Weekly issue: Downside Protection Critical Amid These Uncertain Conditions

Weekly issue: Downside Protection Critical Amid These Uncertain Conditions

Key points inside this issue

  • Ahead of the Fed’s latest dot blot, 2019 GDP expectations move lower.
  • With uncertainties again on the rise, we reiterate our Buy rating on the ProShares Short S&P 500 ETF (SH) ahead of the upcoming March quarter earnings season.


Weakening GDP Expectations for the Remainder of 2019

Looking back over the last few weekly issues, it would be fair to say they were a little wordy. What can I say, between the economic data and earnings season, plus thematic data points, there was a lot to share over the last few weeks. Today, however, I’m going to cut to the point with my comments, largely because all investor eyes and ears are waiting to see and hear what Fed Chair Jerome Powell has to say about the speed of the US economy as they look for signs over what is coming next out of the Fed.

We’ve talked quite a bit about the slowing speed of the global economy, and even though there have been some individual bright spots across the aggregated hard and soft economic data from both government and third-party sources, the slowing speed is hard to ignore. Based on the published data, domestic GDP hit 3.1% last year, and as we’ve shared recently we’ve started to see the expectations for 2019 move lower in recent weeks. Per the March CNBC Fed Survey of 43 economists and Fed watcher findings, GDP for 2019 is now expected to clock in around 2.3% — not quite cut in half compared to 2018, but dramatically lower and significantly lower than folks were looking for in the back half of 2018.

When the Fed issues its post FOMC meeting statement today, the focus will more than likely not be on the interest rate decision – almost no one expects a hike. Instead, rapt attention will be paid to the Fed’s updated economic dot plot, which will reveal how it sees the US economy shaping up. Let’s remember that one unofficial aspect of the Fed’s job is to be a cheerleader for the economy, so it becomes a question of “if they are cutting their GDP forecast” how deep of a cut could we really see?

Culprits of the slowing economy and these cuts include aspects of our Middle-Class Squeeze investing theme as consumers in the US grapple with debt levels that have risen precipitously over the last several years. The consumer spending tailwind associated with our Living the Life investing theme appears to be slowing some given the rising debt levels of Chinese consumers. Governments have also run up debt in recent years as the current business cycle has grown longer in the tooth. And of course, there is the impact of currency as well as political and trade uncertainties, including the pushout of US-China trade talks to June.


Downside Protection is Key Under These Circumstances

In a little over 10 days, we will be exiting March, entering the second quarter and beginning the earnings season dance all over again. My concern is that given the above and the several unknowns therein, we are poised to see another earnings season during which aggregate expectations will be adjusted lower. Case in point, with the  US-China trade agreement timetable slipping and slipping, it becomes rather difficult for a company to factor any resolution into its guidance, especially when the terms of the agreement are unknown.

Despite all of the above, the domestic stock market has continued to chug higher, once again approaching overbought levels, even though 2019 EPS cuts for the S&P 500 have made the market even more expensive than it was as we exited 2018.

The potential poster child for this is FedEx (FDX), which saw its shares take a fall last night after the company cut its annual profit forecast for the second time in three months due to slowing global growth, rising costs from a 2016 acquisition in Europe and questions over its ability to withstand U.S.-China trade tensions and uncertainty over the U.K.’s exit from the European Union.

Not to go all Groundhog Day on you, but this looks increasingly like the situation we saw in December when I added the ProShares Short S&P 500 ETF (SH) to the Select List. If we didn’t have those shares to offer some downside protection for what lies ahead, I would be adding them today. If you don’t have any of those shares in your holdings, my advice would be to add some. Much like insurance, you may not know exactly when you’ll need it, but you’ll be happy to have it when something goes bad.

  • With uncertainties again on the rise, we reiterate our Buy rating on the ProShares Short S&P 500 ETF (SH) ahead of the upcoming March quarter earnings season.



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.


