All I was really trying to do Thursday afternoon was trying to figure out just how much exposure I was wearing going into the closing bell. I was short Netflix (NFLX) . The whole world knew I was short Netflix. Only I knew that I was short more shares than I was comfortable with. When at my home away from home at the New York Stock Exchange, I usually plant myself over by the old booth ZA for old-timers... near the coffee stand for the new kids, or just plain "Jurassic Park" for the really old timers. It's also a stone's throw from my old pals at Meridian Equity Partners.
Tim Anderson happened by. You all know Tim. He appears on many of the same financial TV shows that I do. Smart guy. No doubt. Tim looks over my shoulder at the big score board in the corner at the corner of the NYSE trading floor. "Something just happened" His eyes remained fixed. Dow just moved from -5 to +50 in a second." I mindlessly state the obvious. "There must be news." Then we saw it together. Talk of easing tariffs on China had found their way to the tape. In another few seconds, that Dow Industrial Average would rise 100, then 200 points, before folks realized that the algorithms had once again, jumped the gun. Tim and I decided that the Dow would be up much more than that if the dropping of tariffs had been hard news, and went about our business. There was no fire. There was however...
Some SmokeApparently, according to the Wall Street Journal, Treasury Secretary Steven Mnuchin has proposed scaling back on tariffs in a number of strategy meetings in order to try to make progress on the trade dispute with China, as well as lasting trade reform. We all know that March 1st is the stated deadline to get something done here, or that 10% tax on the last tranche of $200 billion worth of Chinese exports to the U.S. will ramp up to 25%. Another date to keep in mind, is the February 5th Lunar New Year. The new year is a much bigger deal in China than most here in the West realize.
Expect the marketplace to react quickly to every headline, as next week, discussions will be held in Washington between U.S. and Chinese delegations at the Vice Ministerial level. These meetings are intended as preparation for next step, which will be a face to face between Mr. Mnuchin and Chinese Vice Premier Liu He. We all know, I think... how markets will react should any hard news result that appears to lead toward resolution to this condition. Regardless of whether the outcome appears to be a long term win or not, normalization of global trade will result in serious risk on behavior. Growth based investment will be rewarded in the case of such an eventuality. Even if nearly all global economies are slowing.
About Those AlgosLikely you noticed that once the story broke, that the keyword readers took the S&P 500 past the 50 day simple moving average. The momentum chasers took the index precisely to the doorstep of a 50% retracement of the October 3rd through December 26th melt-athon. That's where the index stopped. Like it hit a wall. That 50 day has now dropped to 2626. Support there needs to hold as there is honestly not a lot of technical support between here and where the creatures of the nether regions reside. That 2644 level remains the spot for the bulls to try to tackle. You guys like sandwiches?
There may be a chance, sans a news event, to make a living in between the two this morning for the agile, as equity index futures markets are trading higher in the darkness of early Friday morning. Some traders will almost surely shed some risk later on ahead of a three day weekend in the U.S. amid the ongoing partial federal shutdown that seems not yet to bear anything resembling an amicable conclusion.
Increased Risk Ahead?Anyone else peruse the December inflow/outflow news published on Thursday? As the Fed continued to lift short term interest rates, macro-economic data softened, trade conditions remained as they were, and the government prepared for a shutdown... financial markets imploded in December. Old news. What might not be old news to some folks was that investors pulled money way from active managers... in size. According to Morningstar, those funds defined as actively managed saw monthly outflows of $143 billion, while passively managed funds experienced inflows of $60 billion.
Interestingly, one has to guess that fear, or under-performance, or maybe both, drove investors to exacerbate a trend that in my opinion only increases market volatility. Just a friendly reminder... with algorithms and high frequency traders ruling the point(s) of sale, and passive styles of investment only increasing the impacts of both trend and sector rotation, that there are no sentient beings making decisions in real time. This makes it imperative that retail traders maintain disciplined levels of diversification, while understanding the basics of net basis manipulation and taking a frugal approach to hedging position. Shot taking is for basketball players and amateurs.
As always, I am approachable. I do not sell financial services. I do root for human beings.
About Netflix
I covered some of my short ahead of the closing bell last night. My hope had been for some profit taking ahead of the numbers that never materialized, so I took some risk off of the table as options markets had priced in a rough move of $30, and I was not going to pay prices like that for short term protection. I covered the bulk of that short in after hours trading leaving one final tranche to mess around with for fun.
I was surprised last night. Not in the data. I had written in earlier market notes that I had expected a horrendous performance in terms of free cash flow as well as the rapid evaporation of operating margin. Those lines did not surprise at all after the firm was forced to ante up $100 million just to keep the show "Friends" available on the service for one more year, up from $30 million. The increase in paid subscribers globally that beat expectations did not surprise either. As a consumer, I like Netflix.
What surprised this trader in the after hours on Thursday evening was the resiliency of the share price. When I saw the firm's balance sheet, I thought that just maybe I might be headed for a victory of historic proportions. Instead, I'll accept a more pedestrian victory, which trust me... I do not take for granted. Obviously, leadership at Netflix had saved the share price to some degree with the announcement earlier in the week of the increase in pricing.
That Makes Me WonderI am left wondering. Was the increase in forward pricing that will be implemented through the current quarter and next, the result of pricing power over the consumer, or was it something else? Was it perhaps, a desperate move to become less reliant on that balance sheet as a means to finance content, finance expansion, fend off competition from a host of newcomers, not to mention video gamers?
Being short this name going into earnings has been stressful, especially as the shares ran higher in price for a month. Having to short more than I wanted to in order to get net basis to where there could even be a profit has also been stressful. They did miss on revenue. They lowered guidance for revenue going forward. Free cash flow for the quarter printed at $-1.3 billion, for the year at $-3 billion. The firm projects that in terms of financial performance, that 2019 should be just as awful as 2018... and don't fool yourself... $-3 billion is pretty stinking awful.
Yes, I got away with this one. In fact, I did more than get away with it, but I am left thinking as there was clear support for the name at much higher levels than I anticipated...Why? My fundamental analysis of Netflix was about as accurate as fundamental analysis gets. What is that worth in 2019. I am left figuring that out.
By the WayGood news for Netflix on the competition front. Apparently, Walmart (WMT) has ditched their plan to launch a video streaming service. That truly disappoints as I would have loved to have seen what that might have looked like. Unfortunately for Netflix, Amazon (AMZN) Prime, and Hulu are still competing upfront, while AT&T (T) prepares to improve their already operational service.
What's that over the hill? Oh, nothing to see really. Just Walt Disney (DIS) , Apple (AAPL) , Alphabet (GOOGL) , and Comcast (CMCSA) . Long Netflix? Could happen. Not today though. Good luck with those margins.
Economics (All Times Eastern)09:05 - Fed Speaker: New York Fed Pres. John Williams.
08:30 - Industrial Production (Dec): Expecting 0.3% m/m, Last 0.6% m/m.
08:30 - Capacity Utilization (Dec): Expecting 78.6%, Last 78.5%.
10:00 - U of M Consumer Sentiment (Jan-adv): Expecting 97.0, Last 98.3.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 873.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (KSU) (1.56), (SLB) (.38), (STT) (1.70), (STI) (1.43), (VFC) (1.11)
(Amazon, Disney, Apple, Alphabet, Comcast, and Schlumberger are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN, DIS, AAPL, GOOGL, CMCSA, SLB? Learn more now.)
