All Eyes On The September Jobs Report

All Eyes On The September Jobs Report

Today’s Big Picture

US market futures point to a modestly lower open Friday morning. After the disappointing manufacturing and services data this week, all eyes will be on today’s Nonfarm Payrolls report, which is expected to see 145,000 jobs added in September, up from 130,000 in August with the unemployment rate holding at 3.7% and wages gaining +0.2%. Keep in mind that the General Motors (GM) strike will add some confusion to the data as striking workers aren’t counted in payrolls.

We’ll also be looking for any updates on the previous downward revisions to payrolls. In August the BLS cut job gain estimates for 2018 and early 2019 by about 500,000, the largest such downward revision in the past decade. Overall we’ve seen downward revisions for around 17 months – a sure sign that labor market dynamics ...

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Apple’s negative pre-announcement serves as a reminder to the number of risks that have accumulated

Apple’s negative pre-announcement serves as a reminder to the number of risks that have accumulated


We are “breaking in” to share my thoughts with you on the implications of Apple’s (AAPL) downside December quarter earnings news last night. Quickly this is exactly of what I was concerned about in early December, but rather than take a victory lap, let’s discuss what it means and what we’re going to do. 

Last night we received a negative December quarter earnings preannouncement from Apple (AAPL), which is weighing on both AAPL shares as well as the overall market. It serves as a reminder to the number of risks that have accumulated during the December quarter – the slowing global economy, including here at home; the US-China trade war; Brexit and other geopolitical uncertainty in the eurozone; the strong dollar; shrinking liquidity and a Fed that looks to remain on its rate hike path while also unwinding its balance sheet. Lenore Hawkins and I talked about these at length on the Dec. 21 podcast, which you can listen to here.

In short, a growing list of worries that are fueling uncertainty in the market and in corporate boardrooms. When the outlook is less than clear, companies tend to issue conservative guidance which may conflict with Wall Street consensus expectations. In the past when that has happened, it’s led to a re-think in growth prospects for both the economy, corporate profits and earnings, the mother’s milk for stock prices.

These factors and what they are likely to mean when companies begin issuing their December quarter results and 2019 outlooks in the coming weeks, were one of the primary reasons we added the ProShares Short S&P 500 (SH) shares to our holdings in just under a month ago. While the market fell considerably during December, our SH shares rose 5% offering some respite from the market pain. As expectations get reset, and odds are they will, we will continue to focus on the thematic tailwinds and thematic signals that have been and will remain our North Star for the Thematic Leaders and the larger Select List.


What did Apple have to say?

In a letter to shareholders last night, Apple CEO Tim Cook shared that revenue for the quarter would come in near $84 billion for the quarter vs. the consensus estimate of $91.5 billion and $88.3 billion, primarily due to weaker than expected iPhone sales. In the letter, which can be read here, while Apple cited several known headwinds for the quarter that it baked into its forecast such as iPhone launch timing, the dollar, supply constraints, and growing global economic weakness, it fingered stronger than expected declines in the emerging markets and China in particular.

Per the letter, most of the “revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline occurred in Greater China across iPhone, Mac, and iPad.”

Cook went on to acknowledge the slowing China economy, which we saw evidence of in yesterday’s December Markit data for China. Per that report,

“The Caixin China General Manufacturing PMI dipped to 49.7 in December, the first time since May 2017 that the reading has been below 50, the mark that separates expansion from contraction. The sub-index for new orders slid below the breakeven point of 50 for the first time since June 2016, reflecting decreasing demand in the manufacturing sector.”

In our view here at Tematica, that fall in orders likely means China’s economy will be starting off 2019 in contraction mode. This will weigh on corporate management teams as they formulate their formal guidance to be issued during the soon to be upon us December quarter earnings season.

Also, in his letter, Cook called out the “rising trade tensions with the United States”  and the impact on iPhone demand in particular.

In typical Apple fashion, it discussed the long-term opportunities, including those in China, and other positives, citing that Services, Mac, iPad, Wearables/Home/Accessories) combined to grow almost 19% year-over-year during the quarter with records being set in a number of other countries. While this along with the $130 billion in cash that Apple has on its balance sheet exiting the December quarter, bode well for the long-term as well as its burgeoning efforts in healthcare and streaming entertainment, Apple shares came under pressure last night and today.


Odds are there will more negative earnings report to come

In light of the widespread holding of Apple shares across investor portfolios, both institutional and individual, as well as its percentage in the major market indices, we’re in for some renewed market pressure. There is also the reality that Apple’s decision to call out the impact of U.S.-China trade will create a major ripple effect that will lead to investors’ renewed focus on the potential trade-related downside to many companies and on the negative effect of China’s slowing economy.

In recent months we’ve heard other companies ranging from General Motors (GM) to FedEx (FDX) express concerns over the trade impact, but Apple’s clearly calling out its impact will have reverberations on companies that serve markets tied to both the smartphone and China-related demand. Overnight we saw key smartphone suppliers ranging from Skyworks Solutions (SWKS) and Qorvo (QRVO) come under pressure, and the same can be said for luxury goods companies as well. We’d note that Skyworks and Qorvo are key customers for Select List resident AXT Inc (AXTI, which means if we follow the Apple revenue cut through the supply chain, it will land on AXT and its substrate business.

