Et Tanta Stultitia Mortalium Est
Fear is the root cause for almost everything. We talk about growth fears, shutdown fears, Brexit fears. We ponder what might scare us the most in an effort to determine how to best avoid worst case scenarios. Even at personal, national, or global expense. What fools we have all become. As most of the broader domestic equity indices struggled throughout the day, the industrials easily led the way. Procter & Gamble (PG) , International Business Machines (IBM) , United Technologies (UTX) all appeared to outperform expectations for quarterly results as well as guidance. If these blue chips can perform in such an uncertain environment, and gang, talking heads have been blaming uncertainty since the day I showed up, then these waters must be navigable. So, let's navigate.
He Who Is Not Satisfied With A Little....
.... is satisfied with nothing. Basic tenet of minimalist philosophy. Yet, all of our "massive" worries have within reach, solutions that become easier to envision, once fear is peeled back. Trade War? Brexit? Shutdown? All negative. All partially priced into risk asset valuations. All if not easily repaired, then at least the path toward that reparation easily understood by the reasonable. If Wednesday was a microcosm of our environment, then we understand what on some level, we must have already known. The value of an equity stake in a corporate enterprise will ebb and flow. Correlations will be made for periods with energy markets, yield curves, and headlines driven by both the political as well as the geopolitical. For in truth, what is the value of an equity stake in anything, but a reflection in proportion of the stakeholders willingness to take on risk with the intention of sharing in performance, good or bad.
A Pragmatic Optimism
Back to fear. Thin ice. Still... as economies slow, so do policy hawks. As a shutdown drags on, as the data-points become scarce and sketchy at the same time, fears of quickly rising interest rates abate. As market prices for crude force unwelcome volatility into the energy sector and the transports, one realizes that the majority of names trading in correlation with energy prices have suffered along with the commodity only due to "growth fears", yet in actuality, those names might benefit more from a sudden margin expansion than suffer from a reduction in revenue. Replacing fear with pragmatism, that is our goal. The wicked will know fear. Fear will force error. The one able to make a clear decision amidst panic and overreaction will find opportunity. The one able to best ascertain when and when not to act will find peace in the method. Now, get on the floor and give me 75. Too slow. Make it 100. Start this day right.
Destroyer of Planets
I remember discussing with several of you in mid-December my decision to not reenter FedEx (FDX) when the stock rolled over on reduced guidance after posting some decent earnings. My thought at the time, if you'll recall, was that with Amazon (AMZN) adding 40 cargo jets, and building delivery hubs around the nation that once ready, the firm would offer delivery for a service. Wow, that was a lot quicker than anticipated. Much quicker.
The Wall Street Journal ran with a story on Wednesday that really put the hurt on both FedEx and UPS (UPS) . It would appear that Amazon is not only looking to ship the firm's packages, but in an email to shippers in the New York area, Amazon offered to pick up goods from point A and deliver them to point B, while targeting the fuel and residential surcharges that both FDX and UPS have regularly charged their customers in the past.
Does another industry now suffer margin compression at the hands of the death star? Seems to be a trend. What does this mean for headline level inflation? Remember what Taco Bell had become in the movie "Demolition Man"? Can one firm really do it all? So far, yes.
Chip a Dee Doo Dah
Time for some chips with that dip? How about that Xilinx million Just wow. Not only did this firm beat adjusted EPS expectations, they even beat the GAAP number, which has been a far less often accomplished feat since earnings season began. Better than that, thanks to the expansion of 5G wireless networks in South Korea, this firm put 33% revenue growth to the tape, and guided much higher for the current quarter. The firm now expects to see sales of somewhere between $815 million and $835 million for fiscal Q2 (ending March), well above industry consensus of a rough $775 million. The entire beat came from the communications as well as the industrial sides of the business as spending on the data center missed. I find it hard to believe that even once 5G is rolled all the way out, that the business cloud does not resume wide scale deployment. Are the semis suddenly back on track? Isn't there a gigantic supply issue still to be worked through? Let's check on the "wafer king" to get an opinion.
Silence of the Lam
Silent no more. Like breaking up with a former sweetheart, it pained this trader to sell Lam Research (LRCX) last year. It was the right thing to do as the name gradually wore down all year long, but Lam had been my top earner in 2017, and though one can never love a stock... as a stock can never love one back, I did miss Lam.
On Wednesday evening, Lam Research put their fiscal Q2 numbers to the tape. Beat, beat, and beat despite a year over year contraction in revenue. Guidance was in-line, not overtly robust, so why the run higher overnight. The stock was already well off of the December lows. Do I want to chase Lam? You all know that generally, I do not chase. I am patient if anything. I give you three reasons to own Lam Research.
1) Serious Q2 beat on operating margin at 28.8% vs, expectations of 27.5%, and up from 25.4% for Q1.
2) The Lam Research board approves a $5 billion repurchase program with no termination date that will be funded through a combination of cash on hand, cash generation and borrowing. (The firm stands with cash levels of $3.3 billion plus accounts receivable of $1.8 billion. That will have to balance $2.1 billion in current liabilities plus long term debt of $1.8 billion, so there will be a need to add debt in order to implement the program. In dollar terms, the balance sheet indicates more than a 9% reduction in inventories over the three month period.
3) The new CEO. I don't know Tim Archer who joined Lam in 2012 from the Novellus side of that merger. What I hear is positive. We'll find out soon enough. Archer sounded honest last night in his description of current customer demand for memory. Archer acknowledges the challenging environment, and seems to make a more optimistic case for NAND than for DRAM, which surprised me a little. One one hand, a firm trading at 8 times projected earnings should not need to spend $5 billion on their own shares. On the other hand, if the shares are that cheap, and guidance is not reduced, maybe they should... and so should we.
I am going to buy Lam Research. I am not going to buy the name up ten bucks on in-line guidance. What I am going to do, probably this morning, is sell puts with an expiration date of April 18th as Lam next reports on tax day the 15th. You pay me $8 or $9 to take on risk at a strike price that is discounted to the last sale by more than five bucks, then I think I pounce. In the meantime, I'm coming into Intel (INTC) earnings on Thursday evening hot, long, and fearless, but mostly just long. Rock and Roll.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 217K, Last 213K.
09:45 - Markit Manufacturing PMI Flash (January): Expecting 53.5, Last 53.8.
09:45 - Markit Services PMI Flash January): Expecting 54.2, Last 54.4.
10:00 - Leading Indicators (Dec): Expecting -0.1% m/m, Last 0.2% m/m..
10:30 - Natural Gas Inventories (Weekly): Last -81B cf.
11:00 - Oil Inventories (Weekly): Last -2.683M.
11:00 - Gasoline Stocks (Weekly): Last +7.503M.
11:00 - Kansas City Fed Manufacturing Index (Jan): Expecting 2, Last 3.
Today's Earnings Highlights (Consensus EPS Expectations)