A big thanks for reading my Diary today and all week.

I hope it was value-added.

Enjoy the weekend with your families.

David Einhorn just tweeted to Elon Musk:

Here are the latest Predictit odds for who will win the Democratic nomination for President.

This week's Trade of the Week - shorting Micron (MU) - turned out fine (with a gain of almost 5% in an "up" market).

Currently trading at $47.26, it was shorted on Tuesday's opening at $49.62.

My rationale:

* Semiconductor stocks are momentum darlings and are making new highs
* I question the bottoming thesis

Micron's shares have risen because of hope that the U.S./China trade negotiations will be resolved favorably. (I am less optimistic).

Here are some reasons why Micron is myTrade of the Week:

* Last week the SIA reported that September total semiconductor revenues rose to $38.4 billion (+8.3% month over month). That was more than 310 basis points below the average seasonal increase of +11.4% (also month over month). September semiconductor revenues (excluding memory) was +8.8% - well below the seasonal average of +12.2%.

* September marks a change from the past two consecutive months of above seasonal trends for semiconductor sales (ex memory).

* Despite the Administration's protestations the outlook for a satisfactory resolution of the China/U.S. trade negotiations remains low.

* I question the bullish and bottoming semi thesis. Rather, I believe, based on outsized demand from Hisilicon, Crypto and Apple Supply Chain, that supply chain "pulled forward" demand to minimize the impact of additional tariff increases. 2020 EPS estimates for Micron and others seem to be too elevated.

* DRAM ASPs have now fallen sequentially in 13 of the last 14 months - and are now down 58% from the peak in July, 2018, 15 months ago. This compares to the cycle average of ASPs down 52% over 18 months.

* NAND ASPs have now fallen sequentially in nine of the last 10 months, though we would note that since April-19, NAND ASPs are down just 6.6%. Now ASPs are down 63% since the peak October, 2017 (23 months ago) compared to the cycle average of down 42.4% over 18 months.

Here are some of my recent columns on Micron and the semiconductor space:

* Chips Ahoy!

* A Contrarian View

* Semis Woes

* Still Say No to Micron

* Spots of Vulnerability

The shares were downgraded by UBS this morning.

* No, VXX is for me - at current prices"Once again, TRIX are for kids."
- Trix cereal commercial (1980)
Usually when the VIX drops this low, I hear people talking about buying the VIX as a hedge against a long portfolio.
I don't hear that anymore. Nowhere do I hear it.
On the basis of that silence (and that basis alone) I am taking a starter position in VXX at $18.78.
Just because...

It's a day with slow volume, limited individual stock price action, modest sector price overperformance (or underperformance) and little overall movement (or breadth difference) in the major Indices.
If feels like a Friday in the summer.
No trades today, save some pre-market short sales in Disney.

harleyjokin

Canopy Growth call volume above normal and directionally bullish (TheFlyOnTheWall)
THE FLY 11:25 AM ET 11/8/2019
Symbol Last Price Change
CGC 21.16 +2.08 (+10.9%)
QUOTES AS OF 12:25:12 PM ET 11/08/2019
Bullish option flow detected in Canopy Growth(CGC) with 36,404 calls trading, 3x expected, and implied vol increasing almost 5 points to 75.98%. 11/8 weekly 21 calls and 11/8 weekly 20 calls are the most active options, with total volume in those strikes near 8,700 contracts. The Put/Call Ratio is 0.42. Earnings are expected on November 14th.

I just got back to the office, trying to get my sea legs back!

To quantify the selloff in sovereign bonds this week globally, as of yesterday's close the dollar denominated amount of negative yielding securities has fallen to $11.9 Trillion vs $12.5 Trillion on Wednesday and down from $13.3 Trillion last Friday. That's the least since mid July. Japanese and European bank stocks have been a key beneficiary thankfully for them. Because I believe the main basis for this rise in rates is the change of heart and mind of many central bankers in Europe and Japan to NIRP and no yield curve, I'll argue that we'll never see those August levels again in negative yielding bonds. 

$ Value of Negative yielding securities

Ahead of today's UoM consumer confidence index, yesterday the Bloomberg consumer confidence figure (the old ABC number) which I mentioned had fallen last week at a sharp rate, dropped again this week to the lowest level since March. The components of State of Economy, Personal Finances and Buying Climate all fell. The chart shows this index in white relative to the S&P 500 index in orange. A separation has occurred over the past two weeks but has happened before.