Weekly Issue: Investor anxiety continues

Weekly Issue: Investor anxiety continues

Key points inside this issue

  • As the investors grapple with anxiety over trade as well as the speed of economic and earnings growth, we’ll continue to hold ProShares Short S&P 500 (SH) shares.
  • Our price target on the shares of Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG) remains $14.
  • Our price target on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) shares remains $250.
  • Our price target on Amazon (AMZN) shares remains $2,250


The stock market experienced another painful set of days in last week as it digested the latest set of economic data, and what it all means for the speed of the domestic and global economy. Investors also grappled with determining where the U.S. is with regard to the China trade war as well as the prospects for a deal by the end of March that would prevent the next round of tariffs on China from escalating.

There remain a number of unresolved issues between the U.S. and China, some of which have been long-standing in nature, which suggests a fix in the next 100+ days is somewhat questionable. This combination induced a fresh round of anxiety in the market, leading it to ultimately finish the week lower as the major indices sagged further quarter to date. In turn, that pushed all the major market indices into the red as of Friday’s close, most notably the small-cap heavy Russell 2000, which finished Friday down 5.7% year to date. For those keeping score, that equates to the Russell 2000 falling just under 15% quarter to date.

Last week we added downside protection to our holdings in the form of ProShares Short S&P 500 (SH) shares, and we’ll continue to hold them until signs of more stable footing for the overall market emerge. As we do this, I’ll continue to evaluate not only the thematic signals that are in and around us day-in, day-out, but also examine the potential opportunities on a risk to reward basis the market pain is creating.


Shares of Del Frisco’s get some activist attention

Late last week, our shares of Guilty Pleasure Thematic Leader Del Frisco’s Restaurant Group (DFRG) bucked the overall move lower in the domestic stock market following the revelation that activist hedge fund Engaged Capital has acquired a nearly 10% in the company with a plan to push the company to sell itself according to The Wall Street Journal. Given the sharp drop in DFRG shares thus far in 2018, down 52%, it’s not surprising to see this happen, and when we added the shares to our holdings, we shared the view that at some point it could be a takeout candidate as the restaurant industry continues to consolidate. In particular, Del Frisco’s presence in the higher end dining category and its efforts over the last few months to become a more focused company help explain the interest by Engaged.

In response, Del Frisco’s issued the following statement:

“Del Frisco’s is committed to maximizing long-term value for all shareholders. While we do not agree with certain characterizations of events or of our business and operations contained in the letter that we received from Engaged Capital, the Company values constructive input toward the goal of enhancing shareholder value. “

Compared to other Board responses this one is rather tame and suggests Del Frisco’s will indeed have a dialog with Engaged. Given the year to date performance in DFRG shares, odds are there are several on the Board that are frustrated either with the rate of change in the business or how that change is being viewed in the marketplace.

In terms of who might be interested in Del Frisco’s, we’ve seen a number of going private transactions in recent years led by private equity investors that re-tool a company’s strategy and execution or combine it with other entities. We’ve also seen several restaurant M&A transactions as well. Let’s remember too how on Del Frisco’s September quarter earnings conference call, the management team went out of its way to explain how the business performed during the last recession. That better than industry performance may add to the desirability of Del Frisco’s inside a platform, multi-branded restaurant company.

As much as we may agree with the logic behind Del Frisco’s being taken out, we’d remind subscribers that buying a company on takeout speculation can be dicey. In the case of Del Frisco’s, we continue to see a solid fundamental story. We are seeing deflation in food prices that bode well for Del Frisco’s margins and bottom line EPS. Over the last quarter we’ve seen prices in the protein complex – beef, pork, and chicken – move lower across the board. According to the United Nation’s Food and Agriculture Organisation’s (FAO) food price index, world food prices declined during the month of November to their lowest level in more than two years. We’re also seeing favorable restaurant spending per recent monthly Retail Sales reports, which should only improve amid year-end holiday dinners eaten by corporate diners and individuals.

We’ll continue to hold DFRG for the fundamentals, but we won’t fight any smart, strategic transaction that may emerge.

  • Our price target on the shares of Del Frisco’s Restaurant Group (DFRG) remains $14.


