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Author Archives: Chris Versace, Chief Investment Officer

About Chris Versace, Chief Investment Officer

I'm the Chief Investment Officer of Tematica Research and editor of Tematica Investing newsletter. All of that capitalizes on my near 20 years in the investment industry, nearly all of it breaking down industries and recommending stocks. In that time, I've been ranked an All Star Analyst by Zacks Investment Research and my efforts in analyzing industries, companies and equities have been recognized by both Institutional Investor and Thomson Reuters’ StarMine Monitor. In my travels, I've covered cyclicals, tech and more, which gives me a different vantage point, one that uses not only an ecosystem or food chain perspective, but one that also examines demographics, economics, psychographics and more when formulating my investment views. The question I most often get is "Are you related to…."
Ep 11. Think that’s clean water you’re drinking? Guess again

Ep 11. Think that’s clean water you’re drinking? Guess again

On this episode of the Thematic Signals podcast, we’re tackling an aspect of our Cleaner Living investing theme that most people tend to take for granted – clean water. To dig into the subject, we speak with Dr. Roy Speiser of water and air filtration company CWR Environmental Products, who for over 35 years has championed the cause to mitigate air and waterborne toxins. As you’ll hear, because of environmental abuse, industrial greed and governmental neglect, the harsh reality is out water supply is not as clean or as safe as we think it is. Dr. Speiser explains how you can find out the state of your own water supply, what common contaminants you’re likely to find, and offers some helpful suggestions on how to ensure you have a clean water supply. He also shares exactly what kind of portable drinking water bottle you should be using, and it’s not likely that metal one you might be carrying around.

Have a topic or a conversation you think we should tackle on the podcast, email me at cversace@tematicaresearch.com

And don’t forget to subscribe to the Thematic Signals Podcast on iTunes!

 

Resources for this podcast:

WEEKLY ISSUE: Uncertainty is back, but we’re thematically prepared

WEEKLY ISSUE: Uncertainty is back, but we’re thematically prepared

Key points inside this issue:

  • The Fed, Trump, tariffs and the data bring uncertainty back to the market
  • What it means for investors
  • We will continue to hold Disney (DIS), Apple (AAPL), Amazon (AMZN) and AT&T (T) shares.
  • What to watch this week

The Fed, Trump, tariffs and the data bring uncertainty back to the market

Between the number of S&P 500 companies reporting last week to the Fed’s FOMC meeting and the pieces of economic data coming at us, we knew it was going to be a busy and potentially volatile week. What few saw coming was the attempt by Fed Chairman Powell to give the market the 25 basis point rate cut it was expecting and regain the position of the market not knowing exactly what the Fed’s next move might be. But then we received the July ISM Manufacturing Index and the July IHS PMI data for the four global economic horsemen (China, Japan, the eurozone and the US). In aggregate those data points signaled the continued slowdown in the global manufacturing economy.  

Granted, the sequential pick up in the July ADP Employment Report fostered the view the domestic economy hasn’t frozen over just yet, but Friday’s July Employment Report reveled slower job creation month over month. 

Normally, economic data like we’ve received in the back half of last week would be enough to ignite the market doves and stoke the view that another rate cut by the Fed was more likely before we exit 2019. And it was that view that led the major market indices higher on Thursday, that was until President Trump did something that arguably next to no one saw coming – announced another layer of tariffs on China that would go into effect on September 1. The implications of that move, which would likely lead to yet another trimming of forecasts for both the economy and earnings, pulled the market lower on Thursday afternoon. 

And on Friday morning, China responded by saying while it does not want a trade war, its not afraid to fight one. Soon thereafter, President Trump is “open to delaying or halting the 10% tariff on September 1” if China were to take action between now and then. Remember, we shared our concern that trade talks could devolve into playground taunting and fighting. Well, we are there and sticking with the analogy, it’s likely going to keep the stock market on the uncertainty teeter totter for the next few weeks. 

If some were hoping for a more normal August for stocks following this week’s Fed meeting, we’re sorry to say that’s not likely to happen. In the past we’ve shared several analogies about investing – it’s not crock pot cooking, you can’t fix it and forget it or investing is not a like a photo, i.e. snapshot in time, but much like a good film it’s an evolving story. As this latest chapter begins to unfold, it will be mean assessing and re-assessing expectations as new developments are had and their ripple effects determined.

What it means for investors

Odds are this will uncertainty will result in the usual back and forth for the market in the coming weeks, which will also see the usual end of summer low trading volumes. While a good chunk of Wall Street is at the beach, I’ll remain vigilant and continue to leverage our thematic lens.

More than likely, we will see the herd once again focus on domestically focused as well as inelastic business models as it looks for ports of safety. We’ve have a number of these among the Thematic Leaders and the Tematica Select List – Chipotle Mexican Grill (CMG), Dycom Industries (DY), Costco Wholesale (COST), Axon Enterprises (AAXN), AT&T (T), and USA Technologies (USAT). Unlike the shoot from the hip go to choice of the herd that tends to zero in on electric utilities that group of six have the added benefit of thematic tailwinds propelling their respective businesses.

As August drips by, I’ll continue to look for thematically well positioned companies that offer favorable risk to reward tradeoffs in terms of share prices as I look to position us for what lies ahead. In the meantime, I would recommend subscribers catch the August 5, 2019 issue of Bloomberg Businessweek as the cover story focuses the coming streaming video war that I’ve talked about both here and on the Thematic Signals podcast. The author likens it to “The Hunger Games”, and in many respects I can see why that is a good comparison.

While we were recently stopped out of Netflix (NFLX), I’ll remind you that among the Thematic Leaders and Tematica Select List we have several companies — Disney (DIS), Apple (AAPL), Amazon (AMZN), and AT&T in particular – that are focusing on this market. Each brings their own particular set of strengths ranging from content to addressable customer base, but all three have other businesses besides streaming video to drive profits and cash flow that can fund their respective streaming businesses.

