OPEN: Chipotle (CMG) triple calendar

For whatever reason a few of the middle and lower end restuarants are starting to trend up or sideways.  Chipotle is a good example.  Its post earnings, rising a bit faster than falling and building a wedge pattern.

I’m not sure what the percentages are with the wedge or even which is the more likely  direction to break but I’m going to guess to the upside.

I buying longs puts on the bottom / ATM and long calls at the top.  This will help me to convert this into a diagonal if we break out.  Here’s the order and the risk profile:

I will also look at doing this as a double diagonal and maybe post those thoughts as well.

Have a good day!

Mojo

Popularity: 22% [?]

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Bad Housing Starts is a Good Omen

The January housing starts finally came out and the numbers were abysmal.  Down 16.8% and sending another wave of “gee I wasn’t expecting that” through the corridors of academia and the government.

Unlike the rest of the folks I actually take this as good news.  Why?  Simple supply and demand.  For every new house that is built, it takes the place of a potential sale of an existing home.  Is it one for one?  No, but I bet its close.

Most people would rather buy a new home than an old home.  If someone is in the market to buy not only does an additional new home create more inventory to overwhelm the demand but ususally new trumps old.  This is bad for existing homeowners (making their properties harder to sell), bad for the banks (since they are finally realizing that owning a bunch of vacant properties across the country is NOT a good way to make $$$), and bad for maintenance workers (new homes require less repairs over the first 10 years).  And I think if you look at where most of the ‘bad loans’ came from you will see that new properties (and their builders, agents, loan officers, etc) made of the lion’s share.

Now, why do I think that Bad Housing Starts is a Good Omen?  Because it finally indicates that people are getting realistic about the mess we are in, they are halting new construction, and setting the very beginning foundation of potentially clearing out our current inventory.  Only once the homes for sale are sold we will even have a hope of the housing market returning.

If it were me and I were in charge (I know we are all thankful I’m not) I would actually place a hefty tax on new home construction and tie it to nearby housing rates and sales inventory.

Mojo

Popularity: 21% [?]

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$787 Billion – Nothing Stimulating Here

I just spent the better part of a couple of hours reading over the highlights and breakouts of the Stimulus package.  I’m disheartened to report that unfortunately its amounting to not much more than a collection of pet projects, favors, and paybacks totaling $787 billion.  And the worst of it?  We are going to spend this money not in a sudden and pervasive wave of jobs, credit, and cashflow but in dribs and drabs over the next eleven years.

People are talking about that its a huge boost measuring 5% of the GDP.  Not true.  GDP is measured per year while this package spending will cover more than a decade.

Yes, there is a tax credit for first time homebuyers but nothing for investors (who are holding cash on the sidelines) or for people already in homes that want to move.  These two groups represent not just the vast majority of potential homeowners but probably 80%+ of the force and money likely to enter the market.

There is no credit for buying a new car, no provision for forcing banks to lend at rates spreads more commenserate with the prevailing rates, and no serious effort to increase consumption or reduce debt.

A paper tiger at best and a big disappointment for Obama’s first time at bat.

Mojo

Popularity: 20% [?]

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Is Starbucks the new Folgers?

I got an email this morning from a friend and Starbucks shareholder telling me that his dear company is going to start offering ‘Starbucks Instant’ coffee.  I thought he was pulling my leg but a quick Google search backed him up.

The thinking goes that deeper (and cheaper) penetration into your local cafe’s, hotel rooms, and purses will generate more and more money for Starbucks.  Even if that’s true in the short term (which I think is unlikely), they are running a huge risk of cheapening their brand and losing their image and branding.

And if that horror wasn’t enough guess what?!?  Yep, they are going to offer ‘value meals’ as well!  No, I’m not kidding! What’s wrong with corporate america? Is McDonald’s becoming Starbucks and Starbucks becoming McDonald’s?  Will Starbucks reprise the Hamburglar and install offensively colored plastic seats?

Apparently Schultz is confusing motion and progress throwing out one lame idea after another.  The last good idea out of Schultz was several years ago when Starbucks considered themselves a separate and powerful distribution channel for music.

In tough times I would certainly cut back, make changes (like why does my small town of 6,000 have 4 Starbucks?), and be smart.   But Starbucks is putting at risk their billion dollar brand in exchange for a few pennies.   Does this make sense to anyone??  Is Starbucks the new Folgers??  Are they going to add ‘flavor crystals’??

The next thing to watch for will be the class action lawsuit that will get filed by the Starbucks shareholders for incompetent management.  That looks like an open and shut case.

Mojo

Popularity: 19% [?]

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Vertical Entry on Google (GOOG)

I got an email from a reader asking about how to time vertical entries.   I’m not a big fan of verticals simply because I find the adjustments difficult and its mentally tough for me to take such a large percentage loss on a trade.  “Timing” of course is at best an educated guess and mostly a crapshoot so be prepared to adjust your trade.

While looking through some charts this morning I found good old Google.  Now, for me I’m not allowed to trade Google because she and I have a long, lurid history and I get too emotionally involved (think Femme Fatale).  That being said she does provide for a pretty nice chart and setup.

Notice how we broke the overhead, diagonal resistance?  Then we came back, tested the new support and continued to move up.  Do I think that Google will continue to move up strongly?  No, but I’m open that it could continue to move up for as much as another week so I’m looking for the MACD to turn over to put in my bear call spread (BRCS) somewhere in the 430 to 450 range.  That gives me some distance to the short strike, a bit of exhaustion on price, and also the 200 day moving average. The credit will likely be $1.20 to $1.50 per $10 spread.

HTH,

Mojo

Popularity: 21% [?]

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Update on USO Calendar

I wanted to provide you with an update on the USO triple calendar that we opened a week ago.  The price action has worked out perfectly for us with very little real movement.  Take a look at this graph:

Breakevens look good, price is almost dead center but our current P/L line (the white one) still isn’t making any money.  Why?

Well the nature of calendars is that delta (price movement) and vega (change in volatility) can work against you while theta (time decay) works for you.   Now that doesn’t mean that vega always against you.  If volatility rises vega puts money in our pocket.  If volatility falls vega takes money from our pockets.  So what happened here?  There was very little delta so its not that, theta (time decay) is constant so its not that, yep it was vega.  Since we put on the trade the volatility of these options has dropped enough to overcome the time decay and cause a small loss.

What’s the plan from here?  We will hold for one more week, look for adjustments, and evaluate.  I don’t usually like to hold into expiration.

Mojo

Popularity: 22% [?]

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Bullish Companies

What companies are going to do well in the next few years??  OK, outside “none”??

I think companies that provide good value and essential services will do the best.  For instance, my wife saw a commercial from Allstate talking about how they know hard times, that they founded their company in 1931 and they will be around.  I am no fan of Allstate (since I think that you should pay your claims on properties that you covered in FL) but that’s a really good approach that contains the three elements that are important.

First, its a realistic approach to the economy without being dour.  Second, it reminds you that some services are essential (like care insurance) or such a good value compared to the alternative (think Netflix vs. Comcast cable) that you will likely keep them.  And third, that even in the face of these times ahead we are a strong, stable, non-flashy company that will be with you (just look at our history).  Most people believe that flashy = short term success + long term failure.

I think the Allstate commercial has all of these elements.  What other companies do you think fit the bill?

Mojo

PS – I’ve been watching Netflix (NFLX)  and I’m looking for a good place to jump in.  With the futures pointing strongly lower today might be a good day.

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