WEEKLY ISSUE: Putting Some Defensive Calls in Play

WEEKLY ISSUE: Putting Some Defensive Calls in Play

Key Points From This Issue


Given the way the Fourth of July holiday falls this year, we strongly suspect the back of the week will be quieter than usual. For those reasons, we’re coming at you earlier than usual this week. And while we have your attention, Tematica will be dark next week as we recharge our batteries ahead of the 2Q 2018 earnings onslaught that kicks off on July 16.

 With the housekeeping stuff out of the way, let’s get to this week’s issue…


Putting some defensive calls in play ahead of earnings season

With trade, tariffs and uncertainty taking the pole position in investor conversation, which comes as no surprise given that more companies are sharing the negative impact that might result if these tariffs go through. I go through that in far greater detail in this week’s issue of Tematica Investing, which will be hitting your inboxes and the website later this morning.

The nutshell view is we are starting to see companies warn about the potential impact of these various tariffs and right so investors are growing increasingly uncertain about the expected rate of earnings growth to be had in the back half of 2018. With it looking like neither side is going to back down — Commerce Secretary Wilbur Ross told CNBC on Monday that there’s no level on the downside in the stock market that would alter the way President Donald Trump approaches trade – it looks like we are in for an earnings recasting lower that could make what seems like a moderately priced stock market that much more expensive.

To prepare ourselves, we’re going to add two positions to the Tematica Options+ Select List. The first one is a call option on the inverse ETF for the S&P 500 that is ProShares Short S&P500 (SH). Given the timing of the 2Q 2018 earnings season, I’m selecting the August 17 strike date, which will allow us to capture the majority of quarterly earnings reports. Based on the current share price for SH shares and my preference for out of the money calls, I’m utilizing a 30.00 strike price. In sum this means we are making the following trade:

The second trade is also a defensive one in nature, but it is also one that factors in the sweltering temperatures sweeping the country. The National Oceanic and Atmospheric Administration’s Climate Prediction Center has updated their July forecast and more heat is expected for the month ahead over most of the nation.  While some may see that as heading deeper into summer, the reality is many will be facing higher electric bills as they look to keep cool and that has me adding a Utilities SPDR ETF (XLU) call option play to the Select List.

Breaking down the selection process as I did above for the SH call trade, we’ll use the same strike date – August 17, 2018 – but given where XLU shares are trading it means selecting the 53.00 strike price. Putting it all together:


JPMorgan upsizes dividend and buyback program

Last week we added a call potion in JPMorgan Chase & Co. (JPM), the world’s biggest investment bank by revenue, ahead of the Fed’s annual “stress test” results for U.S.-bank holding companies. Last Thursday night, following the results of the Comprehensive Capital Analysis and Review (CCAR) that is part of the Fed’s annual financial “stress tests” JPMorgan announced it would boost its quarterly stock dividend to $0.80 per share from $0.56 cents and authorized gross common equity repurchases of up to $20.7 billion from July 1, 2018 to June 30, 2019. That dividend hike is in line with expectations for a 3.0% dividend yield at or near the current share price.

While the JPM calls have traded off with the market, we expect the company will deliver a favorable earnings report on July 13 as it discusses this latest move to return capital to its shareholders.


Sticking with our media call plays

Recently, Walt Disney (DIS) upped its bid for assets of Twenty-First Century Fox (FOXA) and last week the Department of Justice made its sign-off official on Disney’s $71.3 billion of those assets, which provides for the divestment of 22 Fox regional sports networks within 90 days after closing the deal. It was then announced Disney and Fox would each hold a special meeting on July 27 to hold a definitive shareholder proxy vote to approve the transaction.