  • We will continue to hold Disney (DIS), Apple (AAPL), Amazon (AMZN) and AT&T (T) shares.

What to watch this week

After all the happenings for last week that I described above, this week looks to be yet another frenetic one for corporate earnings with more than 1,100 reports to be had, but the pace of June quarter earnings begins to slow and we face a lighter economic data schedule as well. And to be clear, even though we will face a plethora of June quarter reports, let’s remember that exiting this week roughly 78% of the S&P 500 has reported and next week another 13% of that group will be doing so. What this means is the vast majority of reports next will have far less of an impact on the market. This doesn’t diminish them from an ownership of data and information perspective, but rather a smaller impact is likely on earnings revisions and trading ranges. 

Corporate earnings to watch

In terms of which reports I’ll be focusing on this week, it should come as little surprise that they are the ones touching our various investment themes. Here’s my short list:

  • Monday, August 5: Tyson Foods (TSN), International Flavors & Fragrances (IFF), Insulet (PODD) and ShakeShak (SHAK). 
  • Tuesday, August 6: Tenneco (TEN), ADT (ADT), AMN Healthcare (AMN), Comscore (SCOR), LendingClub (LC), Disney (DIS), 
  • Wednesday, August 7: CVS Health (CVS:NYSE), CyberArk (CYBR), Physicians Realty Trust (DOC), Darling Ingredients (DAR), Skyworks (SWKS), Tivity Health (TVTY), 
  • Thursday, August 8: Activision-Blizzard (ATVI:), Alarm.com (ARLM), Dropbox (DBX), Synaptics (SYNA:Nasdaq), Uber (UBER) 
  • Friday, August 9: US Concrete (USCR)

Economic data to watch

Before we tackle the coming week’s economic data, I’ll mention GDP expectations from the Atlanta Fed and New York Fed started last week off between 2.0%-2.2% and as we exited the week those expectations sat at 1.6%-1.9%. As I touched on above, the employment data we received last week pointed to a still growing economy but the take on the manufacturing economy per the July ISM Manufacturing Index and the July US IHS Markit PMI data pointed to a slowing domestic manufacturing one. 

We have only a handful of meaningful economic data coming at us this week in the form of the July inflation reports and ISM’s July reading on the US service economy. Given our pension for looking at other data set in addition to the formal economic data, we here at Tematica will be on the lookout for the last Cass Freight Index and other truck tonnage figures as well as the weekly railcar loading data. Those have been signaling the slowdown we’ve seen in the government produced economic data, and as such we’ll keep a close watch on them in order to stay one step ahead of the herd. 

Should the coming economic data be continue to disappoint relative to expectations and signal the vector and velocity of the domestic economy is down and even slower than recent revisions suggest, odds are the market will increasingly expect another Fed rate cut sooner than later. Our concern, however, is the intended effect of this week’s rate cut and another one should it come to pass on business investment could be muted by the continued trade uncertainty and weakening global economy. As we’ve seen with falling mortgage rates that didn’t stimulate demand earlier this year, in the near-term businesses may stay on the sidelines given the trade and economic uncertainties despite more favorable interest rates.


WEEKLY ISSUE: Mismatched Economic Data, Earnings and the Fed

WEEKLY ISSUE: Mismatched Economic Data, Earnings and the Fed

Key points inside this issue

  • Did you notice the June quarter GDP depended on the consumer?
  • Earnings, earnings, earnings and what it may mean for the market
  • Waiting on the Fed and what Powell says about what’s ahead

Did you notice the June quarter GDP depended on the consumer?

While last week’s corporate earnings included the usual mix of better-than-expected and weaker-than-expected results, we also saw mismatched economic data. The IHS Markit July Flash US manufacturing index hit a reading of 50.0, while the initial second-quarter GDP print came in warmer than anticipated at 2.1% vs. expectations for 1.8% – 2.0% it was down from 3.1% in the first quarter. Parsing the GDP data, the quarter was all about the consumer, with personal consumption expenditures rising 4.3% (annual rate), the strongest performance in six quarters.

Given rising debt levels, I continue to have concerns over the consumer’s ability to spend at such a vigorous rate given rising debt levels. We’ve seen rising delinquency rates reported by American Express (AXP)and Capital One Financial Corp (COF). If you’re thinking this meshes with our Middle-Class Squeeze investing theme that has propelled the shares of Middle-Class Squeeze Leader Costco Wholesale (COST) by more than 37% this year (head and shoulders above all the major market indices), you would be right.  And the fact that personal consumer expenditures contributed 2.85 percentage points to the initial GDP print of 2.1% isn’t lost on us here at Tematica.

The upcoming economic data will be critical to assessing the vector and velocity of the domestic economy, in part because it will tell us if the consumer is able to sustain the economy at a time when it relies most on him and her – the year-end shopping season.  In the very near term, however, the market will be fixated on the Fed and the degree to which it uses monetary policy to attempt a “Goldilocks” move for the U.S. economy. Once we are past today’s expected Fed rate cut, odds are investor will get back to business breaking down economic and other data. We hear at Tematica will continue to do that as well as ferret out the latest signals for our investing themes.

Earnings, earnings, earnings and what it may mean for the market

Coming into this week, 220 or 44% of the S&P 500 group of companies had reported their earnings for the second calendar quarter, and among those more than 1,050 reports coming at us this week will be another 168 S&P 500 companies. When the stock market closes on out this week, 78% of the S&P 500 will have reported.

From a statistically significant perspective, this gives us a very hard look at how the second half of 2019 is shaping up from an earnings expectations perspective. As of Friday, July 26 afternoon this is what the picture looked like:

You’ll notice there really isn’t any earnings growth year over year for the first three quarters of 2019, leaving all of the expected over year 2019E PS growth for the S&P 500 that now stands at just 2.6% to come during the December quarter.

