Menu
Weekly Issue: Investor anxiety continues

Weekly Issue: Investor anxiety continues

Key points inside this issue

  • As the investors grapple with anxiety over trade as well as the speed of economic and earnings growth, we’ll continue to hold ProShares Short S&P 500 (SH) shares.
  • Our price target on the shares of Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG) remains $14.
  • Our price target on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) shares remains $250.
  • Our price target on Amazon (AMZN) shares remains $2,250

 

The stock market experienced another painful set of days in last week as it digested the latest set of economic data, and what it all means for the speed of the domestic and global economy. Investors also grappled with determining where the U.S. is with regard to the China trade war as well as the prospects for a deal by the end of March that would prevent the next round of tariffs on China from escalating.

There remain a number of unresolved issues between the U.S. and China, some of which have been long-standing in nature, which suggests a fix in the next 100+ days is somewhat questionable. This combination induced a fresh round of anxiety in the market, leading it to ultimately finish the week lower as the major indices sagged further quarter to date. In turn, that pushed all the major market indices into the red as of Friday’s close, most notably the small-cap heavy Russell 2000, which finished Friday down 5.7% year to date. For those keeping score, that equates to the Russell 2000 falling just under 15% quarter to date.

Last week we added downside protection to our holdings in the form of ProShares Short S&P 500 (SH) shares, and we’ll continue to hold them until signs of more stable footing for the overall market emerge. As we do this, I’ll continue to evaluate not only the thematic signals that are in and around us day-in, day-out, but also examine the potential opportunities on a risk to reward basis the market pain is creating.

 

Shares of Del Frisco’s get some activist attention

Late last week, our shares of Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG) bucked the overall move lower in the domestic stock market following the revelation that activist hedge fund Engaged Capital has acquired a nearly 10% in the company with a plan to push the company to sell itself according to The Wall Street Journal. Given the sharp drop in DFRG shares thus far in 2018, down 52%, it’s not surprising to see this happen, and when we added the shares to our holdings, we shared the view that at some point it could be a takeout candidate as the restaurant industry continues to consolidate. In particular, Del Frisco’s presence in the higher end dining category and its efforts over the last few months to become a more focused company help explain the interest by Engaged.

In response, Del Frisco’s issued the following statement:

“Del Frisco’s is committed to maximizing long-term value for all shareholders. While we do not agree with certain characterizations of events or of our business and operations contained in the letter that we received from Engaged Capital, the Company values constructive input toward the goal of enhancing shareholder value. “

Compared to other Board responses this one is rather tame and suggests Del Frisco’s will indeed have a dialog with Engaged. Given the year to date performance in DFRG shares, odds are there are several on the Board that are frustrated either with the rate of change in the business or how that change is being viewed in the marketplace.

In terms of who might be interested in Del Frisco’s, we’ve seen a number of going private transactions in recent years led by private equity investors that re-tool a company’s strategy and execution or combine it with other entities. We’ve also seen several restaurant M&A transactions as well. Let’s remember too how on Del Frisco’s September quarter earnings conference call, the management team went out of its way to explain how the business performed during the last recession. That better than industry performance may add to the desirability of Del Frisco’s inside a platform, multi-branded restaurant company.

As much as we may agree with the logic behind Del Frisco’s being taken out, we’d remind subscribers that buying a company on takeout speculation can be dicey. In the case of Del Frisco’s, we continue to see a solid fundamental story. We are seeing deflation in food prices that bode well for Del Frisco’s margins and bottom line EPS. Over the last quarter we’ve seen prices in the protein complex – beef, pork, and chicken – move lower across the board. According to the United Nation’s Food and Agriculture Organisation’s (FAO) food price index, world food prices declined during the month of November to their lowest level in more than two years. We’re also seeing favorable restaurant spending per recent monthly Retail Sales reports, which should only improve amid year-end holiday dinners eaten by corporate diners and individuals.

We’ll continue to hold DFRG for the fundamentals, but we won’t fight any smart, strategic transaction that may emerge.

