An Explanation of How I Weight and Manage Individual Stock Holdings
I have received a number of questions about weightings and trading around positions.
I recently posted this explanation in our Comments Section:
In recognition that there is more uncertainty about market outcomes and that there are agents such as ETFs that rebalance daily, producing extreme and often artificial price outcomes, my tactical approach has been to average into both my longs and shorts regardless of conviction. For example, let's say I have a target 3.5% of my entire portfolio for an individual long holding. I typically will purchase a 1.5% initial stake and average in as the relationship between current share price and intrinsic value widens. Similarly, I typically will target 2% of the entire portfolio for a short holding. I typically will short a 1% initial stake and average in as the relationship between the current share price and intrinsic value widens.
In terms of selling longs and covering shorts the same approach applies. Even though the price trends may persist as the spread between share price and my calculation of intrinsic value narrows, I will reduce my longs and shorts.
Examples of longs that I recently have reduced -- the share prices of which have approached my intrinsic value calculation -- are Hartford Financial Services Group Inc. ( (HIG) ) and DuPont & Co. ( (DD) ) . Examples of longs to which I recently have added, where the share price has fallen further relative to the intrinsic value, are Dillard's Inc. ( (DDS) ) and Twitter Inc. ( (TWTR) ) . Examples of shorts that I recently have increased because the share price has widened relative to the intrinsic value are long ProShares UltraShort QQQ ( (QID) )and ProShares UltraShort S&P 500 ( (SDS) ) and shorts of SPDR S&P 500 ( (SPY) ) .
LONG POSITIONS
- Small; <=1.5%
- Medium; <1.5% and <3.5%
- Large; >=3.5%
SHORT POSITIONS
- Small; <=1.0%
- Medium; <1.0% and <2.0%
- Large; >=2.0%
Given:
asymmetry of shorts vs. longs (you can only make 100% on short but can theoretically lose an infinite amount of money) and
gravitational pull higher, over time, in equities
I don't go above 2% on shorts.
The only time I go somewhat higher is when I have protection of out-of-the-money calls and/or the target short is a low vol stock (e.g. AT&T (T) or Verizon (VZ) ).
Yesterday I raised my expected trading range for Twitter (TWTR) over the next three to six months from $15-$20 to $17-$22.50. Given the remarkable strength in technology -- which has increased the possibility and enriched the possible price of Twitter in a potential acquisition -- I am further increasing the projected trading range from $17 -$22.50 to $18.50-$25.00. Twitter was placed on my Best Ideas List at $15.75 in March, 2017.
Tell Me Something I Don't Know About The S&P Index
Regular readers of my diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's "Hardball With Chris Matthews."
So... "Tell me something I don't know, Dougie."
OK, here it goes:
Only 56 companies are making new 52-week highs in the S&P 500 Index.
The final October UoM confidence index was 100.7 as expected, down slightly from the preliminary one of 101.1 but up from 100.7 in September and the best since 2004. Both components were higher m/o/m and one year inflation expectations came in at 2.4% vs 2.3% initially but down from 2.7% in September. This was lowered in part to the 2nd weakest reading in those expecting higher gasoline prices. This of course is a price that many see every day. Business expectations were little changed with September but those expecting higher employment was up by 3 pts m/o/m. The UoM also said this, "Personal finances were judged near all-time record favorable levels due to gains in household incomes as well as decade highs in home and stock values." In fact, the spread between the value of stock and home values relative to disposable income is at a record high and above the March 2000 and July 2007 previous peaks.
Spending intentions moderated from the first October read but are still up nicely from September. Versus last month, those that said it's a good time to buy a vehicle rose by 6 pts. Those that said it's a good time to buy a major household item was up by 3 pts and those that said it's a good time to buy a home was up by 5 pts. Those that said it's a good time to sell rose 1 pt to just below the highest level in 12 years.
Here is an updated chart on the number of people surveyed that think the stock market will be up in the next 12 months. This question dates back to 2002. The two previous peaks were June 2015 and July 2007.
