Today’s session again highlighted the need for us to alter our unrealized P/L calculations to allow for more accurate tracking of future values in Buy/Write positions. While we technically lost only 0.3% of our portfolio value on a dip in US Steel and Oasis Petroleum, our current calculations sent us down more than 1.2% in trading today. Since this is not accurate, we aren’t worried about the drop, but we are worried about our current calculation inaccuracy. We’re actively working on a solution to that discrepancy.
Today we began responding to a situation that is reducing the relevancy of our unrealized gains/losses pin regards to our portfolio net value. In the case of a buy/write how unrealized losses handles the sold call option is technically the safest method – cost basis is established as the cash inflow at the time of sale, and if our prediction regarding stock price movement is accurate the ask price will increase (along with the fact that ask price will have been higher even at the time of sale). This means that for the duration of the position the call option will continue to take unrealized losses until it expires. This will always remain an important statistic – what would the portfolio be worth right now if we tried to convert it to cash in its entirety. However, net present value of the portfolio will start to diverge from this value by an increasing amount and it is therefore important to publish both of those values side by side.
We have decided to stop simply storing the number provided by schwab’s calculation. While this number will always be accurate, and can be used later to audit our automation we will be dramatically altering the math behind the daily report over the next week. This will occur alongside a full redesign of the page to bring it in line with the current position reports provided on US Steel and Oasis Petroleum.
Today we’ve seen strong intraday volatility, and a huge dropout in the price of crude. This morning’s EIA report indicated a sharp rise in the inventories of both crude and gasoline, and while the gasoline spike was anticipated the crude spike sent spot prices down 5% in early trading. This smashed into our position in Oasis Petroleum, putting that position at a net loss. We’re expecting that much of today’s price movement was a little reactionary, and we’re anticipating a recovery throughout the rest of the week.
This morning HDS missed their earnings projections, and announced the sale of their Waterworks division to a holding group for $2.5 Billion in cash. Unfortunately that slashes the value of our call options, but fortunately it was a very small position. The current value of the call options is a literal $0.00 – there is no reasonable way for their stock price to exceed the strike price by expiration. While that is unfortunate, the total value of the position when we opened it was less than $250, so we’re really not that upset.
On analysis of the situation with HDS, we’re mildly disappointed by the market response to the HDS earnings call. EPS were at a healthy $0.63/share, and while this is the lower end of the projected range of $0.69 to $0.63, it is still within the range. HDS stock price dropped 15.99%, which is a response you’d expect from a posted loss, or at least a more significant EPS cut. Gross margins fell slightly but sales still grew in line with previous months and years. Simply put – HDS is doing fine, and that incoming $2.5 Billion will allow them to better leverage their traditionally profitable in-store sales (at retail locations like Home Depot and Lowes).
Today Markets broke out from the recent downturn, with all major indices rising more than half a percent. Our portfolio returned similar results, with Ford Motors (F) leading the gains. We were hampered somewhat by a slide in US Steel, which generated unrealized losses but due to the nature of the position the projected return is actually unchanged (it’s currently capped around 9%). We took a very small position in HD building supplies (HD) in anticipation of tomorrow’s earnings announcement, and we expect to close shortly thereafter.
We’re currently working on a widely diversified multi asset portfolio that we hope will bring stable returns to a large portion of the overall fund. We’ll have more information on that tomorrow, but we don’t expect the model to be complete until the middle of next week.
Back to older news – the first distribution since we took our position in Frontier Communications (FTR) preferred shares (FTRPR) is scheduled to occur in the next two weeks, and we’re anticipating a sharp drop-off in the value of those shares. If the drop is significant enough we will definitely consider growing (up to doubling) that position. The drop will likely occur as investors who were waiting for the next dividend to exit the position do so, there will be far more sellers than buyers for at least a few hours.
Today marks the second day of economic withdrawal, with all major indices and crude oil down. As volatility rose, gold prices have started to tick a little higher. Today’s drop may have been driven by disappointing housing and regional manufacturing data, despite strong Chinese economic reports.
Tomorrow’s activity will be driven by this afternoon’s release of the Fed’s ‘beige book’ – a comprehensive ledger of business activity meant to be used as part of the next monetary meeting between June 14 and 16. Expectations are rising that interest rates will rise again after this meeting, but we’ll know more about that this afternoon.
Our position in US Steel has already crossed the strike price of the call options, meaning our return would be capped at 9.14%. This far from expiration it is unlikely that the contracts will be assigned, but it is encouraging to see this upward movement despite weak manufacturing data and an otherwise market down day.
Markets slipped today following the extended weekend. In an unusual set of circumstances nearly every measurable index was down somewhat today. The major market indices (DJI, S&P), WTI Crude, Gold spot prices, and the US dollar all fell in a range between 0.3% and 0.1% today. Typically several of those indicators have an inverse relationship (the dollar and gold prices/the dollar and crude/crude and gold), but that wasn’t the case today.
In economic news, both personal income and spending were in line with estimates, but consumer confidence is down slightly. Sentiment towards current conditions rose slightly, but confidence in business performance over the next six months declined somewhat.
Overall it was a fairly news-less day, which in turn lead to slightly below average trade volume. This may have contributed to the slump in prices today. We were able to take advantage of a moderate price reduction in deployment of another buy/write position in US Steel. The expiration date for the position is late July, with an expected assignment and total return at just over 7%.