Corporate Earnings

A few days ago I wrote about how the big price drop 

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UPCOMING EVENTS

Corporate Earnings We talked last week how corporate earnings were not going to pull us out of the financial mess the globe has made for itself. It's going to have to come from real spending in the form of capex which then provides more production (jobs) which then sustains consumption (spending). But, corporate earnings sure could throw a wrench into things. Two main things are afoot here. Back in September 2014, corporate Q1 2015 EPS was forecasted to be 10% year over year. That was quickly revised to a more modest 4%. We now stand at -2.8%. What gives? Two things: Crude Oil prices and an overly strong dollar. It's no secret how Crude as had a less than net positive effect on the US economy. Lower capex in the US Shale sector and the accompanying job losses there are the two main things that come to mind. Next, the strong dollar's effect. Let's take a look at some text taken from a few companies' latest earnings reports: --Finally, we do see currency as a continued headwind. We factored into our guidance the headwind of approximately $0.15 to $0.20, which was roughly the same rate of devaluation we experienced in FY 2014." –Monsanto (Jan. 7) -- "Before I share with you some of the highlights from the quarter, let me provide some background on the impact to our business from the volatile foreign exchange rates. Nearly every currency we do business in weakened against the U.S. dollar when compared against Q3 last year, last quarter or against guidance…These rate changes negatively impacted both the income statement, where we use an average rate for the quarter and the balance sheet, which is translated using spot rates at the end of the quarter. For instance, total revenue would have been $13 million higher using Q3 rates from last year, a $11 million higher using rates from last quarter, and $3 million higher using the rates given in September for guidance." –Red Hat (Dec. 18) -- "Turning now to revenues, net revenues for the quarter were $7.9 billion, an increase of 7% in U.S. dollars and 10% in local currency, reflecting a negative 3% FX impact compared to the negative 2% impact provided in our business outlook last quarter." –Accenture (Dec. 18) -- "Our Consumer Foods segment operating profit, adjusted for items impacting comparability, was $310 million or up about 7% from the year-ago period…Foreign exchange had a negative impact of $8 million on net sales and about $6 million on operating profit for this segment this fiscal quarter." –ConAgra Foods (Dec. 18) -- "And as I mentioned, foreign exchange lowered reported sales by 2 percentage points." –General Mills (Dec. 17) -- "The as reported numbers were heavily impacted by the strengthening of the U.S. dollar in comparison to other currencies. Total revenue saw a 4% currency headwind which would double what it was at the time of my guidance." –Oracle (Dec. 17) From FactSet: "And with all variable costs already trimmed out of existence in the past 5 years, this can mean only one thing -millions more in layoffs, especially if the companies that comprise the above sample are also eager to maintain their record pace of corporate buybacks: something they would be unable to do with the residual cashflow that lower sales generate." I cannot wait to see how the BLS comes up with new and improved ways to seasonally adjust and revise the numbers as we go through the next few quarters! Read Past Issues of Larry's Newsletters at TradeWithLarry.com

With another milestone in the markets reached, the bulls continue to push for record highs. While we haven't gotten a new all time high in the Nasdaq Composite, it only seems inevitable that we eventually will. One the first trading day of the month, we predictably jumped higher as the COMP closed above the 5k mark. While I think we may pullback on some profit taking today, if we open above that level and immediate support is found, that can lead us to a strong push higher in the markets. That can help propel some of the recent high fliers such as AMZN, NFLX, and AAPL even higher. Watch that level for support. If support isn't found at the 5k level, look for a pullback and a retest very soon. The Bulls are out and they are hunting for all time highs yet again. Read More

TECHNICAL DATA ES 2114.00/2107.00 POC 2110.75 YM 18,249/18,197 NQ 4477.25/4462.25

When making a bullish directional play why would I consider a call calendar and not just buying a call vertical or selling a put vertical. A quick review: A call vertical is when you buy (or sell) a certain strike and sell (or buy) a call with a higher strike price. For example, the PANW March 6th 150/155 would be an example of a call vertical. A calendar spread is when you buy (or sell) a strike in one expiration and sell (or buy) the same strike but different month. The PANW March 6th/ March 155 is an example of a call calendar. For an earnings type of play, straight verticals tend to be binary in nature. You are either going to max out the spread or lose most if not all of your premium. Typically, you are paid well from a reward to risk perspective to take on a trade like this. For example the March 6th call spread is trading ~1.60. Let's calculate our reward to risk. The spread maxes out at $5.00 (width of the spread) less whatever premium we pay (max reward) divided by the most we can lose which is our premium paid ($1.60). ($5-1.60)/$1.60 = 2.125:1. Not too bad. But like I said above, we are either going to make $3.40 or lose our $1.60. Let's consider a calendar spread. If we buy the monthly March 155 calls and sell the March 6th 155 calls, we can buy this for about $1. The risk to reward is a big less straight forward as there is a level of subjectivity in modeling the post-earnings implied volatility. Using past performance on earnings we can determine an average level IV will regress to. In this case we see that the March implied volatility on average goes to the 30% level. To be conservative, I want to model in a 10% to 15% cushion in determining where to put the weekly vol (it usually goes to even with the back or even below). So, we model this vol at the 35% level. This produces a risk graph like this: We are still targeting the $155 strike level like in our call vertical, but you can see that although our max profit happens at the 155 level, we can theoretically make about $0.95. This is not even a reward to risk of 1:1. Why not do the vertical? This is because this gives us some room to be wrong. We see that if we are unchanged, we theoretically lose only about $0.015 and if we are down 2%, we lose only ~$0.50. If we are wrong with a straight directional move, I will lose my entire premium. I am willing to give up some reward to risk in order to construct a more positive profit and loss scenario. Read More

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