All of the issues discussed above more than likely mean Apple will not be the only company to issues conservative guidance. Buckle up, it’s going to be a volatile few weeks ahead.


Positives to watch for in the coming weeks and months

While the near-term earnings season will likely mean additional pain, there are drivers that could lift shares higher from current levels in the coming months. These include a trade deal with China that has boasts a headline win for the US, but more importantly contains positive progress on key issues such as R&D technology theft, cybercrimes and the like – in other words, some of the meaty issues. There is also the Federal Reserve and expected monetary policy path that currently calls for two rate hikes this year. If the Fed is data dependent, then it likely knows of the negative wealth effect to be had following the drop in the stock market over the last few months.

Per Moody’s economist Mark Zandi, if stocks remained where there were as of last night’s close, it would equate to a $6 trillion drop in household wealth over the last 12-15 months. Per Zani, that would trim roughly 0.5% to 2019 GDP – again if the stock market stayed at last night’s close for the coming weeks and months. As we’re seeing today, and given my comments about the upcoming earnings season, odds are that 2019 GDP cut will be somewhat larger. That would likely be an impetus for the Fed to “slow its roll” on interest rates or at least offer dovish comments when discussing the economy.

Complicating matters is the current government shutdown, which has both the Census Bureau and Bureau of Economic Analysis closed. Even though there will be some data to be had, such as tomorrow’s December 2018 Employment Report from the Labor Department, it means the usual steady flow of economic data will not be had until the government re-opens. No data makes it rather difficult to judge the speed of the economy from all of us, including the Fed.

Given all of the above, we’ll continue to keep our more defensive positions companies like McCormick & Co. (MKC), Costco Wholesale (COST), and the ProShares Short S&P 500 shares intact. We’ll continue to watch input costs and what they mean for corporate profits at the margin – case in point is Del Frisco’s (DFRG), which is benefitting from not only falling protein costs but has been approached by an activist investor that could put the company in play. With Apple, Dycom Industries (DY), and AXT, we will see 5G networks lit this year here in the US, which will soon be followed by other such networks across the globe in the coming years. Samsung, Lenovo/Motorola and others have announced 5G smartphones will be shipping by mid-2019, and we expect Apple to once again ride that tipping point in 2020. That along with its growing Services business and other efforts to increase the stickiness of iPhone (medical, health, streaming, payments services), keeps us long-term bulls on AAPL shares.

When not if but when, the stock market finds its footing, which likely won’t be until after the December quarter earnings season at the soonest, we will look to strategically scale into a number of positions for the Thematic Leaders and the Select List.


Used-car sales poised to climb as new cars become even more expensive

Used-car sales poised to climb as new cars become even more expensive

Since the Great Recession, we’ve seen new auto sales rebound due in part to the attractive if not aggressive low to no interest financing. That’s helped mask the rising cost of buying a new car as original equipment manufacturers (OEMs) ranging from Ford and General Motors to Volkswagen and Honda have packed connective technology and features associated with our Digital Lifestyle investing theme their vehicles.

Over the last few quarters, the Federal Reserve has hiked interest rates and is poised to do some four more times in the coming 15 months according to its most recent economic forecast. At the margin, that will boost the cost of buying a new car or truck, and likely increase the demand for used cars for consumers that are seeing their discretionary dollars shrink as those same interest rates drive their existing debt servicing costs higher. Good news for companies like Carmax that can cater to Middle-class Squeeze consumers, not so good for the auto manufacturers.


Demand for used cars was unusually strong this summer and will remain at elevated levels through the year’s end as higher interest rates and rising prices on new cars continue to stretch buyers’ wallets, industry analysts said.

Used-car buyers are finding a growing selection of low-mileage vehicles that are only a few years old.

While used-car values have also increased in recent years, the gap between the price of a new and preowned car has also widened and is now at one of its largest points in more than a decade, according to car-shopping website

New-car prices have steadily climbed in the years following the recession as companies packed vehicles with more expensive technology and buyers shifted away from lower-priced cars to bigger and more expensive sport-utility vehicles and trucks. The average price paid for a car hit an all-time high of $36,848 in December of 2017 and remains at near-record levels, according to

With nearly 40 million in sales last year, the used-car market is more than double the size of the new-car business.

The shift in demand is a troubling sign for auto makers, which will be under pressure to deepen discounts to keep customers from defecting to the used-car market. New-vehicle sales have started to cool this year following a seven-year growth streak.

As new car prices have climbed, auto lenders have kept monthly payments low by extending loan-repayment terms to five and six years and introducing 0% financing on loans that made buying new a more attractive deal.

But as interest rates rise and credit tightens, auto companies are pulling back on such sales incentives. The average monthly payment on a new car was $536 in August, up from $507 last year and $463 five years ago, according to

Source: Used-Car Sales Boom as New Cars Get Too Pricey for Many – WSJ

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Weekly Issue: Trade Meetings and Earnings Reshape Market Outlook

Key points from this issue:

  • Earnings from Boeing (BA) and General Motors (GM) signal markets will trade day-to-day as trade meetings and earnings season heat up.
  • Our price target on Dycom Industries (DY) shares remains $125
  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50
  • Our long-term price target for Farmland Partners (FPI) shares remains $12.
  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.


