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)