The LEAPS Trader
105 W. Monument Street
Baltimore, MD 21201
Tuesday, July 18, 2006
Email – #328
** A Cure For Insomnia
… At least, that is what many in the lodging industry will be looking for in the months ahead. I live in the resort capital of the world. My family is involved in the hotel business in the U.S. and Canada. It’s been a good five years of healthy growth, increasing real estate values, and strong consumer spending.
But, lately, the news has not been so good. It’s still in the early stages, but the signs are unmistakable. As usual, we will likely be early to the party, but if we wait until the opportunity is evident to everyone, the opportunity will surely be unattractive.
Down by Disney World, this time of the year is boom time. It is summer and the kids are out of school. Between mid-June and mid-August, hotels are supposed to be full. This year, it has been a little different.
I spoke with a major hotelier in the area, and he is disappointed. His major chain hotels are running behind last year, and he is lowering rates. Is it higher gas prices? A slowing economy? A tapped-out consumer? Maybe all of the above. The real estate boom is fizzling at the same time inflation and interest rates are rising. The piggy bank is getting smaller, while outflows are getting bigger – something’s got to give.
Vacations are one of the easiest places to cut back. Now, I know that no one will give up vacations, but they will make changes. Instead of a seven-day stay at Disney, they may only stay six. Instead of staying at a Hilton, families may choose a Courtyard by Marriott and save a few bucks. Not hard to do if you are consumer, but it can be devastating to the business community.
I spoke with some family members in Canada about how their properties were faring. After all, the resource-based Canadian economy is booming. They are doing well, but not as well as they had projected. In fact, they are worried. The Canadian dollar is so strong, tourist business from the States has fallen off the cliff. Again, reality is not living up to projections this year.
From the hoteliers’ point of view, there are several issues playing against them. The slowing economy, falling home prices, rising energy prices, currency concerns, a tapped-out consumer, geopolitical fears (many hotels have properties worldwide), and increasing debt service costs, thanks to a combination of recent renovations and property purchases during the real estate boom. There are positives as well, but not enough to outweigh the potential hit to earnings. I believe that we are on the downward slope of the curve, after plateauing late last year.
I propose we take advantage of the slowdown in the industry by taking a short position in Hilton Hotels. Currently trading for about 20 times this year’s earnings, Hilton faces the above-mentioned issues on a global scale. It has shown strong growth in past quarters – not stellar, but strong. But its competitors are even stronger, especially Marriott. And, if we do enter a slowdown, it will face not only a weaker consumer, but also stronger competition fighting for the same dollar.
In truth, it does not matter which hotelier we short – they will head the same way if the economy slows and energy prices stay strong. Hilton just happens to have the most liquid LEAPS and the least expensive ones, as well, relative to price.
Here is the play:
Buy the Hilton Hotels (NYSE: HLT) January 2009 $25 LEAP PUT options (VHL ME). These are currently trading at $2.60 on the bid and $3.20 on the offer (a huge spread reflecting time value risk.) DO NOT PAY MORE THAN $2.80. Yes, I understand that the price reflected is under the current price, but I expect a short-term rally in the market as geopolitical tensions cool down in the short term. I will update you if there are any changes to the recommended entry price.
Good trading,
Karim
Current Portfolio
Company / Symbol: Hilton Hotels (NYSE: HLT)
Option / Symbol: Jan. 09 $25 put (VHL ME)
Date Purchased: New
Current Price: $3.20
Comment: Buy. Do not pay more than $2.80.
Company / Symbol: Equity Office Properties (NYSE: EOP)
Option / Symbol: Jan. 09 $30 put (OLH MF)
Date Purchased: 6/22/06
Current Price: $2.70
Comment: Hold.
Company / Symbol: sanofi-aventis (NYSE: SNY)
Option / Symbol: Jan. 08 $60 call (WFK AL)
Date Purchased: 4/17/06
Current Price: $2.80
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF AF)
Date Purchased: 8/8/05
Current Price: $0.85
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.09
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $35 call (VVV AG)
Date Purchased: 6/21/06
Current Price: $3.60
Comment: Hold.
Company / Symbol: AMD Micro Devices (NYSE: AMD)
Option / Symbol: January 2009 $45 call (VVV AI)
Date Purchased: 6/21/06
Current Price: $2.00
Comment: Hold. Sold call against January 09 $35 call position.
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $15.00 call (VIX BC)
Date Purchased: 5/3/06
Current Price: $3.70
Comment: Hold
Company / Symbol: CBOE Volatility Index (WCB: ^VIX)
Option / Symbol: Feb. 07 $17.50 call (VIX BW)
Date Purchased: 6/14/06
Current Price: $2.70
Comment: Hold. Sold call against Feb. 07 $15 position.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $30 call (OPJ AF)
Date Purchased: 6/9/06
Current Price: $9.00
Comment: Hold.
Company / Symbol: GoldCorp (NYSE: GG)
Option / Symbol: Jan. 09 $40 call (OPJ AH)
Date Purchased: 6/9/06
Current Price: $5.90
Comment: Hold. Sold call against January 09 $30 position.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $40 call (WTX AH)
Date Purchased: 5/23/06
Current Price: $2.30
Comment: Hold.
Company / Symbol: Teva Pharmaceutical (Nasdaq: TEVA)
Option / Symbol: Jan. 08 $45 call (WTX AI)
Date Purchased: 5/23/06
Current Price: $1.35
Comment: Hold. Sold call against January 08 $40 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $35 call (WZY AG)
Date Purchased: 4/25/06
Current Price: $3.90
Comment: Hold.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan. 08 $45 call (WZY AI)
Date Purchased: 4/25/06
Current Price: $1.65
Comment: Hold. Sold call against January 08 $35 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ MM)
Date Purchased: 3/1/05
Current Price: $0.15
Comment: Hold.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (ORJ MK)
Date Sold: 3/30/05
Current Price: $0.25
Comment: Hold. Sold put against January 07 $39 position.