  • Our price target on the shares of Del Frisco’s Restaurant Group (DFRG) remains $14.

 

What to watch in the week ahead

As we move into the second week of the last month of the quarter, I’ll continue to examine the oncoming data to determine the vector and velocity of the domestic as well as global economy. Following Friday’s November Employment Report that saw weaker than expected job creation for the month, but year over year wage gains of 3.1% the Atlanta Fed continued to reduce its GDP forecast for the current quarter. That forecast now sits at 2.4%, down from 3.0% at the end of October.

With the sharp drove in oil prices has consumers feeling a little holiday cheer at the gas pump, odds are next week’s November inflation reports will be tame. The fact that world food prices per the Food and Agriculture Organization’s (FAO) food price index hit the lowest level since May 2016 also bodes well for a benign set of inflation data this week. Later in the week, we’ll get the November Retail Sales report, which should be very confirming for our holiday facing positions – Amazon (AMZN), United Parcel Service (UPS), McCormick & Co. (MKC) and Costco Wholesale (COST) – that given the kickoff of “seasons eatings” with Thanksgiving and the start of the holiday shopping season that clearly shifted to digital shopping.

That report will once again provide context for this shift as well as more than likely confirm yet again that Costco Wholesale (COST) continues to take consumer wallet share. Speaking of Costco, the company will report its quarterly results this  Thursday. Quarter to date, the company’s monthly same store sales reports are firm evidence it is winning consumer wallet share, and we expect it did so again in November, especially with its growing fresh foods business that keeps luring club members back. Aside from its top and bottom line results, I’ll be focused once again on its pace of new warehouse openings, a harbinger of the crucial membership fee income to be had in coming quarters.

  • Our price target on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) shares remains $250.

We’ll end the economic data stream this week with the November Industrial Production report. Given the sharp fall in heavy truck orders in November, I’ll be digging into this report with a particular eye for what it says about the domestic manufacturing economy.

As discussed above, this week Costco will report its results and joining it in that activity will be several other retailers such as Ascena Retail (ASNA), DWS (DWS), American Eagle (AEO) and Vera Bradley (VRA). Inside their comments and guidance, which will include the holiday shopping season, I’ll be assessing the degree to which they are embracing our Digital Lifestyle investing theme. We’ll also see Adobe Systems (ADBE) report its quarterly result and I’ll be digesting what it has to say about cloud adoption, pricing and prospects for 2019. As we know, that is a core driver of Amazon Web Services, one of the key profit and cash flow drivers at Amazon (AMZN).

  • Our price target on Amazon (AMZN) shares remains $2,250

 

Procter & Gamble – Not innovating where it counts

Procter & Gamble – Not innovating where it counts

The votes are in … at least the preliminary ones, and they are indicating that activist investor Nelson Peltz lost his bid to win a board seat at Rise & Fall of the Middle-Class contender Procter & Gamble (PG).

As background, Peltz has been calling for further change at Procter, including streamlining its operations and bringing in outside talent. Resistant Procter management has countered, saying doing so would disrupt a turnaround that is already in process and that focuses on strengthening and streamlining the company’s category and brand portfolio. The thing is even in the company’s June 2017 quarter, its organic growth lagged behind underlying end-market growth and its presence in the increasingly consumer-favored online market was a paltry 5% of total sales for the quarter.

Following an expensive proxy fight over the last few months and with the vote ending rather close, it appears Peltz is not going to give in easily. According to reports, Peltz’s firm, Trian Fund Management, is waiting for the proxy vote tally to be certified and then plans to challenge the vote. All in all, this is a process that will extend the story that has taken over the potential fate of Procter & Gamble for at least several days more, if not a few weeks, as the final vote tally is certified.

To put it into investor language, the overhang that has been plaguing the shares over the last several weeks is set to continue a little longer. We’re also soon to face earnings that are likely to see some impact from the September hurricanes that put a crimp in consumer spending. Despite the initial post-hurricane bump to spending that benefitted building materials and auto sales during the month, overall September Retail Sales missed expectations. And before we leave that report, once again the data showed that digital commerce continued to take consumer wallet share as it grew 9.2% year over year vs. overall September Retail Sales excluding food services that rose 4.6% compared to year-ago levels.

