As we enter March, the overall stock market has been robust year to date. Perhaps the best indication of that is the 1,000 point move in the Dow Jones Industrial Average since January 25. That’s right in just over a month that index of 30 stocks moved from 20,000 to over 21,000 and closed last night at 21,115.55 — up a hair more than 6.8 percent. We’ve said before that we tend to favor the S&P 500 for a number of reasons, one of them being its a far more representative view of the overall stock market. Five hundred stocks vs. 30, and what that means is the Dow can be influenced by just a handful of stocks. That’s exactly what’s happened with this latest 1,000 point move — it was primarily due to Apple (AAPL), Goldman Sachs (GS) and Boeing (BA).

Why do we call this out? To point out that lest one think the market is moving higher across the board, it’s really less than a handful of stocks that are driving the Dow higher. Given the moves we’ve seen in Universal Display (OLED), AMN Healthcare (AMN) and more recently Dycom International (DY) on the Tematica Select List, we’re not ones to complain, but rather we are ones that prefer to understand the realities of the market’s movements to both appreciate its move higher as well as comprehend the risks that could move it lower. At more than 18x forward earnings that have already started to come down, and on signs the near-term economy is likely stuck in low gear near-term we’ll continue to tread cautiously.

 

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Adding a short position on the accelerating mall pain

You’ve probably seen the headlines regarding JC Penney (JCP) closing as many as 140 stores and two distribution centers in the coming months. Recognizing this means job losses, we don’t mean to be callous, but JC Penney is simply the latest company to admit the ongoing sting it’s feeling as more and more consumers migrate to digital shopping. Macy’s (M), Sears  (SHLD), Gap (GPS), The Limited, Wet Seal, William Sonoma (WSM) and others are all closing locations, and as we’ve shared before it means vacant spaces at malls with mall owners having to scramble. While we do expect mall owners to reposition their properties to more food and entertainment hubs, that takes time. Even as they do this, odds are they will still be left with vacant spaces — we rather doubt a restaurant or movie theater is likely to take over a space vacated by the Gap.

U.S. retail mall vacancies in 4Q 2016  were flat from the previous quarter at 7.8 percent, indicating that the retail real estate market is finally showing signs of a correction. “In short, the fourth-quarter statistics show that the growth in e-commerce that has led to scores of store closures across the U.S. is truly starting to impact many retail property markets in a meaningful way,” said Barbara Denham, senior economist at Reis.

For this reason, we’re initiating a short position in the shares of Simon Property Group (SPG), one of the largest shopping mall Real Estate Investment Trust (REIT) companies. Looking through the company’s recently filed 2016 10-K, we find it’s US properties are littered with stores from Macy’s, JC Penney, Sears, Barnes & Noble (BKS), Kohl’s (KSS) and other retailers that are in throes of shrinking their footprint. Even as the pace of digital shopping accelerates, we expect it will be a slow burn when it comes to Simon Properties shares, which means we will be patient with this position. It also means that should the shares climb higher, something we haven’t seen despite the market’s continued strength thus far in 2017, we are likely to use that to improve the cost basis for our short position.

• We are putting a Sell recommendation on shares of Simon Properties Group (SPG) and installing a short position on the Tematica Select List. We see the company’s business as vulnerable as its tenants struggle with the headwinds associated with our Connected Society investing theme.
• Our price target on SPG shares is $150 compared to last night’s closing price of $182.52. 
• We are instilling a protective buy stop order to limit potential capital losses in this position at $200.

 

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Still bullish on United Parcel Service Calls

As we put this latest position into play, we remain bullish on our United Parcel Service (UPS) April 2017 $110 calls (UPS170421C00110000) that closed last night at 1.14. We have a modest profit in the position since adding it last week at far better prices than we anticipated. As such we are revising our “buy up to” level to 1.40 from the prior 2.10. We’ll continue to hold off with a stop loss recommendation for now, and we’d prefer to scale into the position at better prices ahead of the Easter holiday that falls on April 16

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Rail car loading data continued to improve in February

Even the Personal Income & Spending Report for February showed consumers saved more than expected, the February ISM Manufacturing Report showed the domestic manufacturing economy continues to hum along. Paired with sustained year over year increases in weekly railcar traffic, we remain bullish on our Trinity Industries (TRN) April 2017 $30 calls (TRN170421C00030000). Per the American Association of Railroads, for the month of February total rail carloads rose 6.7 percent year over year. When we compare that to the 4.8 percent year over year increase thus far in 2017, it means carloading accelerated in February compared to January eating away at excess industry capacity. In our book, that’s quite a good thing and bodes well for our TRN calls.

• We continue to rate the Trinity Industries (TRN) April 2017 $30 calls (TRN170421C00030000) a Buy at current levels.
• Given the pullback in the TRN April calls, we would now be buyers up to $0.75
• We have no stop loss recommendation at the shares at this time. 

 

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Aye! Inflationary pressures in the February ISM and Markit Economics data 

As we noted in yesterday’s Tematica Investing, in digging into the February Final Manufacturing PMI reports for the US, China, Eurozone and Japan, all four of them signaled rising input costs, primarily due to higher raw material and commodity costs. Turning to the February ISM Manufacturing Index, we saw similar data with raw materials prices increasing for the 12th consecutive month. We see this specter of inflationary data, especially when paired with that which shows the manufacturing economy continued to expand in February, as inching the Fed ever closer toward pulling the trigger and raising interest rates. We continue to see the timing more in May than March given just two weeks to the next meeting and still no firm details on President Trump’s proposed fiscal plans. As the market comes around to our way of thinking on this, we continue to see upside ahead for our PowerShares DB US Dollar Bullish ETF (UUP) June 2017 $27 calls (UUP170616C00027000).

• We continue to rate the PowerShares DB US Dollar Bullish ETF (UUP) June 2017 $27 calls (UUP170616C00027000) a Buy at current levels.
• As a reminder, we would buy these UUP calls up to $0.32. 
• Our stop loss remains at $0.10 for now.