Re-analyzing American Express

I was indeed on the wrong side of the AXP trade on Thursday and Friday. I wanted until the last minute on Thursday to pull the trigger on an options strangle position and felt extremely confident. The numbers came in and I thought I was gold. But the information was spun in such a way that investors flocked to the buy window. The headlines read "American Express Blows Away Expectations".

Did they really? Well, if the stock move on Friday was any indication, they sure did.

What AmEx has going for them is excellent business management. They recognized the problems early on and made a significant cut in their work force and cut other key spending measures. They knew the numbers would be bad so they set analysts expectations extremely low while kicking the people that got them record earnings last year, out of the back door.

Lets look at the numbers a little closer.

• Revenues down 18% from the previous quarter
• Net Income (at .31/shr) down 64% from last year
• Excluding one time revenues from MC and Visa, net income was .20/shr, down about 80% from last year.
• Transaction volume down a massive 16% from last year
• Charge offs (defaulted payments) were 8.5% which is 100% higher than last year. AmEx itself believes this number will go up to 10% by next quarter results.

But, AmEx management pulled the rabbit out of the hat. AmEx has tremendous brand name and they are just trying to survive this recession by cutting jobs. Good management, right?

Well, it is except AmEx is shooting themselves in the foot. The main reason for the massive decreases in transaction volume, net income and revenues is .... unemployment. As it goes higher, AmEx's numbers go lower. As AmEx's numbers go lower, they lay off more people helping to increase unemployment.

AmEx is feeding the monster which is cutting into their earnings. Yet, the stock rises 20% on the "good news" of its quarterly report.

Sure the company made money but growth is no longer in the picture. The numbers will continue to decline and no matter how low the analysts can take estimates, the picture is not rosy for AmEx.

Double Top???

The market continues to stay resilient based on hope and based on the belief that the economic data is showing a possible bottom. Maybe it is. Who am I to say? Well, I am not to say but there are plenty economists out there who are saying there is still a lot of pain ahead of us and it isn't hard for me to read the data and see that things are not getting better.

Take the housing number. If that number came out 6 months ago, the market would crash. The number is really horrific given that the average home price fell yet again and interest rates are at all time lows. Given the interest rates and the avg house price, housing should double! Yet, it only barely beats estimates. And the media jumps on it as great news. The housing dilemma is over. Everything is fine.

Take the unemployment number. 640K more. Yet the media pundants praise it as a sign of the bottom. 640K new workers unemployed is good???? I am so sick and tired of hearing this.

Look, I am not a bear just to be a bear. I am a bear because I see the reality. And I post this blog mostly for my own sake, but also for yours. If you want to go long, go ahead. If you want to put all of your 401K money back into large cap growth companies, go for it. But don't come crying to me in 3 months when we have tested the bottom again and you lost.

Longs should consider taking profits or protecting their profits via hedges. As a short, if I had not played hedge positions at every corner, I would be crushed right now. Instead, I have helped limit my paper losses, taken profits on some big hits I made and I am quite comfortable in my current short positions.

Now, if the market goes to 1000, well then I will be hurting. Lets see what happens.

AMX is going to correct. As are some of the banks (not all). The VIX barely moved today and is actually getting closer to the 20 dma, rather than farther away. But it still hasn't crossed it so until it does so and we get a 2-3 day decline in the market, there is no evidence the bear market rally is over. TA says it should be. Today represents a double top situation. If the market can top 880, we are headed higher. If it can not penetrate 875, we are headed lower.

Lets see and please, learn to take profits when you can and make sure you have strategic hedge positions whether you are long or short.

End o' Week Wrap Up

I don't have any clever quips or stories or antidotes tonight. I am so sure of where the market is going, I am starting to doubt myself. It just seems very clear that the market will zig zag to the southeast for the next couple of weeks as all the good news is out and now reality sets in waiting for the next earnings season, just as it did in Q1.

But now everyone is saying it so I am doubting it a bit. Still playing it but thinking i need more hedge positions. I won't make that move tomorrow. I want to see what the volume looks like. And the VIX is usually down on Friday unless it gaps up in the morning.

Financials are still dangerous as a whole. There are still pockets out there to pick off. AXP went up after hours even though their earnings and forward looking statements were questionable. I have to believe the A/H action was retail investors thinking they stock will rise on the news. I think there may be downgrades in the morning. How does a company lose 50% of their rev's, say forward looking there are a lot of risk with defaults, and if necessary, they will just lay off more people in order to meet earnings, yet the stock goes up???

