Ep. 95: Short Selling Anyone

Ep. 95: Short Selling Anyone

 

Stocks pop in January, but earnings continue to come down

On this episode of the Cocktail Investing Podcast, we close the books on one of the best Januaries in years for the stock market and trace back the reasons for its inflection point from a painful year-end 2018 for investors. While some issues that plagued the market have rolled back, one, in particular, hasn’t and it’s one investors use to not only value stocks but determine which ones they are willing to pay up for. That includes a brief discussion on earnings from Apple (AAPL), Amazon (AMZN), Facebook (FB) and others, but also prompts a conversation on short-selling.

We round out the podcast with a few Thematic Signals that confirm why Netflix (NFLX) is right to be worried about Fortnite; how consumer products companies like PepsiCo (PEP), Hershey (HSY), and Proctor & Gamble (PG) are embracing our Clean Living Investing theme; and why China is poised to become the largest retail market on the planet as our Living the Life, New Global Middle-Class and Middle-Class Squeeze investing themes intersect.

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

And don’t forget to subscribe to the Cocktail Investing Podcast on iTunes!

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Ep. 59: Exposing the Supply Chain Security Nightmare

Ep. 59: Exposing the Supply Chain Security Nightmare

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A Discussion with Interos Solutions CEO Jennifer Bisceglie

When most people think of the words “supply chain” they harken back to the class room definition — the sequence of steps and processes involved in the production and distribution of a commodity or product in a factory. While that’s true, over the last several decades the move toward low cost outsourcing has dramatically changed where companies source their components and finished products as well as the multitude of players that supply them. Factor in the rise of software and networks, and the downside of this operational focus is it has kicked the door wide open for bad actors to exploit the supply chain in the form of cyber and other attacks.

In today’s podcast, Tematica’s Chris Versace discusses all of this with Interos Solutions CEO and President Jennifer Bisceglie, who recently testified before the U.S.-China Economic and Security Review Commission Hearing on “China, the United States, and Next Generation Connectivity.” As Chris and Tematica’s Chief Macro Strategist, Lenore Hawkins have shared before, the migration deeper into our Connected Society investing theme opens the door for pain points associated with our Safety & Security investing theme. Jennifer not only reaffirms that view, but reveals several aspects that few have likely considered despite how widespread cyberattacks on the supply chain have become.

As Jennifer points out, along with the growing incidents of attacks and notable high-profile ones at Merck & Co. (MRK), FedEx (FDX), Renault SA and others following the NotPetya destructive ransomware attack in 2017, supply chain security and vendor risk management is escalating across the corporate landscape, becoming a focal point in the Board room. Simply put, digital supply chain vulnerability is impacting the physical supply chain via a range of risks from intellectual property theft, to counterfeit components, and even human trafficking. Jennifer explains why with 5G and the Internet of Things soon to become reality, companies should brace themselves for another layer of concern when it comes to their supply chain security and vendors.

The implications are simply staggering, ranging from companies losing their strategic advantages and having investments stolen, to the need to ramp up security spending and added aspects to M&A due diligence that could alter the terms of a deal if not scuttle it all together. Recall how last year Verizon (VZ) renegotiated its deal to acquire Yahoo by $350 million following the revelation of security breaches with the Verizon network.

Jennifer and Chris also talk about Facebook’s (FB) current challenges, which could be viewed as a breakdown in its supply, and why it’s a situation that Jennifer is “surprised at how surprised everyone is that it happened.” And lastly, because it wouldn’t be a podcast without some discussion on Bitcoin or the Blockchain, Chris asks Jennifer for her view on the Blockchain and gains some insights into why it isn’t the likely cure-all for supply chain security.

 

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Surprises From Market Breadth with Record Margin Debt

Surprises From Market Breadth with Record Margin Debt

As we discussed earlier, heading into the third quarter earnings season, we have above average level of positive guidance in terms of both top line sales and earnings as well as lower-than-average negative earnings guidance. We  pointed out yesterday, however, that an uncomfortable portion of that guidance is driven by gains from a weak dollar and we are seeing signs that may be reversing course.

 

In the last quarter, companies that delivered on or beat expectations didn’t get much of a reward for their efforts. We looked at the current market conditions to get a feel for what the earnings reactions could be this reporting season.

 

Margin Debt

Margin debt has reached $550.9 billion, a record high for the second consecutive month and the sixth record high in the past eight months.  Anyone who recalls just a tad bit of market history can see that rapidly rising margin debt has preceded the beginnings of both the March 2000 and July 2007 bear markets. However, nearly one in four monthly margin debt readings since 1959 have been record highs, so to assume that a pullback is imminent based on a record high is folly at best. Instead, we like to look at the rate of change over a 12-month period. Here we can see that the rate of change recently hasn’t been nearly as dramatic as the wild moves we saw around the 2000 and 2007 crashes. This metric does not indicate a market that has been wildly laying on the leverage, despite reaching yet another record high.

