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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 



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. 

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.

 

Weekly Issue: Trade uncertainties continue to rise…

Weekly Issue: Trade uncertainties continue to rise…


Key points in this issue

  • As trade uncertainties and their repercussions grip the stock market, we’ll continue to heed the signs and signals that power our thematic investing lens that has led to a favorable performance with the Thematic Leaders thus far in 2019.


Trade uncertainties continue to rise…


Last week, U.S. trade tensions expanded past China and potentially the eurozone to include Mexico. Meanwhile, retailer earnings continued to be disappointing and reported economic data reinforced the prevailing narrative of a slowing global economy. On Friday, China’s manufacturing data for May not only registered in contraction territory but came in weaker than expected, adding to those global growth concerns, while President Trump’s surprise Mexican import tariffs applied yet another of layer uncertainty for investors and the stock market to grapple with. For the week in full, all the major stock market indices declined, erasing any gains they had on a quarter-to-date basis coming into the shortened trading week.

Over the weekend, China’s retaliatory tariffs kicked in on the $60 billion target list of imported U.S. goods. Ahead of that, on Friday China threatened to unveil an unprecedented hit-list of “unreliable” foreign firms, groups and individuals that harm the interests of Chinese companies. In addition to those tariffs, over the weekend, China released a white paper saying global trade problems were started by the United States, and the United States “has been unreliable during talks.” This is looking more and more like that playground drama and finger pointing that I was worried about. 

The  culmination of that plus potential tariffs on Mexico, the removal of India from special trade status and potential trade issues with the eurozone has companies from Walmart (WMT) and Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) to Clean Living Thematic Leader Chipotle Mexican Grill (CMG) talking about potentially higher costs. And yes, this is at a time when the latest economic data points to a slowing global and US economy. As we exit May, the Atlanta Fed Now survey pegs current quarter GDP at 1.2%, while the New York Fed Nowcast is calling for 1.5%. Both forecasts are well below the most recent 3.1% revision for March quarter GDP. 

The week  ahead will bring several pieces of May data that we will assess to determine the velocity tied to that slowing vector. These include the usual monthly PMI reports for China, Japan, the eurozone and the U.S., as well as the May ISM Reports for manufacturing and nonmanufacturing, and several looks at May job creation. Also this week, we’ll get the April consumer credit report data, and I expect to look through this carefully given our Middle-Class Squeeze investing theme and my growing concern over the consumer’s ability to spend. If there is data inside that report which points to climbing consumer debt, it would likely mean an intensifying headwind for the domestic economy. 

… and have yet to be reflected in earnings expectations

Last week, we noted that as the velocity of earnings slows, it will be replaced by a flurry of investor conferences. As this happens, we will be parsing company comments at these events to determine what, if anything, has changed since they reported their March-quarter results. This goes for the current quarter as well as the back half of the year. 

We’ve already seen current quarter EPS estimates for the S&P 500 group of companies fall over the last several weeks but expectations for the second half of the year are still looking for 11% growth compared to the first half. In my view, these mounting trade and economic concerns have yet to play out on second half expectations, which means they will likely come into greater focus in the coming weeks. The likely narrative to be had will be tariff related cost increases that will not only pressure margins and earnings but also stoke inflation as well. Should that come about, it will be a very different story than the one the stock market has been used to and as we know, a change in the expected story is not met with sunshine and candy. 

Barring any forward progress on the trade front, given the outlook and increasing uncertainty there is far greater risk in my opinion to the downside for those expectations. And while some may hold out hopes for a trade deal at the G-20 meeting later this month, both J.P. Morgan and Morgan Stanley say it’s looking likely that there will not be a deal at the G-20 summit in Japan this month. 

The bottom line is this – we are likely in for a bumpy stock market ride in the coming weeks with the day to day movement reflecting the latest trade and tariff comments. 


Tematica Investing

Given the current and likely near-term environment, we will continue to follow the signs and signals that power our thematic investing lens. While the market uncertainty has brought some short-term lumps for AMN Healthcare (AMN), comments continue to point to the 5G buildout and network deployment to be had. That along with the pressure being placed on Chinese telecom company Huawei should keep us bullish on Digital Infrastructure leader Dycom Industries (DY) as well as Disruptive Innovator leader Nokia Corp. (NOK). 


