We Bulls Wobble
But, we don't fall down. Action at the point of sale has been very interesting. Broad equity indices such as the S&P 500 have behaved quietly volatile, if that is even a thing, all week after the sharp selloff of one week ago. What you see over the four day period beginning on Monday looks something like a coiled spring. A series of lower highs, supported by a series of higher lows. Take a look.
What such short-term behavior implies, especially on volume that does not cause much notice, is an imminent or a near imminent spike in violence at the point of sale. Interestingly, the S&P 500 closed on Thursday night precisely at the 2815 level that we had already defined as the battleground for what comes next. Unfortunately a chart like this does not imply direction.
Last day of the month. Last day of the quarter. Window dressing? Last day of the week. Risk off? Lyft (LYFT) IPO. Highly sensational news item that may not only pull attention away from the broader market, but capital as well. Some of my proprietary work is starting to show considerably higher equity prices later in the year as a result of multiple expansion. That thought is still developing in the back of my head. I am not sure I can trust that thought as of yet, but I know you trust me, and if we win, I want us all to win together. I am still higher cash than is most of Wall Street, but I am well below the highs. Team.
It would appear, based on the market behavior of the Shanghai Composite (+3.2%), that talks in Beijing between China's Vice Premier Liu He and Americans Treasury Secretary Steven Mnuchin and Trade Rep Robert Lighthizer must have gone very well. The trio are already schedule to continue these talks in Washington next week. Though there did seem to be some disagreement, the general takeaway on Thursday of the comments made by White House economic adviser Larry Kudlow was market positive. Instead of appearing to traders as delay, the weeks and perhaps months referred to by Kudlow were taken as a sign of seriousness. Now, on Friday morning comes news of trade talks with Japan scheduled to begin in two weeks (April 12th).
Know what else is two weeks away? Earnings season. That could be tough. Then again, the bar is low. Domestically, at least for now markets are removing a certain level of political risk from price discovery mechanisms.
Ideas From the Neighborhood
I have come a long way on St. Louis Fed President James Bullard. I will admit that in years past, I honestly thought some of his ideas, and how rapidly he would change his mind, were out of left field. I certainly do not always agree with the man on preferred direction for monetary policy. I will say this for Bullard, though. The regional district president in St. Louis thinks for himself. He is definitely not part of the "group think" crowd that permeates both politics and economics with their existence. Bullard is a voting member of the FOMC this year, and he did speak publicly on Thursday night.
Bullard sees the recently weak spate of macro-economic data-points as temporary. He also feels that any talk of a short-term rate cut is premature as the economy is likely to rebound in the second half of the year. I get what he is saying here. It does make sense. What makes even more sense was his short blog post published on Thursday morning favoring GDP targeting as a goal of monetary policy over the targeting of consumer level inflation. All I ask of my policy makers is that they think, and that they evolve on their own. Bullard does that. His idea makes sense, especially at a time when the central bank's dual mandate of price stability and maximum sustainable employment both present as accomplished, yet many good people struggle on indefinitely for a number of reasons.
Take a look... ahh never mind. You're not going to crunch the numbers. I'll just tell you. The weak links in fourth quarter GDP were twofold. Federal Non-Defense spending contracted, printing at -6.1%. That's at least partially shut-down related and is still self-correcting in real time. This line item will boost, not slow Q1 GDP. The other weak spot is more dangerous. Residential Investment hit the tape at -4.7%. This was the fourth consecutive quarter of contraction for housing markets in terms of impact on GDP, and the sixth in seven. Yet, what do I see as the calendar quarter closes? I see 30 year mortgage rates approach 4% from the upside. I see a January print for the national 20 city Case-Shiller release that shows the slowest year over year performance for housing prices in six years, not to mention month over month contraction for a third consecutive month. Does that hurt Q1 GDP? No doubt. Does the prospect of more affordable home prices on top of lower mortgage rates set up the spring season for the housing market? Oh, I think so, cowboy. I think there's a whole generation out there that has been priced out of household formation. If the economy can stay out of recession, and these young folks can stay employed, they're ready.
Avoiding recession becomes focus now, and it can be done. While Bullard thinks talk of a rate cut are premature, I differ... not necessarily on whether there is necessity for a short-term rate cut. I don't care how you go about compressing yields on T-bills, or for that matter letting out some slack on the long end. Just repair the yield curve before you can't. It's that simple. I don't care if they launch an "Operation Un-Twist" (If they do, I want some kind of mention), I don't care if they just buy the short end, and I don't care if the Treasury Department takes all of these foreign investors to school with an epic sized issuance of 10 year paper. Just stop playing with fire. Heck, while we're at it, float the idea of a 500 year bond. Current structure for monetary organization could be a relic by then, as a post-digital successor to the IMF's Special Drawing Rights (SDR) eventually replaces today's reserve currencies. Just an idea. We are going to have to be creative at some point. Wake up.