What to watch in the week ahead

As we move into the second week of the last month of the quarter, I’ll continue to examine the oncoming data to determine the vector and velocity of the domestic as well as global economy. Following Friday’s November Employment Report that saw weaker than expected job creation for the month, but year over year wage gains of 3.1% the Atlanta Fed continued to reduce its GDP forecast for the current quarter. That forecast now sits at 2.4%, down from 3.0% at the end of October.

With the sharp drove in oil prices has consumers feeling a little holiday cheer at the gas pump, odds are next week’s November inflation reports will be tame. The fact that world food prices per the Food and Agriculture Organization’s (FAO) food price index hit the lowest level since May 2016 also bodes well for a benign set of inflation data this week. Later in the week, we’ll get the November Retail Sales report, which should be very confirming for our holiday facing positions – Amazon (AMZN), United Parcel Service (UPS), McCormick & Co. (MKC) and Costco Wholesale (COST) – that given the kickoff of “seasons eatings” with Thanksgiving and the start of the holiday shopping season that clearly shifted to digital shopping.

That report will once again provide context for this shift as well as more than likely confirm yet again that Costco Wholesale (COST) continues to take consumer wallet share. Speaking of Costco, the company will report its quarterly results this  Thursday. Quarter to date, the company’s monthly same store sales reports are firm evidence it is winning consumer wallet share, and we expect it did so again in November, especially with its growing fresh foods business that keeps luring club members back. Aside from its top and bottom line results, I’ll be focused once again on its pace of new warehouse openings, a harbinger of the crucial membership fee income to be had in coming quarters.

  • Our price target on Middle-Class Squeeze Thematic Leader Costco Wholesale (COST) shares remains $250.

We’ll end the economic data stream this week with the November Industrial Production report. Given the sharp fall in heavy truck orders in November, I’ll be digging into this report with a particular eye for what it says about the domestic manufacturing economy.

As discussed above, this week Costco will report its results and joining it in that activity will be several other retailers such as Ascena Retail (ASNA), DWS (DWS), American Eagle (AEO) and Vera Bradley (VRA). Inside their comments and guidance, which will include the holiday shopping season, I’ll be assessing the degree to which they are embracing our Digital Lifestyle investing theme. We’ll also see Adobe Systems (ADBE) report its quarterly result and I’ll be digesting what it has to say about cloud adoption, pricing and prospects for 2019. As we know, that is a core driver of Amazon Web Services, one of the key profit and cash flow drivers at Amazon (AMZN).

  • Our price target on Amazon (AMZN) shares remains $2,250


More year-end trimming — big gains and managing 2017 capital gains

More year-end trimming — big gains and managing 2017 capital gains


  • Following the continued surge higher in the shares of Cashless Consumption company USA Technologies (USAT), we are trimming back our position by selling one-third of the position, which will produce a gain of more than 85% over the last seven months, and leave ample exposure on the Tematica Investing Select List. As we make this trade, we will also set a stop loss for USAT at $7.50, which will lock in a gain of roughly 65% on the remaining shares.
  • We are also trimming back our position in Disruptive Technology company Universal Display (OLED), which closed last Friday up more than 240% from our October 2016 entry. Similar to the USAT trade, we are selling one-third of the position, which lets us book some fantastic gains, but also ensures meaningful exposure to ramping demand for organic light emitting diode displays. We are also boosting our stop loss on OLED shares to $125 from $100.
  • As we book these gains, we will also offset these gains for tax purposes by matching them with losses. As such, we are exiting our positions in Nuance Communications (NUAN) and the ProShares Short S&P 500 ETF (SH) shares, which are down roughly 7% and 27%, respectively since being added to the Select List in 2017 and 2016.