AXP is on life support and are living off of "reengineering" their resources which means cutting more jobs. Cutting more jobs is not an act of growth but an act of desperation to maintain short term profits. I feel pretty good about my AXP position.

I think tech is starting to form a bubble. Tech can not be an island in a sea of a poor economy. It will eventually be pulled down as well.

Commodities and metals will be the play again in the next couple of weeks as we head toward 760.

The Play of the Day

I am not really a daytrader in the sense of getting in and out of stocks or options within a span of a day to do scalping and such. But sometimes a stock will present an incredible opportunity to make a trade intended for no more than a day.

Today, I see that opportunity with AXP (American Express). They report earnings after the bell and are sitting near the upper Bollinger Band line at $20. But that is not what is so enticing.

Look at the analyst estimates for AXP. There are 19 analysts with an average estimate of .12/shr profit. But look at the low and high estimates. The low estimate is a .19 loss and the high estimate is a .34 profit. That is a HUGE relative span. You are talking about 200% in either direction.

That tells me that perhaps someone knows something that other analysts don't. It would be great to see the entire list of estimates so a more relative computational method can be used to determine how wide the differences are using standard deviations and such. But a 200% swing in either direction?

That could present an opportunity. I can't say for certain if AXP will miss big or hit big. But this could be a great straddle play if the price is right. With the estimates having a deviation of 200% in both directions, it would seem a straddle is a good play but it could be a suckers bet. The May 20 calls and puts are both right around $2. A 10% premium. This means for a straddle to pay out, you really need at least a 15% move in AXP to really make any money on the straddle.

A butterfly spread would be the another option if you think the deviations in the estimates is a red herring. It is a safer play but why make such a safe play on a volcano which can explode at anytime? And you will lose if it hits or misses big.

I want to bet on volatility here and a straddle is a good way. But an ATM straddle seems pricey to me at a 10% premium. So a Strangle has to be considered which would be OTM calls and puts. I will put less money into the bet but have more potential for higher gain. I also have more potential to lose all of the money I put in if the stock does not move.

But, I want to lean on the side that AXP will miss earnings and guidance will be bad. The current price of the stock has it meeting earnings. I have to believe that will be very hard to do. So, I don't want to get carried away and just buy puts. I know, if anything, AXP is not going to skyrocket. So I feel safe selling May 20 calls. At the same time, I will buy a bit of the May 21 calls as protection. And then I will also buy May 19 puts. So my bet is for it to go lower but just in case it goes higher, I have some protection. And if it happens to remain the same, I limited my losses by selling the May 20's.

The breakdown of how much I would invest in this relatively would be $1000 for the May 19 puts, $2000 selling the may 20 calls and $1000 on May 21 calls so my initial investment is $0. I only make money on a large move down. I can only lose money on a large move up. I like my odds.

Who Has The Wheel?

Imagine a car that has two steering wheels. They used to make this for drivers education but they no longer do. You may find one out there built 10, 15 or 20 years ago, but they no longer make them. They don't make them for a number of reasons, not the least of which is, having two people steering really made no sense.

The same goes for the stock market. Having both sides steering makes little sense. So who is driving right now? For 6 weeks the bulls have obviously held the wheel. But it is hard to say who has it right now.

To me it "feels" like the bears have the wheel. But that is just a gut feeling. Looking at the VIX chart, it is not obvious at all one side or the other has the wheel. The VIX is getting very close to a break out to the upper trend area but I have to see 3 straight days of closing above the 20 dma to be convinced. Right now, it is below that line.

But the compelling chart to me is the SPX chart. if you chart it out with a 20 dma, it is obvious the 20 dma is curving down and heading back down toward the 50 dma. The SPX seldom reverses a down curve of the 20 dma without first crossing the 50 dma. So this alone gives me confidence that the bears seem to have control of the wheel.

A lot of data coming out. I think the housing numbers are going to be much worse than expected. Unemployment will continue to be bad and now some of the healthy companies are now announcing layoffs in anticipation of slowing down and keeping profits up.

It may not be too late to get into short positions of the largest credit card debt holders such as AXP, DFS, BAC and C. VMW is probably too late to get into a short position since it will probably steady at 27.