The last two weeks have been a tough time for retailer stocks given for the most part falling same-store comparisons. In the face of that, which is due in part to the ongoing shift to digital shopping that is helping power Thematic King Amazon (AMZN), I continue to favor Middle-Class Squeeze leader Costco Wholesale (COST)  given its membership business model that continues to grow as the company expands its warehouse footprint. 

Later today, Apple (AAPL) will hold the keynote address at its 2019 World Wide Developer Conference. Historically this event has previewed a number of new products, both hardware and software, that will be coming from Apple late this year. At a minimum, we expect updates on all of the company’s operating systems, and perhaps further clues on soon to be rolled out services such as AppleTV+. With the latter in mind, I’ll be watching is shared with an eye for Digital Lifestyle leader Netflix (NFLX). 


Weekly Issue: For the stock market, uncertainty remains the name of the game

Weekly Issue: For the stock market, uncertainty remains the name of the game

Key points inside this issue

  • Given the favorable upside to downside risk in AT&T (T) shares, the defensive mobile business and enviable dividend, we are adding T shares to the Select List with a $40 price target as part of our Digital Lifestyle investing theme. 


For the stock market, uncertainty remains the name of the game


The stock market looked poised to rebound Friday following President Trump’s prediction of a swift end to the trade war with China. However, the rally faded as investors and traders braced for potential weekend uncertainty on the trade front.

The fade in the stock market capped off a week in which all the major indices closed lower for the fifth consecutive time, pushing their quarter-to-date returns into the red. That has continued in this week as trade tensions escalated further complete with US Secretary of State Mike Pompeo saying the U.S. “may or may not” get a trade deal with China. As we all know, if there is one thing the stock market does not like it’s uncertainty and currently, we have that in spades. 

In addition to increasing trade concerns, which included fallout on technology suppliers from the Huawei ban, the latest round of economic data still points to a slowing global economy. Last week, the U.S. economy saw a slump on April core capital goods orders and continued declines in the May IHS Markit Flash U.S. PMI, with soft orders for the month. In response, the New York Fed’s Nowcasting forecast for the current quarter fell to 1.4% on Friday from 1.8% on the prior one, very near the 1.3% forecast by the Atlanta Fed’s GDPNow. We saw similar month-over-month declines in the April IHS Markit Flash Eurozone PMI and Nikkei Flash Japan Manufacturing PMI, which further points to a slowing global economy.

The bottom line: As we exited last week and entered this one, we have an uncertain outlook on the U.S.-China trade front as the global economy continues to slow.

This likely means the market will teeter totter on the latest trade talk comments in the near term. But, as we’ve seen in recent weeks, it will take real progress to convince us and other investors those negotiations are moving forward.

With the earnings season wrapping up, it also means we will soon be entering investor conference season, during which companies will share developments in their respective industries and businesses. Given the factors addressed above, we could very well see them revise their near-term forecasts to the downside. Should that come to pass it more than likely means the recent market declines will be added to. 

From my perspective, it means examining and adding companies that sit at the intersection of our 10 investing themes and have defensive business models, preferably with a domestic focused business. It just so happens I have one in mind…


Tematica Investing

Ringing up AT&T shares to the Select List

As trade tensions have heated up and we continue to get more economic data pointing to a slowing domestic economy, we are adding to our position in AT&T given its sticky mobile service that is essentially a digital utility in today’s world, the enviable dividend near 6.3%, and prospects for investors to revisit how they value the shares once the company launches its own streaming platform, WarnerMedia. 

Digging into each of these reasons a bit further, in today’s world in which people have an unquenchable thirst for mobile content be it streaming music, video, podcasts; messaging and emailing; shopping or paying bills, smartphones and other connected devices are increasingly “must-haves” in today’s connected world. Plain and simple, AT&T’s mobile business is a Digital Lifestyle access point for consumers. 

In my view that not only makes for a sticky business model in today’s connected world, but an inelastic one as well. This means which means there is a high probability those subscribers will pay those bills to keep themselves connected. This makes AT&T and other major mobile network companies rather defensive in today’s environment. 