And if you’re thinking like me that expected 11% EPS growth forecast for the S&P 500 group of companies in 2020 looks a little bit much, well, here’s some perspective:

The point to that last graph is that for some reason the investing herd seems to start out with a +10% or more EPS growth assumption for the coming year. I’m not sure why that is, I merely comment on the data being presented. Given the vector and velocity of the global economy today, it seems that forecast is more likely to move lower than higher. And odds are rather high we’re not going to see yet another tax cut like we did exiting 2017 that goosed corporate EPS in 2018.

The last time we saw back to back years of little to no earnings growth for the S&P 500 was 2015-2016, and the S&P 500 peaked around 18.4x earnings. If 2020 EPS expectations for the S&P 500 continue to fall toward 2019 levels near $165 per share, it could mean we are seeing a market ceiling near the 3,040-3,060 range for the S&P 500.

No doubt there are some moving pieces in that analysis, but I find it is a smart move to keep a bead on how real earnings expectations are as well as their likely directionality vis a vis the global economy when charting what to do next with one’s investments.

Again, this is not a snapshot kind of a thing, but rather an evolving story. Yeah, I may sound like the Fed hear, but it shouldn’t come as a surprise the evolving nature of the market. So… I guess this means more on this as the story continues.

Waiting on the Fed and what Powell says about what lies ahead

Just after 2 p.m. ET today, we’ll hear from the Federal Reserve following its much-anticipated July FOMC meeting and the prevailing expectation is for a 25-basis-point rate cut. We do not expect an update to the Fed’s June economic projection materials, but what Jerome Powell says during the press conference will likely set expectations for the Fed’s three remaining monetary policy meetings in September, October and December. Odds are the central bank will remain on message, saying it will continue to be data dependent.

Weekly Issue: Several thematic bright spots among 2nd Quarter earnings disappointments

Weekly Issue: Several thematic bright spots among 2nd Quarter earnings disappointments

Key points inside this issue

  • Boosting our stop loss on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) to $240.
  • Safety & Security Thematic Leader Axon Enterprise Inc. (AAXN) catches a TAZR win.
  • Housekeeping: The next issue of Tematica Investing will be published during the week of July 29th. Why? Because next week I will be on vacation. Even though I’ll be catching up on some reading and thematic thinking, I’ll be kicking back and recharging for what lies ahead.

Last week, we started the June-quarter earnings season. While there were only 20 reports, what we heard from BASF SE, Fastenal (FAST), and MSC Industrial (MSM) served to remind us that, even though the Fed will likely cut interest rates, odds are the current earning seasons will be a challenging one. That view was reaffirmed this week with results from JB Hunt (JBHT) and CSX (CSX) that confirmed the slowdown in freight traffic, an indicator that we here at Tematica watch rather closely as a gauge for the domestic economy’s health.

Given the declines in the Cass Freight Index over the last seven months, the results out of JB Hunt, CSX and other shippers should hardly be news to the investment community. On the other hand, what is somewhat concerning to me is that these declines in freight are coming in even as June Retail Sales surprise to the upside and e-tailers, like Thematic King Amazon (AMZN), Walmart (WMT), Target (TGT) and others, are embracing one-day and same-day shipping from the prior table stakes that were two-day shipping. The growing concern that I have is that despite the tailwind associated with our Digital Lifestyle investing theme, continued declines in the Cass Freight Index and other freight indicators could signal that the domestic economy is moving from one that is slowing into one that is in contraction territory.

Despite the upside surprise in the June Retail Sales report, it was counterbalanced by a revelation contained in the June Industrial Production & Capacity Utilization report. What we learned yesterday from that report was that domestic factory production fell at an annualized rate of 2.2% in the June quarter. Paired with the slowing freight-related signals mentioned earlier, there is little question over the vector of the domestic economy. Clearly the June quarter will be slower than the March one, but the real question we need to face as investors is, how slow will it be in the current third quarter, as well as the fourth quarter this year? That speed along with the degree of the expected July Fed rate cut and the continuation of the current US-China trade war will influence business spending and earnings expectations for the back half of the year.

As far as the June Retail Sales report goes, while I am all for consumers spending, I’m not in love with the fact that it is increasing credit card debt that is likely driving it. According to data collected by the FDIC and published by MagnifyMoney, “Americans paid banks $113 billion in credit card interest in 2018, up 12% from the $101 billion in interest paid in 2017, and up 49% over the last five years.” And as we’ve seen in the monthly Consumer Credit Report issued by the Federal Reserve, revolving consumer credit, which includes credit card balances, has only grown year to date. In other words, consumers are using credit card debt to fund their spending and rising interest payments will squeeze disposable income levels.

While increasing consumer debt is not exactly an uplifting thought, and certainly a headwind for the economy in the coming quarters, these development are a tailwind for Middle-Class Squeeze Thematic Leader Costco Wholesale (COST):

  • Year to date, COST shares are up some 37%, and we are only now heading into the seasonally strongest time of the year for the company’s business. We should continue to hold COST shares, but we will also increase our stop loss to $240 from roughly $225.

Thematic Leader dates to watch

With investor attention turning to corporate earnings, here are the announced reporting dates for the Thematic Leaders:

  • Netflix (NFLX) –  July 17
  • Chipotle Mexican Grill (CMG) – July 23
  • Amazon (AMZN) – July 25
  • AMN Healthcare (AMN) – August 6
  • Dycom Industries (DY) – N/A
  • Costco Wholesale (COST) – N/A
  • Alibaba (BABA) – N/A
  • Axon Enterprises (AAXN) – N/A

Not all of the Leaders have shared the reporting dates for their latest quarterly earnings, but no worries as I’ll be filling the calendar in as the missing ones announce them. And it goes without saying that as the June 2019 earning season continues, I’ll be sifting through the sea of reports looking for thematic data points to be had.

