Long and Short Tech and Energy Stocks

Equities and Energy Options

The trades executed are for long MSFT, short AAPL in tech; long XOM and short CHK in energy. These trades are based on both sector sentiment and fundamentals. MSFT appears to be in an outperform trend while AAPL is poised to underperformed following poor sales data in China, slowing down of growth.

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In energy, the price of oil is a big factor in any stock’s performance and with crude hitting a ceiling at $50, it will not be good for companies like CHK which are overwhelmed by debt and need oil prices to be higher in order to maintain any kind of leverage. XOM on the other hand is in an outperform trend which looks to continue as it nears a deal with Russia to deliver gas to China and as the company continues to invest along these lines, giving it an outlet should oil prices drop again. However, will the global economy looking so sluggish right now and no sector appearing to be safe (and should the UK vote to leave the EU, equities across the board may plunge) a cautious position should be taken first and built up in the coming weeks should the Brexit referendum not pass.

Thus a cautious stake in equities (both long and short positions) and a cautious stake in energy (both long and short positions) will be wisest, with 60% of funds remaining in cash, should positions turn against us and require quick action to effect a swing trade. Even buying and holding with equities at these prices (expensive) or shorting with equities at these prices (makes more sense but with markets manipulated by central banks — whether in China, Europe or the U.S., being a bear can be a good way to get crushed), caution right now is the word.

Equities Hypothesis

In the computer tech sector, there are Apple (AAPL) and Microsoft (MSFT). Apple has outperformed since its stock split last year and has recently made all time highs prior to a down trend setting in. This down trend is the result of the market pricing in a number of negatives that appear to be impacting Apple’s future growth. China sales have begun to shrink just as they have globally and the company itself seems to have hit peak tech development, with no new creative outlets being probed. The sense is that following the death of Steve Jobs, inertia may have continued to propel the company forward, but now the company has peaked.

Not to mention that Apple has taken on new debt to finance dividend increases in order to make the stock more attractive to investors (Cherney). However, any portfolio that has been holding AAPL since 2015 has surely been adversely affected by the stock’s significant pullback. I believe this trend is going to continue as AAPL continues to suffer from a slowdown in growth with no significant development in the pipeline to keep it foremost of the computer tech sector.

Against Microsoft, which has recently acquired LinkedIn and gotten into the marijuana seed-to-sale software business, AAPL looks ready to underperform. MSFT on the other hand may outperform as a result of its acquisition of the social media giant and its partnership with Kind, a marijuana tracking software company (Popper). Whether this will allow MSFT to benefit from the marijuana boom remains to be seen but it certainly could not hurt. On technicals alone, the stock appears to be consolidating nicely and barring any major global economic catastrophe such as a Brexit vote on the upcoming referendum in the UK, MSFT may outperform in the coming weeks and months.

Equities Number of Contracts and Data Screen Grabs

For AAPL, selling the Jun17 90 calls with strike price of $12 — number of contracts sold = 50 for price of $59, 750. This will leave sufficient funds available in case of margin call should the trade turn against us and sufficient funds available should more trades need to be executed to build on the portfolio. For MSFT, buying the For MSFT, buying the Jun17 50 calls with a strike price of 4.70 — number of contracts 200 for a total of $94,000.

Energy Hypothesis

Chesapeake (CHK) has underperformed as of late and while it may begin to see a reversal as it sells assets to make ends meet while the energy sector as a whole is hit hard by global macro data indicating rough times ahead and oil hitting lows prior to its recent bounce, the stock is still in serious downtrend. It is unclear whether CHK will be able to weather the storm even if oil stays above $40, and should WTI break and stay above $50 it is unclear whether CHK would move from underperform to outperform as a result of lackluster fundamentals. Analysts are bearish, with The Street calling for underperformance and a trend reversal in this company may not be in the cards any time soon (Gomez)

With an a global economy over-laden with debt and credibility issues plaguing central banks like the BOJ, the ECB and the Fed (talk of negative rates and helicopter money drops do not help — neither do promises of raising rates being walked back every time the latest round of poor economic data suggests that the economy is not in as fine a state as the Fed would like to see), energy stocks could be hit hard, especially if oil collapses again due to over-supply and dwindling demand. With Iran now pumping again and no real oil freeze on the horizon (and with the State Department no doubt still looking to cripple Russia’s economy by keeping oil prices low) energy stocks like CHK bear a certain amount of risk.

Exxon (XOM) on the other hand has risen with oil prices adding $45 billion to its market cap in recent weeks, and as it looks to secure a deal with Russia to export gas to China, the stock could pop further (Ausick). If XOM can strike a strategic deal with Russia, it will look to continue its uptrend and outperform in the coming weeks and months (Zacks).

Energy Number of Contracts and Screen Grabs

For CHK selling the Jan17 4.50 calls — number of contracts 300 for total price of $34,500.

For XOM buying the Jun17 92.50 calls — number of contracts 200 for total price of $103,000.

Works Cited

Ausick, Paul. “Exxon Adds $45 Billion to Market Cap.” 24/7 Wall St., 20 June 2016.

Web. 21 June 2016.

Cherney, Mike. “Apple to issue $10 billion to $12 billion of bonds to finance share buybacks, dividends.” Wall Street Journal, 16 Feb 2016. Web. 21 June 2016.

Gomez, Amanda. “Here’s Why Chesapeake Energy (CHK) Stock is Falling Today.”

The Street, 13 May 2016. Web. 21 June 2016.

Popper, Nathaniel. “The first big company to say it’s serving the legal marijuana trade?

Microsoft. Wall Street Journal, 16 June 2016. Web. 21 June 2016.

Zacks. “ExxonMobil’s Russian Project May Get Nod to Export to China.”

Finance.Yahoo.Com, 20 June 2016. Web. 21 June 2016.

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