This week we’ve moved into the meaty part of 2Q 2018 earnings season, and so far, we’ve seen a number of companies beat top and bottom line expectations. Some market observers will point out that some 20%-25% of the S&P 500 group of companies are in that boat, and are declaring “victory” for the market. With today’s earnings from Boeing (BA) that and General Motors (GM), the market is trending lower as Boeing’s outlook falls short of Wall Street expectations while GM cut its outlook due to higher commodity prices. As you probably guessed, one of the culprits for GM is higher aluminum and steel prices.

My take on that is with 75%-80% of the S&P 500 yet to report, that claim while it could prove to right, it also could be a bit premature. As I shared with Oliver Renick, host at the TD Ameritrade Network a few days ago, we’ve only started to see the impact of initial trade tariffs and if the international dance continues we could see far more tariff jawboning put into action.

Consider a tweet from President Trump this morning that suggests a tariff follow through is possible.



But last night Trump tweeted a path forward to eliminating tariffs and other trade barriers between the Eurozone and the US ahead of his meeting today with the European Commission President Jean-Claude Juncker today to discuss trade, including tariffs on autos.

It would appear Trump is attempting to keep his negotiating opponents off balance in the hopes of improving trade relations from a US perspective. But it also seems that others have read Trump’s Art of the Deal by now as according to EU trade commissioner Cecilia Malmstrom, the Commission is also preparing to introduce tariffs on $20 billion of U.S. goods if Washington imposes trade levies on imported cars.

While I would love to see some forward progress coming out of these talks, but just like with China the probability is rather low in my opinion. Much like with the China trade talks, things have escalated so that both sides will be looking to claim some victory to report back to their countrymen and women.  This likely means that as we migrate over the next few weeks of earnings, we will have to continue to watch trade developments, especially if more recent and wider spread tariffs wind up being enacted.

With more on the earnings and trade to be had in the coming days, we should be ready for day-to-day moves in the market, which will make it challenging for traders and options players. As they struggle, we’ll continue to take a longer-term focus, heeding the signals to be had with our thematic investing lens. Now, let’s get to some updates and other items…


Checking in on 5G spending from Verizon and AT&T

With both Verizon Communications (VZ) and AT&T (T) reporting June quarter results yesterday, I sifted through their comments on several fronts but especially on 5G given our positions in mobile infrastructure and licensing company Nokia (NOK), specialty contractor Dycom (DY) as well as compound semiconductor company AXT Inc. (AXTI). The nutshell take is things remain on track as both carriers look to launch commercial 5G networks in the coming quarters.

Verizon delivered solid quarterly results, buoyed by its core wireless business that added 531,000 net retail postpaid subscribers, which included 398,000 postpaid smartphone net adds. We’ve talked about how sticky mobile service is with consumers as smartphones are increasingly a life link for their connected lives so it comes as little surprise that Verizon’s customer loyalty remains strong with the quarter marking the fifth consecutive period of retail postpaid phone churn at 0.80 percent or better.

In terms of capital spending, a figure we want to watch as Verizon gets ready to launch its commercial 5G network, the company shared its 2018 spend will be at the lower end of its previously guided range of $17.0-$17.8 billion. Now here’s the thing, the mix of spending will favor 5G, which confirms the bullish comment and tone we shared last week from Ericsson (ERIC) on the North American 5G market.

With AT&T, its net capital spending in the June quarter slipped to $5.1 million, down from roughly $6 million in the March quarter but the company shared it will spend roughly $25 billion in all of 2018. Doing some quick math, we find this spending is weighted to the back half of 2018, which likely reflects investments in its 5G network as well as the new first responder network, FirstNet, it is building. During the earnings call, management shared the company now has 5G Evolution in more than 140 markets, covering nearly 100 million people with a theoretical peak speed of at least 400 megabits per second with plans to cover 400 plus markets by the end of this year. In terms of true 5G, trials are progressing and AT&T is tracking to launch service in parts of 12 markets by the end of this year.

That network spend and 5G buildout bodes well for both our Dycom shares.

  • Our price target on Dycom Industries (DY) shares remains $125


In addition, a few days ago mobile chip company Qualcomm (QCOM) shared that its 5G antennas are ready from prime time. More specifically, Qualcomm is shipping 5G antennas to its device partners that include Samsung, LG, Sony (SNE), HTC and Xiaomi among others for testing. Moreover, Qualcomm said it stands ready for “large-scale commercialization” which likely means 5G devices are just quarters away instead of years away.

We’d note those device partners of Qualcomm’s mentioned above have all announced plans to bring initial 5G powered phones to market during the first half of 2019. That means the supply chain will be readying power amplifiers and switches that will enable these devices to communicate with the 5G networks, which bodes well for incremental compound semiconductor substrate demand at AXT. Because 5G is being viewed as an “access technology” that will move mobile broadband past smartphones and similar devices, I continue to see this as a positive for the higher margin licensing business at Nokia as well.

As a reminder, AXT will report its quarterly results after tonight’s market close, and expectations for its June quarter are clocking in at $0.08 per in earnings on $26.1 million in revenue, up 60% and roughly 11% year over year.

