I was mighty good playing "Joe Genius" when I cashed out of Pfizer in the low 29's in early April and invested 300K in long calls in Baidu when that stock was at $84.85. I am currently up by over 200K on that investment which right now is even more than what I am losing on JCP. If I had stuck with Pfizer, the meager gain since early April wouldn't have me doing any better than what I have done combined with BIDU and JCP. Also, part of the PFE proceeds were used for a new call spread portfolio and I'm currently up by 65K on those spreads.
So even with the JCP travesty, I'm still better off having cashed out of Pfizer. And in the fullness of time, I'll end up a LOT better with the alternate portfolios when I recover my losses on Penney and then some.
While I still have enormous losses in JCP, I don't at all consider my situation to be "dire." Just a 60-cent upmove from here and all of my naked puts with the exception of the 10-strikes would expire worthless.
The company was the victim of a vicious bear raid similar to the Tyco situation of 2002 but I ended up with nice profits on that one and I'll do the same with JCP as the company already has started to turn things around in its business.
Shame on Goldman Sachs for agreeing to lend the company $2.25B based on the appraised value of JCP's substantial real estate holdings and then turning around just four months later and saying that Penney had borrowed way too much for a company its size. Nobody was holding a gun to Goldman's head forcing them to lend that money to the retailer. I have never in my life seen a lender turn on its borrower the way that Goldman did.
What is even more bizarre is that right after issuing a sell rec on JCP, it was that self-same Goldman that was the sole underwriter for the secondary offering. Goldman may be slime but they are considered by most to be the best in the world at underwriting and pricing stock. And knowing all the details in the JCP saga, they nevertheless set a $9.65 offering price for that secondary on Sept. 27. Terms of JCP's agreement with Goldman regarding the underwriting was that in exchange for paying a higher-than-usual underwriting commission of 29 cents a share, Goldman would guarantee to JCP that the company would receive the full $9.65 per share on all 84 million shares regardless of Goldman's ability to sell all of the shares to investors.
There wasn't a single "Algerian boy" to be seen during my visits to Como, Italy and Aix-en-Provence, France. I was hoping to find a #$%$ or two in Como but no such luck.
As a veteran of the Tyco and Pfizer crashes, I know what has to be done when adversity hits the stock price but the fundamentals haven't deteriorated much. The first things that I do of course is to look carefully at the Balance Sheet and the Statement of Cash Flows. Short-sellers can tell all kinds of lies and they can create short-term panic but they cannot stop a turnaround in the company's business and they certainly can't force a company with a liquidation value of $13.40 a share into bankruptcy.
If JCP's downward sales spiral was continuing, I would have been out in a flash but such is not the case nor would you expect it to be when the company throws almost $3B into the ring to turn things around.
I have nev er given in to hysterical headlines and panic and at this late stage in my life, I sure don't intend to start doing that now. When I feel that I know the truth as I felt I did in 2002 with Tyco and with JCP now, I will stick it out and be willing to accumulate even horrific losses in order to be there in size at the bottom which is necessary if you are going to come back. In the fullness of time - meaning out about a year, I expect that I will have completely turned around the JCP situation. Remember - I don't own the stock and don't need the company to go back to $15 to recover as would buyers and holders of the stock; just $8 a share a year out puts me nicely ahead. I really do have superior methods and once again I'll be proving it in spades.
In the fullness of time, I'll do infinitely better on my JCP puts than you are doing on your short positions in PCLN. I'll be recovering my losses on my investments but sad to say, you will not be doing the same on PCLN.
Yes - I indeed am taking a bath on the puts in the insane returns portfolio - with losses that at one time exceeded 200K. But I have the courage of my convictions and am sticking it out; I had plenty of reserves to be able to do so by virtue of my out-sized gains on BIDU as well as smaller gains on the quarter-million-dollar long-term put-writing portfolio and also nice profits on the spread portfolio.
BANKRUPTCY - are you kidding me? JCP will have at least $2B IN CASH as of year-end and that cash is almost as much as the entire market cap of the company. Book value after the capital raise is $3.0B and the company has 305 million shares outstanding. But the company's real estate was recently appraised as being worth $1.1B more than the cost basis shown in the ledgers. So even if the company was to fold its tent and simply liquidate, fair net asset value is $4.1B which is about $13.40 a share. And you talk about BANKRUPTCY? Obviously you haven't set eyes on the company's balance sheet.
