The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, November 22, 2006
Email – #223
Consumer Sentiment Survey Unmasked and a New Trade
Dear Volatility Trader Member,
Well, we’re just a day away from sitting down with friends and family for Thanksgiving. And as usual at this time of year, the market is stagnant.
There isn’t much economic news out there at the moment, except the University of Michigan Consumer Sentiment Survey (UMCSS), which pointed out that American’s expectations of the economy waned slightly in October.
I don’t want you to think I’m bullish (because I still think we’re overbought in the short-term), but I am going to dispel today’s lackluster sentiment reading. In fact, I’m going to go as far as saying the UMCSS is not an accurate reading of sentiment whatsoever. Here’s why:
Once a month, the University of Michigan Consumer Research Center calls 500 people around the nation and asks them some questions about money, business, shopping etc. If you break it down, it works out to be 10 people per state. Now how in the heck can 10 people per state give an accurate snapshot of overall U.S. consumer sentiment? This minimal data collection effort provides false results, so I urge you to ignore this report whenever it comes out. You would get equal or better results standing at the bus stop asking folks there the same questions.
Toying With a New Trade
Recently, toymaker Mattel (NYSE: MAT) has come under fire after a string of bad news, including the recall of the Polly Pocket dolls and a discard by the infamous Jim Cramer on “Mad Money.”
And right now, the company is trying to upend competition with litigation. For example, MGA owns the ever-popular Bratz brand – but Mattel contends that it really owns the rights, implying that the creator (a former employee) was lured away with the secrets of the successful line.
Regardless, Mattel is simply trying to take back lost Barbie sales via a lawsuit. And at this point, I’d like to quote Sun Tzu in the Art of War, where he said: “When fire breaks out inside an enemy’s camp, respond at once with an attack from without.”
Fire is starting to break out at Mattel, and my guess is that the new lawsuits, along with sagging Barbie sales, could lead to a management shakeup. In the recent third quarter earnings release the CEO said: “I am pleased with our third quarter results. We had good performance across our portfolio, with especially strong contributions from Fisher-Price, the CARS entertainment property, and girls’ brands such as Polly Pocket! and Pixel Chix,” Well, now you can take out one quarter of that “good performance” with the recall of Polly Pocket dolls, which leads us to our trade.
Buy the January 2007 $25 puts (MAT-ME) for no more than $2.85.
The stock could easily roll over any day now, and the option will quickly gain in value. There is about $1 in time premium currently built into the option, which is certainly a concern, but not overpriced by any means. We will exit the option position if the underlying stock closes above $24.
The rest of our portfolio is doing well, and I’m hoping to take St. Paul Traveler’s off the table Friday or Monday (for a big win), should the stock continue to fall. Please be ready for an alert.
Have a happy Thanksgiving,
Mark Whistler
