Trade Alert: One aggressive buy and two sells

***THE BUY***

FIO’s down 3% again today, just as it seems like it has been nearly every day for the last couple weeks. Time to buy some FIO. I’m buying some calls dated out into September with strike prices up to $30.

The stock is right now at $24. If I buy a FIO call with a $30 strike price, that’s a very aggressive bet because it means the stock has to go up above $30 a share before the third week of September, and I’m paying $200 for every call which represents the right to buy 100 shares of FIO at $30 on that date.  That said, if the stock is to go back to nearly $40 a share, which I think it might if the fundamentals are good in the next six months, that would mean that I could sell those FIO calls for nearly $1000 each ($40 share price – $30 strike price * 100 shares for each call = $1000).


Remember decoupling? That fanciful idea that the emerging economies of the world were so powerful that they didn’t need GDP growth from the U.S.? Turned out to be malarky but something similar is being promoted right now in the tech sector.  Last week saw a big spike in Spanish yields last week for the 4th week in a row, a bunch of Greek bond holdouts kept firm that they would keep holding out, and the burecrats in Washington blamed the bad jobs report on nice weather.

Meanwhile in tech world, Microsoft paid $1 billion for patents from AOL that expire in a few years & Facebook paid$1 billion for a photo sharing app with no revenues.

So clearly there is a real divergence going on, especially as the market realizes that unfulfilled potential of Web 1.0, all the enthusiastic aphorisms like click-and-bricks, are starting to find tenable business models.  Fundamentally I want you to look through the hype and realize that corporate spending and consumer sentiment is guided by the macro situation, and at some point that fact that the U.S. borrows debt to service it’s debt will eventually catch up to the market.  But as long as deals like Facebook-for-Instagram are widely lauded, we won’t have hit that inflection point.

Yesterday I wrote about Six ways to invest in Facebook before the IPO.  The group includes an advertising firm and a South African media conglomerate.  Over the next few  months as we get closer to the Facebook IPO I think of these names could inflate right along side.   And trust me, just like 1999 when traditional companies bought internet startups just to be able to put out a press release and get that one-day stock-pop, we’re about to see a spate of reverse mergers and SPACs just to be part of the Web 2.0-Facebook halo.

Speaking of buying a startup to stay young, our old friend Microsoft’s $8.5 billion acquisition of Skype seems to be part of this trend. They overpaid a bit and are letting Skype’s management buy buzzy zero-revenue companies likeGroupMe.  And while I like the aggressiveness and the gambit Softee is trying, they are simply just too large for any of these things to matter.  So today I’m closing out our position in the name.

I’ve got a double in the MSFT calls I bought back here a full year ago.  I originally initiated our MSFT position because of Kinect and all the opportunities it presented.  Here’s what I wrote at the time:

As far-flung as its focus can seem at times, Microsoft has essentially been placing small bets relative to its size, that it hopes can blossom into full blown product lines. Just look at Kinect, the companion to its Xbox gaming console. For years Microsoft has lost money in on each Xbox sold, but with Kinect it has a full-fledged hit, one that juiced first quarter revenues at its entertainment division to the tune of 55%. Few companies have Microsoft’s wherewithal to hold out for a decade while a product base is installed.

But none of that matters now.  Kinect sales are slowing, and Windows Mobile, their effort with Nokia to stymie Google’s Android and Apple’ ios, is dying.  Which wouldn’t be a new thing for Redmond, over the last two decades they have killed so many platforms like UMPC that it’s hard to keep track.  Softee is essentially a great utility dividend stock, that throws of billions in free cash flow, and won’t see its core business anytime soon.  But that’s not enough to keep me in it and I want to take the cash off the table and have it put to work better in other places.

And I’m closing another names as well, Cypress, but for different reasons.  Something is just wrong with this name.  The Dow is up 5% this year and Cypress is down ~15%.  They should be firing on all cylinders, everything should be easy right now.  But instead they are cutting estimates and sales targets.  Since then the shares have come down from $16 to $14.  The stock is up 28% since I added it to the Revolution Investing portfolio, even as it’s down here near 52 week lows. The company reports earnings next week and I just don’t have the confidence in the management to stick with it for now.

If you’ve lost confidence in company’s management, you have to be willing to walk away even when you’ve missed the highs as I have.

Stay tuned for several new trades, investments and earnings gambles over the next couple weeks.