Bottom line, consumer confidence is very good but as stated here many times this is just a coincident indicator and something I don't rely on in trying to gauge how consumers will spend in coming months and quarters.
My good friend Peter Boockvar, chief market analyst with The Lindsey Group, discusses some overseas inflation data this morning:
In the central bank quest for higher inflation (aka, a higher cost of living matching 2%), Japan reported that core CPI (ex food for them) rose .7% y/o/y in September as expected and unchanged from August. It does though match the highest level since March 2015 when the CPI prints were rolling thru the impact of the VAT increase. Also taking out energy prices has it up .2% y/o/y, also in line with expectations but is far from the higher inflation the BoJ so desperately wants. The October Tokyo CPI (so a more timely read for this city) saw the core rate up by .6% y/o/y, one tenth more than expected and also up one tenth from September. That is also the highest level since March 2015. But ex food and energy, prices were up just .1% y/o/y. As all the data was basically in line, JGB yields held steady. The irony of Japanese inflation over the past 25 years is that they've actually achieved true price stability as inflation ex food and energy has averaged up by .2% per year. The 2% target has been literally picked out of thin year. The BoJ meets next week and maybe at some point they will acknowledge a needed change in that target. With the yen lower again, the Nikkei closed up another 1.2% and is up 15% year to date, thus finally catching up with many global indices.
A day after Mario Draghi pulled every verbal lever out of his mouth to sound as dovish as possible to offset the 50% monthly reduction in QE and likely end next year, German import prices in September spiked by .9% m/o/m and was higher by 3% y/o/y. That was above the estimate of up .5% and 2.6% respectively. Part of the jump was certainly petro prices but even ex this saw import prices up by .4% m/o/m and 2.1% y/o/y. Draghi's success in focusing on the stock of its bond holdings vs the flow, an unofficial September end to QE and relying on NIRP until 2019 helped to keep European bond yields at bay and most likely due to positioning had a good day. The German 10 yr yield today is down 1 bp after yesterday's 6.5 bp drop. At .41% it remains in the range over the last month of .37% and .48%. The European bank stocks though after rallying 1.6% yesterday are giving back half of that gain today. NIRP continues to damage their profitability.
While extreme monetary policy has been the global rage over the past 10 years, there hasn't been much discussion on how central bankers will deal with the next downturn. We know the Fed is trying to reload its interest rate gun but there still won't be much there. Peter Praet, the ECB chief economist said this today, "It's difficult to imagine that if there is a new shock, that the policy space that you have will be available as it was 10 years ago."
Quietly, interest rates continue to move higher in China. Their 10 yr yield was up by 5 bps to 3.84% and is now at a 3 year high. This yield is up 10 bps on the week which is the biggest one week move since January. This coincides with the 7 month high that is the US 10 yr yield. With the rise in Chinese interest rates, I continue to have an eye on Chinese property stocks which fell .4% overnight but still saw a weekly gain. Copper prices are falling by 1.7%, down for a 3rd straight day. Iron ore is down by 2.3%, also down for a 3rd straight day.
"Amazon is the titan of twenty-first century commerce. In addition to being a retailer, it is now a marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house, a major book publisher, a producer of television and films, a fashion designer, a hardware manufacturer, and a leading host of cloud server space. Although Amazon has clocked staggering growth, it generates meager profits, choosing to price below-cost and expand widely instead. Through this strategy, the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it. Elements of the firm's structure and conduct pose anticompetitive concerns - yet it has escaped antitrust scrutiny.
This Note argues that the current framework in antitrust - specifically its pegging competition to "consumer welfare," defined as short-term price effects - is unequipped to capture the architecture of market power in the modern economy. We cannot cognize the potential harms to competition posed by Amazon's dominance if we measure competition primarily through price and output. Specifically, current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anticompetitive. These concerns are heightened in the context of online platforms for two reasons. First, the economics of platform markets create incentives for a company to pursue growth over profits, a strategy that investors have rewarded. Under these conditions, predatory pricing becomes highly rational-even as existing doctrine treats it as irrational and therefore implausible. Second, because online platforms serve as critical intermediaries, integrating across business lines positions these platforms to control the essential infrastructure on which their rivals depend. This dual role also enables a platform to exploit information collected on companies using its services to undermine them as competitors.
