I’m moving into a more defensive mode through year end.
music selection: “Right Here” — Staind
weigh-in: 212.4 – no change from prior week
I have concerns about the European banking situation. Deutsche Bank is potentially facing a 17 billion dollar fine from the US DOJ. They will probably will settle for less but it could still be enough to completely wipe out their capital cushion. Could this be Europe’s Lehman moment? I’m even more concerned about the 4DEC2016 Italian referendum. Italy could leave the Euro currency union and return to the Lira. This could also rock Europe and World Markets. Finally, there is the November election in the US. With the markets looking richly valued and potential triggers for a sell-off, I want some short exposure. I’ll be making some sales next week after options positions expire to raise additional cash as well.
First up is a short of Tesoro Corporation. The thesis here is Tesoro is a domestic refiner on the West Coast that is under regulatory pressure. At the same time, the good times for US refiners is ending. Now that the US can export crude oil directly, the huge ‘crack spreads’ refiners have enjoyed are shrinking as the price of WTI crude normalizes against Brent crude. Tesoro will come under margin pressure as a result. I shorted 62 shares at $80.831.
My remaining shorts are all on the same theme of rich valuations coupled with crushing debt loads. A European banking crisis or a strong move by the Fed to raise rates could hit the following companies hard. Whipping boy number one is General Motors. GM’s sales are heavily dependent on subprime financing. Any economic weakness will send defaults soaring and financing for new sales crashing down. That’s a double whammy. I sold 155 shares short at $32.3211.
My next victim is Capital One Financial. COF has made a name for itself extending credit to people who probably shouldn’t have it. They have a ton of subprime credit card debt outstanding. I see this company as subject to the same dangers as GM. I sold 68 shares short at $73.56.
My next position is a pair of half positions in the two main publicly traded rental car companies, Avis Budget Group and Hertz Global Holdings. CAR and HTZ both have a capital inefficient model that is heavily dependent on bundling Asset Backed Securities to finance their fleets. We saw in the 2008 crisis both companies nearly went bankrupt when the ABS markets froze. Revenues are also heavily dependent on non-business recreational travelers. That business could take a wicked hit in an economic downturn. So I sold 75 shares of CAR short at $33.40 and 67 shares of HTZ short at $36.95.
Altogether, I raised 20,004.02 in cash with these short positions. I picked up some hedging in a frothy market and feel better positioned for some potentially rough waters ahead.
Devour your prey raptors!