We’re coming at you a day earlier than usual this week for a few reasons. First, as you’ll see we’re trimming back our short position in Simon Property Group, given the 15 percent fall in the shares since we recommended the short trade. Second, team Tematica will be training our way to New York City for a visit to the New York Stock Exchange as well as spending some time with Nasdaq. We wouldn’t leave you hanging, so we combined two birds as they say hence Tematica Pro hitting you today instead of Thursday.

Now let’s get on with it as we’ve got some profits to book…

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Retail pain has led to gains for our Simon Property short position

Since the last edition of Tematica Pro, we’ve seen brick and mortar retailers from Macy’s (M) and Kohl’s (KSS) to JC Penney (JCP) and the TJX Companies (TJX) take it on the chin. Retail Metrics expects the sector’s earnings to fall 6.8 percent. That would mark the worst three-month performance since the final quarter of 2013, when profits fell 7.1 percent, according to the firm’s data, is based on the historical and expected performance from 113 companies.

Those results are rather confirming for one aspect of our Connected Society investing theme – the accelerating shift toward digital commerce that has been pressuring brick and mortar retailers as they contend not only with the juggernaut that is Amazon (AMZN), but increasingly Walmart (WMT), Costco (COST), Macy’s (M) and other retailers that are targeting online and mobile shopping.

Why are brick & mortars struggling?

On the one hand, there is the convenience, which has come about as e-tailers like Amazon have compressed the delivery time of orders. That time compression has occurred with Amazon Prime’s Same-Day and One-Day options that it’s often easier for shoppers to order online or from their smartphone or tablet than head to the mall — in DC can be quicker than going to the actual store given all traffic we battle around here (we’re only half joking about that). And yes, there has been a slowdown in mall traffic as noted by recent comments from Starbucks’s Howard Schultz who said, “The seismic change that we talked about a number of years ago, with regards to compression in terms of mall traffic and street traffic, has certainly accelerated.”

There is also the ability to easily compare prices to get the best deal on products, allowing Cash-strapped Consumers to get the biggest bang for their disposable income dollars. With consumers feeling the pinch of rising debt levels, both credit card and student loan, and little to no wage growth, it’s not surprising to see them turn to online shopping. The fact is, they can get better deals online AND have it quickly shipped to them is a winning one-two combination.

Are we surprised by the headwinds plaguing brick and mortar retailers? We are not given our short position in Simon Property Group (SPG). With last night’s close, SPG shares have fallen more than 15 percent since we added the short position in the shares on March 2 vs. a 0.8 percent rise in S&P 500 over the same period.

Do we expect continued pain in the retail sector to translate into operating difficulties for Simon Property Group as the toll of store closings picks up?

We do, but we are also not ones to be piggish, especially with a short position. As such, we will be making the following adjustments:

• We will cover half of the short position in SPG shares at market, booking a gain of roughly 15 percent and leaving the other half of the position to capture additional gains.
• As we make this trade, we will adjust our buy stop order to $163 from $200, which will lock in a gain of at least 10 percent.

 

Ford’s headcount cuts and dismal April European auto sales solidify our GM short confidence

Last week we touched on the continued decline in domestic auto and truck sales during May given our short position in General Motors (GM) shares. The bad news for automotive companies continued this week on two fronts. First, Passenger car registrations fell 6.8 percent in Europe in April as the shift of Easter from March reduced buyers’ time for shopping, while vehicle sales in the UK were hit by tax changes. Digging into the April figures, we find the region’s two largest markets, Germany and the UK, saw registrations drop 8 percent and 20 percent respectively, per data from industry association European Automobile Manufacturers’ Association (ACEA). In sum, the April drop was the first decline since October and was the steepest since a 10 percent plunge in March 2013. Declining sales in two of the largest automotive markets is not a good indicator that demand remains robust in our opinion.

The second item was the news that Ford Motor Company (F) will make a 10 percent cut in salaried employees across its North American and Asia operations. Per Ford, the cuts are part of a previously announced plan to slash costs by $3 billion as U.S. new vehicles auto sales have shown signs of decline after seven years of consecutive growth since the end of the Great Recession. We see Ford’s move as confirmation the long in the tooth automotive recovery is poised for more declines. As a reminder, over the last few months we’ve seen auto incentives tick higher, but auto sales have continued to move lower resulting in a build of inventory on dealer lots.

• We’ve seen this movie before and it tends not to end well. For that reason, we are sticking with our short position on GM shares. Our price target remains $30.
• With GM shares falling some 10 percent since we added the short position, we’ll move our buy stop order down to $40 from $42. As GM shares move lower, we’ll continue to tick down our buy stop order with the goal of using it to lock in a profitable position.

 

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Checking in on our Chipotle calls

 
Last week we added the Chipotle Mexican Grill (CMG) July 2017 $500 calls at $14.95, and the position climbed just shy of 24 percent over the last week. With food deflation continuing and the company beginning to feel the benefit of its recent price increases, we’re inclined to be patient with the position as we monitor food input cost trends and restaurant traffic data.

Even though we will be patient with the position there’s no reason not to be prudent:

• We are proactively boosting our stop loss to $13 from $12, and as the CMG calls climb further we’ll make similar adjustments to the stop loss level.
• We said we would be buyers of these calls up to $16.50, and that level has come and gone. Subscribers that missed this opportunity, should wait for a pullback to $16.50 or lower rather than chase the calls after a near 24 percent move.