This was an unprecedented attack by the shorts using the social media. Anyone with a brain would know that the company was essentially FORCED into issuing stock when it really didn't need the money. If anyone has unclean hand here, it's Goldman Sachs - not JCP. Goldman saw fit to lend the company $2.25B in late May based on the new appraisals for the company's real estate. Goldman's research department then came out just four months later on Sept. 25 with a scathing report against the company's debt saying that Penney had borrowed way too much for a company its size. Can you believe it - Goldman willingly lends the company over $2B and then says that Penney borrowed too much? How outlandish!
Who forced Penney to issue more stock when the company said it had all the cash it needed? The ultra-conservative likes of CIT Financial which obviously read the devastating Goldman report and demanded that JCP raise more capital at once and if they didn't, they would cut off financia
Cash basis losses will only be about 200M but if depreciation and amortization are factored in, $500M to $600M is the likely figure. Analysts on balance are looking for the company to lose $1.95 per share in Q3 on an accrual basis. But after Q3-14, losses will be greatly diminished. For the year beginning 2/1/15, accrual basis losses will be down to almost nothing and cash flow should actually be slightly positive.
You can bet your bottom dollar that Penney was FORCED to sell those shares by the likes of CIT in light of the Goldman report the previous day. Exactly what was Penney supposed to do if CIT or other financiers gave them an ultimatum to raise more capital or have financing to supplikers cut off with the key holiday season right around the corner?
After announcing in the morning that they had ample cash reserves for at least another year, NO experienced CEO and Board Chairman would immediately be selling more shares unless their hand was absolutely forced.
If Penney management made any mistakes here, it was in not wanting to admit that this is what happened but it would be irrational to believe that they would be issuing stock in the absence of an ultimatum. That issuance didn't occur in a vacuum; it occurred the very day after the horrific Goldman report. All kinds of financiers to the suppliers and the suppliers themselves were reading that report. As a retired accounting manager, I can put two and two together.
Did you ever stop to think exactly why JCP went to the capital market just hours after they said they wouldn't need to raise any more money for at least a year?
Hint: Think of the Goldman report that came out just the previous day and how ultra-conservative CIT Financial is. Obviously the situation changed dramatically between that analyst presentation and later that day when the announcement about the secondary offering came. If it wasn't CIT that forced JCP's hand, it was another large financier or some key suppliers, etc. who demanded an additional capital raise in the wake of the Goldman report.
JCP won't have to pay anything on the lawsuits as when Ullman made his comments, the company had more than enough cash for anyone reasonable and they could never anticipate CIT or a similar financier demanding even more for THIS holiday season. Use your noodle.
The company says it will have $2.0B to $2.1B as of 1/31/14. For the next year, factor in:
1) $300M in cash basis losses for fiscal '15.
2) $300M in capitalized expenditures next fiscal year
So there should be about $1.4B to $1.5B in the till at the start of fiscal 2015. At the low cash point at the end of October 2014 after the holiday inventories have been ordered, cash should be on the order of $0.9B to $1.0B. That could be a little light for the ultraconservative likes of CIT Financial but the closing of maybe 200 of thei worst-performing stores would put cash nicely above $1.0B even at that low point.
Instead of giving in to the wild rumor-mongering of the shorts, investors need to look at the facts and the financial statements to see where JCP actually is and the very high likelihood of being able to stay in the game long enough to see an expected turnaround.
As of Aug. 3, Shareholders' Equity was $2.34 billion. Factor in about $800M from the share issuance less about $500 M in Q3 losses and the figure is about $2.64 B as of 10/31/13. That's about $8.70 per share. Considering that the real estate is fairly valued at $1.1 billion over what the books show, shareholders would garner about $12.40 per share in a straight liquidation. This is why talk of bankruptcy is so preposterous.
I'm taking quite a beating at present with the portfolio down by 73K. However, in the fullness of time I'm going to come out just fine as if necessary, I'll be able to roll out the March 6-strikes to the August 5's when that series becomes available and if necessary I can then go to perhaps the Feb. 4's later on. Un less this stock is just a complete bottomless pit which I don't think is the case, I'll end up recovering all of my losses and I'll have some substantial profits to show for my efforts.
JCP has already thrown almost $2B into its turnaround efforts and when that much is spent, you know there will be results. Last holiday season under Ron Johnson, there were no discounts; no Black Friday door-buster sales, no promotions for Cyber Monday, etc. Results a year ago were disastrous. And you think that with the new merchandise, the stores within a store, the refurbishing of the stores, etc. won't have any effect at all? Good luck with that idea. As for bankruptcy right after the holidays, management just said that there would be $1.3B IN CASH as of 1/31/14 and that was BEFORE the raising of $800M from the stock offering. And in addition to the war chest of at least $2.1B as of 1/31/4, Penney can have substantially MORE cash than that if they decide to close down their worst-performing stores and sell the valuable underlying real estate.