With AT&T, the dividend yield, which is far higher than the 4.0% at Verizon (VZ:NYSE) infers modest downside but also implies upside to be had as the company continues to reassure investors it is right sizing its balance sheet with ample cash flow to remain a company that has been steadily inching up its quarterly dividend for more than 20 years. Recently AT&T sold its 10% stake in Hulu for $1.43 billion to Disney (DIS) and management has commented it has several other “asset monetization alternatives” underway. 

The opportunity we see with AT&T shares in the coming months is a valuation transformation similar to the one we recently saw with Select List resident Walt Disney (DIS) that boosted its share price to $130-$135 from $110-$115. Similar to Disney and Disney+, AT&T is slated to launch its own streaming service later this year that will leverage the Time Warner library. Unlike Disney, AT&T exited March with a mobile subscriber base that tallied 79.7 million in size, which offers a target-rich platform for service bundling. As we saw with the final episode for Game of Thrones, which had a reported 19.3 million viewers, people will flock to content they want to watch. Odds are AT&T will offer standalone subscriptions to WarnerMedia rather than an AT&T mobile service bundle only, if only to address how it will AT&T monetize WarnerMedia outside of markets it offers mobile service. 

To us that makes AT&T shares a near-term safe harbor stock that is on the cusp of changing how investors value it. That valuation transformation is likely to unlock the share value associated with the synergies to be had with the AT&T-Time Warner merger. And we haven’t even touched on its  advertising and analytics business, Xandr, that also stands to benefit from the WarnerMedia launch. More on that as we better understand the relationship to be had between the two business units. 

Over the 2011-2018 period, AT&T shares traded in a dividend yield range from a low of 4.9% to a high of 6.1% vs. the current 6.3%. Again, this suggests limited downside from the current share price provided the company continues to make its quarterly dividend payments to shareholders, something the management team has committed to. That historical range established potential peak and trough price levels for AT&Ts’ shares between $34-$42 based on its expected 2019 dividend payment of $2.05 per share. 

  • Given the favorable upside to downside risk in AT&T (T) shares, the defensive mobile business and enviable dividend, we are adding T shares to the Select List with a $40 price target as part of our Digital Lifestyle investing theme. 

Weekly Issue: The Impact of Trump and China on Thematic Leaders

Weekly Issue: The Impact of Trump and China on Thematic Leaders


Key points inside this issue

  • US-China trade takes the center stage… as expected
  • What Trump’s restrictions on Huawei mean for our thematic positions
  • Our price target on Apple (AAPL) shares remains $225 
  • Our price target on Universal Display (OLED) of $150 remains under review
  • Our price target on Alphabet/Google (GOOGL) shares remains $1,300
  • Our price target on Nokia Corp. (NOK) shares remains $8.50


US-China trade takes the center stage… as expected

As expected, the market last week and again this week is primarily driven by trade and geopolitical headlines first, and economic data second, followed by corporate earnings. Those headlines include not just the mounting trade war between the U.S. and China, but also U.S.-Iran tensions. We also now have the realization that after six weeks of talks we are no closer to a Brexit deal, with Prime Minister Theresa May set to depart during the first week of June. 

Still, there was some trade relief as early on Friday President Trump said he would delay for six months tariffs on imports of cars and car parts from Europe and Japan.

While the market enjoyed some relief on that news, as we prepared for the weekend the focus was back on U.S.-China trade battle following comments from China that until the U.S., in its view, is sincere about negotiations, “it is meaningless for its officials to come to China and have trade talks.”  Candidly, we here at Tematica find this fascinating given the news behind last weekend’s tariff move by President Trump, who stated it was in response to China, not the U.S., walking back trade progress. 

The net effect led the market to see US-China trade talks as stalling, stoking the flames uncertainty in the process. While this could devolve into a game of “no, you first” commonly seen on schoolyard playgrounds, I will continue to watch for signs of progress ahead of the Group of Twenty economic meeting in Japan next month, where President Xi and Donald Trump are expected to meet. As a reminder, those two heads of state met in Argentina during December and were able to put trade negotiations back on track. 

Hopefully, that will be the case again. If not, it means the investment community will have to factor the impact of the recent tariff hike and pending ones on growth expectations for the economy and corporate earnings. Barring signs of reprieve, the likely revision will be downward, and we’ve already seen plenty of that of late when it comes to June quarter earnings expectations for the S&P 500. 