I continue to think the bidding war is not yet finished, and while I see Fox’s assets offering many synergies with Disney, I will monitor how far Disney is willing to stretch to win the deal. Here’s the thing – if Disney wins the bid, it means Comcast (CMCSA) loses; if Comcast surprises with a new winning bid, it means Disney loses. Either way, the race to add content is on and it likely means additional M&A activity will soon be had. For that reason, we are keeping our AMC Networks (AMCX) and Discovery (DISCA) call options in play. I am, however, boosting our stop loss on the AMC Network call options to 2.00 from 1.25. In sum:


WEEKLY ISSUE: Positioning for Fed Stress Test Result

WEEKLY ISSUE: Positioning for Fed Stress Test Result

Key Points in this Issue


Positioning for the Fed Stress Test Results

Over the last few weeks, as the last of the March quarter earnings have been reported, investors have been focused on fresh economic data as well as the escalating back and forth on trade and tariffs. As that escalating conversation has taken up more headlines, it’s rankled the market with uncertainty, which has led the market to once again move up and down in the span of not weeks, but days.

Odds are not all investors have been paying attention to the Federal Reserve’s annual stress tests for banks.  As we’ve seen in the past, the likely outcome of these tests is a dividend increase, a boosted share repurchase program or a combination of the two.

This very topic was the focal point of a piece in Barron’s over the weekend. While the article touched on several banks, including Citigroup (C) and Goldman Sachs (GS), it clearly called out expectations for JPMorgan Chase & Co. (JPM):

“Among the biggest banks, JPMorgan Chase may raise its dividend by about 50%, boosting its yield to 3%… Overall, banks are expected to return an average of 100% of their earnings to shareholders over the next 12 months, the highest capital return of any major industry group.”

The results of the first round of annual stress tests by the Federal Reserve were released last week, and the second set, which takes into account capital adequacy in stressed environments after planned distributions to shareholders, will be announced after today’s market close. That means in the coming days, JPMorgan and others are likely to make their capital return announcements.

With investor sentiment bouncing between Fear and Greed amid escalating trade talks, as I shared in yesterday’s Tematica Investing weekly issue, odds are we will see a rocky 2Q 2018 earnings season as companies do their best to guesstimate the potential impact. Harley Davidson (HOG) was the canary in the coal mine for this. As that happens,  I suspect the investing herd will once again flock to higher dividend yielding stocks and other safer ports in an earnings storm.

The prospects of a higher dividend and stepped up share repurchase program at JPMorgan combined with the likelihood of greater investor demand is a mixture to drive JPM shares higher. To capitalize on that, I’m adding the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000)that closed last night at 1.37. As we add these calls, I’m setting a stop loss at 0.90.

  • We are issuing a Buy and adding the JPMorgan Chase & Co. August 110.00 calls (JPM180817C00110000) that closed last night at 1.37 to the Tematica Options+ Select List. As we add these calls, we are setting a stop loss at 0.90, and will look to adjust that higher as the underlying JPM shares and the calls move higher.



Comcast still circling 21stCentury Fox keeps these two call positions in play

As we all know, Disney (DIS) recently upsized its bid to acquire 21st Century Fox (FOXA) and Fox quickly endorsed the new deal. Even as the proposed transaction received conditional approval from the Department of Justice provided that Disney divests 22 of its regional sports networks, I am hearing that Comcast could be making another counteroffer. This likely means there could be more media M&A drama in the short-term, but nonetheless, one of the bidders for Fox will be left on the dancefloor and that will more than likely lead to another round of takeovers. As such, I continue to have a Buy on both on both AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000)and Discovery (DISCA) October 2018 30.00 calls (DISCA181019C00030000)



Weekly Issue: The Media Landscape is Posed to Once Again Change


As we all know by now, Tematica Investing Select List resident Walt Disney (DIS) has upped its offer for 21stCentury Fox (FOXA), something that was widely expected following a counterbid by Comcast (CMSCA). While I suspect we haven’t heard the last from Comcast, this bidding war along with the recent clearing of the decks for the merger between AT&T (T) and Time Warner (TWX) means the media landscape is poised to once again change.

