Email – #471

Our most recent pick – buying LEAP puts on American Express – is off to a rocky start. Last night the company reported that its

* earnings were down 58%
* net charge-offs were up significantly
* provision for bad debts increased significantly
* credit quality is deteriorating

The result: Believe it or not, there was a rally in the shares as the results weren’t as bad as anticipated. The company did a very good job in trimming expenses by more than 20%, which was the only source of earnings for the company.

We own LEAPs, and one of the advantages of LEAPs is that we can withstand a bad quarter, which in this case is a good quarterly earnings report since we are short. So we’ll wait to see how the next couple of weeks plays out and reassess the situation.

The market is still overbought and the financial sector more overbought than the market. American Express’s prospects aren’t any better than they were a week ago, and the company itself has acknowledged that things are not looking any better. The current rally in price is, in my opinion, nothing more than a relief rally because they didn’t come out and completely bomb.

The shares have moved up by 100% in the past few weeks and the coming weeks will provide investors an opportunity to cash in.

Karim