Friday Flip Flop – Five Fed Speakers and Trade Progress Finish the Week Strong

Phil - "It's only 10% of their total assets so a 25% drop is still a bit of an over-reaction."

Williams (twice!), Clarida, Harker and Bullard.

We knew on Tuesday that the Fed expected the market would need saving on Friday and despite the Dow being up 100 points pre-market this morning, at 25,926 we're still below Tuedsay's highs though well off yesterday's lows – which was 25,762.  On Wednesday we talked about the importance of the Russell 2000and the 1,600 line and, at 1,581.50 – we're no closer today than we were on Tuesday, but off our lows at 1,570, which was a $700 per contract gain from our shorting line (you're welcome!).  

Fortunately, Kraft Foods (now KHC) was dropped from the Dow back in 2012 or we'd be red this morning anyway as that company is down 25% pre-market as the merged company (with Heinz) catches 5 downgrades this morning after their accounting methods are being questioned by the SEC (which is actually not a big deal) and the company is writing down $15Bn in "Goodwill", which is a big deal as it indicates they dramatically overstated the value of their balance sheet BUT – it's only 10% of their total assets so a 25% drop is still a bit of an over-reaction.

If you want to capitalize on this event, you can, of course, go long KHC (who also cut their dividend) or you can short Berkshire Hathaway (BRK-B), who are taking a $3Bn hit on their KHC holdings – the day before Buffett's annual letter to his shareholders comes out.  Berkshire is not a company you would usually short but they own a lot of the kind of companys that have "Goodwill" as a major asset and KHC's situation will calll all Goodwill Assets into question – all $3Tn of them that are declared in the S&P 500 – $80Bn of which is Berkshire! 

BRK-B was at $205 this morning but is already indicating a $5 drop but a $3Bn hit is 20% of their quarterly income and Buffett doesn't sugar-coat things so they could drop further and the March $195 puts are $2 and could be a fun play there.  As to KHC – We'll be taking a hit on the spread we have in our Long-Term Portfolio and I won't be quick to add, as we'll wait for the downgrade police to be done with them but selling the 2021 $40 puts for $9 gives you a net $31 entry (now $35) and I simply don't see another 10% drop sticking.  

With $3Tn of Goodwill maaking up about 10% of the S&P's total assets and asset write-downs impacting companies ability to borrow and Corporate Borrowing at record highs – I don't see how this S&P or Dow rally can stick – despite all the Fed cheerleading.  We still like the 1,584 line for shorting the Russell (on the way down, not up) with stops over 1,590 and S&P (/ES) 2,785 is a good shorting line – but VERY tight stops above that.

It's going to be a crazy day, with the Fed speakers come at 10:15, 1:30 (3) and 5:30 and the last is Williams' 2nd speech of the day so I'd bet the reaction to his 10:15 speech will likely stick.

Have a great weekend,

  • Phil
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