Last week, we added the AMC Networks (AMCX) September 2018 $65 calls (AMCX180921C00065000)to the Tematica Options+ Select List, and while the calls traded off their recent highs, they finished up last night +32.5% vs. our 4.00 buy-in price. I continue to see follow-on, or more correctly pile on, media acquisitions coming not only by the company that fails to win the bid for 21StCentury Fox, but others looking to shore up their positions as well. Keep in mind too, we have Facebook (FB), Amazon (AMZN), Apple (AAPL) and Google (GOOGL) as well as Hulu and others looking to expand their content offering. Another sign the media landscape as we know it is changing.

To me this warrants keeping our position in the AMC calls intact. That said, I am raising the protective stop loss on the position to 4.00 from 1.25, which means at a minimum we should have a break-even return on the trade.



Given what I’ve discussed above, it’s logical to think other media-entertainment companies could be acquired as the fallout of those transactions occurs. Aside from AMC Networks, another potential takeout candidate is Discovery, Inc. (DISCA), which operates various television networks under the Discovery Channel, TLC, Food Network, Animal Planet, Investigation Discovery, Science Channel, Velocity, Discovery Family Channel, Destination America, American Heroes Channel, Discovery Life, The Oprah Winfrey Network, Eurosport, Discovery Kids, DMAX, and Discovery Home & Health brands, as well as other regional television networks. Aside from its domestic and international footprint, Discovery has a growing digital presenceas well as its own Discovery Studios business that helps fill all those distribution points.

I continue to think AMC Networks is a more viable, first choice over Discovery, but as we’ve discussed both last week and above when a M&A wave hits an industry, it tends to result in a scramble that results in  a number of new linkages. It looks to me that Discovery could very well be one of them, especailly with the shares trading at multiples that are well below that of 21st Century Fox and CBS (CBS). For that reason,  I’m adding the Discovery (DISCA) October 2018 60.00 calls (DISCA181019C00030000) that closed last night at 1.65 to the Tematica Options+ Select List, and setting a stop loss at 1.00.


Adding to our MoneyOnMobile position

Several weeks back, I adjusted the prices for our MoneyOnMobile (MOMT) position to account for the 1:20 reverse split. Sadly, it clearly showed the position to be in the red, but there have been some favorable and recent developments that warrant scaling into the shares at current levels.

Aside from the largely cosmetic reverse stock split, the company has launched several new solutions, including a biometric-based ATM cash-out solution that leverages the Indian government’s Aadhaar Enabled Payment System national identity system. Aadhaar is a 12-digit unique identifier issued to all Indians. As part of this ID program, the consumer’s 10 fingerprints are linked to each individual’s number. One of the purposes of this ID is for people to link their bank accounts, mobile phones and other services to this unique identifier. Exiting February, roughly 1.2 billion people, almost 99% of the country, had been enrolled in Aadhaar.

MoneyOnMobile also launched Bharat Billpay, the Reserve Bank of India’s payment service, through its retailer program that spans more than 350,000 retail locations throughout India.

As with most small-cap stocks, there are a few knocks on MoneyOnMobile, including its lack of Wall Street coverage as well as its bottom-line losses. However, given the recent reverse stock split and the company’s unique position as a play on the underbanked Indian population, odds are it will be attracting attention from the investment community. Another helping hand in terms of Wall Street research coverage and institutional ownership will be if MoneyOnMobile “graduates” from being an OTC- listed stock to either the Nasdaq or the New York Stock Exchange. In tandemn with its current rights offering, the company is activley pursuing an uplisting with Nasdaq. As far as bottom-line losses, the company has targeted being operationally cash breakeven in India by the middle of 2018.

From my perch, the positives continue to outweigh the negatives for this company that is serving the, dare we say it, “yuuuge” under-banked population in India. As such, we’re dipping our toes deeper into the MoneyOnMobile pool, reducing our cost basis in the process.

  • We are scaling into our MoneyOnMobile (MOMT) position at current levels, which will serve to meaningfully improve our cost basis for this position.