Let’s also keep in mind the upward move in oil prices of late, which led to a 5.8% month over month increase and an 11.4% year over year increase in gasoline stations sales in September. That same tick up in oil prices does not help P&G given that one of its key cost items is “certain oil-derived materials.”

This has me cautious on PG shares in the near term, especially with the shares just shy of 23x consensus 2017 expectations vs. the peak P/E valuation over the last several years ranging between 22x-24x. To me, this says a lot of positive expectations have been priced into the shares already, much like we have seen with the overall market over the last several weeks. As we saw this week, even after delivering better than expected bottom line results, shares of Domino’s Pizza (DPZ), Citigroup (C) and JPMorgan Chase (JPM) traded off because the results weren’t “good enough” or there were details in the quarter that raised concerns. We continue to think the upcoming earnings season is bound to add gravity back into the equation and could see expectations reset lower.

Here’s the thing: I think P&G has a bigger issue to contend with. I’ve been thinking about this comment made during the June 2017 quarterly earnings call by Proctor & Gamble’s CEO David Taylor:

“We’re working to accelerate organic sales growth by strengthening and extending the advantages we’ve created with our products and packages, improving the execution of our consumer communication and on-shelf and online presence, and ensuring our brands offer superior consumer value in each price tier we choose to compete.” 

There was the talk of innovation, but it centered on packaging innovation and product innovation of yore, but little on new product innovation. There was also much talk over advertising prowess, but as someone who has watched many a Budweiser (BUD) commercial and chuckled as I drank another adult beverage, I can tell you advertising can only cover for a lack of product innovation for so long.

I’m a bigger fan of companies that are innovating and disrupting like Amazon (AMZN) and Universal Display (OLED) — both of which are the Tematica Investing Select List. In my book, packaging is nice to have on the innovation front but isn’t always needed. Perhaps this lack of innovation and disruptive thought explains why the company has been vulnerable to the Dollar Shave Club as well as Harry’s Razors, both of which have embraced digital commerce as well as cheaper-by-comparison subscription business models while also expanding their product offerings.

If that’s the kind of transformation Nelson Peltz is talking about, that is something to consider. And yes, I get my razors from Dollar Shave Club, not P&G.

BlackBerry’s accelerating transition lands it on the Tematica Contender List

BlackBerry’s accelerating transition lands it on the Tematica Contender List

We’re adding a new name to the Tematica Investing Contender List today, and it’a one that you may have heard something about before – BlackBerry (BBRY).

As you read that sentence there is a distinct probability that you said “huh?” or something similar to yourself or the person next to you.

Yes, we said BlackBerry, as in the company that was once the dominant smartphone manufacturer until it was outflanked by Apple (AAPL) with the iPhone, which as we all know revolutionized the smartphone industry. Back in the day, we had BlackBerry’s named device and while it was ahead of the competitors when it came to email, the reality was  the device had a horrible internet browser, a click wheel that made maneuvering around the screen challenging to say the least and its phone capabilities paled in comparison to other mobile phones at the time. In short, it was ripe for disruption and Apple did just that.

All of this helps explain the “huh?” reaction you likely had.

Here’s the thing, one of the traps that investors fall into is thinking things remain the same at companies. Sometimes that is true, and we’re seeing as part of the reason activist investor Nelson Peltz was gunning for a seat on the board of Proctor & Gamble (PG) – more on this is another post. In the case of BlackBerry, it has been a turnaround in the making that has spanned several years with revenue falling from $6.8 billion in 2014 to $1.05 billion for the 12 months ending this past August.

Now, this is where things start to get interesting because during that time period the company managed to not only shrink its bottom line losses from $1.99 per share in 2014, over the last 12 months it delivered EPS of $0.13. Current consensus expectations sit at $0.06 per share for the current year, rising to $0.08 next year even as revenue is forecasted to decline further. From a stock perspective, this means the shares are still uber expensive even if we back out the roughly $3.00 per share the company has in net cash. That’s one reason why the shares are only making it onto the Contender List, and I’ll share a few more before too long.