We’ve also seen GDP expectations for the June quarter come down hard vs. the 3.2% print for the March quarter. As I discussed before, one of the key drivers of that upside surprise was inventory growth. The thing is given the faster slowing pace denoted in the economy, odds are those inventories won’t be depleted in the near-term. 

Following the disappointing April retail sales report and April industrial production numbers, the Atlanta Fed cut its GDPNow forecast for the current quarter to 1.2% from 1.6% 10 days ago. As it digested the data, the New York Fed’s NowCast reading for the quarter sank to 1.8%, from its 2.2% reading last week. However, with these revised GDP forecasts, it’s important to remember the reported economic data has yet to include the impact of President Trump’s upsized trade tariffs, or the China tariff response slated to begin June 1.

The net effect of the week, which we would characterize as a teeter totter of uncertainty, saw the major market indices trade off, adding to their move lower over the last month. That continued into the weekend as tensions with Iran rose further.

The question that will be coming to the forefront very soon

As we move into the second half of the current quarter, the Dow is down modestly quarter to date, the small-cap heavy Russell 2000 is essentially flat, while the S&P 500 and Nasdaq Composite Index are up modestly.

With 90% of the S&P 500 having reported March-quarter earnings, it’s looking like aggregate earnings for the 500 companies will wind up essentially flat year over year. That’s better than expected several weeks ago, but not as strong as the start of the earnings season suggested.

One question that will likely arise as we move further into the second half of the quarter will center on the confidence level of the consensus view for June-quarter earnings for the S&P 500 companies. Currently, those earnings are expected to grow 5% sequentially, but decline 1% year over year. 


Again, as more economic data, the balance of corporate earnings, and tariffs, are factored into the forecast equation, we’re likely to see further movement in those expectations. 

For 2019 in full, the S&P 500 is now slated to grow EPS by 4.1% — well below forecasted levels as we approached the end of 2018 — and at current levels, that has the S&P 500 trading at 17x 2019 earnings based on last Friday’s market close.


What to do now?

Given the confluence of uncertainty and the risk of downward economic and earnings growth expectations, we are likely to see the market trade sideways over the next few weeks. We’ve got our market hedging ProShares S&P 500 (SH) position in place at Tematica Investing, and we’ll continue to stick with the companies on the Thematic Leaderboard. Given the pullback in the market, as I cast about for new contenders for us, I’ll be on the hunt for defensively positioned companies that are growing their earnings faster than the S&P 500 and are also trading at a discount relative to the market multiple. Not exactly shooting fish in the barrel, but as I said, we’re on the hunt.


Tematica Investing

What Trump’s restrictions on Huawei mean for our thematic positions

Yesterday, we saw the fallout of the Trump administration’s restriction on Huawei as companies like Alphabet (GOOGL), Qualcomm (QCOM), Intel (INTC), Xilinx (XLNX) and others sever ties with the Chinese telecommunications and smartphone company. While this could be a tactic by President Trump to bring China back to the trade negotiating table, the restrictions are poised to deal a blow to companies that supply key technologies from software in the case of Google Android to chips to Huawei. Some estimates suggest Huawei, one the world’s biggest providers of telecom equipment, purchases some $20 billion of semiconductors each year.

From our perspective here at Tematica Investing, this blow to Huawei is a positive for our Nokia (NOK) and Apple (AAPL) shares, but a modest negative one for Universal Display (OLED) and to a lesser extent Alphabet shares. Recently Huawei passed Apple as the second largest smartphone vendor by market share, and these developments could crimp Huawei’s ability to supply not just smartphones, but also its ability to produce 5G capable ones without Qualcomm chipsets. We know the president has talked about 5G being a key competitive technology issue, and it comes as little surprise that he would flex this to get China back to the negotiating table.

 With Universal Display, Huawei was an expected adopter of organic light emitting diode displays and given its market size in the smartphone market any disruption could dial back expectations for that adoption. That said, Apple’s ability to regain smartphone market share could soften that blow. Longer-term we continue to see smartphone vendors adopting organic light emitting diode displays due to their superior color and image quality and more favorable battery consumption, something that will be a key factor as initial 5G handsets come to market. In recent weeks, we’ve signaled we would look to add to our OLED position at favorable prices and that has us watching the shares very closely in the near-term.

