.

    So...Morningstar estimates fair value at $21 per share...

    Looking at the financials as shown on Morningstar, they have earnings for TTM, 2013 and 2012, which I used as three years. They don't show share counts.

    Well each OXY shareholder gets 0.40 shares of CRC, and OXY retains 20% of the shares. So I see the final ratio as 0.50. OXY has 789 million shares outstanding, half of that is 395 million.

    CRC TTM earnings were $869 million, with 2013 and 2012 checking in at $869 and $699 respectively. Average the three periods, and dividing by 395 million shares, I get three year average EPS of $2.05. Applying a P/E of 10, I arrive at an estimated FMV of $21, the same as M*.

    About the Monterey shale, and the EIA. The original high-ball estimate of the formations potential was produced by INTEK, who were commissioned by EIA. A search of the internet for their credentials, whereabouts, etc. produced nothing. Maybe I didn't do it right. But I didn't get any relevant results. Anyway, I smell a rat. Some sort of environmental politics, the drill baby drill group against the eco-freaks.

    The Monterey shale is tight, very tight. However, it is the mother-lode from which much CA conventional oil flows, and in point of fact CRC produces more conventional oil than unconventional. The terrain has a lot of tectonic activity, things have been broken up, bent, shifted, etc. But CRC has a huge amount of 3D seismic information, and a wealth of experience figuring out where the oil is.

    While CA has a water problem, and fracking uses water, CRC points out that they are a net contributor to the water supply, and have used for example municipal waste water for their purposes in oil production. The company emphasizes their efforts to be environmentally responsible, play by the rules, etc.

    If the price of oil recovers to the $100 area, as I expect, then CRC should earn $2, and trade at $20, sooner or later.

    Shale oil has this tendency to grow reserves as success is achieved on each additional well. The point is, if the technology can be proven to be economically feasible, then additional acreage can be included in reserves. The increases are called extensions, and they are a huge factor for most shale oil producers. CRC thinks they can get that sort of thing going in CA, based on their understanding of the geology, don't forget all that 3D seismic.

    Finally, CRC has a price advantage over other sources in CA, which is a net importer. Oil from the Bakken can reach the state, by rail, but that costs money and the environmentalists don't really like it going through their strongholds. It's a potentially explosive issue. In contrast, much of CRC's output is produced in proximity to the state's refineries.

    So I took a position, 40% of my normal size, and will wait to see how things develop.

    Tags: CRC, Energy, Oil
    Dec 09 11:21 AM | Link | 9 Comments
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