In actual fact, the company has at least enough funds for TWO more holiday seasons after this one - in other words out to Jan. 2016. Now it's possible that despite all efforts, they still can't turn things around and bankruptcy wouldn't be a shock say 2.5 to 3 years from now. But it sure isn't about to happen anytime soon and there will be a lot of chances to turn things around. None of my options go out further than March.
By the way, even if the company isn't destined to get back to profitability, wouldn't you think that there would be all kinds of private equity capital wanting to take this thing private for $5?
I should have waited? How could I possibly know in advance that Goldman, the very party that loaned JCP $2.25B in May would come out with a scathing report on JCP's debt? For its part, business seems to be improving at the company. Management announced that they would be hiring 35,000 temporary workers for the holiday season - about what they hired TWO years ago in 2011 before Ron Johnsons reign.
There is NO liquidity crunch at Penney; the company will end the year at $1.3B in cash (before the equity offering) and they could if they wanted to raise a lot more by putting mortgages on some of their properties or else close 100 or 200 of their worst stores and sell the valuable real estate.
The Good Lord gave me a good brain and I figured out just why JCP sold shares when they said they didn't need the financing. I'm sure that after reading that awful oldman report, a major financier to JCP's suppliers such as CIT threatened to cut off financing unless the company raised more cash forthwith. So what was the company to do given such an ultimatum just before the critical holiday season. That just had to be the reason for that incredible turnaround; CIT is incredibly conservative and they actually did cut off supplier financing to Sears Holdings (SHLD) for four months in early 2012.
JCP is taking a terribly unfir hit to its credibility because they had to comply with CIT's ultimatum despite the fact that they have liquidity coming out of their ears and the turnaround effort is coming along nicely.
I'm leaving for my nine-day European trip (Como, Italy and the Provence area of France) on Saturday . I'll resume the updates when I return mid-month.
Every brokerage has the right to set its own margin requirements for naked puts as long as minimum requirements set by the SEC are met. To the best of my knowledge, TD Ameritrade alone keeps margin requirements at the floor levels. All other brokerages have their own jacked-up requirements which serve to lower the possible returns.
I am an options consultant who specializes in the sale of deep out-of-the-money naked puts and i deal only with clients who agree to open accounts at Ameritrade. I have never had any other affiliation with that brokerage other than as a client of theirs and the reason why I deal with them is that there is no other firm that offers lower naked put requiremtns. If I'm going to write naked puts, I certainly want to do so with the firm that offers the lowest margin requirements.
Options market makers are fully aware that there is considerable artificial buying of lower-strike options from bullish sellers of puts who can only sell them fully cash-covered. And so they have all the incentive in the world to try and force the prices of the ostensibly semi-worthless options such as the November 5's to what the traffic will bear. And the traffic will bear a LOT because remember that buying lower-strike puts is the ONLY way that fully cash-covered put sellers can lower the truly onerous margin requirements mandated by the SEC.
The ones truly benefitting from this other than theoptions market makers are folks like myself who have authorization to sell NAKED puts. At TD Ameritrade, which has the lowest margin requirements in the land for naked puts, the margin requirements per contract are as follows:
1) 10 times the selected strike price as long as the stock is 12.5% or more above the strike
2) To the above, add in the asked price of the put.
So for a seller of a naked put like the November 5-strikes, total margin needed per contract at Ameritrade is: $50 (10 times the $5 strike) plus $13 (the asked price of the Nov. 5-strike put with the current quote being $12 bid, $13 asked)
So while fully cash-covered 8-strike puts would need to have $800 per contract in margin and would still need $300 per unit if they simultaneously sold the 8's and bought the 5's, a NAKED put seller of the Nov. 5's such as myself would need only $63 per contract in cash margin availability. That difference in margin requirements makes all the difference in the world when it comes to return on investment.
Many brokerages were hit hard by unsuitability lawsuits in options during the crash and they really don't want naked put business at all. To try and discourage those who have the authority to sell such puts, they jack up the margin requirements unmercifully to make the selliong of such options unattractive.
If you are looking at the put options, you are coming to the wrong conclusion regarding the remarkably-high prices of some of the lower-strike puts.
Do you want to know the REAL reason why such options as the November 5-strike puts are so richly valued? It's because 98% to 99% of all put sellers (they are BULLISH on the stock) don't have the authority to sell NAKED puts and therefore if they want to sell puts at all, they have to do it fully cash-covered.
When writing fully cash-covered puts, SEC regulations require that the assumption be made that the company will be worthless by options expiration. So margin requirements are such that the full amount of the potential loss to zero must be in the account.
