Maybe They're Not So Crazy
The talk seems almost out of place. Last week, the Bureau of Economic Analysis revised upward the agency's estimate for U.S. Q2 GDP to a seasonally adjusted annualized 4.2% rate of growth quarter over quarter. A lower revision had been expected. Yesterday, the Institute for Supply Management released the results from their August survey of purchasing managers. Apparently, U.S. manufacturers are not just busy, they are busy at a blistering pace. For those new to surveys of this type, any print above 50 shows expansion. Anything above 60 is considered "face melting". Not only did the ISM's headline print hit the tape at 61.3, but the most important component...New Orders posted at 65.1.
With a seemingly red hot economy, why would St. Louis Fed President James Bullard call on his colleagues to slow down on rate hikes? There was a time when I considered James Bullard to be the most erratic of high level Fed officials. That was years ago. He has been consistent for quiet some time now. Maybe I was wrong about this man at that time. Maybe, at a time when other folks at the central bank were feigning certainty, this regional president was simply more honest about his lack of certainty. An uncertainty that a changing monetary environment impacted by what was then experimental policy should have permitted. Bullard understands that he is an outlier at the Fed right now, but maybe he is not really all that alone. Bullard expressed a concern over possibly inverting the yield curve.
You may recall that in late August, that Atlanta Fed President Raphael Bostic expressed some trepidation along those lines as well. Last night, Minneapolis Fed President Neel Kashkari joined the growing chorus. While both Bostic and Bullard appear to fear inverting the 2/10 curve, and the repercussions of such an occurrence, Kashkari is more overt. He simply states that the FOMC is raising rates "too aggressively". He also made sure that we knew that he was unsure that the domestic economy could handle that pace.
Cracks in The Armor
Are these men crazy? Do they have a point? Stock prices are ultimately driven by two forces. There is organic earnings growth (or lack thereof) driven by supportive macro economic conditions, and there is valuation expansion (or contraction) supported through conditions created by policy decisions. There are already some cracks in the armor. Total Vehicle Sales have underwhelmed in three of the last four months, Construction Spending has visibly slowed over two months, and on top of that, nearly every single data-point connected to the U.S. housing market shows visible negative reaction to the central bank's trajectory on interest rate policy. Serious food for thought here, kids.
These three regional presidents will not serve together as voting members of the FOMC at any point in the near future. Atlanta currently has a vote, while St. Louis votes in 2019, and Minneapolis will not cast their next vote at a policy meeting until 2020. Chicago will join St. Louis on the committee next year, perhaps lending a little more dovish flavor to the mix, with John Williams also at the helm in New York, and perhaps Boston joining in. If you thought that conditions were eased dramatically through the zero interest rate policy that coincided with reckless balance sheet expansion, then you had to expect the withdrawal of such policies to leave a mark. Right now, that mark is most visible in emerging markets. Italy stands (not alone) in the on-deck circle, swinging a couple of weighted bats while the ECB ponders their short to medium term policy path. They say that there are potentially dangerous storms out at sea right now.
Yes, Amazon (AMZN) did kiss the $1T market capitalization level yesterday. The stock may not have closed there, but unlike the de-fanged members of FANG, this beast is not just the feared "Death Star" for retailers, but the dominant player in web services (the cloud), and an advertising juggernaut as well. Where does the stock go from here? Morgan Stanley did put that $2500 price target on this name last week. It appears from my quiet office here at zero-dark thirty on Wednesday morning that Amazon's level of profitability is simply a choice made according to how much the firm continues to spend on growth. This firm seems to me to be able to do whatever they want. I will be long this name until the cows come home.
Oh, the Irony
You probably noticed the "Sell" rating that David Tamberrino at Goldman Sachs placed on Tesla (TSLA) yesterday with a six month target price of $210. Tamberrino mentions in his note note the growing competition in the space as well as the phaseout of tax credits for electric vehicles that is likely to put downward pressure on the firm's gross margins, not to mention profitability.