Market Breadth

Another measure of the health of the market is the Advance/Decline line which has been well above its 50-day and 200-day moving average. This indicator is showing a market that appears rather robust, but the value of this indicator may lessened by the rapidly rising use of ETFs. When an investor puts money into an ETF, those funds are used to buy all the companies in the ETF indiscriminately, which can give the appearance of greater robustness than would otherwise exist.

 

To further assess breadth, we look at the ratio of equal weight versus market cap weighted for the major market indices. What we found is the S&P 500 and the Russell 2000 equal weight indices underperformed their market cap weighted indices by a material amount year-to-date. This metric indicates that the indices upward moves have been driving by larger cap high-flyers, which indicates weaker breadth than we’d like to see.

 

High Fliers Losing Some Altitude

Amazon (AMZN) tried to carve out a head and shoulders pattern this week, down by over 2% during the week, but closed the week back in the black by Friday. If it moves below the neckline where it is currently perched rather precariously, the shorts will go for the jugular and this is one of those mega cap stock that has been helping to keep the indices up. Another high flier that has driven a good portion of the market’s gains, Apple (APPL), has dropped below both its 50-day and 100-day moving averages and is now down in 13 of the last 18 days as the new product line doesn’t exactly have consumers busting down the doors.

 

Facebook (FB) is also feeling the pain with all the bad press surrounding is ad platform that Ivan and his Russian buddies have been abusing to stir up domestic strife here in the U.S. Who knew Putin’s team may not play fair! The stock suffered its worst day this week since last November, falling over 5% at one point during the week and closing below its 50-day moving average for the first time since July 6th. By week’s end the shares had moved back to neutral territory in this Teflon market, but the warning flares have been fired. Netflix (NFLX) joined in falling as much as 5.5% this week to waver right arounds its 50-day moving average.

 

With the performance of the equal weight indices below that of the market cap weighted, weakness in the big guys are cause for concern. The end of the week saw a rebound in most, such as Alphabet (GOOGL) but we’ll be watching to see if the rebound holds.

 

Another Breadth Indicator

We then looked at the percent of companies above their 50-day moving average in the S&P 500, Nasdaq and the NYSE Composite. We found that the number of stocks trading above their 50-day moving averages has been rising, so from this metric, the markets are looking to have decent breadth, which limits the damage from those high fliers weakening.

 

When assessing either the markets or a stock we always want to find confirming or discordant data points to increase our confidence. While we have conflicting indicators here, our assessment leans more towards a bullish view based on this data for the near term.

 

Volatility

 

What about that wacky VIX that appears to be on a IV drip of some sort of powerful sedative? No matter what gets thrown at it, the index continues to be like Fonzi. The recent Commitments of Traders report from the CFTC revealed that the net speculative short position on the VIX has once again reached a new record high at 171,187 futures and options contractions, taking out the prior 158,114 peak in early August. This is a 63% increase! Talk about the calm before the storm. Yeah, we know, been saying that for a while. This has been a seriously impressive run!

 

Of all the days the VIX has been below 10 since its inception, 70% those have been in 2017. We can’t help but shake our heads, (and remember to stock up on Alka Seltzer) when we consider the likely impact on the markets when the reversion to the mean rule kicks in.

 

Given the lack of volatility, investors seem to be going all in. The last week’s Market Vane report found that the bullish share has reached the highest level in the current bull market. The last time it was this high was in June 2007.

 

The bottom line is while equities are clearly expensive at these levels, the market breadth looks decent and volatility is still hitting the snooze button. The disconnect between fundamentals, historical norms and the current market is likely to at some point result in some seriously dramatic moves.  However, we’ve all seen that expensive stocks can get even more expensive and for at least the near term, we are not seeing any clear catalyst for a pullback that would get the attention of this seemingly Teflon market.

Markets Reach New Highs, But Why?

Markets Reach New Highs, But Why?

At Tematica, we separate our politics from our analysis to be able to provide objective assessments, which means that we need to call out an error we see in the prevailing narrative. Thursday the Dow hit its 7th straight record close, despite the news that Special Counsel Mueller has impaneled a grand jury in the Russia election tampering probe. While many are attributing the market’s gains to president Trump’s administration, this divergence calls that into question. As does the reality that President Trump’s approval rating has hit new lows with disapproval ratings reaching new highs while the market has continued to rise.

Apple (AAPL) and Boeing (BA) collectively have been responsible for 70 percent of the Dow’s gains the past 6 weeks while the FAANG stocks – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) – which account for just 11 percent of the S&P 500 market capitalization have generated 26 percent of year-to-date return. Juicing up those returns has been leverage, with margin debt up 20 percent on a year-over-year basis in each of the past 5 months and is today over 60 percent HIGHER than at the 2007 peak.

The reality is that in the past 6 weeks, the median stock price and median sector price haven’t actually moved. What has happened has been a falling U.S. dollar, which is on track for the weakest annual performance in 14 years. That’s really something in light of the prevailing narrative that assures us the U.S. economy is going like gangbusters. Ignore that recent ISM report which saw Services experience the biggest drop since November 2008 – same goes for the Composite Index. Amazing to have a falling dollar and the U.S. Treasury 10-year yield right around where it was during the depth of the Great Recession while the Fed is tightening and yet we are to believe the economy is firing away, hmmm.