  • Our AXTI price target remains $11.
  • Our price target on Nokia (NOK) shares remains $8.50


Farmland Partners fights back

A few weeks ago, we shared not only our long-term conviction for Farmland Partners (FPI) shares but also prospects for continued drama in the coming months. Well, let’s say we’re not disappointed as this morning the company filed a lawsuit in District Court, Denver County, Colorado against “Rota Fortunae” (a pseudonym) and other entities who worked with or for Rota Fortunae in conducting a “short and distort” scheme to profit from the sharp decline in Farmland’s stock price resulting from false and misleading posting on Seeking Alpha. Farmland is seeking damages and injunctive relief for defamation, defamation by libel per se, disparagement, intentional interference with prospective business relations, unjust enrichment, deceptive trade practices, and civil conspiracy.

Are we surprised? No, especially since the Farmland management team signaled it would be moving down this path. While this will likely result in some incremental noise, we’ll continue to focus on the business and the long-term drivers of the agricultural commodities that drive it.

  • Our long-term price target for Farmland Partners (FPI) shares remains $12.


Paccar delivers on the earnings front, boosts its dividend

Tuesday morning, heavy and medium duty truck company Paccar (PCAR) delivered strong June quarter results, beating on both the top and bottom line. For the quarter, Paccar reported earnings of $1.59 per share, $0.16 better than the $1.43 consensus on revenues that rose more than 24% year over to year to $5.47 billion, edging out the $5.39 billion that was expected. The strength in the quarter reflects not only rising production and delivery levels that reflect the pick up in truck orders over the last 6-9 months, but also the ripple effect had on the company’s high margin financing business. Also too, as truck up time increases as does the number of Paccar trucks in service, we’ve seen a nice pick up in the company’s Parts business that carries premium margins relative to the new truck one.

During the quarter, Paccar repurchased 1.21 million of its common shares for $77.2 million, completing its previously authorized $300 million share repurchase program. The Board of Directors approved an additional $300 million repurchase of outstanding common stock earlier this month and given the current share price that is below that average repurchase price we suspect this new program will be put to use quickly. Also during the quarter, Paccar boosted its quarterly dividend to $0.28 per share from $0.25, and management reminded investors of the company’s track record of delivering quarterly and special dividends in the range of 45-55% of net income.

Given 111% year over year growth in the new heavy truck orders throughout the U.S. and Canada during the first half of 2018, we continue to be bullish on PCAR shares as we head into the second half of 2018. Even so, we’ll continue to analyze the monthly truck order data as well as freight indicators and other barometers of domestic economic activity to assess the continued strength in new truck demand. In the coming months, we expect long-time followers of Paccar will begin to focus on the potential year-end special dividend the company has issued more often than not.

  • Our price target on Paccar (PCAR) shares remains $80.


A quick note on United Parcel Service earnings

Early this morning, United Parcel Service (UPS) beat estimates by a penny a share, with an adjusted quarterly profit of $1.94 per share. Revenue beat forecasts, as well, boosted by strong growth in online shopping – no surprise to us given our Digital Lifestyle investing theme. UPS will host a conference call this morning during which it will update its outlook for the back half of the year, and that should help quantify the year over year growth in Amazon’s (AMZN) Prime Day 2018 ahead of its earnings report later this week.

  • As we head into the seasonally strong second half of the year for United Parcel Service (UPS), our price target on the shares remains $130.



A new digital key standard could finally put your car key inside your iPhone

A new digital key standard could finally put your car key inside your iPhone

We as a people have been carrying many things in our pockets when we leave the house – first keys and wallet then keys, wallet and phone. As part of our Cashless Consumption investment theme we have seen mobile wallets begin to proliferate as well as apps like Apple Pay and PayPal that likely mean at some point we won’t have to carry our physical wallets – if only someone can figure out a digital driver’s license.

Before too long it seems we may be able to ditch the car keys as well, which will naturally be incorporated into our smartphones. We’ve already seen smartphone apps that unlock and lock doors as well as garage doors, which to us means car doors are inevitable. Of course, as this happens it also means another avenue of potential theft that will be a part of our Safety & Security investing theme.

The Car Connectivity Consortium, which counts Apple among its charter members, on Wednesday announced the publication of new “digital key” standard that allows drivers to actuate vehicle systems like door locks and the engine via an NFC-enabled smartphone.

With its technology, aptly dubbed the Digital Key Release 1.0 specification, the CCC aims to bringautomotive manufacturers and mobile device makers together to create an interoperable digital key standard.

The system operates in much the same way as first-party digital keys currently available from a handful of vehicle OEMs. Users with authenticated smart devices are able to lock, unlock, start the engine of and share access to a specific car. Unlike some remote control solutions that leverage Wi-Fi or Bluetooth communications, however, Release 1.0 appears intrinsically tied to short-range technology like NFC.

Relying on existing Trusted Service Manager (TSM) infrastructure, Release 1.0 allows carmakers to securely transfer digital key information to a smart device like a smartphone, perfect for car-sharing or fleet deployments. Specialized hardware like near-field communications chips and internal secure elements provide a high level of user protection.

According to a white paper outlining the technology’s architecture, Release 1.0 looks to create standardized interfaces between a car, a smart device’s NFC and Bluetooth Low Energy stack, secure element, first-party app, TSM, OEM backend and SE provider. OEMs are responsible for proprietary interfaces between their respective backends and the car.

As noted by the group, which focuses on developing mobile device-to-vehicle connectivity solutions, a number of carmakers already field proprietary digital key solutions, though the market is fragmented. A single unifying standard would not only enhance the customer experience, but provide manufacturers access to the latest security protocols and technological advancements, the CCC argues.