Should this surprise? No. What has kept the firm at seemingly buoyant levels, in my opinion, is the short interest and the cult-like following of small investors. The irony of it all, is just this... wasn't Goldman Sachs just recently retained by Tesla as an adviser as the firm explored the possibility of going private in the wake of CEO Elon Musk's bizarre tweetstorm? In addition, is not Goldman's $210 price target exactly one half of the $420 takeout price implied during that social media rambling on August 7th? Oh, the irony.
The Chase Is On
If you're like me, you hate to chase a stock gone wild. I mean, this discipline is so ingrained, that I will write put options against these stocks with the intent of being forced into equity ownership when the share price dips. Sometimes the share price never seems to dip enough, and strike prices are never met on expiration day. Sometimes all you do is increase your cash balance in a most pedestrian way, while the equity holders are rewarded for their greater risk appetite. One can't complain. At least by selling puts,the trader was on the right side of the line of scrimmage.
Two such stocks, for me at least are Apple (AAPL) and Advanced Micro Devices (AMD) . Apple is facing a potential catalyst one week from today when the firm is expected to unveil the new iPhones on September 12th. Both Canaccord Genuity and RBC Capital Markets got in front of the event by increasing their respective price targets of $250 and $240 yesterday. The shares went out last night at $228.36, up small on a down day for the markets.
Now, that other firm... AMD... they have an unfair advantage over their direct competition. They have CEO Lisa Su at the helm.
Two Ships Passing
I liked Brian Krzanich. I thought that he was a very good leader for a data-center centric business like Intel (INTC) . He was a main reason why the stock had been a core position in my main portfolio for a good while. When the scandal that involved Mr. Krzanich broke, I took a profit on half of my position. That turned out to be the smartest move that I have made in response to that news. The worst move that I made was hanging on to the other half. I have also added back some of the shares sold earlier at current levels. I'll let you know how that turns out down the road.
I have traded in and out of Advanced Micro Devices several times. I have sold puts along the way that expired worthless. Pretty nifty. Not quite as nifty however as the investors that bought and held this name. Tip of the cap if that is you. AMD and INTC were at one time considered rivals. I guess they still are. As the rising star that is AMD has taken market share away from INTC in the data-center, they have also become a Nvidia (NVDA) rival in some of the fields, such as gaming where Nvidia has been the dominant player.
While Cowen was raising that firm's price target for AMD to $30, Evercore ISI had a lot to say about the semiconductor industry in general. While Evercore heaped praise on several firms, they told you to avoid Intel through the rest of the year. Ouch.
At some point, Intel will name a successor to the post of chief executive. I had thought for quite some time that this might anchor the perception of a firm lost at sea, and act as a catalyst. The firm has historically hired from within. Now rumor has it that there are four candidates in the running, two internal and two former Qualcomm (QCOM) executives. Really, while I have hoped that the firm would go after Lisa Su in the past, I know that is unrealistic. Any name at this point might afford a minor improvement in the share price. Any minor improvement, I will look at as an opportunity to reduce exposure to INTC. I have owned the name long-term, so my basis is fine, the name just does not excite me at this point.
As for AMD, the stock soared 11% on Tuesday, closing at $28.06. The firm reports next on October 22nd. You going to grab them here? Today? Me neither. October 19 $27 puts still paid $1.90 last night. So would you risk having to buy the shares at $25.10 in order to pocket the $1.90? That sounds like a decent risk/reward set-up. A truly skittish investor could get paid $1.10 for the October 19th $24 puts. Does $22.90 in six weeks scare anyone? Scare is a strong word.
Economics (All Times Eastern)
08:30 - Balance of Trade (July): Expecting $-49.3B, Last $-46.3B.
08:55 - Redbook (Weekly): Last 5.1% y/y.
15:00 - Fed Speaker: New York Fed Pres. John Williams.
16:00 - Fed Speaker: Minneapolis Fed Pres. Neel Kashkari.
16:15 - Fed Speaker: New York Fed Pres. John Williams.
16:30 - API Oil Inventories (Weekly): Last +38K.
17:30 - Fed Speaker:
New York Fed Pres. John Williams.
18:30 - Fed Speaker:
Atlanta Fed Pres. Raphael Bostic.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (HDS) (.96)