This Note maps out facets of Amazon's dominance. Doing so enables us to make sense of its business strategy, illuminates anticompetitive aspects of Amazon's structure and conduct, and underscores deficiencies in current doctrine. The Note closes by considering two potential regimes for addressing Amazon's power: restoring traditional antitrust and competition policy principles or applying common carrier obligations and duties."
Since I have adopted a negative and non-consensus view on Amazon.com Inc. (AMZN) , I have made four or five separate trading shorts that have resulted in an accumulated $150 per share in profits.
Yesterday I gave some of that back to the delight of my haters on Twitter and elsewhere, even though I entered the third-quarter earnings report with only a small short position. (I added small to my short at $1,043 in after-hours trading last night).
My short view of Amazon had nothing to do with an assessment of the company's current operating results, which were put on display and shined last night. Rather, my short view is based on the notion that Amazon's technology and business model have advanced far faster than regulatory oversight -- a condition that is likely to change given the massive disruptive and anti-competitive impact the company has had and likely will continue to have on other industries, and in light of its adverse impact on employment, real estate and our economy.
If my negative view was based both on fundamentals (which it is not) and regulatory risk, I likely would have maintained a midsize to large short. However, given that reason and in light of my relatively conservative risk profile/appetite, I basically have maintained a relatively small position that at times briefly has moved to medium in size in Amazon's shares over the last few months.
My specific concern is that there are profound political and existential threats that could alter the trajectory of Amazon's growth in sales and profits. Specifically, the company's growth plans might be stifled going forward by government regulation. Political and antitrust forces represent an existential threat to the company's horizontal and vertical expansion plans.
On a fundamental note, though secondary in importance with regard to my short, I also continue to be of the view that even if Amazon is allowed to disrupt other industries' profit streams it does not necessarily hold true that Amazon will garner much of those income streams.
I have discussed these concerns repeatedly, as seen in in Monday's opening missive and numerous previous columns I have written.
In late July Amazon had a huge miss to consensus expectation as second-quarter earnings per share came in at $0.40 compared to a consensus EPS estimate of $1.42. (That day Amazon's shares fell by 3%.) In other words, the company missed in the second quarter by a factor of two times the amount that it surprised to the upside for the third quarter.
Third-quarter revenue came in about $1.35 billion above forecast, Amazon Web Services (AWS) sales were $75 million better and third-quarter earnings per share were $0.49 ahead of expectations. As seen here in this recap from Zero Hedge, all was not perfect. Among other things, the company lost money in retail, with AWS funding the loss. Margins at AWS are now under pressure as its growth rate slows to 30% with intensified competition clear as day. Also, "earnings quality" was not stellar as Amazon's effective tax rate was approximately 18.5% vs. 46.5% a year ago.
And the company's operating margins have begun to dip again:
Source: Zero Hedge
It is also important to note that the company's consensus EPS estimate was much higher three months ago and has been steadily lowered over the last three months. After the second-quarter earnings release, consensus for the third quarter was at almost $1.10 a share (estimated) compared to $0.51 (actual) reported last night.
Bottom Line
In mid-July I added Amazon to my Best Ideas List as a short at $1,007 and I have made a series of "doubles" and profitable short trades.
Last night, though, I struck out on three pitches.
It should be noted that the third-quarter earnings surprise of more than $0.50 a share was 50% less than the size of the second-quarter earnings disappointment (of $1.00 a share), and despite some earnings-quality issues (e.g., a sharp drop in the effective tax rate) Amazon's shares soared last night and, as I mentioned, I added to my small short at about $1,043.
That said, it is my political and antitrust concerns - not current fundamentals - that remain at the core of why I am short Amazon.
Stated simply, Amazon's anti-competitive moves and growing dominance underscore wide deficiencies in outdated antitrust opinion and doctrine.