With regard to Alphabet/Google, I don’t see a major revenue impact primarily because Search & Advertising is such a large component of the company’s revenue and profit stream. In the March quarter, Google’s advertising revenue accounted for 85% of the quarter’s revenue, pretty much intact with the March 2018 quarter. 

Perhaps the biggest beneficiary is Disruptive Innovator Thematic Leader Nokia Corp. The shares got some lift yesterday in response to the dilemma that Huawei will be in as key chip suppliers restrict their sales.  While we’ll have to see how these restrictions play out in terms of duration, I’ve been sharing the rising tide of concern over reported backdoor access in Huawei’s equipment. This clearly kicks it to the next level and puts a major crimp in Huawei’s ability to service existing network infrastructure wins as well as those for 5G. Could we see some existing 5G contracts get put back out to bid? Certainly possible, and that is a potential opportunity for Nokia.

  • Our price target on Apple (AAPL) shares remains $225 
  • Our price target on Universal Display (OLED) of $150 remains under review
  • Our price target on Alphabet/Google (GOOGL) shares remains $1,300
  • Our price target on Nokia Corp. (NOK) shares remains $8.50

Weekly Issue: As trade concerns escalate, investors brace for an expectations reset

Weekly Issue: As trade concerns escalate, investors brace for an expectations reset


Key points inside this issue

  • Safety & Security Thematic Leader is up big year to date, and new body camera and digital records products hitting later this year should accelerate the company’s transition. Our long-term price target on AAXN shares remains $90.
  • The April Retail Sales Report should offer confirmation for Thematic King Amazon (AMZN) as well as Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). 


Given the wide swings in the market over the last few days that are tied back to the changing US-China trade talk landscape, I thought it prudent to share my latest thoughts even if it’s a day earlier than usual. 

As we discussed in the last issue of Tematica Investing, we knew that coming into last week, it was going to be a challenging one. Trade tensions kicked up to levels few were expecting 10 days ago and as the week progressed the tension and uncertainty crept even higher. We all know the stock market is no fan of uncertainty, but when paired with upsized tariffs from both the US and China that will present new economic and earnings headwinds, something that was not foreseen just a few weeks ago, investors will once again have to revisit their expectations for the economy and earnings. And yes, odds are those past and even more recent expectations will be revisited to the downside. 

What was originally thought to have been President Trump looking to squeeze some last- minute trade deal points out of the Chinese instead turned out to be more of a response to China’s attempt to do the same. This revealed the tenuous state of U.S./China trade talks. Last Friday morning, the U.S. had boosted tariffs to 25% from 10% on $200 billion worth of Chinese goods with President Trump tweeting there is “absolutely no need to rush” and that “China should not renegotiate deals with the U.S. at the last minute.” Even as the new tariffs and tweets arrived, trade negotiations continued Friday in Washington with no trade deal put in place, which dashed the hopes of some traders. Candidly, I didn’t expect a trade deal to emerge given what had transpired over the prior week. 

That hope-inspired rebound late Friday in the domestic stock market returned to renewed market pressure over the weekend and into this week as more questions over U.S.-China trade have emerged. As we started off this week, the trade angst between the U.S. and China has edged higher as China has responded to last week’s U.S. tariff bump by saying it would increase tariffs on $60 billion of U.S. goods to 25% from 10% beginning June 1st. Clearly, the latest round of tweets from President Trump won’t ease investor concern as to how the trade talks will move forward from here.

As the trade war rhetoric kicks up alongside tariffs, the next date to watch will be the G-20 economic summit in Japan next month. According to Trump economic adviser Larry Kudlow, there is a “strong possibility” Trump will meet Chinese President Xi and this morning President Trump confirmed that. 

The cherry or cherries on top of all of this is the growing worries over increasing tension with Iran, which is weighing on the market this morning, and yet another 2019 growth forecast cut by the EU that came complete with a fresh warning on Italy’s debt levels. Growth projections by the European Commission showed a mere 0.1% for GDP growth this year in Italy. The country has the second-largest debt pile in the EU and, according to the latest forecasts by the commission, the Italian debt-to-GDP ratio will hit 133% this year and rise to 135% in 2020. I point these out not to worry or spook you, but rather remind you there are other issues than just US-China trade that have to be factored into our thinking.

