Exiting the Boral position (ASX BLD)

On November the 21st 2016 Boral (ASX:BLD) indicated that it was purchasing the Headwaters corporation. A US company at a premium of 21% over their share price. To fund this they began a rights issue this week. While Boral was trading at around $6.15 prior to this, the right issue was at $4.80.

A trading halt was initiated, it reopened at $5. It has moved in the $4.99 to $5.1 range.


I made the decision to exit from the trade BLDZ18 at a price of $1.05, this was slightly under the odds it was worth, but the price was moving north at the time. The options were purchased on the 18th of October for $ 0.43. With a minor adjustment in which the original strike price of $6 (contract size 100) was adjusted to $5.87 and a contract size of 102 securities.

A tidy profit. There could be further downward movement between now and when the option expires (28th of September 2017), but there is significant lack of surety there. Especially given the "Trump rally", which I suspect will eventually run out of steam(at least on the ASX)

Borals move to move into the US market is fraught with danger, Mr Trump among them. This is true for all acquisitions of course. But in particular the fact that they are partially heavily focused on fly ash. A coal oriented commodity which is likely to become less available at low costs in the mid to long term, since it is a byproduct of coal which is on the way out even without an awareness of global warming(gas production has at least a decade more demand to go than gasoline(ie crude), which has at least a decade left itself). However, on the basis of a buoyant US housing market, Headwaters can be a potential source of income growth over the next few years (or at least it will be a consistent source of income, which I'll get to in a second)

The question of course if why is Boral doing this? And why fund it this way? There are of course complications between an Australian company buying a US one. Minor stockholders become a large hassle to deal with, along with the vagaries of US shareholder law. But at it's core I believe that the income from a non Australian source is an excellent choice by Boral. Both Boral and CSR have put heavy investment into diversifying their income base. And Boral took a major hit to do it. I thinking that it's not the best thing for the Shareholders in a short term (<1 year, ie the idiots time horizon) but potentially quite a solid upside in the medium to long term (5 years)

Put simply, Australia is out of housing growth this cycle. The US is not. I purchased puts in Boral because I believed that they would be the first to feel pain from a downturn in the Australian housing market, given their strong exposure. Between now and then we've had a US election and bond rates have risen.

I do not strongly suspect that Mr Trump will in fact act as he has claimed. I believe his policies will be functionally hostile to the poor and middle class. This is different from Mrs Clinton, who was simply indifferent (which allows those hostile to do what they want) to them, until political forces within her party forced her to make some minor changes. Either way, the negative effects of this hostility will take a number of years to rattle out and Boral will make plenty of money on the way during the gradual downfall of the modern west. It will probably balance out a major Australian downturn.

One real possibility is that if Mrs Yellen leaves the Federal Reserve in 2018 (a very real possibility given she serves as chair with renewal at the discretion of the sitting president), Mr Trump will appoint a "pet" fed chair of the Arthur Burns variety(Mr Nixon's Fed chair, a fellow who is the reason there is the word "stagflation"). One who will bow to Political pressure, which is always to keep Fed rates low(or at least low in election years). Whether this simple leads to a decoupling of the fed rate from the bond market remains to be seen.

This will be bad for Boral, but bad in a multi-year, decade long cycle. I suspect they will fall, but the poor policy I saw before within the company(a focus on the Australian housing market) has been reduced.

As for the long term strength of the US market. I will leave with a quote about Mr Burns that was good enough to grace his wikipedia page. 

"The only alternative is that he was under irresistible political pressure from Nixon and had no choice. Neither explanation is very favorable to Burns. Economists now recognize the Nixon era as Exhibit A in how the adoption of bad economic policies in pursuit of short-term political gain eventually turns out to be bad politics as well"

Good luck Boral. My profit in less than 2 months was 244%.

This Blog does not give or pretend to give financial advice. Go find someone who knows what they're doing for that.

Fessing up on what I've got.

In my view, the time to buy puts is now. For some peculiar reason, the political and media cycle has flipped over to one where the madness of the housing market has become clear. A blizzard of negative press has arisen, and politicians have already started passing the buck. Thus my plan to write today on additional details on the housing market will simply be delayed.

Observers of depth of these markets will see that I have almost nothing invested in them. If I had more capital I would put more in, but I don't.