Safety & Security Thematic Leader Axon Enterprise Catches a TAZR Win

As I was putting this issue of Tematica Investing to bed, I saw that Safety & Security Thematic Leader Axon Enterprises (AAXN) announced a big win for its business — a significant order for its TASER Conducted Energy Weapons from agencies across the United States. These orders, which were landed during the first half of 2019, will ship in multiple phases in the coming quarters.

Why are we only hearing about this now?

Partly because Axon needed permission from the agencies make the announcement, and even with such permission granted, the company still needed further permission to name those agencies as customers. A full list of those announced orders can be found here.

Of course, this news is a positive for Axon, and it serves as a reminder that even though the headline story for Axon is the company’s ongoing transformation into a digital security company as it grows it body-camera and digital subscription storage business, the steadfast TAZR business remains a firearm alternative.

We’ve enjoyed a nice run in Axon shares since they were added to the Thematic Leader board, and year to date the shares are up more than 46%. I see no reason to abandon them just yet and our long-term price target of $90 remains intact. For now, our stop loss on the shares continues to sit at $51.

And for what it’s worth, as impressive as that year to date gain is for AAXN shares, it still trails behind Cleaner Living Leader Chipotle Mexican Grill (CMG), which as of last night’s close was up more than 76% year to date.

Weekly Issue: Key risks to watch in the second half of 2019

Weekly Issue: Key risks to watch in the second half of 2019



Key points inside this issue

  • Powell Watch: Will the Fed chief dial back recent dovish talk?
  • The New York Fed reports signs of inflation
  • We will continue to hold both AT&T (T) and Universal Display (OLED) shares. 
  • The Cleaner Living Index: Up 6.5% in June



Despite the strong finish to the June quarter, in my view, three risks remain aheadthat the market needs to navigate during the second half of the year: the China trade war, earnings season and the Federal Reserve’s rate cut decision.

In recent missives, the U.S.-China trade negotiations, including the tariffs that are slowing the global economy, will likely impact June quarter earnings season, lead to further negative revisions of S&P 500 expectations in the back half of the year, and may prompt the Fed not to be as accommodating as has been expected.

While the U.S.-China trade talks will likely be tracked in terms of months, the other two risks will be ones we face in the coming weeks. June quarter earnings season kicks off this week, with results from PepsiCo Inc. (PEP) and newly public Levi Strauss & Co. (LEVI), and the Fed’s next monetary policy meeting is set for July 30-31. As we saw, last night Levi Strauss (LEVI) modestly missed expectations, but it was the profit warning from German chemical company BASF SE that reminded investors of the impact to be had in the June earnings season from both the slowing global economy, including weakening auto demand,and trade conflicts trade. As I said on this week’s Thematic Signals podcast, I seriously doubt BASF SE will be the only company to cite those factors as they dial back their expectations for the second half of 2019.


Powell Watch: Will the Fed chief dial back recent dovish talk?

Later today, some three weeks before that Fed policy meeting, we’ll be hearing from Fed Chairman Jerome Powell during his semi-annual testimony in front of the House Financial Services Committee. These events can be a showcase for a lack of understanding among committee members when it comes to monetary policy, the economy and financial markets. However, the investment community will be watching and listening to Powell to see if he tips the Fed’s collective hand ahead of the end-of- July meeting.

On the somewhat sleepy Friday after the Fourth of July, the Fed published its latest Monetary Policy Report, which reiterated it is “firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.”

Over the last several weeks we’ve talked about the downward vector and slowing velocity of both the domestic and global economies that have led to sharp gross domestic product forecast declines for the June quarter compared with the March quarter’s 3.1% reading. In perusing the Monetary Policy Report, there is little question the Fed has taken note of this as well, noting that “… consumer spending in the first quarter was lackluster but appears to have picked up in recent months. Meanwhile, following robust gains last year, business fixed investment slowed in the first quarter, and indicators suggest that investment decelerated further in the spring. All told, incoming data for the second quarter suggest a moderationin GDP growth — despite a pickup in consumption — as the contributions from net exports and inventories reverse and the impetus from business investment wanes further.”

In the report, the Fed went on to state the following, which reiterates the dovish comment Powell made at the Fed’s last monetary policy press conference, the same remarks that rallied the stock market in June: “At its meeting in June, the FOMC judged that current and prospective economic conditions called for maintaining the target range for the federal funds rate at 2 1/4 to 2 1/2 percent. Nonetheless, in light of increased uncertainties around the economic outlook and muted inflation pressures, the Committee indicated that it will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near the Committee’s symmetric 2 percent objective.”

The thing is, up until last Friday’s better-than-expected June Employment Report, the market had been expecting not one but a few rate cuts in the back half of 2019. Now, per the latest CBOE FedWatch details, the market still thinks there is a better than 90% chance the Fed will cut interest rates by a quarter pointin 22 days, but the probability of additional cuts in the coming months has fallen dramatically. Based on the latest probability tables published by CBOE, it looks like the market is now expecting only one more rate cut before the end of 2019. As we saw on Friday and again Monday, the market had to adjust to that new mindset by giving back some of its June gains.


The New York Fed reports signs of inflation

Adding fuel to the fire, the New York Federal Reserve on Monday published a report indicating a pickup in expected inflation a year from now and three years from now to a rate of 2.7%, up from 2.5% and 2.6%, respectively, in the previous report. This inflation uptick goes against one of the prevailing thoughts behind why the Fed’s recent dovish comments — the lack of inflation — and is potentially another item that could put a Fed rate cut on the back burner in the near term, thus bucking what the stock market has been thinking.

As we dissect Powell’s comments later today, we’ll be looking to see if he maintains the dovish posture he showed in June or if he will attempt to roll back that stance following the June jobs report and the New York Fed’s inflation findings. If it’s the latter, we can likely expect Powell to trot out the standby Fed comment that it will remain “data-dependent.” If Powell does jawbone a likely pushout, it likely means the market pressure of the last few days will continue, and for that, we have the inverse ETF position on the Select List that should help insulate us. 