CCC charter member Audi is already using digital key technology in its vehicles, while Volkswagen, another charter member, said it plans to integrate the technology soon. Alongside Audi and Volkswagen, Apple, BMW, General Motors, Hyundai, LG Electronics, Panasonic and Samsung are listed charter members of the organization, while core members include ALPS, Continental Automotive, DENSO, Gemalto, NXP and Qualcomm.

The CCC says it is already working on a Digital Key Release 2.0 that should be completed by the first quarter of 2019. The second-generation technology will provide a standardized authentication protocol between the vehicle and a paired smart device, and will be fully with interoperability between difference smartphones and cars.

Source: Apple wants to replace your car keys with an iPhone

Weekly Issue: Earnings from UPS and Intel on deck

Weekly Issue: Earnings from UPS and Intel on deck


Key Points From This Issue:


The last several weeks, we’ve had a string of significant returns across call option trades in Walmart (WMT), Applied Materials (AMAT), Home Depot (HD) and others. Earlier this week, we added Corning (GLW) to that list as we closed out the Corning (GLW) November 17, 2017, $31 calls (GLW171117C00031000) at 1.21, a 92% return off of the 0.63 buy-in price. The underlying Corning shares spiked following an upbeat earnings report and outlook for the company and we prudently booked those profits.

As I pointed out yesterday in this week’s Tematica Investing issue, the market is poised to follow the tone of each day’s earnings reports. This tends to be the case in times like this when the stock market is “priced to perfection” and expectations are running high — sometimes too high. In the current environment that saw the market fall Monday and climb Tuesday only to drop yesterday, we’re inclined to sit back and be patient full well knowing the sheer volume of earnings reports to be had over the next 12 trading days.

That doesn’t mean we are sitting on our hands, as we’ll continue to look for new options trades as well as potential stock shorting candidates. For example, since we covered our General Motors (GM) short in early September the shares have climbed 22% as the company issued a favorable 3Q 2017 earnings report. But in looking at the report in detail, auto sales still fell more than 16% year over year… they just fell less than expected. Remember, we covered the GM short given the expected enthusiasm associated with the need to replace cars following the September hurricanes. As that enthusiasm fades and GM shares are now even more expensive, it’s being reported:

“The majority of GM’s U.S. assembly plants, including somewhere a shift already has been eliminated, produce vehicles that on average have at least an 80-day supply, 33 percent more than what the industry generally considers healthy, according to estimates from the Automotive News Data Center.”

And that’s one example of what we’re keeping tabs on. Again, we’ll be sure to act and pull the trigger when the time is right.


UPS reports 3Q 2017 earnings today

Later this morning, United Parcel Service (UPS) will issue its 3Q 2017 earnings report, and odds are it will have an impact on our United Parcel Service (UPS) Jan 2018 130.000 calls (UPS180119C00130000) that closed last night at 0.43. Consensus expectations for UPS have it delivering (yes, pun intended) EPS of $1.45 on revenue of $15.6 billion. As we saw with our Corning calls earlier this week, an earnings beat and upbeat outlook could quickly pop our UPS calls.

  • We will have more following the company’s earnings report, but should a bad report be had, we have our stop loss set at 0.30.



Hanging steady with Applied Materials

Week over the week the underlying shares for our Applied Materials (AMAT) January 2018 60 calls (AMAT180119C00060000) were trending higher. That is until yesterday’s pullback in the market led to a pullback in the calls. Even so, we’re still modestly profitable and odds are the capital spending update contained inside Intel’s (INTC) 3Q 2017 earnings report will remind investors of the current ramp in semiconductor capital equipment. We heard about the robust environment from AMAT competitor Lam Research (LRCX) last week and that led us to boost our AMAT price target to $65 from $60 on the Tematica Investing Select List.

Looking outside of semi-cap demand, Applied’s display business will remain busy over the next several quarters as manufacturers ramp capacity to meet rising demand, particularly for organic light- emitting diode displays.

Exiting two positions, adding a new one and sticking with Amazon and Home Depot

Exiting two positions, adding a new one and sticking with Amazon and Home Depot




Throwing in the Towel on Costco

We are tossing in the towel on the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) that closed down another $0.06 yesterday and closed at 0.46. As we shared last week, we were frustrated, but that level of frustration rose even higher over the last few days given the continued degradation in the calls even though Costco continues to put up stellar comparable sales growth metrics. We saw those stellar domestic results that prove positive that Costco is one of the few retailers that continues to thrive despite the herd mentality that is “all Amazon” (AMZN). Good thing we also own the Amazon (AMZN) December 2017 $1000 calls (AMZN171215C01000000), which closed last night at 38.75 vs. our 34.25 buy-in price.

Earlier this week, on the back of the company’s stellar August sales report, we added to the Costco Wholesale positon on the Tematica Investing Select List, which served to nudge the average cost basis a bit lower. Given the cost basis in the Costco Wholesale (COST) October 2017 $173 calls (COST171020C00173000) vs. the current share price, we recognize it is going to be a difficult battle for the calls to reach breakeven. If the last three comparable sales reports haven’t perked up the calls, we think they will have a slim chance of doing so in the coming weeks. We could be wrong, but we would rather fish in more fertile waters like we’re doing with the Amazon calls as well as the recently added Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) – more on those Home Depot calls in a few minutes.