A week ago I shared that we would be doing some year-end house cleaning on the Tematica Investing Select List as well as looking to minimize 2017 capital gains. We are back at that today as we look to match both short and long-term gains with short and long-term losses. Here we go:


Trimming back USAT shares

Last week I boosted our price target on Cashless Consumption company USA Technologies (USAT) to $8.00 from $6.50, and the shares proceeded to go on a tear following an upbeat presentation at the Craig-Hallum Alpha Select Conference. I’ve been a long-time fan of the company’s business model that focuses on mobile payments, particularly for vending applications, for some time. As much as I am a fan, with the shares up roughly 85% in the last seven months and having blown past our new price target into overbought territory, it means now is the time to be a prudent investor.

In keeping with the Wall Street saying — bulls make money, bears make money, but pigs get slaughtered — we are going to sell one-third of the USAT position on the Tematica Investing Select List, which will harvest a significant win. Given that we are in the early stages of mobile payments around the globe, the remaining USAT shares will offer us ample exposure to our Cashless Consumption investing theme. Again, we want to be prudent, which means setting a stop loss at $7.50, which locks in a gain of roughly 66% on our remaining USAT shares.

  • Following the continued surge higher in the shares of Cashless Consumption company USA Technologies (USAT), we are trimming back our position by selling one-third of the position, which will produce a gain of more than 85% over the last seven months, and leave ample exposure on the Tematica Investing Select List.
  • As we make this trade, we will also set a stop loss at $7.50, which will lock in a gain of roughly 65% on the remaining shares.


Following the same strategy with Universal Display (OLED) shares

Much like USAT shares, the position in Disruptive Technologies company Universal Display (USAT) has also been on a tear this past year, soaring roughly 280% over the last 12 months compared to more than 27% for the Nasdaq Composite Index and 19% for the S&P 500. Again, while we know the ramp in organic light emitting diode display demand will continue in coming quarters, as investors we need to remain prudent.

Therefore, we are employing a similar strategy with OLED shares that we did with USAT shares – we will sell one-third of the position and book a hefty win, while keeping the balance in play to capture additional upside in the coming quarters. We will also boost the positions stop loss to $125 from $100, which will lock in a profit of 135% on the remaining shares.

  • Similar to the USAT trade, we are selling one-third of the Universal Display (OLED) position, which books a gain of roughly 240% from our October 2016 buy-in.
  • We are boosting our stop loss on the remaining OLED shares to $125 from $100.



Cleaning up the Select List and optimizing year-end capital gains

It’s not lost on us those two trades will deliver some meaningful short and long-term gains. While we’re fans, big fans in fact, of such gains, we’re also fans of minimizing capital gains. As such we’re going to further clean up the Tematica Investing Select List by offsetting those gains with losses as we make the following trades:

  • We are exiting our position in Nuance Communications (NUAN), which is down 8% since it was added to the Tematica Investing Select List in January of this year.
  • We’re also exiting ProShares Short S&P 500 ETF (SH) shares, which are down 27% over the last 20 plus months.


Booking losses are never fun, but in this case, it does serve to soften the 2017 tax bill. Not a bad thing at all, especially since it adds back, even more, capital back to the war chest. Given our positions in Amazon (AMZN), Apple (AAPL) and Alphabet (GOOGL), we have ample exposure to voice technology and interfaces that are part of our Disruptive Technology investing theme. And while we are shedding the inverse ETF position, given our concerns with the other overall market that appears to be stalling amid tax reform, we’ll examine other hedging strategies to utilize when the time is right.




Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Reasons To Be Cautious Ahead of Trump’s Feb. 28 Speech?

Subscribers to Tematica Investing received this commentary on Monday, Feb. 27 with specific instructions pertaining the Tematica Select List.