Tematica Investing

Over the last few days, I’ve updated the performance for both the Thematic Leaders as well as the positions on the Select List, and I have to say there is no shortage of ones beating the domestic stock market year to date. But I also recognize that is the rear-view mirror view and as investors we want to be focused on the road ahead. 

In recent weeks, I’ve shared here and on the Thematic Signals Podcast the upcoming earnings season will be, in my view, one of the more challenging ones we’ve faced. So much so that as we were approaching the end of the June quarter, I purposely set stop loss levels across all of the live positions at both the Thematic Leaders and the Tematica Select List. 

And while the near-term is likely to be challenging, there are longer-term reasons to be bullish on many, if not all of those positions. For example, recent chatter points to Apple (AAPL) offering three new iPhone models in 2020 that have organic light emittingdisplays, which bodes rather well for our Disruptive Innovators Universal Display (OLED) shares. Yesterday, Digital Lifestylecompany AT&T (T) formally unveiled its Netflix (NFLX) rival will be called HBO Max, and like Netflix, it will feature a combination of past programming from the Time Warner library and new proprietary content as well. HBO Max will launch publicly in the spring of 2020, but ahead of that, I expect AT&T will unveil the service at an upcoming analyst day, similar to what Disney (DIS) did with Disney+…. And we know how that popped DIS shares. I expect the same to happen to T shares as Wall Street revisits its valuation framework for the company. 

  • We will continue to hold both AT&T (T) and Universal Display (OLED) shares. 


The Cleaner Living Index: Up 6.5% in June

As you know we recently debuted the Tematica Research Cleaner Living Index, which reflects the companies whose business models are riding the tailwinds of our Cleaner Livinginvesting theme. You also know that shortly before the July 4th, Independence Day holiday, we closed out the month of June, which also shut the books on the second quarter of 2019. As I mentioned above, the Fed’s dovish comments exiting its June 18-19 monetary policy meeting buoyed the stock market leading to one of the best month’s performance in some time with the major domestic stock market indices up between 6.9%-7.4%. That move brought the returns for those indices to 16.2%-20.7% for the first half of 2019. 

For the first half of 2019, the Cleaner Living Index rose 8.1%, with the majority of that gain had in the first three months of the year. Retracing the second quarter’s performance, as with the overall domestic stock market, the Cleaner Living Index gave back all of its April gains and then some during May, but rallied during in June following the dovish Fed comments to eke out positive performance for the quarter. Driving that first halfperformance, 28 of the index’s 48 constituents climbed more than 10% during the first half of the year with JinkoSolar (JKS) and Sunrun (RUN) leading the pack with their 119% and 72% returns.  

Offsetting those gains, 14 constituents came under pressure led by Tenneco (TEN), down almost 60% for the first half of 2019, and National Beverage Corp. (FIZZ), which saw its shares fall 38%.  Shares of auto parts company Tenneco came under pressure following the company’s slashing of its 2019 guidance due to the weakening global automotive market, particularly in China. The drop in National Beverage is the result of both weakening sales that reflect the increasing competitive flavored seltzer market expectations and consumer concerns following a class-action lawsuit claiming its ingredients are not all-natural that pressured earnings. 

As we move deeper into the back half of 2019, we’ll continue to monitor developments at National Fizz and Tenneco to determine their continued suitability for the Cleaner Living Index based on its underlying selection criteria. We will also scrutinize newly public companies to determine the degree to which their business models may be riding the Cleaner Living tailwind in a meaningfully way. It was that determination that led Beyond Meat (BYND) shares to be added to the index during our semi-annual June reconstitution. 


Weekly Issue: The Data Continues to Weaken

Weekly Issue: The Data Continues to Weaken


Key points inside this issue


  •  June quarter earnings season could reset second half expectations
  •  Introducing the Tematica Research Cleaner Living Index
  • Setting protective stop loss levels for the Select List 
  • We are issuing a Sell rating and removing both AXT Inc. (AXTI) and Energous Corp. (WATT) shares from the Select List 

And the data continues to weaken


If you’ve been paying attention to the financial media — be it on CNBC or Twitter — you’ve probably seen the news that the latest rash of economic data has come in weaker than expected. This includes a growing number of June data issued by the regional Federal Reserve banks as well as a drop in both June Consumer Confidence and May New Home Sales. We’ve also seen a sharp drop in the May Cass Freight Index and other similar indicators. 

Over the past several weeks, we’ve continued to see a growing amount of data come in below expectations, and arguably the best representation for this is found in the Citibank Economic Surprise Index, better known as CESI. As we can see in the below chart, that index shows the sorry state of economic data relative to expectations, which also explains the downward slope and slowing velocity depicted in GDP forecasts for the current quarter.


As I type this, the Atlanta Fed GDP Now reading for the June quarter sits at 2.0%, but I would be quick to call out it was last updated on June 18. This means several of this weeks’ weak data points have yet to be factored into that GDP forecast. By comparison, the New York Fed’s Nowcast reading for the June quarter is 1.39% as of June 21 – better in the sense that it is more up to date, but it’s still missing some of the most recent data. Both of those GDP forecasts will more than likely be revised lower, exacerbating the sharp slowdown relative to the March quarter’s GDP print of 3.1%.

When we look at the stock market, however, one might think things were going gangbusters given what is poised to be the best June in sometime. But it’s the next two charts that have me concerned for the upcoming June quarter earnings season. The first one shows how the market has performed despite the data showcasing a weakening economy. The second one shows second half EPS expectations for the S&P 500 group of companies remain above 10% compared to the first half. Take a look at the charts and let that last comment sink in. 