The nagging question is what is driving the bottom line improvement even as revenue is expected to fall further over the coming quarters?

It’s the transition in the business model from hardware to software services, which carry richer gross margins, and focuses on security. This transition brought BlackBerry back onto our radar screens as part of our Safety & Security investment theme. As we all know in reading the headlines, there isn’t likely to be any slowdown in the speed of cyber-attacks, and this is helping fuel BlackBerry’s transition. In the recently reported August quarter, its software services business accounted for just under 80% of overall revenue vs. 44% in the year-ago quarter. To show the power of that transition, gross margins in the recently completed August quarter rose to nearly 74% vs. 29% in the year-ago quarter. Lending a helping hand, the comparatively lower margin device business fell to just $16 million in revenue vs. $105 million in the August 2016 quarter. This accelerating transition helps explain why BBRY shares have climbed 15% over the last three months vs. 6.6% for the Nasdaq Composite Index and 5.3% for the S&P 500.

As this transformation continues, another item to watch at BlackBerry is its embedded software business, a key part of our Asset-Lite investment theme.  The initial licensing focus for BlackBerry has been in the automotive industry with regard to autonomous cars. Recently Delphi Automotive (DLPH) announced that it chose BlackBerry QNX for its Centralized Sensing Localization and Planning platform, which is a fully integrated autonomous driving solution. Given our recent Cocktail Investing Podcast with Audi on prospects for autonomous cars, we know this is a development that still has several years to go until it is ready for prime time. That said, the win for BlackBerry at Delphi is certainly encouraging.

Finally, BlackBerry has had some success leveraging its licensing business, which includes software licensing, intellectual property licensing, and technology licensing. As we know given the position in Nokia (NOK) on the Tematica Investing Select List, licensing businesses tend to carry very favorable margins, but it’s also one that moves in fits and starts not a smooth, continuous line. We also know that it’s a business that takes time to convert prospects and opportunities into revenue and profits, and in the case of BlackBerry, there are others such as Qualcomm (QCOM), InterDigital (IDCC) and Nokia that have competing licensing businesses. This means we’re not apt to see leaps and bounds of improvement with this Blackberry business in a short period of time, but more likely periodic wins.

The bottom line is that BlackBerry’s transition to a Safety & Security and Asset Lite Business Model is accelerating, it has yet to really reap the rewards on its bottom line. With the shares currently trading at 142x expected 2018 earnings and well into overbought territory, we are going to place BBRY shares on the Contender List and watch for either a pullback in the shares to $8 to $9 at which they have support or signs its EPS generation is poised to accelerate in a meaningful manner over the coming quarters.

 

 

Assessing the Market as We Get Ready for 1Q17 Earnings Deluge

Assessing the Market as We Get Ready for 1Q17 Earnings Deluge

Despite yesterday’s move higher in the stock market, March to date has seen the Dow Jones Industrial Average move modestly lower with a larger decline in the Russell 2000. Only the Nasdaq Composite Index has climbed higher in March, bringing its year to date return to more than 9 percent, making it the best performing index thus far in 2017. By comparison, the Dow is up 4.75 percent, the S&P 500 up 5.35 percent and the small-cap heavy Russell 2000 up just 0.75 percent year to date.

So what’s caused the move lower in the stock market during March, bucking the upward trend the market enjoyed since Election Day 2016?

Despite the favorable soft data like consumer confidence and sentiment readings, investors are waking to the growing disconnect between post-election expectations and the likely reality between domestic economic growth and earnings prospects. Fueling the realization is the move lower in 1Q 2017 earnings expectations for the S&P 500, per data from FactSet, as well as several snafus in Washington, including the pulling of the vote for the GOP healthcare plan. These have raised questions about the timing and impact of President Trump’s stimulative policies that include infrastructure spending and tax reform.

