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!

Short Stuff With Lizard King

Never miss another opportunity to devour prey!

9 thoughts on “Short Stuff With Lizard King

  • October 10, 2016 at 6:41 pm
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    Raptor,

    Have you considered buying puts on those securities, to limit your potential losses? I actually own GM and could see it climbing to 40 just as easily as falling to $28. I sell covered calls in the high 30s and buy shares and calls in the high 20s.

    MDP

    Reply
    • October 10, 2016 at 10:41 pm
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      MDP, I thought about it long and hard. In the final analysis, I don’t know how long this thesis takes to play out so I don’t want time value ticking away on me the whole time. I have a long put trade I’m looking at closer to the Dec 4 referendum. Still undecided there.

      Reply
      • October 11, 2016 at 6:24 am
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        How does the short borrow fees compare to the time decay on puts? Also the tickers above are dividend payers so you need to cover that as well right?

        Your theses above seem sound and well researched, good luck!

        TSO looks interesting. What do you think is the compelling event that causes it to fall? You mentioned margins, what specifically are you listening out for? I prefer to play these buying short dated options over earnings – better leverage and easy to limit exposure.

        Reply
        • October 11, 2016 at 1:23 pm
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          Triage, the borrow fees are roughly .25% on each of these names. I checked before shorting. I passed on shorts of TSLA and SCTY because the borrow fees were sky high. I might enter those later as synthetic shorts (short call, long put, same strike).

          For TSO, the main driver is the US being able to export crude oil. WTI current sells at a discount to Brent but that can’t last as WTI is actually higher quality oil. It should (must) eventually trade at a premium. That will handicap US refiners against European ones.

          Reply
          • October 14, 2016 at 2:51 pm
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            Lizard King,

            Thank you so much for sharing your knowledge with us. Could you please explain how synthetic shorts when you get a chance. May be you can write a future post on this topic when you place such a trade.

            Thank you,

            SF

  • October 11, 2016 at 5:52 am
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    Speaking of time value ticking away…what’s all this mean in terms of your UVXY puts?

    Are you looking to be aggressive about closing them before things go bananas?

    Or do you think that even with elevated volatility, the time value of the long put options will continue to decay more slowly than the contango effect erodes the ETF’s futures positions?

    Reply
    • October 11, 2016 at 1:21 pm
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      I’m looking to close UVXY soon and cut my allocation in half for a time. I think the position is still a winner even with volatility events but it could take some time for contango to erode to a profit.

      Reply

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