June quarter earnings season could reset second half expectations

Simply stated, the odds of the S&P 500 group of companies delivering that level of EPS growth in the back half of 2019 given the vector and velocity of both the domestic as well as global economy, with the impact of tariffs that are in place, and the lack of anything like the 2018 bottom line benefit that was tax reform are rather low in my opinion. Before the usual July deluge, this week we’ll get earnings from the likes of FedEx (FDX), Nike (NKE) and Select List resident McCormick & Co. Inside those reports, I’ll be listening for comments not only on their respective businesses, but also international demand, currency and tariffs. In my view, what we hear from these three companies and others will set the stage for what is to come in the following weeks. 

One recommendation I would make to subscribers is to hang onto the ProShares Short S&P 500 ETF (SH) shares that were added to the Select List back in December. While SH shares have moved against us as the market has moved higher in 2019, much like insurance when we’ll want to own them, it will be too late to buy them. 

With the Fed out of the way for now following last week’s meeting that signaled its more dovish bent, ahead of us we have the G20 summit and all eyes are now bracing for its outcome. Will Presidents Trump and Xi get US-China trade talks back on track? Will there be any new development to be had between the US-Iran? 

The answers to these questions and others will shape the start of the stock market in the second half of 2019. While I remain hopeful, the chatter we are hearing that includes White House officials now saying US-China trade talks could “go on for months or years.” The optimist in me hopes this is pre-game $#!+ talking, but better to hope for the best and prepare for the worst.

We did that last week with the Thematic Leaders and shortly we’ll do that for the Select List as well. First, however, I have something exciting to share with you… the unveiling of the Tematica Research Cleaner Living Index.

Introducing the Tematica Research Cleaner Living Index

Yesterday we debuted the Tematica Research Cleaner Living Index (CLNR), which as you probably guessed, is an index of publicly traded companies that reflects our Clean Living investing theme. There are more than 50 constituents in the index, including Clean Living Thematic Leader Chipotle Mexican Grill (CMG), that reflect the accelerating shift by consumers and businesses toward products and services that are better for you, your home, and the environment. We’ve culled the index’s constituents from our thematic database that spans more than 2,400 companies scored across our 10 investing themes. And because we wanted to isolate the companies with the greatest exposure to this theme, the index’s constituents are those companies that derive more than half of their sales or profits from Clean Living tailwinds. 

The formal press release announcing the index can be read here. Subscribers should expect to hear much more about the index in the coming weeks in a number of updates that include price action, Thematic Signals, and other articles. Like other indices, we view Cleaner Living as a living, breathing thing that will change over time as new companies debut and companies pivot their business into the Clean Living theme tailwind with new products or M&A activity. That M&A activity could also lead to companies being removed from the index. As we’ve seen in recent quarters with the takeout of SodaStream by PepsiCo (PEP) or Cava Grill acquiring Zoe’s Kitchen, companies are indeed using that strategy to accelerate their make over. There should be no shortage of Cleaner Living index related items to share and discuss.

With that in mind, as I write this, I am winging my way toward Manhattan where over the next two days I’ll be appearing on a number of programs from The First Trade on Yahoo Finance! to Making Money with Charles Payne on Fox Business and others across Cheddar, the TD Ameritrade Network and other outlets. As we get the clips, I’ll be sure to share them via Twitter (@Chrisjversace). 

Get ready, because when it comes to the Cleaner Living index, we are just getting started.


Tematica Investing

Setting protective stop loss levels for the Select List

Last week we set or reset stop loss levels for the Thematic Leaders, and with the preponderance of data coming in weaker than expected this week, I’m going to do the same for positions on the Select List as follows:

  • Apple Inc. (AAPL) – $160                            
  • Applied Materials, Inc. (AMAT) – $34                                           
  • The Walt Disney Co.  (DIS) – $111              
  • Alphabet (GOOGL)- $900                         
  • ETFMG Prime Cyber Security ETF Safety & Security (HACK) – $31     
  • International Flavors and Fragrances (IFF) – $117
  • McCormick & Co. (MKC) – $123
  • Universal Display (OLED) – $150   
  • AT&T  (T) – $26
  • United Parcel Service (UPS) – $85
  • USA Technologies (USAT) – $6 


Removing AXTI and WATT shares from the Select List

As we make these moves, we’ll also cut bait on shares of AXT Inc. (AXTI) as well as Energous Corp. (WATT). Both positions have been hard hit, despite the thematic potential associated with 5G and wireless charging. With key AXT customers, such as Skyworks (SWKS) and Qorvo (QRVO) slashing their outlooks given the ban on Huawei, odds are rather high AXT’s business will be impacted. Similarly, with Energous, with Apple opting to not enter the wireless charging market, and a longer design to product conversion cycle unfolding we’ll look to preserve existing capital by those shares as well. 

  • We are issuing a Sell rating and removing both AXT Inc. (AXTI) and Energous Corp. (WATT) shares from the Select List 



Using Options to Protect Yourself in an Uncertain Market

Using Options to Protect Yourself in an Uncertain Market

Trading options with Bob Lang, founder and Chief Options Trader at ExplosiveOptions.net





On this episode of the Thematic Signals podcast, Tematica’s Chris Versace is joined by Bob Lang, founder of and Chief Options Trader at Explosive Options, to talk all options and options strategies, including how an investor can use them to protect themselves in an uncertain stock market. While we focus on thematics, Bob focuses on charts and technical analysis to chart his way for both the market and his options trades. On the podcast, Bob will talk about why he likes options over stocks, share several trading strategies and how he manages a portfolio that can be 20-40 options in size while managing risk as well. Chris also talks with Bob about his book, Know Your Options: How To Build Wealth Using Proven Options Trading Strategies and Technical Analysis, which has received high praise from institutional as well as individual options traders. 

Have a topic or a conversation you think we should tackle on the podcast, email me at cversace@tematicaresearch.com

And don’t forget to subscribe to the Thematic Signals Podcast on iTunes!