Unleash The Mouse
First quarter earnings season comes out of the gate in two weeks. That day, JP Morgan (JPM) and Wells Fargo (WFC) will put their numbers to the tape. The banks are, in my opinion, going to show "above the broader market" revenue for the quarter, but profits will likely have declined. The group is largely un-invest-able in terms of market perception as long as the short end of the yield curve continues to emit some kind of warning.
Before we even get to Friday, April 12th, we will have to, God willing, get through Thursday, April 11th. That's the Walt Disney Company's (DIS) "investor day." Get ready. There will be plenty of hype going into the event. Much will be made of the success in the theme parks, and success both realized and expected at the box office. The impact of the merge with the assets of Fox will be interpreted, possibly as a reduction in earnings guidance up front, but coupled with sizable cost synergies as well. Very hard now to interpret this as a trader, but understand that I have been talking about a multiple expansion in equity valuation across markets. This will benefit Disney perhaps more than most as the Disney+ service is released.
Disney+ is where being the king of content will matter in terms of being capable of producing margin at lower price points. Surveys may show that Netflix (NFLX) will not be severely impacted as not just Disney, but also Apple (AAPL) , attempt to steal their lunch. One thing is likely, though. Even if Netflix does not lose great numbers in terms of paid subscriptions, it stands to reason that they will lose much content, that the firm will have to keep paying up in order to create content, and that pricing power over the point of sale is now yesterday's roast beef.
Now, you all know that I have been long DIS and AAPL, as well as short NFLX. For those of you who do not follow me on social media, I covered the NFLX short this week. I have not changed opinion. I take profit at targets. That's what traders do, and my targets are always fairly tight for short positions in three digit stocks with loyal, cult-like followings. I will establish that short should the shares once again appear toppy.
As for Apple, I am more interested in the credit card and in the development of future health care applications across the firm's line of wearables than I am in their streaming business. I thought that the Goldman Sachs take was somewhat sobering.
Now, Disney is in my opinion, playable as an increased long going not the event. The novice trader may want to trim back to core position size by April 10th however, as there is that risk of reduced EPS guidance that would result in some selling in between the event the next day and the release of the next Avengers movie on April 27th. Traders willing to take on some risk, though still reduced from simply taking on more equity might want to keep reading.
I've made allowances for the severe dip in late December and the mid-March dip brought on by the Fox deal actually closing that forces a realization that the regional sports networks were worth less than originally thought. Even omitting those two dips, the shares have been mired in a persistent state of consolidation for months. Can the shares see $116 ahead of the firm's investor day? The idea is realistic. This is the trade.
Short-Term Trade Idea (minimal lots):
- Purchase 100 shares of DIS at or close to the last sale of $110.71.
- Sell one DIS April 12th $116 call (value: 0.81)
- Sell one DIS April 12th $105 put (value: 0.80)
Note: The sale of the options brings in a net credit of $1.61, reducing net basis on this trade to $109.10. Best case? The trader gets called away at $116 in two weeks. Max profit: 6.3%. Worst case? The trader ends up eating an additional 100 shares at $105 in two weeks with the shares trading below that price. Net basis on the 200 share long position at that point would be $107.05.
Obviously the demand for this issue is there. This IPO will open for trading today at the Nasdaq market-site. 32.5 million shares were priced on Wednesday night at $72, raising $2.34 billion, Underwriters hold options to buy an additional 4.9 million shares, If exercised, that brings the take to $2.69 billion. The firm lost $911 million in 2018. Why so much demand? Growth. Despite that loss (which was growth of 32% itself), the firm experienced a roughly 500% increase in active riders, that led to a roughly 100% increase in revenue.
The name is expected to remain in the red for perhaps years. Still, there is a path to victory that investors can visualize. I think that a considerable number of portfolio managers may need to buy shares in the secondary market after the opening bell. This could support the stock or even increase it's value. As a trader, I very well may participate. As an investor? No thank you. There will be better days for those not privy to allocation to gain entry.
Economics (All Times Eastern):
08:30 - Personal Income (Feb): Expecting 0.3% m/m, Last -0.1% m/m.
08:30 - Consumer Spending (Jan): Expecting 0.3% m/m, Last -0.5% m/m.
08:30 - PCE Price Index (Jan): Expecting 1.8% y/y, Last 1.9% y/y.
08:30 - Core PCE Price Index (Jan): Expecting 1.5% y/y, Last 1.7% y/y.
09:25 - Fed Speaker: New York Fed Pres. John Williams.
09:45 - Chicago PMI (March): Expecting 61.1, Last 64.7.
10:00 - New Home Sales (Feb): Expecting 620K, Last 607K SAAR.
10:00 - U of M Consumer Sentiment (March-F): Flashed 97.8.
13:00 - Fed Speaker: Fed Gov. Randal Quarles.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 824.
Today's Earnings Highlights (Consensus EPS Expectations):
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