If you’ve missed our weekly Monday missive that is the Monday Morning Kickoff, we’d encourage you to pursue it later today as it offers both context and perspective on last week, including much talk about the Fed, and sets the stage for this week. We’ve got a lot of data coming at us, more corporate earnings that prominently feature our Cash-strapped Consumer and Fattening of the Population investing themes. There are a number of events and conferences as well, and before too long we’ll have some thoughts on this week’s Mobile World Congress, an event that meshes very well with our Connected Society, Disruptive Technology and Cashless Consumption investing themes. We expect to see a number of announcements ranging from new smartphone models, connected as well as autonomous vehicle developments, voice digital assistant initiatives, drones, and payment systems to name a few. We’ll be watching these with regard to a number of positions on the Tematica Select List,

As Mobile World Congress gets underway, however, we have another event that should capture investor attention. After presenting what’s called a “skinny budget” today, (which we view as the “opening bid budget”) tomorrow night, President Trump will be speaking to a joint session of Congress. Typically this is referred to as the State of the Union Address, but it’s not called that for a newly elected president. Trump has already shared that he will be talking about health care reform – “We’re going to be speaking very specifically about a very complicated subject…I think we have something that is really going to be excellent.”

As we’ve said before, we’re optimistic and hopeful, but thus far it seems Republicans have yet to find common ground on which to move forward on this. In addition to healthcare reform, investors, including us, will be listening for more details on Trump’s fiscal policies. The issue is speeches such as this tend to be lacking in specifics, and we would be rather surprised to see Trump deviate from that tradition.  Moreover, we’ve already seen the Treasury Secretary push out the timetable for a tax report to late summer, and Trump himself suggested that we are not likely to see his tax reform proposal until after the healthcare reform has been addressed.

As we shared in this morning’s Monday Morning Kickoff, with the S&P 500 trading at 18x expected earnings, it looks like the stock market is out over its ski tips. Two drivers of the market rally over the coming months have been the improving, but not stellar economic data and the hope that President Trump’s policies will jumpstart the economy. We’ve been saying for some time that the soonest we’d likely get any meaningful impact from Trump’s policies would be the back half of 2017. That’s been our perspective, but as we know from time to time, the stock market can get ahead of itself, and we see this as one of those times. The stock market’s move reflects expectations for an accelerating economy – it’s the only way to get the “E” that is earnings growing enough to make the market’s current valuation more palatable.

One of the common mistakes we see with investors is they almost always only focus on the upside to be had, without keeping an eye on the downside risks. If Trump is successful when it comes to the domestic economy, and we’d love nothing more than to see acceleration here, earnings will likely grow materially.

One of the potential risks we see this week is the market being disappointed by the lack of details that Trump will share tomorrow night, which might be read as a push out in timing relative to what the stock market expects. As we said on last week’s Cocktail Investing podcast, resetting expectations is a lot like children that open presents on Christmas morning to find something other than what they expected — it’s far from a harmonious event and more like one that is met with mental daggers, confusion, and second guessing. In short, not a fun time at all.

Again, our thought is better to be safe than sorry given where the market currently sits. Some investors may want to utilize stop losses across positions like Universal Display (OLED), CSX Corp. (CSX), Skyworks Solutions (SWKS), Activision Blizzard (ATVI) and others that have been robust performers thus far in 2017 in order to preserve gains should the stock market get its post-Trump speech jiggy on. More aggressive investors may wish to utilize inverse ETFs, such as ProShares Short S&P500 ETF (SH), ProShares Short Dow30 ETF (DOG), or ProShares Short QQQ (PSQ), while traders implement call options on those inverse ETFs or employ the use of select puts.



As earnings kick into 5th gear expected volatility has us on sidelines, for now

As earnings kick into 5th gear expected volatility has us on sidelines, for now

We are waist deep in March quarter earnings with more than 1,400 companies reporting this week — a 40% increase compared to last week. Mixed in that horde are 124 S&P 500 companies (including 2 DJIA components) reporting. By the end of the week that will mean 87% of the S&P 500 group of companies will have reported March quarter results. 

As we’ve shared with you thus far, overall earnings expectations for the S&P 500 group of companies has continued to trend lower since the end of 3Q 2015. The expected volatility has us on the sidelines from jumping on new positions . . . for now. But that doesn’t mean we’re not busy sharpening our pencils and getting ready for the right opportunity. 

