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Another Ominous Sign: Pickup in General Electric Put Option Volume
As if there wasn’t enough negativity surrounding General Electric Inc. (GE), there is some notable bearish put option activity picked up by our daily options screener. In addition to the broad based accumulation of the sub-$30 puts for the month of July, there is anticipation of further downside in the very near term. Traders have flocked to the June puts - remember, these options expire next Friday, with volume more pronounced in the $27.50 strike, 17,717 contracts traded there, and the $29 strike where 19,091 contracts have changed hands, about as much as the entire open interest for that strike price.
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After what looked like a washout bottom yesterday with General Electric Inc. (GE) shares tumbling to a near 5 year low at $28.89, the stock is sporting another 1% drop this morning – even with the Dow Jones Industrial Average up 1.4%, holding for now a triple digit gain. The conglomerate is the second largest percentage loser and one of only five stocks in the Dow 30 that are lower, as well as having the distinction of being the only component that is at a new 52-week low today. Can’t imagine what former boss Jack Welch is thinking right about now, or what he would say publicly. If you recall, after the company reported disappointing first quarter earnings, he went on CNBC and said that CEO Jeffrey Immelt has a credibility issue and said “I’d be shocked beyond belief, and I’d get a gun out and shoot him if he doesn’t make what he promised now.” Immelt has since reiterated 2008 guidance and made a token gesture of buying back stock, 115,000 shares on May 28 for about $30.60 a piece, but that hasn’t done anything to stop the stock slide as investor fears of further write downs in its finance division persist. Have to believe that Welch has a few choice words for Immelt at this time too.
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New short interest numbers out, and there is one company that the shorts just seem to continue to pile on; True Religion Apparel Inc. (TRLG). As of the latest date of May 30, there are now 11.67 million shares short, a record level and total that is 8.1% higher than the 10.79 million shares reported just two weeks ago. The short interest is of mind blowing proportions considering that 75% of the shares making up the publicly traded float of 15.75 million are borrowed, or about half of the total shares outstanding. What’s puzzling is that this is not a fundamentally bad stock – the jeans maker guided higher in May with earnings and revenue now expected to grow 20% and 29% respectively, new stores are opening and analysts have raised estimates and bumped up price targets. This is a decent growth story by any measure and yet for all that the stock trades at just 16x forward earnings. What’s even more surprising is that the shorts have added to their positions on the recent break above multi-year resistance at $24 that sent the stock to a new 52-week high of $26.85. Go figure.
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eResearch Technology Inc. (ERES) has flirted with $16 technical resistance for the past few weeks. In fact, it’s traded above that level ten times intra-day since its second quarter report on May 5 that showed the investment thesis for eResearch continuing to play out – record bookings and a growing share of a growing cardiac safety services market that’s benefitted from increased outsourcing of clinical trials. But it’s never closed above $16 decisively, remaining tangled in a narrow trading range. Showing much relative strength -failing to fall apart even while suffering a double whammy from the news of the resignation of its CFO on top of a broad market selloff, a solid technical breakout backed by fundamentals is looming.
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Lehman Brothers Holdings Inc. (LEH) announced this morning that it will be replacing its CFO Erin Callan and COO Joseph Gregory. This is the first piece of good news in quite some time and though it doesn’t overshadow the fact that the investment bank expects a loss of $2.8 billion in the second quarter and had to dilute stockholders by about 30% in issuing 143 million shares plus $2 billion worth of convertible preferred stock, you have to believe this is a positive move to the extent that it combats negative investor perception even if the pre-market action did not agree - Lehman traded lower by $2.20, or 9.26%, to $21.55. It’s possible the market is not satisfied and was looking for the CEO to get axed too, but the selling is overdone with Lehman on pace to trade about 50 million shares in the first 30 minutes of trading. The stock is exhibiting signs of a classic capitulation bottom.
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With June options expiring next Friday, the big money is beginning to plow into July options. The continued brisk activity for the Financial Sector Select SPDR (XLF) is well represented in the puts, mirroring heavy trading in the exchange traded fund’s shares -174 million shares traded versus the 95.6 million daily avg. on a down day of 2.9%. By the close, the puts with a strike price of $24 had 95,062 contracts traded, nearly the total of its open interest, and the out of the money $22 puts had 156,169 contracts traded, more than double the open interest and outweighing all of the July call option volume. Naturally, the exchange traded fun is 97% comprised of financial services companies, with its top ten holdings making up for half of the fund. They maybe aren’t the worst performers in the sector, but still definitely among the poorest; the likes of Bank of America at 8.61%, Citigroup at 5.70%, and Wells Fargo at 4.91% which are all pacing towards fresh 52-week lows. Likewise, options traders are betting that the ETF will breach its mid-March low of $22.29.
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First Solar Inc. (FSLR) is down about 24.5% in the last month but is bouncing up by 3.94% to $253.92 after what has been the longest reprieve from a three month deluge of insider selling since a break in sales between Apr. 22 and May 13. It’ probably not a coincidence that the 52-week high of $317 was reached on May 14 and that it has been downhill ever since. As Bloomberg noted at the beginning of June, Chief Executive Officer Michael Ahearn has amassed quite a fortune, reducing his stake to 3.1 million shares down from an ownership of 6.1 million shares at the company’s initial offering in November 2006. But it’s not just the CEO. From late February onward, the estate of John Walton – yes, the Wal-Mart Walton, has also participated in the mass dumping of stock along with Executive Vice President Kenneth Schultz and other officers. Yet the good news is that the insider selling has stopped with the last reported transaction occurring on May 28. It’s now been ten trading days and counting.
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After hitting a high of 13,170 on May 19, in less than a month, the Dow Jones Industrial Average has managed to give up roughly 1,000 points, down 170.33, or 1.39%, today alone to drop to 12,119.43. It’s the seventh day since that time that the major financial benchmark of the U.S. stock market has had a triple digit decline with the obvious culprits of the destruction in value being the continued malaise in financials and the threat of inflationary pressures stemming from the rising price of oil. The January low of 11,634 and March low of 11,731 are dangerously close.
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Sun Microsystems Inc. (JAVA) hit an intra-day low of $11.81, its lowest level since Sept. 2002 when the stock began a precipitous drop in the wake of the tech bubble (split adjusted the price would be sub $2). The computer-server hardware and software maker is now down 34.8% year to date. This type of share performance and unfortunate loss in shareholder wealth is just flat out pitiable. And there is no way you can paint anything but a bleak picture with the recent quarterly report in which earnings were just breakeven and guidance for the fourth quarter projected flattish revenue growth and trimmed profit estimates. To compound the pain, there has been a string of analyst downgrades and a series of senior management departures. If there is anything remotely positive in the story, it’s that the stock is now trading at 1.64 times book value and expectations for upcoming quarters are at a rock bottom.
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Evergreen Solar Inc. (ESLR) is down about 24% since it hit a May 22 high of $12.12 on the back of a slew of solar panel contracts, though there is one thing that could stem the tide of losses; the solar power product manufacturer is holding an analyst day next Thursday. Evergreen Solar Chairman and CEO Richard Feldt, CFO Michael El-Hillow and other members of the executive team are expected to provide a strategic overview of the company’s business through a series of presentations followed by a factory tour of the company’s new wafer, cell and string ribbon solar panel manufacturing facility. These events are typically meant to drum up support in the investment community with the objective of getting the analysts to become firm believers in the company’s business plan - it’s also noteworthy to mention that this will be webcasted, a great move by the investor relations department to reach the investing public. And it’s usually a successful tactic because often following a meeting, an analyst will publish a positive note reiterating a bullish forecast, for instance, because of renewed confidence in the management team.
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