Resources for this podcast:

Weekly Issue: Here Comes the Fed

Weekly Issue: Here Comes the Fed


Key point in this Issue

  • And here comes the Fed
  • Institutional investors get cautious
  • Revisiting and revising stop loss levels for the Thematic Leaders



Today is the day the stock market has been looking forward to with the results of the Federal Reserve’s latest monetary policy meeting, which will not only include a press conference with Fed Chairman Powell, but also the publication of the Fed’s latest economic projections. Given the data of late as evidenced that have led the Atlanta Fed and the New York Fed to revise current quarter GDP expectations lower, odds are the Fed’s economic projections, at least for 2019, will inch lower as well. 

As I shared on last week’s Thematic Signals podcast, I expect the Fed to wait until next week’s G20 summit in Japan comes and goes before doing anything on the interest rate front.


If President Trump and China’s President can once again jumpstart trade talks, odds are the Fed will not trim interest rates at the July monetary policy meeting. However, if that encounter leads to more tariffs then I fully expect the Fed will cut interest rates in the coming weeks. 

But the Fed doesn’t like to surprise the markets, which means watching the language it uses in today’s policy statement as well as that used by Powell during the press conference. What we’re looking for is a softening of that language, and perhaps the removal of “patient” in the context of “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support” its goal of a “sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective…”

If you’re thinking this means the next few weeks will set up the balance of 2019, I would tend to agree with you. The overhanging issue is the disconnect between the economic data, which has been coming in below expectations, and the stock market’s march higher even as earnings expectations have moved lower. And by the stock market’s move higher, I mean just a few percentage points from its high. What this in effect means is we are paying more for slower earnings growth. 


Institutional investors get cautious

This has led to a sentiment shift among institutional investors according to the findings of the June Bank of America Merrill Lunch survey of money managers. According to the survey findings, concerns about the trade war, a recession and “monetary policy impotence” all contributed to the bearish sentiment and led to the second-biggest drop in equity allocations since the survey was started. Cash holdings, however, jumped by the most since the 2011 debt-ceiling crisis. 

Clearly, the investor base is getting nervous and after today the focus will be on what does or doesn’t happen at next week’s summit. I’ll be factoring those developments into my thinking – no question about it – but I will continue to focus on the structural and transformational changes occurring around us and are captured in our 10 investing themes. While the trade war and economic slowdown could curb the rate of change associated with our themes, the tailwinds are poised to persist, nonetheless. From the G20 fallout to the June quarter earnings season, the coming weeks could be ones that bring opportunity to revisit several of the existing Thematic Leaders at better prices as well as round out that group with some new ones. 


Tematica Investing

Revisiting and revising stop loss levels for the Thematic Leaders

Year to date, we’ve enjoyed, for the most part, pronounced moves higher in the Thematic Leaders and a number of residents on the Tematica Select List. These include the near 70% move in Chipotle Mexican Grill (CMG) shares year to date as well as the market-beating double-digit moves in Amazon (AMZN), Netflix (NFLX), Costco Wholesale (COST), Alibaba (BABA) and Axon Enterprises (AAXN). Outside of the Leaders, we’ve enjoyed pronounced gains with McCormick & Co. (MKC), Alphabet/Google (GOOGL), USA Technologies (USAT), Disney (DIS) and ETFMG Prime Cyber Security ETF (HACK) shares. Make no mistake, there have been some lumps along the way, including AXT Inc. (AXTI) shares as well as prior losses in Energous Corp. (WATT). 

In aggregate, we’ve done pretty well so far this year, but given what’s ahead, I’m going to install or update stop- loss levels for the Thematic Leaders as follows:

  • AMN Healthcare (AMN) – $43
  • Chipotle Mexican Grill (CMG) – $585
  • Dycom Industries (DY) – $45
  • Amazon (AMZN) – $1,520
  • Netflix (NFLX) – $340
  • Nokia Corp. (NOK) – $4
  • Costco Wholesale (COST) – $210 
  • Alibaba (BABA) – $135
  • Axon Enterprises (AAXN) – $52

Next week, we’ll have an earlier than usual issue of Tematica Investing in which I’ll share revised stop loss levels for the Select List. 

What’s Behind the Commodities Rally?

What’s Behind the Commodities Rally?


On this episode of The Thematic Signals Podcast Chris Versace checks in with Sal Gilbertie, Teucrium Trading Chief Investment Officer


Welcome to the Thematic Signals podcast, where we look to distill everyday noise into clear investing signals using our thematic lens and our 10 investing themes. On this episode Chris Versace welcomes Sal Gilbertie, the Chief Investment Officer at  Teucrium Trading, back to the podcast. In the past on Tematica’s Cocktail Investing podcast, Chris and Sal have talked about the thematic influences on agricultural commodities, including Tematica’s New Global Middle-class one. They touch on that today but also discuss the current supply constraints as well as looming ones that have led to a supply imbalance, particularly for corn and soybeans, that has sent prices soaring. Sal explains how investors should think about these commodities across the 5 to 7 year cycle and shares why the upcoming G20 summit could serve as another catalyst for commodity prices to move higher. The two also discuss the ripple effect to be had on both consumers and companies in the agricultural complex but also those that count corn as a key input. 

Have a topic or a conversation you think we should tackle on the podcast, email me at cversace@tematicaresearch.com

And don’t forget to subscribe to the Thematic Signals Podcast on your favorite Apple device

Resources for this podcast:


Weekly Issue: Watching the G20 for what the Fed may or may not do

Weekly Issue: Watching the G20 for what the Fed may or may not do


Key points inside this issue

  • The G20 meeting will set the stage for what the Fed does next
  • Earnings expectations have yet to follow GDP expectations lower
  • We are implementing a $340 stop loss on Digital Lifestyle Thematic Leader Netflix (NFLX).


Over the last few days several economic data points have reinforced the view that the domestic economy is slowing. Meanwhile, the continued back and forth on the trade front, between the U.S. and China as well as Mexico, has been playing out.