In this week’s edition of Tematica Investing:

  • Ahead of its May 9 earnings report, we are adding online pet pharmacy Petmed Express (PETS) to the Tematica Contender List. 
  • Regal Entertainment (RGC) rides the strong movie box office to beat earnings expectations.
  • A Tematica Investing subscriber question opens the door for Amazon (AMZN) shares.
  • We’ve got the latest thematic supporting data points that ripped from the headlines around us.
  • What did we enjoy this week? The Big Green Egg of course.

Click the link below to download the full report

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Wading deeper into earnings reports reveals growth expectations not living up to expectations

Wading deeper into earnings reports reveals growth expectations not living up to expectations

It’s earnings season, and with anywhere from a few hundred to more than a 1,000 companies reporting their results, this certainly makes for a volatile time with investors shooting first as results hit the tape and asking questions over the quality of those earnings later.

As we navigate the maze of earnings reports to be had in the coming days, we’ll continue to refine our thematic shopping list and look to pounce on opportunities that offer a compelling risk to reward trade off.

In this week’s edition of Tematica Investing:

  • Wading deeper into March quarter earnings finds growth expectations are not living up to expectations. As we’ve said before, it sometimes takes time for the market to react to the fundamentals, but the fundamentals eventually catch up with expectations.
  • While we expect no-action from the Fed’s FOMC meeting later today, expect Wall Street to parse the commentary on the economy and inflation to determine the Fed’s next course of action.
  • Earnings reports for companies on the Tematica Select List are starting to trickle in, and we see no reason to alter our position in AT&T (T) or American Capital Agency (AGNC) shares at this time.
    Checking in on Chipotle Mexican Grill (CMG) shares, we find more patience is required before pulling the gun on this Food with Integrity contender.
  • We’ve got the latest thematic supporting data points that ripped from the headlines around us.
    Finally, we’re re-introducing an old feature called “What We’re Enjoying” and this week it’s the new Echo Dot from Amazon.

Click the link below to download the full report


Entering Choppy Waters as Earnings Velocity Picks Up

Entering Choppy Waters as Earnings Velocity Picks Up

Actions from this post

Ratings changes included in this dated post

  • Maintain DOG, SH, RWM as “BUY”: We expect the volatility of the markets to once again be upon us, not just because the S&P Short Range Oscillator closed yesterday at 9.2 percent (compared to just 3.9 percent a week ago), but because that Oscillator is now back to 2x overbought levels. We continue to rate DOG, SH and RWM inverse ETFs Buy at current levels.
  • ADDING DIS MAY $105 CALLS: We are adding Disney (DIS) May $105 calls(DIS160520C00105000) that closed last night at $1.57 to the Tematica Pro Select List. We would buy these calls up to $1.85 and to minimize potential downside we are setting a stop loss at $1.15.
  • ADDING XLY MAY $80 CALLS: We are also adding Consumer Discretionary SPDR ETF (XLY) May $80 calls (XLY160520C00080000) that closed last night at $1.24 to the Tematica Pro Select List. We would be comfortable adding to the position up to $1.50; to manage downside risk, we are setting a stop loss at $1.00.
  • CONTINUE TO HOLD PCAR SHORT CALL: Data supporting our short call in Paccar (PCAR) shares continues to mount, but a key determinant of whether or not we scale into the position will be found in quarterly results from heavy truck retailer Rush Enterprises (RUSHA) due this morning.

Earnings season kicks into high gear this week. Despite the headline print of the Dow Jones Industrial Average, which has climbed just over 1 percent over the last week given the moves in the 30 stocks that comprise the index, we’re seeing choppy waters emerge following March quarter results from Netflix (NFLX), IBM (IBM) and Intel (INTC). Intel in particular shared it will cut 11 percent of its workforce as it shifts focus from PCs to other markets including data centers and the Internet of Things. To us here at Tematica, that means Intel is finally catching up with what is driving the Connected Society. 

Intel is not alone in announcing layoffs — also this week Nordstrom (JWN) shared it will cut 400 jobs at its corporate headquarters, which raises questions over spending habits of more well off consumers. To us, it means consumers are turning elsewhere to shop —another confirming datapoint of not just our Cashstrapped Consumer thematic, but also the Connected Society — and we continue to see Amazon (AMZN) as a primary beneficiary (see more on this below). We’ve also started to see more ratings downgrades on the likes of Boeing (BA), Bloomin Brands (BLMN), Intel, Badger Meter (BMI), Spirit Airlines (SAVE) and Toll Brothers (TOL) to name a few.