Attention Wal-Mart Shoppers

We will take the returned capital from that closed CostCo positon, and pair it with profits made in our recent AXT Inc. (AXTI) and Utilities SPDR ETF (XLU) call trades as well as the COST calls we sold in early August to buy the Wal-Mart (WMT) January 19, 2018 82.50 calls (WMT180119C00082500) that closed at 2.29.

We’ve said that Wal-Mart is poised to be one of the top two retailers alongside Amazon, and our conviction is rising as Wal-Mart continues to adapt its business to our Connected Society tailwind. We’ve seen Wal-Mart management continue to expand its digital footprint, first organically and then in a more pronounced way with its acquisition of After that strategic purchase, Wal-Mart has made several nip and tuck acquisitions to expand the kinds of products offered at, some of which, like Bonobos, will not be offered in Wal-Mart locations.

At the same time, the company, which is also the largest vendor of groceries in the U.S., is seeing a strong pick up in its food business. During its recent June quarter earnings call, the management teams shared its food categories delivered the strongest quarterly comp sales growth in five years. Food sales now account for half of the company’s revenue stream, nearly $200 billion – a strong lead over the second largest grocery chain, Kroger (KR), which has sales of $115.3 billion last year. Part of that is the appeal of Wal-Mart’s every day low prices to the Cash-Strapped Consumer, but here too the company is embracing our Connected Society theme as more than 900 locations offer online grocery.

Quietly, Wal-Mart is becoming “more of a digital enterprise that moves with speed and agility,” that includes experimenting with other tech-based initiatives that include robotics, image analytics to scan aisles for out of stock products.  One example of Walmart’s tech push is its new “Scan & Go” app, which allows shoppers to purchase items in-store without waiting in line or paying at a register. Shoppers will be able barcodes of items they want to purchase and then click a button to pay using their smartphones. They simply have to show a digital receipt to a Walmart greeter on their way out. Pretty cool and yes, we recognize this first very much within our Cashless Consumption investing theme.

With the company embracing several thematic tailwinds as we head into the Halloween season and then the year-end holiday shopping season, we see it capturing greater wallet share at the expense of others that are less able or willing to adapt their business models. One is Kroger, another is Target (TGT), which delivered flat food and beverage comps in its most recent quarter, and then there is Sprouts Farmers Market (SFM) that is already closing locations.

With regard to the call option we’re adding, we’ve selected the January 2018 strike date to capture the bulk of the holiday shopping season, as well as the initial return season that begins immediately after the Christmas holiday and runs into January.


And as I am sure you are asking yourself, “what about the Amazon calls?”



Sticking with Home Depot, watching the narrative on General Motors

On the heels of Hurricane Harvey, we now have Hurricane Irma barreling down on the Caribbean with its sights set on Florida. Irma has been upgraded to a Category 5 hurricane and is widely believed to be one of the most powerful Atlantic hurricanes ever. Moreover, it’s looking to be followed by tropical storm Jose. Odds are this trifecta of back-to-back-to-back storms will hit the economy in a meaningful way, and we expect to see third-quarter GDP forecasts drop as the effect of Irma and Jose wind down.

As the recovery from these storms begins, there is a high probability that Home Depot (HD)’s business will flourish as homeowners as well as contractors look to rebuild and refurnish. If we look at the building products that will be in demand over the coming weeks and months, Home Depot is the “gun” for all of those bullets.

Over the last week, we’ve seen a surge in the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000), which closed last night at 7.70, up more than 70% from where we added them just last week. Given what Florida and the lower east coast are likely to be in for over the coming days, and let’s be honest, there will be no shortage of media coverage, we’ll continue to hold these calls. We will boost our stop loss to 5.00 from 2.00, which ensures a profit of more than 10%.


Now for General Motors (GM)… we’ve been bearish on the shares hence our short position. While Hurricane Harvey put a dent in August auto sales, according to Cox Automotive 300,000 to 500,000 vehicles were destroyed by Harvey’s path — with many of those covered by insurance. This means Harvey has destroyed more vehicles than Hurricane Katrina in 2005 and Hurricane Sandy in 2012, which destroyed 200,000 and 250,000, respectively. Odds are Irma and then Jose will weigh on September auto sales, but as the overall impact of these three storms subsides, it’s likely consumers will begin the arduous task of not only rebuilding and refurnishing but also replacing their cars and trucks.

We suspect that given the magnitude of the cars and trucks to be replaced, the herd will look past any slump in September auto and trucks sales, and focus on the surge in replacement demand to be had. As that activity happens, we are likely to see General Motor’s excess inventory and use of incentives evaporate. Therefore, we are covering our short position on General Motors shares at market.

  • We are covering our short position on General Motors (GM) shares at market.




U.S. auto demand likely to see a post-Harvey pickup

U.S. auto demand likely to see a post-Harvey pickup

The tallies for the damage inflicted by Hurricane Harvey are rolling in, and in the coming days, we expect to see those figures refined even further. Retail and restaurants will clearly feel the pain, but so too will automotive dealerships in and around Houston, the fourth largest city in the U.S. This is likely to have a negative impact on August auto & truck sales. However, with estimates calling for “several hundred thousand vehicles” ruined as a result of the hurricane, the industry could see a boost in the coming months as replacement demand picks up. This would be welcomed by an industry that is seeing declining sales, rising inventories and aggressive use of incentives. The problem is this would likely be a temporary surge, and it also assumes the potential buyers of those cars can afford them.


