A Speculative Bet against a German Financial Giant?

Last week was mixed for global stock markets, with the Dow Jones down 0.37%, the S&P 500 falling 0.67% and the NASDAQ dipping 0.37%. MSCI Emerging Markets Index (EEM) gained 0.64%.

Big gainers in your Bull Market Alert portfolio included ProAssurance Corporation (PRA), which moved 3.28% higher, and Cirrus Logic, Inc. (CRUS), which rose 1.71%. ProAssurance Corporation (PRA) also moved back above its 50-day moving average to become a BUY.

You were also stopped out of Spire, Inc. (SR) and NorthWestern Corporation (NWE) each at a loss.

Two positions — B&G Foods Inc. (BGS) and Drew Industries, Inc. (DW) — fell below their 50-day moving averages and moved to a HOLD.

With the U.S. S&P 500 trading exactly where it was back on July 13, it has been a challenging time to make money in the markets.

The recent rise in the volatility of U.S. markets, combined with the “all in” or “all out” nature of trading during successive days, suggests that traders are increasingly nervous about the market.

Uncertainties about the outcome of the U.S. presidential election are adding to the risk. Whatever your political stripes may be, there is little doubt that a Trump victory would trigger a sharp short-term sell-off in the markets.

In addition, if you look at the S&P 500 from the chart reader’s standpoint, you see that the market has formed a “wedge” — trading in ever narrower ranges over the course of successive weeks. Chartists will point out that the market tends to break out sharply either to the up or downside after this kind of a pattern.

The greatest immediate risk is the fate of Germany’s leading investment bank, Deutsche Bank AG (DB). Over the weekend, Deutsche’s CEO John Cryan failed to reach a settlement on a $14 billion fine with the U.S. Justice Department, putting further pressure on the bank’s stock price. Add this to the bank’s 46 trillion(!) in outstanding derivatives — about 3x the size of the U.S. gross domestic product (GDP) –- and there is little doubt that a collapse or even bailout of Germany’s biggest bank would trigger a huge market correction across the globe.

Many hedge funds are poised to profit from Deutsche’s potential “Lehman moment” — a reference to the collapse of Lehman Brothers in September 2008, the event that triggered the global financial crisis.

You can see this in the massive number of put options outstanding on Deutsche Bank’s stock — a whopping 40,638 on the $10 puts expiring on Oct. 21 (DB161021P00010000). The stock closed at $13.64 on Friday.

As you know, Bull Market Alert does not recommend huge speculative bets. So I’m not making these options as a formal recommendation. At the same time, with the options trading at 10 cents, this position could be interesting to you as a “lottery ticket” style speculation over the next two weeks.

With this heightened uncertainty, let’s take a breather this week. I’ll be back with a new formal Bull Market Alert recommendation next week.

Portfolio Update

B&G Foods Inc. (BGS) lost 1.95% last week as markets traded slightly lower. Analysts at Credit Suisse reiterated their price target last Friday on BGS at $55. This represents a potential 14% increase from last Friday’s close. BGS slipped just below its 50-day moving average (MA) to become a HOLD.

ABM Industries Incorporated (ABM) fell 2.32%. Looking at an ABM chart clearly shows that after a slight dip in the opening weeks of 2016, ABM’s rise has been unabated ever since. When comparing ABM’s performance to the industry as a whole, ABM is up 8.4% over the past 12 weeks compared to the industry’s 4% gain. ABM’s earnings estimates also have been revised upwards through the year and, in the past month, have been bumped up 8.8% compared to an industry 0.1% increase. ABM remains a BUY.

Cirrus Logic, Inc. (CRUS) rose 1.71%. CRUS will report earnings on Oct. 27 after markets close. In a possible tip of the cards, another Apple (AAPL) chipmaker, Dialog Semiconductor, reported better-than-expected earnings last week. Apple constitutes approximately 75% of Dialog’s yearly sales revenue. CRUS may be expecting similar results. CRUS is a BUY.

ProAssurance Corporation (PRA) moved 3.28% higher last week. ProAssurance announced its Nov. 3 earnings reporting date early last week to push PRA higher as buying volume spiked last week. Consensus earnings per share (EPS) estimates call for $0.60 earnings per share on revenue of $205.74 million. This pushed PRA back above the 50-day MA to become a BUY.

Cantel Medical Corp. (CMN) added 0.82%. After dropping following better-than-expected earnings the week prior, CMN has been slowly making a comeback over the past week, rising each day. With the recent dip presenting a buying opportunity, CMN remains a BUY.

Sincerely,

Nicholas A. Vardy