The trade data out of China was less negative than expected. Exports in October fell .9% y/o/y vs the estimate of down 3.9%. Imports were lower by 6.4% y/o/y, a touch above the forecast of down 7.8%. Many pieces of these imports end up in exports. Trying to figure out what was stimulus induced rather than organic and trying to calculate how much trade activity is being done ahead of more tariffs or most likely now, less is very difficult. Also, what was rushed ahead of maybe new Huawei licenses and/or backlists is also tough to know. Chinese stocks didn't care about the trade beat as the Shanghai comp fell .5% as did the H share index. The yuan is losing about 1/3 of yesterday's trade story driven gain. 

Taiwan, a key tech exporter, also reported its October trade figures and exports fell 1.5% y/o/y vs expectations of down .3% while imports were lower by 4.1% y/o/y vs the estimate of down just .1%. Exports specifically to China fell 3.5% y/o/y but rose by 18% to the US. The Taiex was lower by .2%. 

Germany said its exports in September, thus a month late compared to the China and Taiwan numbers, rose 1.5% y/o/y, better than the estimate of up .3% and August was revised up by 9 tenths. Exports to the US helped to offset weakness to China, their biggest trading partner. Imports too beat the Street estimate with its 1.3% y/o/y rise vs the estimate of no change. Maybe this data can help Germany avoid a technical recession in Q3 after the slight Q2 contraction. Markets there didn't respond as the euro is lower as is the DAX modestly but we know has had a great run. After rising 10 bps yesterday, the German 10 yr yield is down by 1.6 bps. 

Lastly in Europe, industrial production in France in September was a bit light relative to expectations but the manufacturing component specifically did beat the estimate by 4 tenths with a .6% m/o/m gain. Auto's though were soft. After getting back above zero, the French 10 yr oat yield is lower by 1 bp to +.05%. I do have to say that it's sad that I have to put a plus sign in front of a yield but it's a new world as we know.

* And comparing Papa John's to Chipolte
* I would add to PZZA on any weakness

I added Papa John's (PZZA) stock to my Best Ideas List on August 8, 2018 at $38.94.

The shares closed yesterday at $62.54/share

I traded the stock profitably (three times) and recently reestablished a small long position.

Papa John's reported its third quarter, ending September, the first under the leadership of new CEO (Robert Lynch). It is safe to say that Lynch, in place only for two months at the moment, had nothing to do with the reported fundamental results. The results, adjusted, along with Lynch's excellent reputation, were sufficiently encouraging to take the stock up by about +10%. The adjusted earnings per share was $0.21 vs. $0.19 a year earlier, but the most important aspect was that the comp sales have bottomed out, up +1.0% in North America and up +1.6% internationally. (This was my original August, 2018 thesis and it's playing out now).

Rob Lynch arrives at Papa John's with great credibility, and will hopefully provide the consistent and informed leadership that has been lacking over the last two years. Franchisees, who have been undoubtedly in distress, are no doubt encouraged by Lynch's arrival, and will support him every way they can. 

Our object here is to reflect on the current valuation relative to the current EBITDA run rate, and we will accept the non-recurring nature of adjustments as the Company suggests. We will compare today's valuation with that of Papa John's, at its peak in late 2016. In evaluating the stock at this point, it seems to us a comparable situation to that faced by Chipotle (CMG) , which fell from grace about four years ago, brought in new management about two years ago, and the stock, CMG, has outraced the earnings recovery to make new highs. 

The Previous Peak Valuation

At the end of 2016, PZZA traded at $90/share. There were 37.7 million shares outstanding - an equity capitalization of $3.39 billion. Adding the $300 million of long term debt provided an enterprise value of $3.69 billion - or 17.8x the EBITDA for calendar 2016 (of about $207 million). 

Today's Valuation

Today the shares trade at about $62/share, with 31.6 million shares outstanding, valued at $1.93 billion. Adding the $346 million of long term debt provides an enterprise value of $2.28 billion. This is about 19.8x the adjusted EBITDA for the year ending December, 2019. This is in the same range of EBITDA multiples that other large scale publicly traded franchise systems sell for. 

The Possibility of Recovery

We view Papa John's rebound at least as probable as that achieved by Chipotle. There are lots of differences to be sure. Chipotle is largely company-owned, Papa John's is franchised. Chipotle had food borne illness problems, Papa John's had leadership/political problems. There was a leadership crisis at both companies with both founders, Steve Ells and John Schnatter (who, on November 1, 2019 sold 1.9 million shares for $107.5 million, losing credibility for very different reasons). The QSR industry is more competitive than ever, but PZZA had the scale to compete two years ago, and there seems to be no major reason why they can't regain most, if not all, of their previous market share. 