In short, we expect the volatility of the markets to once again be upon us, not just because the S&P Short Range Oscillator closed yesterday at 9.2 percent —compared to 3.9 percent just a week ago — but because that Oscillator is now back to 2x overbought levels.

To us this means, continuing to hold onto our heeding positions that are our inverse ETFs — ProShares Short Dow30 ETF (DOG), ProShares Short S&P 500 (DOG) and ProShares Short Russell2000 (RWM) — as well as our more defensive positions in Health Care Select Sector SPDR ETF (XLV) and iShares Barclays 20+ Year Treasury Bond ETF (TLT).

Adding Disney Calls and Another Call Trade on the House of Mouse, Marvel, Lucas

Despite the growing gloom, there are still bull markets to be had with companies poised to benefit. One of those is easily found in our Content is King investing theme and in yesterday’s Tematica Investing we added shares of content and merchandising champ Disney (DIS) to the Tematica Select List. If you missed it, you can read it here, but in a nutshell Disney has several powerful catalysts that have started to kick in thus far in 2016 with several more coming over the next several quarters. The more well known ones are found on the upcoming slate of Marvel, Lucasfilm, and Pixar movies that range from Captain America, Dr. Strange, Star Wars and Finding Dory. Those films will drive merchandizing and other key content platforms, such as gaming and music to name a few. Disney has also adopted surge pricing at its existing theme parks and in June it will open its largest park in China dubbed Shanghai China.

From our perspective these layered catalysts kick in over the next few months, and while we see DIS shares as a core holding for our Content is King investing theme, we see each catalyst adding to the share price.

In order to capture greater returns, we’re adding the DIS May $105 calls(DIS160520C00105000) that closed last night at $1.57 to the Tematica Pro Select List. We are comfortable buying these calls up to $1.85; to limit downside in the position, we are setting a stop loss at $1.15.

Adding a Multi-Thematic ETF Call

Also in yesterday’s Tematica Investing we shared another way to invest and capture the upside we see in DIS shares — through the Consumer Discretionary SPDR ETF (XLY), which counts DIS shares as its third largest holding behind Amazon.com (AMZN) and Home Depot (HD). In addition to meaningful upside to be had with DIS shares, we see Amazon benefitting from the continued shift to online and mobile shopping that is a key tenant of our Connected Society investing theme, while Home Depot is a natural beneficiary of the spring season. Other key holdings of XLY include Comcast (CMSCA), McDonald’s (MCD) and Starbucks (SBUX) and each of these are potential candidates in our Connected Society, Fattening of the Population and Affordable Luxury/Guilty Pleasure investing themes, respectively.

Given the upside to be had at Disney and these other core holdings, we are adding the XLY May $80 calls (XLY160520C00080000) that closed last night at $1.24 to the Tematica Pro Select List. We would be comfortable adding to the position up to $1.50; to manage downside risk, we are setting a stop loss at $1.00. 

Rush Enterprises to Give Direction on Paccar Short

Along with the market melt up, we’ve witnessed the short in heavy truck company Paccar (PCAR) move against us these last several days despite weak fundamentals. The most notable was the disappointing March Industrial Production reading, which marked the 6th month of contrition out of the last 7 months. In the below chart, we see the historically tight correlation between the year over year change in Industrial Production has diverged in 2016, but as we have seen time and time again, at some point fundamentals catch up with a climbing stock price.

We see the weakening fundamentals for Paccar that include lackluster economic activity, falling heavy truck orders and weak guidance from Paccar competitor Navistar (NAV) all weighing on Paccar’s March quarter performance and current quarter outlook.