Code	Expiry	Exercise Price ($)	C/P	Option Type	Contract Size	In the Money
ANZGO7	29/06/2017	26	PUT	Buy to Open	100
BLDZ18	28/09/2017	6	PUT	Buy to Open	100
CBATP9	30/03/2017	69	PUT	Buy to Open	100
NABG18	29/06/2017	27.63	PUT	Buy to Open	103
NCMW67	23/02/2017	21.5	PUT	Buy to Open	100	Yes
WBCLQ9	28/09/2017	30	PUT	Buy to Open	100

What is the most risky of these? It's Newcrest and Commonwealth bank, they have a shorter time horizon. Market timing isn't something I can do, and in my view very few really can except when there is major scandals(the outcome of which can be predicted via good analysis of available or non available information), M&A or political events. Thus every purchase was made with the original option around 5-10% out of the money.

At this moment, I'm approximately -5% over the past two months but have good feelings about things.

The current questions on my mind are twofold.

1. Are warrants a reasonable alternative to options, given they are much more widely available.
2. Are REITs a good enough proxy on the corporate real estate market. I have severe misgivings about it, but don't expect severe issues until mid-late 2017 at the earliest. Firms take at least 3-6 months from the good times to really start slashing payroll, and at least another 6 months to get out of leases in a down market.

This blog is not investment advice and should not be taken as such. Please consult a financial adviser for details on finance.

Buying Puts on the Australian Banking Sector, aka The widowmaker

A widowmaker trade is a trade which while appearing to make total sense, it somehow will defy gravity for a time vastly longer than is rational. Thus traders with perfectly reasonable basis are driven bankrupt or forced to take large losses while they wait for the market to finally make sense. Classic examples are those that shorted the US housing market in 2005 or the tech sector in 1998(or shorting Herbalife). It's often clear to those thinking rationally that something mad is occurring, but the sheer time taken for the market to turn can make even the most reasonable investors lose faith. They even make movies about it, one won an Oscar.

The collary of course is the reminder that the interest rate demanded on Japanese bonds has refused to disobey the government demand to stay low, despite traders licking their lips and imagining they are George Soros. Widowmakers might not turn, they might be the new normal(or at least normal for over a decade)

The widowmaker recently has been applied to the choice of some to short the Australian Banking system. The most practical way to do this in Australia is to buy Puts, which is effectively the same thing.

Both methods, shorting stock and buying puts (long Puts) come with a cost. Shorting means to borrow stock, often with a cost equivalent to a debt interest. Plus if the stock goes up the loss is theoretically unlimited until you close the position. Buying an option means paying a premium for an option, but eventually that option expires, making the trade worthless.

The Australian Banking system is fundamentally a "too big to fail" system. The policy that four Banks, ANZ, Commonwealth, NAB and Westpac shall never fail is called the Four Pillars. It's position as an official and unofficial policy varies over time. This puts these Banks at a distinct advantage over their competition. They will never go to zero while the policy holds.

But they may go to hell. The policy also acts to prevent(or at least limit) potential capital inflow from foreign sources in the event of major negative event.

The factor which leads to the banks weakening is simple, the Australian nation is leveraged to the hilt. Only the extremely low interest rates worldwide is saving the borrower's from their debt eating them alive. Even then, buying the Sydney median house will cost you $1021000, with 10% deposit will cost you $56492 in repayments over 30 years at a 4.59% interest rate(according to the NAB). I do not believe there is any realistic way down for interest rates. Even a RBA reduction in rates would only have a mild effect on cutting costs to borrowers. However any increase will have a growing effect. The argument that the RBA will never do this simply doesn't hold water.

The second argument is that capital inflows from Chinese investment andor money laundering will maintain prices. I believe this is having an effect, but nowhere near the popular Press theories. But I feel it has a limited capacity, based on the simple observation that the Chinese government are not as nationally corrupt as western governments. Unlike the West, if things are bad for the nation, the Chinese government will act. This makes them difficult for someone raised under a western government to predict them. A government which does sometimes act in the best interest of the nation is the definition of "Outside context problem". Eventually they will stop the outflows.

Continued in Part II

All commentary is general and is not financial advice.

Welcome to Twelve Oh Two A blog about trading on the Australian Stock Market, focussing on options.

Hello everyone. Welcome to the Twelve Oh Two blog.

This blog will focus on trading in the Australian market, with a current focus on options and warrants. Due to a number of reasons, options trading is very illiquid in the Australian market. Less than half the stocks on the most common index the S&P/ASX 200 are traded as options. Making granular trading difficult.

I will state early on that I have one major trade for which I'll be focussing. The widow-maker of Australia. Going short on the Australian banks in the common parlance. Since this is an options blog, I'll be mostly starting on that as my details.

I do not believe that the EMH is correct in a strict way. My opinion is that HFT tends towards legalised frontrunning. I cannot time the market, I will almost always buy options with expirations of 6 months or more.

I will not disclose my identity at this stage. I am not a financial professional, I at no point give any financial or legal advise. Consult someone who knows what they are doing for advice. Which will be difficult given many professionals are terrible at their job.