We’ve been steadfast in our view that the earliest Trump’s policies could possibly impact the US economy was late 2017, with a more dramatic impact in 2018. On a side note, we agree with others that would have preferred to have team Trump focus on infrastructure spending and tax reform ahead of the Affordable Care Act. As we see it, focusing on infrastructure spending combined with corporate tax reform first would have boosted confidence and sentiment while potentially waking the economy from its 1.6 to 2.6 percent annual real GDP range over the last five years sooner. We’d argue too that that would have likely added to Trump’s political war chest for when it came time to tackle the Affordable Care Act. Oh well.

 

Evolution of Atlanta Fed GDPNow real GDP forecast for 2017: Q1

 

So here we are and the enthusiasm for the Trump Trade is being unraveled as growth slows once again. As depicted above, the most recent forecast for 1Q 2017 GDP from the AtlantaFed’s GDPNow sits at 1.0 percent compared to 1.9 percent for 4Q 2016 and 3.5 percent in 3Q 2016. Even a grade school student understands the slowing nature of that GDP trajectory. Despite all the upbeat confidence and sentiment indicators, the vector and velocity of GDP forecast revisions and push outs in the team Trump timing has led to to the downward move in S&P 500 EPS expectations for the current quarter and 2017 in full.

With Americans missing bank cards payments at the highest levels since July 2013, the delinquency rate for subprime auto loans hitting the highest level in at least seven years and real wage growth continuing to be elusive, the outlook for consumer spending looks questionable. Factor in the aging of the population, which will have additional implications, and it looks like the consumer-led US economy is facing more than a few headwinds to growth in the coming quarters. These same factors don’t bode very well for the already struggling brick & mortar retailers like Macy’s, Sears, JC Penney, Payless and others.

Now here’s the thing, currently, the S&P 500 is trading at 18x 2017 expectations —expectations that are more than likely to be revised down than up as the outlook for U.S. economic growth in the coming quarters is revisited. In three days, we close the books on 1Q 2017 and before too long it means we’ll be hip deep in corporate earnings reports. If what we’ve seen recently from Nike, FedEx, General Mills, Kroger and Target is the norm in the coming weeks, it means we’re more likely to see earnings expectations revised even lower for the coming year.

While it’s too early to say 2017 expectations will be revised as steeply as they were in 2016, (which started the year off with the expectation of a 7.6 percent increase year over year but ended with only a 0.5 percent increase following 4Q 2016 reporting), but any additional downward revisions will either serve to make the market even more expensive than it currently is or lead to a resumption of the recent downward move in the market. Either way, odds are there is a greater risk to the downside than the upside for the market in the coming weeks.

Buckle up; it’s bound to get a little bouncy.

Bearish Thoughts on General Motors Shares

Bearish Thoughts on General Motors Shares

While higher interest rates might be a positive for financials, at the margin, however, it comes at a time when credit card debt levels are approaching 2007 levels according to a recent study from NerdWallet. The bump higher in interest rates also means adjustable rate mortgage costs are likely to tick higher as are auto loan costs, especially for subprime auto loans. Even before the rate increase, data published by S&P Global Ratings shows US subprime auto lenders are losing money on car loans at the highest rate since the aftermath of the 2008 financial crisis as more borrowers fall behind on payments. If you’re thinking this means more problems for the Cash-strapped Consumer (one of our key investment themes), you are reading our minds.

In 4Q 2016, the rate of car loan delinquencies rose to its highest level since 4Q 2009, according to credit analysis firm TransUnion (TRU). The auto delinquency rate — or the rate of car buyers who were unable make loan payments on time — rose 13.4 percent year over year to 1.44 percent in 4Q 2016 per TransUnion’s latest Industry Insights Report. That compares to 1.59 percent during the last three months of 2009 when the domestic economy was still feeling the hurt from the recession and financial crisis. And then in January, we saw auto sales from General Motors (GM), Ford (F) and Fiat Chrysler (FCAU) fall despite leaning substantially on incentives.

