We’re slowing inching our way closer toward 1Q 2017 earnings season, which, as we shared earlier this week, we think could bring a return of volatility to the stock market. We’ve read a lot of bullish commentary, with many pointing to the robust inflow of funds into ETFs during 1Q 2017 — $134.7 billion vs. 29.6 billion in inflows in 1Q 2016 – but we have to remember individual investors tend to stay on sidelines only to return to the market near the top.

Part of what’s to blame is the overly bullish talking heads, and in my readings, I found a great example of this. Financial firm LPL published the following commentary about 1Q 2017:

Although the S&P 500 Index just missed out on a five-month winning streak in March with a 0.04% loss, the good news is it still gained 5.5% in the first quarter.|

“This came out to the best quarter overall since the fourth quarter of 2015, and it was the best first quarter gain since 2013! Going back to 1950, this was the 25th time the S&P 500 gained 5% or more during the first quarter. The good news for the bulls is the returns after a big first quarter have been broadly stronger across the board.”

Now let’s dig into this…. there have been 67 years between 1950 and 2017, and doing some basic math we find 25/67 equals 37 percent. This means the “good news” for the bulls happens a little more than one-third the time. This also means that nearly two-thirds of the time, it doesn’t happen.

Just another example that we need to really dig into the data with context and perspective to understand what is really going on vs. what is being said. In doing so with this LPL commentary, we’ll be generous and say it has an overly bullish slant given the data. With the herd taking a bullish view despite the hard data we’ve been getting that calls for a rest in expectations for both 2017 earnings and GDP forecasts, we’ll continue to keep all three of our inverse ETFs in the Pro Select List.

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Housekeeping!

Before we get to recapping our existing positions, we have a quick housekeeping reminder. As we mentioned in yesterday’s Tematica Investing, we’ll be using the market holiday next week to take a breather to get ready for the explosion in earnings reports that will begin the day after Easter. As such, your next regular issue of Tematica Pro will be April 20.

Rest assured that is something important comes along, we’ll be sure to issue a special alert.

 

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March Auto Sales Confirm our Bearish View on GM 

March was supposed to be the month US auto sales rebounded from decreases in January and February. Instead, ample discounts were unable to spur demand for at the biggest automakers such as Ford (F), Fiat, and Toyota (TMC), and Honda (HMC), which all posted year over year declines. Sales incentives rose 13.4 percent in March, compared to a year earlier, to an average of $3,511 per vehicle, according to ALG. Making matters even worse, production is outpacing sales, which means auto dealers getting stuck with too many vehicles. Inventory levels hit 4.1 million units entering the month, the highest level since June 2004, according to Edmunds analysis based on Ward’s Auto figures.

General Motors faired a little better, with its US sales rising 2 percent year over year in March, but that was well below the consensus forecast that called for a +9.6 percent increase year over year.

As we look around us and see consumers saving more while others are grappling with rising bank card and subprime auto loan delinquencies, we continue to question the degree of new car demand. Adding to our concern is a new report from the Mortgage Bankers Association that showed the average size of a home loan was the largest in the history of its survey, which dates back to 1990. Another data point that points to Cash-strapped Consumers at a time when auto loan costs are ticking higher following the Fed’s two recent interest rate hikes.

GM will report its 1Q 2017 earnings on Friday, April 28 and as important as the rear view mirror quarterly results are, it will be the guidance that sets the tone for GM shares in 2Q 2017.

• 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. 

 

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More Retail Pain Adds to Bearish Resolve on Simon Properties 

Next week will bring the March Retail Sales report, and based on what we’ve heard from retailers over the last few weeks paired with the data we’ve been sharing of late that shows our Cash-Strapped Consumer theme remains in full force, odds are it won’t be a pretty report. With Payless (PSS) and Bebe (BEBE) filing for bankruptcy and hhgregg (HGG) likely headed for liquidation, these are just the latest retailers that are dying on the vine. As we have learned this week, others are wounded including Urban Outfitters (URBN), shared its quarter to date sales are down in the mid-single digits, and Saks owner Hudson Bay (TSE:HBC) reported a drop in overall consolidated sales.

While Simon Property Group (SPG) rose modestly over the last week, we continue to be concerned over the shrinking customer landscape. We are also mindful that we will soon begin to see store closings from anchor tenants like Macy’s (M), JC Penney (JCP) and others. As those closings progress, we suspect investor sentiment will weigh on SPG shares.

• 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.

 

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Facebook continues to expand its footprint;
All eyes on April 18-19

Shares of this Connected Society investment theme social media company that is morphing into much more dipped modestly over the last several days, which reflected a similar move in the Nasdaq Composite Index. While Facebook lost out on its bid to stream the NFL’s Thursday Night Football package, we continue to see it benefitting from YouTube’s recent advertising snafu as branded companies ranging from AT&T (T) to Johnson & Johnson (JNJ) pull advertising spend.

That’s a nice development for FB shares as well as our Facebook (FB) May 2017 $150 calls (FB170519C00150000) calls, but we still have the two major factors ahead of us that led to our adding the call position to the select list. First, on April 18-19 is Facebook’s annual F8 Developer Conference at which we expect a number of updates and announcements from new monetization strategies to its plans for virtual as well as augmented reality and now payments.

That’s right, we said payments. Through its WhatsApp business, Facebook is launching digital payments in India, which happens to be WhatsApp’s largest market with more than 200 million users. Given the November 2017 ban on high-value currency notes in India as well as the country’s push into digital payments, we see WhatsApp as extremely well positioned for this. Forecasts have mobile payments growing to $2.57 billion in India by 2021, up from just $79 million this year, which would be awesome if it happened. Even if it falls short of that target, there is still phenomenal growth ahead that bodes well for our Facebook shares as well as the Facebook (FB) May 2017 $150 calls (FB170519C00150000) calls.

The second date to watch will be Facebook’s 1Q 2017 quarterly earnings that will be reported on May 3. Given its focus on monetization and mobile, Facebook has been handily beating expectations, and given the growing adoption of its platforms across the globe we see the company continuing that trend once again.

• At current levels, the Facebook (FB) May 2017 $150 calls (FB170519C00150000) calls remain a Buy. 
• Our protective stop loss remains at 1.00.
• We’d be buyers of the calls up to the $2.00 level.