The Chipotle Comparison

The following charts show the revenue and earnings statistics, and the stock price performance, per Bloomberg, for CMG over the last five years. You can see that revenues and earnings peaked in calendar 2015, the stock turning down at the end of 2015 as the food borne illness issue arose. The stock bottomed in late 2017, early 2018, just before Brian Niccol arrived as the new CEO. The stock moved almost immediately from about $250 to $400, before Brian had learned where the bathrooms were (especially since headquarters was moved from Denver to San Diego, at a cost of over $100 million). Chipotle has made great strides and the stock recently hit a new all time high above $800. It is worth noting that the $13.88 EPS estimate for 2019 is still below the $15.43 high in 2015.

So, that's Chipotle:

Now we have Papa John's.

The following charts shows the company's earnings data and the stock price chart.

PZZA stock price peaked in late 2016, with earnings reported at $2.55 in 2016, no doubt expected to be higher in 2017 than the $2.61 reported. The stock has bottomed in 2019, with PZZA under the control of interim management. It is interesting that the enterprise value (equity cap plus debt) at the bottom, this year, was very close to the 17.8x trailing EBITDA at the end of 2016. With the stock price up from the $40s to the low $60s, the enterprise value of about 19.8x the trailing EBITDA does not seem out of line. In fact, valuations in terms of the Price Earnings multiple or the enterprise value to EBITDA are almost always highest at the bottom of a cycle, when earnings and EBITDA are depressed - and the stock price is hope for some sort of recovery. 

Conclusion

The current price of PZZA seems to reflect some continued recovery potential - which has clearly begun (based on improving domestic comps). Robert Lynch is a qualified leader, the company has a strong enough balance sheet to support an extended recovery period and the franchise system has little choice but to make every effort to do their part. Unit growth has been mostly international in recent years, those sales trends never suffered as much as those in North America, so that third of the worldwide 5,000 unit system should continue to provide unit growth.

Overall, I estimate that the run rate of EBITDA will increase materially over the next 2-5 years (if not sooner) and the stock price could move in lockstep.

I would not chase the recent strength but I plan to add to my small long position on any weakness.

* I covered some of my Disney (DIS) short on the better EPS report, but added more shorts back as the stock climbed rapidly in after hours. 

I will have more on Disney later, but I am running out of the office shortly.

Here is the Monarch Notes edition:

Disney's shares responded strongly to a +$0.15/share beat (with strength in studio, direct to consumer and media (affiliate rates +7% and subscribers -4%, network advertising +1% and ESPN -2%) beating consensus expectations.

Park attendance was flat (but +1% excluding the hurricane's impact, per capita spending strong at +4%).

Despite the EPS beat, the company's guidance suggests that EPS estimates for 2020 will be trimmed reflecting +$400 million higher (to $3.2 billion) direct to consumer losses.

From Cowen:

Our FY20 revenue, segment EBIT, and EPS estimates go from $82.62B, $15.79B, and $5.96 to $80.91B, $14.84B and $5.21, respectively. We are downwardly revising our FY20 Studio Entertainment estimates to reflect a more conservative view on the prospects for 2H:F20 and likely continued drag from the Fox studio. We are also trimming our PEC estimates to reflect a drag at the Hong Kong park from the ongoing political turmoil there (Disney indicated it would be ~$80MM EBIT in FQ1 and as much as $275MM for the FY). Finally, we are reducing our Media Networks estimates to reflect incrementally negative sub trends since last quarter and a somewhat slower pace of cost synergies. Offsetting some of this in the model is the fact that FY20 will benefit from a 53rd week.

While bullish investors prefer to look at "earnings power" of $7.75E (excluding Fox dilution and digital investments), I believe that is premature given the continued uncertainties of a more-competitive streaming landscape.

Today's implied value of the streaming business exceeds $40 billion (more than two times calendar year 2023 revenues (!)), given reasonable estimates of the company's core franchises. That seems much too high to me.

Multiple challenges remain for the company during this transition to streaming, including the need to demonstrate better Fox execution, the delivery of reasonable ratings, film successes (harder compares), a stabilization in cord cutting and a resumption of attendance growth in the parks.

I covered some of my Disney short on the immediate gap (+$3/share) but upon reviewing the report and watching the stock rise by another +$5 (reaching my ideal $140/share short entry point), I reshorted more stock than I covered earlier in the after hours session.

UBS downgrades Micron Technology (MU) this morning.