Over the last six months, shares of General Motors, Ford, and Fiat Chrysler are up 8 percent, -2.4 percent, and more than 70 percent, respectively. A rebound in European car sales, as well as share gains, help explain the strong rise in FCAU shares, but the latest data shows European auto sales growth cooled in February. In the U.S., according to data from motorintelligence.com, while General Motor sales are up 0.3 percent for the first two months of 2017 versus 2016, Ford sales are down 2.5 percent, Chrysler sales are down 10.7 percent and Fiat sales are down 14.3 percent.

In fact, despite reduced pricing and increasingly generous incentives, car sales overall are down in the first two months of 2017 compared to the same time in 2016.

 

So what’s an investor in these auto shares to do, especially if you added GM or FCAU shares in early 2016? The prudent thing would be to take some profits and use the proceeds to invest in companies that are benefitting from multi-year thematic tailwinds such as Applied Materials (AMAT), Universal Display (OLED) and Dycom Industries (DY) that are a part of our Disruptive Technology and Connected Society investing themes.

Currently, GM shares are trading at 5.8x 2017 earnings, which are forecasted to fall to $6.02 per share from $6.12 per share in 2016. Here’s the thing, the shares peaked at 6.2x 2016 earnings and bottomed out at 4.6x 2016 earnings last year, which tells us there is likely more risk than reward to be had at current levels given the economic and consumer backdrop.  Despite soft economic data that shows enthusiasm and optimism for the economy, the harder data, such as rising consumer debt levels paired with a lack of growth in real average weekly hourly earnings in February amid a slowing economy, suggests we are more likely to see GM’s earnings expectations deteriorate further. And yes, winter storm Stella likely did a number of auto sales in March.

Subscribers to Tematica Pro received a short call on GM shares on March 16, 2017

 

 

The Market Climbs Higher, But Look at These Two Charts and It’s Ruh-Roh Time

The Market Climbs Higher, But Look at These Two Charts and It’s Ruh-Roh Time

As the stock market continued to get further and further out over its ski tips last week, as investors we have a split mind on the current state of things. On the one hand, we’re certainly enjoying the higher stock prices. On the other hand, we are mindful of the increasingly stretched market valuation. One of the common mistakes see with investors is they all too easily enjoy the gains, but tend not to be mindful of the risks that could wash those gains away.

Over the last few weeks, we here at Tematica have been pointing out the growing disconnect between the stock market’s valuation and the current economic environment. We have a snootful of data points that underscore our cautious stance in this week’s Monday Morning Kickoff, but we wanted to share two charts from our weekend reading that caught our cautious eye.

There have been some who call into question the use of Robert Schiller’s Cyclically Adjusted Price to Earnings (CAPE) ratio, but Tematica’s Chief Macro Strategist Lenore Hawkins does a pretty good job handling that criticism. Exiting last week the CAPE to GDP growth of 19.77 has far surpassed the 1999 peak and all points back to at least 1950. As we like to say when looking at data, context and perspective are key to truly understanding what it is we’re looking out. So here’s that context and perspective for the current CAPE to GDP reading —  it is over three times the average for the last 66 years. Going back to 1900, the only time today’s ratio was eclipsed was in 1933 and that reflected the Great Depression when GDP has been running at close to zero for nearly a decade.

Students of CAPE will point out that in order for the CAPE to GDP to fall back to more normalized levels, we either need to see a dramatic increase in GDP (not likely in the near-term) or we need to see a pullback in the CAPE. Here’s the thing, as Michael Lebowitz of 720 Capital points out, “if we assume a generous 3% GDP growth rate, CAPE needs to fall to 18.71 or 35 percent  from current levels to reach its long-term average versus GDP growth.” Based on the data we’re seeing, there is a rather high probability 2017 GDP is more likely to be closer to 2.5 percent than 3.0 percent per The Wall Street Journal’s Economic Forecasting Survey of more than 60 economists, which means to hit normalized levels, the CAPE would need to fall further than 35 percent.

