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Two and Ten-Year Yields Invert, Indicating Recession Ahead

Posted: 15 Aug 2019 03:00 AM PDT

Bond market gives biggest recession signal in 12 years.

U.S. yield curves continue to invert, with the yield on 2-year Treasury notes now paying investors more than the yield on 10-year Treasury bonds.

Although the 3 month yield on Treasury securities have inverted against the 10-year note back in May, the correlation between the two-year and ten-year are a bigger indication that a recession is on the horizon, likely starting within the next 12-18 months.

Yield curve inversions are a crucial investment trend to follow, as prior inversions in 1989, 2000, and 2006 indicated trouble ahead with recessions in 1990, 2001, and 2008. The indicator has the best track record of predicting recessions.

While some investors see the yield spread between 3-month securities and 10-year bonds as the real indicator to watch, the 2-year and 10-year inversion indicates that the 3-month and 10-year may invert within the coming months.

Many traders and investors also see the move as one of caution in the market on trade war uncertainties, and the resolution of trade issues will create enough market clarity and economic strength to move yield curves back to normal.

Action to take: We advise caution, with an eye towards a higher portfolio allocation to cash, defensive trades such as gold, and that traders look to take lower profits more quickly on short-term trades like options trades around earnings reports.

 

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Unusual Options Activity: Barrick Gold (GOLD)

Posted: 15 Aug 2019 03:00 AM PDT

December call buying indicates further rally in shares.

Gold mining companies have been doing well this month, as gold prices have risen along with market fears. Traders continue to bet on the space moving higher, with a big trade on Wednesday in shares of Barrick Gold (GOLD).

Over 3,100 contracts on the December 2019 $23 calls on shares traded, a 16-fold increase in the prior open interest just under 200 contracts. With a current share price just over $18, the option is a bet on a 25 percent rise by the holidays. With a current share price just over $18, the option is a bet on a 25 percent rise by the holidays.

Barrick Gold is one of the "major" producers of metals, with global operations and some of the lowest-cost mining operations. It may not be as speculative as some of the smaller plays, but the company's profitability will improve if gold prices continue to rise.

Action to take: Although shares of Barrick gold are now up 74 percent in the past year, there's more room to run as markets look for a safe-haven trade. Barrick looks a bit expensive at 31 times earnings, but gold mining companies tend to have poor earnings when gold is out of. Investors looking for a safe-haven should look at shares.

Traders should look at the December $23 calls, which are an inexpensive bet on a further rally in gold at $0.50 right now, or about $50 per contract.

 

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Insider Activity: Conduent (CNDT)

Posted: 15 Aug 2019 03:00 AM PDT

Owner Carl Icahn makes $30 million buy.

On Tuesday, August 13th, billionaire investor Carl Icahn bought 4,572,521 more shares of a company he already owns more than 10 percent of, Conduent (CNDT). The stake, costing just under $30 million, increased the size of his holdings by about 14 percent to over 36.2 million shares.

Icahn has previously bought shares in May, when he picked up over 6 million shares in three separate purchases.

One director has bought this year, and no insiders have sold in over one year, when shares traded over 60 percent higher than today.

Conduent provides business process services in various segments for both commercial industries, the government, and transportation.

Action to take: With shares down over 67 percent in the past year, and with the company facing a heavy debt load of $1.91 billion, or about $600 million more than its equity right now, Icahn's ability to make drastic changes appear necessary here to get the company back to profitability.

While we prefer to invest alongside Icahn, we also see shares as likely to continue dropping from their current price around $6.55. We suggest investors buy a put option with a $5 strike to bet on a further drop in the coming months, but consider going long at or under $5 per share.

 

World Wrestling Entertainment (WWE) Gets Buy Rating

Posted: 15 Aug 2019 03:00 AM PDT

Sports streaming potential makes company a buy.

Investment firm Rosenblatt started its coverage of World Wrestling Entertainment (WWE) on Wednesday, giving the sports and media firm a buy rating.

The rating was based on the company's 30 percent drop since April, as well as the possibility of the company increasing its revenue going forward thanks to streaming channels for its wrestling coverage. Other analysts also have the company listed as a buy right now, with an average rating of outperform.

The initial rating came with a price target of $85, about a 28 percent increase from where shares traded on Tuesday. Shares rallied at the open, but declined with the overall selloff in the market.

Action to take: At 22 times forward earnings, the company looks a little pricey. And despite a recent 30 percent drop, shares are only off 15 percent in the past year. We think anyone looking to go long shares should wait until the price gets under $60, about another 10 percent lower from here.

Speculators may even want to buy a put option, to bet on shares continuing their downtrend in the coming months—a weak overall stock market may provide a better return. The January 2020 $55 puts look attractive here in terms of the potential return and relative cost—with the option under $3, it could rally to $5 or $6 in a steep market decline.

 

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