What has really captured investors’ focus, however, is the Federal Reserve and the comments earlier this week from Fed Chair Jerome Powell that the Fed is monitoring the fallout from trade issues and eyeing the speed of the economy. Powell said the Fed will “act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

This has led to a pronounced shift in the market, from bad economic data is bad news for the market, to bad news for the economy and trade is good news for the Fed to take action and cut interest rates.

In other words, after the disappointing one-two punch of the IHS Markit US PMI and May ISM Manufacturing Index data, combined with the sharp uppercut that was the May ADP Employment Report, “hopium” has returned to the market.  

Over the weekend, we received signs the potential trade war with Mexico will be averted, though few details were shared. China is up next, per comments from U.S. Treasury Secretary Mnuchin, who warned Beijing of tariffs to come if it does not “move forward with the deal … on the terms we’ve done.”

“If China doesn’t want to move forward, then President Trump is perfectly happy to move forward with tariffs to re-balance the relationship,” Mnuchin said.

Near-term, we’re likely to see more “bad news is good news” for the stock market as evidenced by Friday’s market rally following the dismal May jobs report that fell well short of expectations. More economic bad news is being greeted as a positive right now by the market under the belief it will increase the likelihood of the Fed cutting rates sooner than expected.



While that data has indeed led to negative GDP expectation revisions for the current quarter as well as the upcoming one, this new dynamic moved the market higher last week and helped reverse the sharp fall in the market in May, when the major stock indices fell between 6.5% and 8.0%.

As I see it, while the Fed has recently done a good job of telegraphing its moves, the new risk is the market over-pricing a near-term rate cut.

The next Fed monetary policy meeting is less than two weeks away and already expectations for a rate cut exiting that two-day event have jumped to around 21% from less than 7% just over a month ago, according to the CME FedWatch Tool.

Let’s remember there are four more Fed monetary policy meetings — in July, September, October and December — and those give the Fed ample room to cut rates should the upcoming G20 Osaka Summit on June 28-29 fail to get U.S.-China trade talks back on track.

To me, this makes the next two weeks imperative to watch and to build our shopping list. If there is no trade progress coming out of the G20 meeting, it increases the potential for a July rate cut. If trade talks are back on track, we very well could see the Fed continue its current wait-and-see approach.

And what about that potential for over-pricing a rate cut into the market? Anyone who has seen the Peanuts cartoons knows what happens when Lucy yanks the football out from under Charlie Brown at the last minute as he goes to kick it. If you haven’t, we can assure you it never ends well, and the same is true for the stock market when its expectations aren’t fulfilled.

I talk much more about this on this week’s Thematic Signals podcast, which you can listen to here.



Earnings expectations have yet to follow GDP expectations lower

Here at Tematica our view is that one of the clear-cut risks we face in the current market environment is the over- pricing in of a Fed rate cut at a time when profit and EPS expectations are likely to be revised lower for the second half of 2019. When we see falling GDP expectations like those depicted in the two charts above, it stands to reason we will likely see, at a minimum and barring any substantial trade progress at the G20 summit, companies adopt a more cautious tone for the back half of the year in the coming weeks as we enter the June quarter earnings season. 

If that proves to be the case, we are likely to see negative revisions to EPS expectations for the second half of the year. Despite the slowing economic data and impact of tariffs, current expectations still call for an 11% increase in earnings for the S&P 500 in the second half of the year compared to the first half. Viewed a different way, those same expectations for the second half of 2019 call for mid-single digit growth on a year over year basis. To me, given the current backdrop there seems to be more downside risk to those expectations than upside surprise. 

Between now and then, we should be listening closely as management teams hit the investor conference circuit this week and next. This week alone brings the Stifel Inaugural Cross Sector Insight Conference 2019, Morgan Stanley U.S. Financials Conference 2019, JP Morgan European Automotive Conference 2019, UBS Asian Consumer, Gaming & Leisure Conference 2019, Deutsche Bank dbAccess 16th Global Consumer Conference 2019, Nasdaq 40th Investor Conference 2019 and the Goldman Sachs 40th Annual Global Healthcare Conference 2019, to name just a few. What we’ll be listening for is updated guidance as well as industry comments, including any tariff impact discussion.

In my view, the conferences and the information spilling out of them will reveal what we are likely to see and hear from various industry leaders in the upcoming June- quarter earnings season.


Tematica Investing

The June rebound in the stock market propped up a number of the Thematic Leaders, most notably Cleaner Living leader Chipotle Mexican Grill (CMG) and Safety & Security leader Axon Enterprises (AAXN). Digital Infrastructure Leader Dycom Industries continues to tread water on a year to date basis, but with 5G deployments accelerating I see a more vibrant landscape for it as well as Disruptive Innovator Leader Nokia (NOK). 

In recent weeks, we’ve gotten greater clarity and insight into forthcoming streaming video services from Apple (AAPL) and Disney (DIS), which are likely to make that market far more competitive than it has been to date. Disney’s rumored $6.99 per month starter price recently led Comcast (CMCSA) to not only abandon its own streaming initiative due in 2020 but to also sell its stake in Hulu to Disney. That to me is a potential game changer depending on how Disney folds Hulu’s streaming TV service into Disney+. 

One of our key tenants is to observe the shifting landscape, and with regard to streaming video we are seeing the beginning of such a shift. For that reason as well as the risk of a challenging June quarter earnings season in the coming weeks, we are implementing a $340 stop loss on Digital Lifestyle Thematic Leader Netflix (NFLX). That will lock in a profit of just over 27% for NFLX shares. 

Later this week, we’ll get the May Retail Sales report, which should once again showcase the accelerating shift to digital shopping. In my view, it’s just another positive data point to be had for Thematic King Amazon (AMZN)… as if all the UPS and other delivery vehicles aren’t enough proof.