The natural market reaction to all of these concerns is to adopt a “risk off” attitude, which, as we’ve seen before, can ignite a storm of “fire first, ask questions later.” And as should be no surprise, that has fueled the sharp move lower in the major market indices. Over the last several days, the S&P 500, which as we know if the barometer used by most institutional and professional investors, fell 4.7% while the small-cap heavy Russell 2000 dropped 5.7%.

At times like this, it pays to do nothing. Hard to believe but as you’ve often heard few will step in to catch a falling knife and given the sharp declines, we also run the risk of a dead cat bounce in the market. We should be patient until the market finds its footing, which means parsing what comes next on the economic and earnings as well as trade front.  

I’ll continue to look for replacements for open Thematic Leader slots as well as other contenders poised to benefit from our pronounced thematic tailwinds. In the near-term, that will mean focusing on ones that also have a more U.S.-focused business model, a focus on inelastic and consumable products. Another avenue that investors are likely to revisit is dividend-paying companies, particularly those that fall into the Dividend Aristocrats category because they’ve consistently grown their dividends for the past 10 years. As I sift through the would-be contenders, I’ll be sure to look for those that intersect our investing themes and the aristocrats. 


Tematica Investing

As the stock market has come under pressure, a number of our Thematic Leaders, as well as companies on the Select List, have given back some of their year-to-date gains. One that has rallied and moved higher in spite of the market sell-off is Safety & Security Thematic Leader Axon Enterprises (AAXN) and are up some 48% year to date. That makes it the second-best performer on the Thematic Leaderboard year to date behind Clean Living company Chipotle Mexican Grill (CMG) that is up nearly 60% even after the market’s recent bout of indigestion.

Axon reported its March quarter earnings last week, which saw revenue grow 14% year over year as Axon continues to shift its business mix from Taser hardware to its Software & Sensor business that fall under the Axon Body and Axon Records businesses. During the company’s earnings conference call, the management team shared its next gen products will be available during the back half of the year. These include the Axon Body, its first camera with LTE live streaming, will launch during the September quarter and Axon Records, its first stand-alone software product. Records w will launch with a major city police department and it is already testing with a second major police department. As far as the new Axon Body product, I suspect the untethering of this camera could spur adoption much the way Apple’s (AAPL) Apple Watch saw a pronounced pick up when it added cellular connectivity to its third model. 

These new products, which leverage the intersection between our Digital Infrastructure investing theme and our Safety & Security one, should accelerate the transition to a higher margin, recurring revenue business in the coming quarters. In other words, Axon’s transformation is poised to continue and as that happens investors will be revisiting how they value the company’s business. More than likely that means further upside ahead for AAXN shares. 

  • Our price target on Safety & Security Thematic Leader Axon Enterprises (AAXN) remains $90.


Here comes the April Retail Sales Report

Later this week, we’ll get the April Retail Sales Report, which should benefit for the late Easter holiday this year. Up until the March report, this data stream was disappointing during December through February but even so from a thematic perspective the reports continued to reinforce our Digital Lifestyle and Middle-class Squeeze investing themes. 

When we look at the April data, I’ll be looking at both the sequential and year over year comparisons for Nonstore retailers, the government category for digital shopping and the category that best captures Thematic King Amazon (AMZN). I’ll also be looking at the general merchandise stores category with regard to Middle-Class Squeeze Thematic Leader Costco Wholesale (COST). Costco has already shared its April same-store sales, which rose 7.7% in the US despite having one less shopping day during the month compared to last year. Excluding the impact of gas prices and foreign exchange, Costco’s April sales were up 5.6% year over year. From my perspective, the is the latest data point that shows Costco continues to take consumer wallet share. 

With reported disposable income data inside the monthly Personal Income & Spending reports essentially flat for the last few months and Costco continuing to open new warehouse locations, which should spur its high margin membership revenue, I continue to see further upside ahead in COST shares. And yes, the same applies to Amazon shares as well.

  • Our $250 price target for Middle-class Squeeze Thematic Leader Costco Wholesale (COST) is under review.