Danielle DiMartino Booth looks at Dallas and Mexico: 

• Mexico's economy unexpectedly fell into contraction in the third quarter, the first print since 2009; while business investment has stabilized in contraction, Mexico's vehicle production continues to decline, and vehicle exports are off nearly 20% from the prior year
• Future retail inventories in the Dallas Fed District have contracted for nearly four straight quarters, suggesting tepid anticipated spending; the area encompassing the nation's second most populous state leads national consumption trends
• Texas' reliance on the weakening auto and energy sectors helps explain the double-digit increase in the state's jobless claims; the state could fall into recession if tariff relief, the end of the GM strike and Fed liquidity fail to turn around the state's economy

Did you know that ooey and gooey date back to 1800 B.C.? That's the earliest date we know the Mayans settled the Guatemalan tropical lowlands. At its peak of power and influence, around the sixth century A.D., the Mayan Empire grew to 40 cities that boasted populations of 5,000 to 50,000 summing to an impressive 2,000,000.

While most conjure images of palaces and pyramids and a civilization that mysteriously collapsed, Texans thank their lucky star for what survived -- the tradition of rolling other food into tortillas. The palette of the Spanish conquistadores never knew what hit them, but they did keep detailed records of enchiladas such that they would forever remain a part of modern history. Given the Mayans were a deeply religious people, we prefer to think of their culinary mainstay as the holy, rather than the whole, enchilada.

Markets Thursday cheered the holy enchilada that captured news of tariffs being lifted alongside an oversubscribed Federal Reserve term repo operation. It was the best of news for the macroeconomy rolled into the worst of news for the repo market, the result of which was visions of ooey, gooey liquidity as far as traders' eyes could see.

With the trade hawks summarily sacrificed at the altar of re-election, we must now ponder whether the damage wrought by the tariffs can be reversed. Our short answer is, it depends. The secular downturn in the global auto market pre-dates the first Trump tweet and continues to drag on growth. And while oil prices have recovered from their recent lows, they're still not sporting the $60 handle that would resuscitate the struggling shale sector.

The intersection of the Texas and Mexican borders would seem to be a logical locale to gauge what's to come on the two fronts least affected by the resolution of the trade war.

As you see in those blue bars above, on a not-seasonally adjusted basis, Mexico's economy has slipped into recession. If you prefer the metric most cited in the media, the seasonally adjusted year-on-year rate was -0.1% in the third quarter, the first negative print since 2009. And while business investment appears to be stabilizing, albeit in contraction, Mexico's vehicle production has weakened further, falling -16.3% over last year while vehicle exports are off by -19.5%.

As for its other economic mainstay, though the government has managed to trim Pemex's debt load from $106 billion at year-end 2018 to $99.6 billion, the state oil company recorded a $4.6 billion loss in the third quarter. Low crude prices and a strong dollar have crippled the world's most debt-laden oil company.

Closer to home, 89% of energy companies saw declining earnings in the third quarter. As for what's to come, energy's robust reversal is expected to be the stock market's savior in 2020. To test this thesis, we checked in with QI amiga Tracy Shuchart who works for a family office in Montreal running an index and energy fund and is the voice of authority on Twitter where she's fervently followed as @chigrl.

Let's just say she's not holding her breath on the rebound narrative: "90% of companies' earnings calls have said things don't look better next year and half are saying it may be worse. The first half of 2020 may be bad as it looks like we will be very oversupplied, meaning lower oil prices. I don't think this turns around until 2021 or 2022."

The greenest shoot we can conjure is Texas jobless claims, which have improved ever so slightly from being up (bad) 13% in September to up 12% in October. We can only hope that the economy of the nation's second most populous state recovers, and fast. The best case scenario: the benefits of the end of the GM strike and a rapid reversal of tariffs could hit all at once.

Otherwise, we remain a bit concerned. Consider the orange line above from the Dallas Federal Reserve's Retail Outlook Survey. Future retail inventories have been in a contraction for nearly four straight quarters. How on earth do retailers plan for blowout holiday sales and slash inventory at the same time? And by the way, consumption at the national level follows Texas inventories' lead.

Spending could be faltering judging by a separate metric that highlights the risk of Texas' and Mexico's reliance on the auto sector. Yesterday, Manheim reported that wholesale used vehicle prices had fallen 0.4% over the prior year, the first decline in 33 months. It's evident incentives to move bloated new car inventories were not free after all. But that's what automakers are forced to do when the cycle turns. If it is U.S. consumption that's at stake, nothing less than the Holy Enchilada of the Powell Printing Press and Trump's Trade capitulation will stop Texas from following Mexico into recession.

I will be out of the office most of the morning. My posts will be less frequent and shorter.