Too bad their is not a Credit Card ETF. It would be gold right now. Tech has been a big leader in the recent rally so you have to expect there is some pullback. I think the next cyclical to drive the market forward will be energy since it has been neutral for so long. But that won't happen until we hit around 800 and a mini rally occurs.

We are headed to 760 as I have been saying. Still 2 weeks away, but we are headed there.

The Next Potential Catastrophe

I know I sound like a gloom and doomer, but there are so many problems with the economy that it is really hard to ignore. On Sunday I pointed out the credit card market and why the problems there will escalate. Today, I want to point out the next potential catastrophe on the horizon.

Chrysler. Chrysler is in negotiations with their lenders to take 15 cents on the dollar for their loans. The banks are not even remotely interested and want the full 100 cents on the dollar via cash and preferred equity in the company. Apparently the banks loaning to Chrysler don't get it.

These banks have no reason to take the Chrysler offer of .15 on the dollar because they have TARP money to replace the lost Chrysler money. It is simple to say no to such an offer. The banks want close to .70 on the dollar in cash and the rest in guarantees of future payments or company equity.

It really makes me sick to my stomach. Chrysler, on May 1, will file for bankruptcy due to the banks not playing the game. The banks will get about .10 on the dollar via bankruptcy so the gap is very small. But the jobs that will be lost are enormous, not to mention pension programs, insurance benefits and the massive increase in unemployment and GDP this will cause. The banks do not care. They will get money from Timmy and Ben no matter what.

If you have not read up on the Chrysler situation, you really need to. They are too big to fail unfortunately but they will and I think they need to. Even so, the way the banks are handling this is very much un-american. Apparently the gov't is good at giving out money to banks so they can pay big bonuses but the gov't is not good at making these same banks help bailout the auto industry.

May 1. Put it on your calendar. It could be the beginning of a very ugly cycle in the economy.

I Leave For A Day and...

Looks like the bulls jumped back in today in the face of market weekness. It really was not a surprise at all and I told you last night that if you didn't take profits from Monday, you were a greedy pig.

You have got to take profits after days like Monday if you are a bear. You can't ride it out unless you are ok with loosing some of it back in anticipation of a further downward move. But when things like SRS, are up 20%, SKF up 17%, you got to take your profits and wait for a new entry point. Don't get greedy! We are still in a bear market rally so a big pull back is going to be met with resistance and a bounce.

I think todays action was healthy. It could be healthy for the bulls that it bounced back but it could also be a healthy correction for bears.

I think we broke a key trading range and we are headed for a correction. I know Waxie is going to the bullish side, but I am betting against him. I have done this 3 other times with him being right once and me being right twice.

I think we are on a trail to 760 which will take a couple of weeks to play out. More clarity will come out about the banks and once that is out, the market will start behaving based on fundamentals again, which are negative. The market is riding the financial wave right now but once the visibility on banks are clear, the focus will move back to unemployment, retail, RE.

The VIX was down slightly today and I think that is a sign of potential bearishness coming up. But it is not a clear signal at all. In fact, we have to consider the VIX as a bullish indicator right now until it can go above the 20 day MA and close there.

So, tomorrow I am re-entering short positions that I sold off on Monday. I am attacking DFS and AXP. Going to buy back the SRS I sold and be very happy about it. Any move up in SRS and I am going to sell covered calls on them for protection and generating some cash.

A somewhat bullish-ish play I am making is to short or buy puts on EEV (ultrashort emerging markets). It is primed to go down or stay level but with decay, should be a pretty good bet for May and July puts.

VIX Update

I guess I should comment on the VIX. It has spent the better part of the last 29 days under the 20 day MA. It happens that the same happened in December thru early Jan for 29 days.

Also, the VIX is now slightly below the 20 day MA right now and likely to cross it soon. Until the VIX gets back above 42, I can't say that this is going to be a major correction. But, that said, I think this is going to be a major correction (down to 760 at least). :)

I am travelling most of the day tomorrow so I won't be watching the market. Which is probably a good thing because many investors make the biggest mistakes the day after a big move.

What Did Today Tell Us?

First, we knocked it out of the park today. From BAC to SRS to SDS to DFS to AXP. Just a solid day all the way around. I hope some of you were able to get into short positions on DFS and AXP before the open or soon after. Unfortunately for me, was too busy this morning to hit the trading desk so I missed out on the early move on DFS and AXP and decided not to chase just yet. I do appreciate the donations from those of you who did cash in. There will be more of it but not sure it now is a good time to chase.

