The Data Coming Across Our Desk Confirms Our Short Positions in SPG and GM

As we move into the second half of this week, we are seeing a transition of sorts in the stock market from a wider berth of corporate earnings to one that is far more focused on quarterly results from retailers. We’re also seeing several new bumps in the road down in Washington, which are likely to push out the timing of Team Trump’s tax reform and other initiatives. While these new bumps don’t themselves pose a threat to Trump’s actual policies, odds are they will embolden traditional DC politicking, thereby gumming up the works in the process. As we noted in yesterday’s Tematica Investing and this week’s Monday Morning Kickoff, we continue to get data that suggests a sharp as expected rebound in 2Q 2017 GDP is unlikely. We’ll continue to assess the data for what it is, and plot our course from there.

The report that we are most looking forward to this week, the April Retail Sales report, is released tomorrow. Consensus expectations call for a rebound to +0.5 percent in April excluding auto sales; we know April auto sales missed expectations by a wide margin but we also know the Easter holiday fell later than usual this year landing in April vs. March last year. That’s bound to result in “better comparisons” similar to the +55,000 leisure and hospitality jobs that were created in April to deal with the late spring break. We continue to be concerned over the financial health of the consumer and his or her ability to spend, but the willingness to spend at the mall. Even the new CEO of Coca-Cola (KO) is calling out the impact of digital shopping on soda sales, and while it’s probably true fewer trips to the mall are having a marginal impact on soda volumes, we still think Coca-Cola has bigger problems in the form of consumers shifting to Foods with Integrity as well as the Cash-strapped Consumer.

Based on the results of Macy’s (M) quarterly results as well as those of Fossil Group (FOSL), we’re sticking with our short position in Simon Property Group (SPG) on the Tematica Select List. In our view the underlying dynamics that are leading to brick & mortar retail pain will only continue to accelerate in the coming months with Back to School shopping and then year-end holiday shopping season given that Amazon (AMZN) has once again lowered its minimum for free shipping for non-Prime orders, from $35 to $25, undercutting Walmart’s (WMT) minimum by $10. We expect a competitive response from Walmart, with the combination pushing consumers off the digital shopping fence in the process.

• With retail pain likely to intensify, we continue to have a bearish view on SPG shares. Our price target on SPG remains $150 and our buy stop order remains at $190.
• As SPG shares move lower, we’ll continue to ratchet down this buy stop order as well.

Those same consumer spending concerns we mentioned above also keep us bearish on shares of General Motors (GM). We’ll continue to watch auto dealer inventories as well as the use of incentives, which did little in April despite being stepped up compared to March.

• We continue to have a Sell rating on GM shares with a price target of $30.
• Our buy stop order on GM remains at $40. As the shares continue to move lower, we’ll look to revisit our buy-stop loss further with a goal of using it to lock in position profits.

Getting bullish on Chipotle Mexican Grill Calls

One of the indicators both we and the Fed tend to watch surround prices, and for the most part that means keeping tabs on commodities as part of our Scarce Resources investing theme. While most tend to think of oil and gold when contemplating commodities, as we discussed on a recent Cocktail Investing Podcast, agricultural commodities are key inputs for a variety of goods as well as food companies and restaurants.

While many are focused on swings in gold and oil prices, since February the Bloomberg Commodity Index has fallen some 8 percent. We’d note this index includes oil, gas, gold, silver, soybeans, corn, wheat, coffee, nickel, copper, hogs, and cattle….and the prices of all these goods are falling. That bodes well from a cost structure perspective, especially if a company has recently enacted price increases as well

One company that did just that is Chipotle Mexican Grill (CMG), which boosted prices by “about 5 percent” at 440 locations, roughly 20 percent of its footprint. We’ve seen this combination of falling input costs and higher prices before at Starbucks (SBUX) and it’s a strong combination when it comes to margin leverage. With consumers finally flocking back to Chipotle following the disastrous bout of E.Coli related issues, the company faces very easy comparisons in the coming quarters as well. Consensus EPS expectations for 2017 are currently clocking in around $8.48 compared to the $0.77 in EPS Chipotle served up in 2016.

As we noticed from quarterly results from Whole Foods (WFM) as well as Amplify Snacks (BETR), consumers continue to flock to “better for you foods” when eating, and Chipotle certainly checks that box in our view. We’d also note, eating at Chipotle is not only quick but far easier on the wallet than eating at Red Robin Gourmet Burgers (RRGB) or any of the restaurants that fall under the Darden Restaurants (DRI) umbrella.

To capture the benefit of that one-two pricing punch, we are adding Chipotle Mexican Grill (CMG) July 2017 $500 calls that are currently trading just under $15. We would be buyers of the calls up to $16.50.

The one fly in the ointment was something Chipotle squeezed in at the very end of its recent earnings call – that it had experienced a data breach on its payment processing network, and it is in the middle of an investigation. For that reason, we are setting a stop loss at 12.00 for this new call option position.

• We are adding Chipotle Mexican Grill (CMG) July 2017 $500 calls that are currently trading just under $15.
• We would be buyers of the calls up to $16.50. 
• As we add this new position, we are setting a stop loss at 12.00 for this new call option position.