Wednesday, July 22, 2009

Bookkeeping: Covering Most of Our Credit Card 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 5 second glance at a headline. These are 2 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 mistakingly though the stock market had the ability to go down for more than 2 hours and wanted to 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 1 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 2 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. AXP I like the business model more, but its 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 of made good money very soon. But who ever knows - "news" always trumps "technicals".

Short AXP, COF in fund; no personal position

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