For those who want to sell short something like the November 8-strike naked put, they must have $800 per contract in margin availability because that would be the loss if the 100 underlying shares for each contract went to zero. There is only one way that cash-covered put sellers can reduce their margin. And that is by BUYING lower-strike options at the same time as they are selling the higher-strike ones
If a fully cash-covered put seller at the 8-strike now BUYS a 5-strike put, the margin per unit that he would have to put up is now only $300 instead of $800. That's because by buying the 5-strike contract, the investor is now protected for declines below $5 per share; his only risk is between $5 and $8 which is only THREE points and not EIGHT. So a cash-covered put seller at the 8-strike would certainly be more than willing to give back a little of the potential profits by buying something like the 5-strikes. Because in exchange for giving back a slight amount of those potential profits, the investor acting completely in his own interest now reduces the amount of margin availability he needs from $800 per contract to onlynow $300 per unit.
To partially compensate for the dilution is the fact that the company now has $900M more in liquidity than they did before the secondary. The company now has ample reserves to fund TWO more years of turnaround without having to worry about CIT and its ilk threatening to cut off vendor financing because of worries about JCP's ability to pay timely its vendors. The turnaround will go faster with this cash infusion and the headlines shouldn't be nearly as ominous as they might have been a little ways down the road without it. That all has to be worth something.
The stock is now down by 37.5% from the $14.47 price it closed at just fourteen sessions ago. And it's down by over 30% from where it was just lFriday at $12.96. The dilution isn't great news to be sure but it certainly doesn't warrant a 30% drubbing in a week. A lot of that though was due to negative quarter-end window-dressing and that should start to be reversed when Q3 becomes Q4 on Tuesday. Regarding the bottom for the stock, we should now be there or thereabouts.
Yes - it's true - that kind of return is readily available in the options market. What you do is to sell naked the JCP November 5-strike put which expires on Friday, Nov. 15 - seven weeks from today. Those puts are currently quoted at $12 bid, $13 asked. Cash margin requirements per contract at TD Ameritrade, the lowest-margin brokerage in the land for naked puts, is $63. If sold at the $12 bid, net proceeds per contract after 80 cents in brokerage commissions is $11.20. You do the math - $11.20 in proceeds for every $63 invested. That's a nominal return of 17.8% for seven weeks which is at the rate of 2.54% per WEEK. Unless JCP is below five bucks in seven weeks, the puts will expire worthless.
Ullman was 100% correct when he said that JCP did not NEED any more funds to be able to continue paying the bills. Aside from the capital raise, they will have $1.3B in cash as of 1/31/14 and they still have untapped money from existing credit lines. To say nothing of the ability to put mortgages on some of their properties and to sell off some of the more unprofitable stores.
But some conservative higher-up - probably on the Board of Directors WANTED an extra cash buffer so be able to fully have control of the second year of this turnaround without the likes of CIT threatening to cut off financing to some of JCP's suppliers. The capital raise will prevent shareholders from seeing for at least another year threats by CIT and its ilk to cut off financing.
There is now the ongoing threat of class-action lawsuits alleging "false and misleading" information but Ullman never said that the company wouldn't soon be trying to raise more capital. He said that the company didn't NEED additional financing now to continue operating but that didn't mean that the company might now WANT to shore up cash reserves now to make sure that they are fully funded for a second year of attempted turnaround.
If there are a spate of class-action lawsuits, I would expect JCP to prevail because NEEDING money immediately and merely WANTING more reserves and then raising capital isn't necessarily a contradiction. These days words really need to be parsed and it's not valid to just assume that because a company may not NEED immediate additional financing to get by that they won't WANT such funds to insure that they and not the factors and financiers are in control of the situation.
Last Friday at a $12.96 close, the 220 million shares had a market cap of about $2.85B. After the sale of 936 million shares for about $900M, the market cap of the 316 million shares at $9.05 comes to $2.87B. So a $900M capital raise will hve ended with virtually no difference in the market cap. How incredible that the company can be valued no more in total after a $900M capital raise.
It's the end of the quarter and underperforming fund managers certainly don't want to show this name in the portfolio to fund-holders who may be thinking of switching funds. So dunds that stuck with this thing the entire quarter dump the last few days so that at quarter-end they don't have to show the stock in the portfolio.
Starting on Tuesday, the same funds that kicked this out near quarter-end will be buying since the next quarter-end is still three months away. At the beginning of a new quarter, stocks that have been unduly depressed due to negative window-dressing usually rally while the pricey momentum stocks on the upside get sold.