Hurricane Harvey and its catastrophic aftermath likely destroyed more vehicles than any other natural disaster in U.S. history, according to several early reports.

The calamity likely ruined several hundred thousand vehicles along the Texas Gulf Coast, including more than 1 in 7 cars in the Houston area alone, according to Evercore ISI analysts.U.S. auto sales suffered a temporary setback in late August as flood waters shut down hundreds of Texas dealerships. But sales are likely to get a boost in the fall as Texans scramble for transportation and spend insurance checks to replace their cars, sport-utility vehicles and pickup trucks.

Harvey destroyed about 300,000 to 500,000 vehicles owned by individuals, Cox Automotive chief economist Jonathan Smoke estimated. Insurance is expected to cover a large portion of those losses.

Source: Hurricane Harvey car damage worst in U.S. history

WEEKLY ISSUE: The Market Impact of Hurricane Harvey

WEEKLY ISSUE: The Market Impact of Hurricane Harvey

Key Points from this Alert

Several days after Hurricane Harvey initially hit Houston, the storm continues to dump massive amounts of rain on Texas and Louisiana.  As the waters are just now beginning to recede, we are still getting estimates as to the extent of the damage that has been done. With rain slated to continue until tomorrow, those estimates look like a moving target in the upward direction.

Initial estimates are putting the damage from the storm into the billions of dollars — Hannover Re, one of the largest re-insurers in the world, predicted a price tag of $3 billion on insured losses. That’s just what’s insured, and a more encompassing estimate from Enki Research, a group that calculates risks and costs of hurricanes, tsunamis, and other natural disasters, says the “middle-of-the-road” estimate for Harvey costs at anywhere from $48 to $75 billion. Over the coming days, I suspect we will get a far firmer picture as to how much it will cost Houston and its surrounding areas to recover from this tragedy.

One of the wisest words I’ve heard in the investing world is to be “cold-blooded” when it comes to one’s investments – don’t fall in love with your holdings, and in times of uncertainty or tragedy remain focused. In the case of the Hurricane Harvey disaster, the people of Houston are in all of our thoughts here at Tematica, but we also realize the rebuilding effort to come over the ensuing months will be massive. Near-term, we’re likely to see a hit to the overall economy, much the way we did after Hurricane Katrina hit New Orleans. Accuweather projected it to have a $190 billion impact on the economy, which means we are likely to see a downtick in the economy in September and into October. If Accuweather’s eye-popping estimate is correct, Harvey would cost nearly as much to the economy as Hurricanes Katrina and Superstorm Sandy combined. In other words, expect those GDP forecasts to be revised lower, and we could see the Fed hold off embarking on unwinding its balance sheet a tad longer.

Before too long and as the water recedes, however, we’ll see rebuilding efforts spring forth and that has us eyeing Home Depot (HD), which has numerous stores located in and around the Houston area. We’re also looking at HD Supply (HDS), the sister company that focuses on more so on contractors, government entities, maintenance professionals, home builders and industrial businesses than Home Depot. We could look at shares of Lowe’s Companies (LOW) as well, but Home Depot has been handily beating it delivering faster top and bottom line growth, and Lowe’s lacks the “professional” exposure found at Home Depot Supply.

One of our favorite investment strategies is to “buy the bullets, not the guns,” but in this case, we see Home Depot as a central repository for the things contractors and individuals will need to rebuild – lumber, wallboard, paint, hardware and so on. In assessing the potential for call options between Home Depot and HD Supply, the ones for HD Supply are simply too thinly traded to make them viable. That leaves us to focus on Home Depot calls, and in looking to capture the wave of rebuilding that will begin to occur in the coming months it means a strike date in early 2018.

Putting all of these pieces together ahead of what is likely to be upward revenue and EPS revisions for Home Depot in the coming days and weeks, we’re adding the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) that closed last night at 4.32 to the Tematica Options+ Select List. In keeping with our view that September could be a volatile month – check recent Monday Morning Kickoff and Tematica Investing issues for more on this – we will set a 2.00 stop loss, with the intent of moving that protection up as Home Depot’s business benefits from the Harvey disaster.

In Summary:

  • We are issuing a Buy on the Home Depot (HD) Jan 2018 155.000 calls (HD180119C00155000) that closed last night at 4.32 to the Tematica Options+ Select List.
  • We would be buyers up to 5.00, and we are setting a stop loss at 2.00, which we intend to move up as the calls appreciate in the coming weeks.


Waiting for August Sales Data

Tomorrow we enter September, and that means the usual start of the month data. Among that flow, we’ll get the August Car & Truck sales data and given our short position in General Motors (GM) shares we’ll be dissecting that when it hits. We expect the recent trend of slower than expected sales and rising incentives to continue, but in keeping with our comments on Harvey above, in the coming months, we could see a wave of car and truck replacement activity. I’ll continue to keep close tabs on this short position, looking to cover at the proper time.

  • We are holding steady with our short position in General Motors (GM) shares and our price target remains $30. Our buy-stop level remains at $40.


Next week we should get the August sales data for Costco Wholesale (COST), and given our October calls positions we will also be paying close attention to the results. Candidly speaking, we here at Tematica are rather frustrated with this position as I suspect you are. Even after delivering stellar July same-store sales results and continuing to open additional locations, a key driver of membership fee income, COST shares have been unchanged over the last month and that has weighed on the calls. The culprit is the market’s view of Amazon (AMZN) acquiring Whole Foods Market (WFM), but the mistake it is making is equating Costco’s business to that of Kroger (KR) and other grocers.