For bears, today was a big day. A solid correction which was very much anticipated by many (other than CNBC analysts). Did you notice the Fast Money guys all saying this was expected??? Did you hear them all late last week saying banks are safe???

So, what does today mean? Well, first, on a macro level, we are in a bear market. We know that because the 200 day MA on the SPX is still on the down trend and neither the 20 or 50 day MA's are even close to it.

On a micro level, we are still in a bear market rally and today was a correction. So don't expect the entire bear market rally to be wiped out this week or even next week. It will take time.

You should have taken some profits today. If you didn't, you are a greedy pig and you deserve to lose some of it. You don't have to sell your ETFs or cover your shorts to take profit. Use options to protect profits by buying puts or selling calls. Its a great way to generate some cash and protect profits.

I think we have a bit of a bounce here but we are clearly headed to the 760 level or so. It may take a couple of weeks but we are headed there. From there, it will test how strong the bulls are. With key earnings already out, there is not much to rally on unless unemployment and retail numbers improve, which is highly unlikely.

Stress tests are meaningless now. If all banks pass with no problems, it was a waste of time and a farce. If some of them fail and need recapitalization, we already knew that but will be a wash because the strong banks will outperform the weaker ones equally.

What stress tests hopefully will do is give some transparency. And I have to believe transparency will be negative. Did you hear Ken Lewis today? How many times did he use the word "hope" when describing future earnings and revenues?

Hope is all BAC has. Hope that credit debt will improve even though it is clearly declining. BAC is screwed. They will be injected with more gov't money, dilute the common shares, and sell off some key banking units in order to survive. I have been telling you for weeks that BAC May puts are the play. And what an opportunity last week gave us. $11.56???? Are you kidding me??? Wow. I wish I had timed it right but I bought into the May puts when BAC was around $10. I never sweated it though. And now it is my time to relish the glory on BAC's slide back down to sub $5.

But keep your donations coming. :) Only if this helps you though. Google wiped out my account so all AdSense earnings are gone. Screw Google. I am shorting them now. :)

Unemployments Unexpected Consequences on Credit Debt

I have been pounding the table that unemployment is not a trailing indicator, but a leading indicator of a recovery. It is not *the* leading indicator but it certainly is not a trailing indicator. Unemployment has to be reduced (not just slowed down) in order to have any sort of sustained economic recovery.

On a large notepad, I have two tree diagrams. One is diagramming the positive side of the economy and one diagrams the negatives of the economy. On the positive side, the roots of the tree are the Fed and Treasury programs/bailouts and government stimulus programs. On the negative side, unemployment and toxic assets are the roots.

Without going into too much detail on the resulting effects, on the positive side, most of the leaves end with job creation which re-feeds the entire tree. On the negative side, the effects result in growing unemployment.

So I see unemployment as the key indicator for the economic recovery or for the continued recession/depression.

But this is not the point of this blog. While putting this tree together, something stood out to me that I hadn't really thought about but I think is a reality that will play out. Debt is what got us into the current economic decline. And while most consumers are cutting down on debt, I found an interesting possibility of a class of consumer which may actually increase debt which will cause a windfall of problems for the economy.

The unemployed, in order to avoid losing their home, and making sure they can afford the essentials, are likely to use credit cards to their limits to protect their cash as long as they can. In fact, financial advisers will tell you it is better to make sure you have money for your home and worry about paying off your credit cards later. You can always file for bankruptcy protection from creditors while still saving your home.

My point is, many credit card companies are reporting a higher rate of defaults. Many due to unemployment. But not only are the number of defaults growing, the size of the defaults are growing. Meaning, not only are people not paying off their debt, they are growing it first, before defaulting.

This is bad news for the credit card companies and it is why many are being aggressive about reducing limits and increasing interest rates, to try to avoid overuse of credit lines.

I think this spells a lot of trouble for certain credit card companies. Particularly Discover Card (DFS) and American Express (AXP). Many banks will be hit too but banks are well diversified enough not for this to cause a big impact. For these credit card companies, it could have huge ramifications.

Both DFS and AXP have had big run ups lately due to banks and other financial stocks going higher. Do not mistake DFS and AXP as the same business structure as Visa and MasterCard. Visa and MasterCard make their money on service and fees, not on credit. They have very little if any credit/debt exposure. Discover and AmEx both have heavy exposure to credit.

I think now may be a great time to look at short positions in these two companies.