As you ponder that and think on why it has us a tad cautious, here’s more food for thought:

 

 

Coming into 2017, forecasts called for the S&P 500 group of companies to grow their collective earnings more than 12 percent year over year, marking one of the strongest years of expected growth in some time. Granted energy companies are likely to be more of a contributor than detractor to earnings growth this year, but we as can be seen by the graph above, earnings expectations for the S&P 500 are already coming down for the current quarter. Those revisions now have year over year EPS growth for the collective at up just over 10 percent.

Are we getting data that shows the current quarter isn’t likely to break out of the low-gear GDP we’ve been seeing for most of the last few years?

Yep.

Are earnings expectations for 2Q-4Q 2017 still calling for 8.5 to 12.5 percent earnings growth year over year?

Yep.

Is it increasingly likely that President Trump’s fiscal policies won’t have a dramatic impact until late 2017 and more likely 2018?

Yep and yep.

The bottom line is we have the stock market melting higher, pulling a Stretch Armstrong-like move in terms of valuation even though earnings expectations for 2017 are starting to get trimmed back.

Yep, you can color us cautious at least for the near-term. While we continue to use our thematic foresight to ferret our companies poised to ride several of our thematic tailwinds, the current market dynamic has us being far more selective.

l

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Subscribers to Tematica Investing received this commentary on Monday, Feb. 27 with specific instructions pertaining the Tematica Select List.

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week. We’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes. We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List,

As Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting what’s called a “skinny budget” today, (which we view as the “opening bid budget”) tomorrow night, President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform – “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on which to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition.  Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been the improving, but not stellar economic data and the hope that President Trump’s policies will jumpstart the economy. We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

Again, our thought is better to be safe than sorry given where the market currently sits. Some investors may want to utilize stop losses across positions like Universal Display (OLED), CSX Corp. (CSX), Skyworks Solutions (SWKS), Activision Blizzard (ATVI) and others that have been robust performers thus far in 2017 in order to preserve gains should the stock market get its post-Trump speech jiggy on. More aggressive investors may wish to utilize inverse ETFs, such as ProShares Short S&P500 ETF (SH), ProShares Short Dow30 ETF (DOG), or ProShares Short QQQ (PSQ), while traders implement call options on those inverse ETFs or employ the use of select puts.

 

 

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

Putting Some Defensive Measures in Place Ahead of Tuesday’s Trump Speech

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week.

This week, we’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes.

We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List, including Universal Display (OLED), Nuance Communications (NUAN), AT&T (T), Dycom Industries (DY), CalAmp (CAMP) and Alphabet (GOOGL) as well as Amazon (AMZN). Already Amazon has announced it will bring its Alexa VDA to Motorola’s smartphones, and we see that as the tip of the proverbial iceberg his week.

As the Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting today what’s called a “skinny budget”, (which we view as the “opening bid budget”) tomorrow night President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform — “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on how to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition. Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been:

  • The improving, but not stellar economic data
  • The hope that President Trump’s policies will jumpstart the economy.

We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

 

Need to Keep Our Eyes on Both Sides of the Equation

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

For that reason, we’re going to make some defensive adjustments to the Tematica Select List, which has enjoyed the market rally over the last few months and led to strong moves in our Universal Display (OLED), AMN Healthcare (AMN), Costco Wholesale (COST) shares as well as several others.

 

With an eye toward preserving profits, we are going to introduce the following stop losses:
  • Alphabet (GOOGL) at $800
  • Universal Display at $70
  • AMN Healthcare at $37
  • PowerShares NASDAQ Internet Portfolio ETF (PNQI) at $90

 

Alongside these new stop losses, we’re also going to raise several existing ones:
  • Boost our stop loss on AT&T (T) to $36 from $31
  • Raise our stop loss on International Flavors & Fragrances (IFF) to $115 from $105
  • Boost our stop loss on Costco Wholesale to $170 from $165
  • Increase our stop loss on Disney (DIS) shares to $100 from $87

 

Again, our thought is better to be safe than sorry given where the market currently sits. We’ll continue to review other positions on the Tematica Select List with similar actions where and when it makes sense.