The top three stocks in the Dow for foreign revenue, Apple (APPL), Boeing (BA) and McDonalds (MCD) account for 50 percent of the Dow’s year-to-date gains, hmmmm.

So what’s going on here?

Euro to US Dollar Exchange Rate Chart

Euro to US Dollar Exchange Rate data by YCharts

In euro terms, the S&P 500 is actually down 1.9 percent year-to-date. In Mexican peso terms it is down around 4 percent and even in the polish zloty it is down roughly 5 percent.

In fact, when President Trump was elected, the U.S. stock market capitalization represented 36 percent of total global market capitalization. That ratio rose to nearly 38.5 percent but has since fallen to 35 percent where it was all the way back in June 2015. On a relative basis, the U.S. stock market has significantly outperformed. What we are seeing here is more a function of a falling currency that a rising stock market reflecting a robust economy.

What could go wrong? The Intercontinental Exchange now has a net short position for the U.S. dollar for the first time since May 2014 and after that time the greenback gained 5 percent within 3 months. If the market has been rising on a falling dollar….

Then there is that debt ceiling debate that, when taking into account recent dynamics in D.C. between various members of Congress and the White House, could make Game of Thrones appear rather tame. This coming at a time when the tax reform debate is set to kick off. Oh and there are those November elections to really bring out the softer side of politics. With the Chargers no longer playing in San Diego this Fall, (What the hell?) I think I’ll have more than enough games to watch coming out of Washington.

WEEKLY ISSUE: A Company in Transition Can Be an Opportunity When the Time is Right

WEEKLY ISSUE: A Company in Transition Can Be an Opportunity When the Time is Right

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Cocktail Investing Ep. 25: Petya with CEO of Alert Logic, GM’s got the blues, Blue Apron’s IPO

Cocktail Investing Ep. 25: Petya with CEO of Alert Logic, GM’s got the blues, Blue Apron’s IPO

In this week’s program, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins discuss the week’s economic data, relevant political happenings and share where they have spotted a few of the latest Thematic Signals. We then have a fascinating discussion with the Chairman & CEO of Alert Logic, Gray Hall.

In this week’s program, Tematica’s investing mixologists, Chris Versace and Lenore Hawkins discuss the week’s economic data, relevant political happenings and share where they have spotted a few of the latest Thematic Signals. We then have a fascinating discussion with the Chairman & CEO of Alert Logic, Gray Hall.

A few highlights include:

  • Tuesday the U.S. Dollar experienced its worst day in three months after European Central Bank President Mario Draghi gave an optimistic speech on the state of the Eurozone economy, citing improving political tailwinds and a reemergence of reflationary pressures.
  • While the Eurozone continues to show signs of acceleration, this week’s Durables report showed an economy stuck in slow gear with both core shipments and orders falling 2 percent month-over-month versus expectations for an increase of 0.4 percent. While that doesn’t sound too good, digging deeper we found something more concerning for those high-flying technology stocks.
  • Big U.S. banks plan to increase their dividend payouts and share buybacks to their highest level in years after the Federal Reserve on Wednesday approved capital plans for all 34 firms that took part in its annual stress tests. While this may provide some lift for bank stocks, we discuss why this doesn’t necessarily translate into optimism for the economy overall.
  • We discuss the level of complacency we see all around as the VIX volatility index has dropped below 10 more times in 2017 alone than in the 22 years prior to 2017.
  • While GM had issued a cut to its 2017 auto forecast — surprising no one at Tematica and we’ve all seen the same pain in the oil sector — analysts are doing little in the way of revising earnings for the rest of 2017. Considering those ripple effects, it’s quite the head scratcher as we head into 2Q 2017 earnings.
  • Finally, while the mainstream financial media keeps up expectations for accelerating growth in the back half of the year, the bond market is telling a different story.

 

In our discussion with Gray Hall, Chairman and CEO of Alert Logic, we gained valuable insight into the cybersecurity landscape and the rising need for Security-as-a-Service as more companies move to the cloud. We covered such topics as:

  • How cybersecurity needs and providers are evolving along with technology platforms such as Amazon Web Services, Microsoft’s Azure and Google Cloud.
  • Where hacks typically initiate and what that means for your company or those you invest in
  • How Alert Logic defines its customers in a way that is very different from most cybersecurity firms… and why they are likely ahead of the pack in thinking this way
  • Why advanced analytics such as machine learning is mission critical for cybersecurity’s road ahead as the cloud is poised to continue its rapid growth vs. on-premise solutions.
  • The evolving landscape for cloud platforms, and much more.

 

 

Companies mentioned on the Podcast
  • Alert Logic
  • Alphabet (GOOGL)
  • Amazon (AMZN)
  • Blue Apron (APRN)
  • Facebook (FB)
  • General Motors (GM)
  • Microsoft (MSFT)
  • Oracle (ORCL)
  • Snap (SNAP)
  • Twitter (TWTR)
  • Whole Foods Markets (WFM)

 

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Chris Versace Tematica Research Founder and Chief Investment Officer
Lenore Hawkins Tematica Research Chief Macro Strategist