We will get further insight into the tone of the heavy truck market and Paccar’s prospects this morning when Rush Enterprises (RUSHA), a retailer of commercial vehicles and related services, which includes a network of commercial vehicle dealerships, reports its March quarter earnings. In the company’s 2015 10-K filing with the SEC, Rush notes that “We are dependent upon PACCAR for the supply of Peterbilt trucks and parts, the sale of which generates the majority of our revenues.” As such, we see Rush’s results as a guiding hand for what Paccar will likely say when it reports its March quarter results next Tuesday (April 28).

After analyzing Rush’s quarterly results and digesting comments on its related earnings conference call, we will assess the prospects of adding to our Paccar short position and/or revisiting a put position in PCAR shares. Should we make any such additions to the Tematica Select List we will issue a special alert detailing the specifics of our actions.

Recap of Action Items from this Week

  • Continue to Hold inverse ETF’s DOG, SH and RWM, as well as defensive ETF TLT.
  • Adding DIS May $105 calls (DIS160520C00105000) up to $1.85 with a stop loss at $1.15.
  • Adding XLY May $80 calls (XLY160520C00080000) up to $1.50 with a stop loss at $1.00.
  • Continue to Hold short position in PCAR
Content continues to be king as we add another position to Tematica Select List

Content continues to be king as we add another position to Tematica Select List

While Sumner Redstone claims to have coined the phrase, it was Bill Gates who over two decades ago brought “Content is King” into the common vernacular when he wrote on the Microsoft website:

Content is where I expect much of the real money will be made on the Internet, just as it was in broadcasting . . . When it comes to an interactive network such as the Internet, the definition of “content” becomes very wide. For example, computer software is a form of content-an extremely important one, and the one that for Microsoft will remain by far the most important. But the broad opportunities for most companies involve supplying information or entertainment. No company is too small to participate.

We are seeing a new era of content given the entrance of companies like Netflix (NFLX), Amazon (AMZN) and Hulu as well as the growing influence of gaming, which has already spawned several cross platform properties. New technologies bring challenges, but at the end of the day no matter where consumers are with whatever device they have in their hands, content is what they will be consuming in one form or another.

It’s at this inflection point where we focus our investment strategy on one of the oldest content producers in the business, the Walt Disney Company (DIS).

In this week’s edition of Tematica Investing:

  • March Housing Starts disappointed, but given its multiplier effect a slower than expected spring housing season probably means a lackluster economy in the June quarter
  • We are adding Content is King company Disney (DIS) to the Tematica Select List with a price target of $125. We would be comfortable adding to the position up to the $106 level, and we are also instating a protective stop loss at $87. As you’ll read in our detailed comments, we are very upbeat about this new recommendation. Investors desiring an alternative strategy to invest in DIS shares could consider Consumer Discretionary Select Sector SPDR Fund (XLY) which counts Disney as its third largest position at 6.7% behind Amazon.com (AMZN,10.4%) and Home Depot (HD,7.4%).
  • The best domestic movie box office in years means we remain upbeat on our position in Regal Entertainment Group (RGC) shares.
  • Kudos to us for not recently adding Nike (NKE) shares to the Tematica Select List, but we continue to watch the shares.

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See, fundamentals do matter

See, fundamentals do matter

Welcome to this week’s edition of Tematica Investing. As you recall, this is the publication that replaces my old Growth & Dividend Report newsletter. Each week in Tematica Investing we’re going to provide you with investment ideas and strategies based upon our proprietary thematic investing framework, and takes a long-view approach to investing based upon documented trends that are uncovered while analyzing the intersection of economic, demographic, psychographic, regulatory and technological factors.

Now, in this week’s edition:

  • There are no new additions to the Tematica Select List today, however, we continue to examine new opportunities for it and the Tematica Contender List . . .read more.
  • As we expected, volatility is back on Wall Street as the herd once again begins to focus on fundamentals.
  • Looking at what’s up with the Tematica Select List as Physicians Realty Trust (DOC) makes a big transaction
  • We’re not taking it easy, we’re adding a new theme to the Tematica stable – The Fountain of Youth.
  • All that and more thematic confirmation ripped from the headlines

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