As frustrating as this misconception is to watch, we’ll continue to hold the Costco calls for now. Should they get some lift on the company’s next sales report, we’ll look to limit our losses, but if we are languishing at current levels a more prudent move might be to let the calls expire. More on this after the next report from Costco.


As earnings move into the fast lane, things are likely to get bumpier

As earnings move into the fast lane, things are likely to get bumpier

Key Points from this Alert

  • With market volatility picking up as earnings velocity takes off, we are keeping our inverse ETF position intact.
  • Recent data confirms our short bias on General Motors (GM) and Simon Property Group (SPG).
  • Today we are using a lackluster developer conference to scale into Facebook (FB) May 2017 $150 calls (FB170519C00150000) as we drop our stop loss to $0.75 from $1.00.

Over the last two weeks, we’ve seen the stock market bounce up and down with both oil and gold prices doing the same. The latest blow in oil prices comes following a report on Tuesday that “U.S. crude stockpiles fell less than expected in the latest week while gasoline stockpiles grew unseasonably” — not exactly something we want to hear as economists and others trim back their GDP forecasts.

Peering below the headlines, we saw the first dip in the manufacturing component of the monthly Industrial Production report in March. Even if we exclude the step-down in the production of motor vehicles and parts, March manufacturing output still declined. Furthermore, revisions to January and February meant manufacturing activity was weaker than previously thought.

Yes, we realize that we have been talking about this for several weeks, and while we take solace in knowing that once again the herd is catching up to us, we’re not exactly thrilled the latest data suggests there is more revising to be done. As this is happening, we are also seeing a drop in Fed interest rate hike expectations. Just a few weeks ago, 57 percent of traders expected the Fed to boost interest rates two more times this year. As of last night, that expectation fell to 36 percent according to CME Group’s FedWatch program.

Tracing back the market’s up and downs over the past month or so tells us investors continue to look for some direction, and in our view, the coming days are likely to offer the road map. The issue is, the road ahead may not be the one that most are hoping to take and its guide will be the plethora of earnings reports we get not just this week, but increasing pace over the next two weeks. Compared to some 300 reports this week — the vast majority of which will hit after tonight’s market close — next week has more than 990 companies reporting followed by another 1,269 during the first week of May.

As this pace picks up, we’re seeing more political drama unfold in Washington, and when we put it all together it tells us there is more risk to be had in the near-term than reward. While we recognize we are likely preaching to the choir at this point, the simple truth is corporate expectations needs to be reset given the economic climate and as that happens we are likely to see more wind taken out of the stock market’s sales.


In looking at the recent move in the Volatility Index (VIX), which recently hit its highest level since before the November election, the market is on edge as earnings ramp up. Adding to this is some new findings from the Bank of America Merrill Lynch monthly fund manager survey that shows some 83 percent of fund managers believe U.S. stocks are overvalued. As always we try to put data like this into perspective, and in doing so we find that 83 percent is a record number for data that reach back to 1999.

Now that certainly tells several things, but the one we are zeroing in on is the simple fact that in a nervous market, investors are likely to shoot first and ask questions later when faced with a barrage of earnings reports.

  • For these reasons, we will continue to stick with all of our inverse stock market ETFs — the ProShares Short S&P500 (SH), ProShares Short Russell 2000 (RWM) and ProShares Short Dow30 (DOG), all of which climbed higher over the last two weeks — for at least the next several weeks. 



Turning to Our Short Positions in
General Motors (GM) and Simon Property Group (SPG)

The March Retail Sales report confirmed our concern over the consumer’s ability and willingness to spend. The fact that 1Q 2017 was the worst quarter for restaurant traffic in three years is yet another confirming sign of that fact. As earnings reports roll in, we’ll take stock in what Visa (V) and MasterCard (MA)have to say about consumer spending, but with more than $1 trillion in consumer credit card debt, we are inclined to keep our short position in GM and SPG shares intact.

  • 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.
  • 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. 



That Brings Us to Our One Long Position — Facebook

The Facebook (FB) May 2017 $150 calls (FB170519C00150000), closed last night at $1.10, modestly above our $1.00 stop loss level. The calls have traded off over the last two days and we can understand why. We have to say we were somewhat underwhelmed by this year’s annual developer conference, better known as F8, that spanned the last two days. CEO Mark Zuckerberg has announced a series of new features covering augmented reality, artificial intelligence bots, and more far-fetched plans to close the gap between humans and machines. In particular, Zuckerberg wants Facebook users to be able to “type with their brains and hear with their skin.”

If you thought you heard our eyes roll, you were correct.

Each of these announced initiatives will take Facebook time to develop and then, in turn, it will be even more time for them to have a meaningful impact on the company’s business model — far more time than we have with our May calls.

That said, given Alphabet’s (GOOGL) recent snafu with YouTube and advertisers, we suspect Facebook saw a bump in advertising that should help it keep its earnings beating track record intact. With the company set to report its 1Q 2017 earnings on May 3, we’ll use the recent pullback in the calls to scale into the position, reducing our cost basis along the way. As we do this, we will drop our protective stop loss to $0.75 as well.