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DAILY DIARY

Chris Versace

Th-Th-Th-That's All Folks!

As the famed cartoon character of my youth Porky Pig fondly says, "Th-th-th-that's all folks!"

Thanks for tuning in and allowing me to once again play in the sandbox. Many thanks to editors that help bring my thoughts to you in a timely and spiffed up fashion. 

Let's do it again before too long, and be sure to get your popcorn for Sunday's Oscars. Despite what Ben Zauzmer thinks, I'm still pulling for Tarantino and "Once Upon a Time in Hollywood." 

CV out.

Position: None

The Current Earnings Season So Far

This afternoon, FactSet published its usually helpful roundup of corporate information received so far during the current earnings season. Here is what it found: 

To date, 64% of the companies in the S&P 500 have reported actual results for Q4 2019. In terms of earnings, the percentage of companies reporting actual EPS above estimates (71%) is below the five-year average. In aggregate, companies are reporting earnings that are 4.6% above the estimates, which is also below the five-year average. In terms of sales, the percentage of companies (67%) reporting actual sales above estimates is above the five-year average. In aggregate, companies are reporting sales that are 0.7% above estimates, which is below the five-year average.

The report concludes by sharing that next week we have another 65 S&P 500 companies reporting, which means by this time next week 77% of that index's constituents will have reported. 

One of the things that I'll be paying close attention to is the guidance that we receive next week from companies that are expected to report their quarterly results as well as those that disclose the impact the coronavirus is having on their business. As I do that I'll be looking to determine how low expectations can go for S&P 500 earnings in the current quarter. As we can see in the graph below, over the last two weeks those expectations have fallen such that March quarter earnings are expected to come in below that for the December 2019 quarter.

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Given the influence of China's economy, in the next weeks we very well could see March 2020 EPS expectations for the S&P 500 fall below the $38.80 registered for the March 2019 quarter. Should that come to pass, the next question investors will ponder is how far, how fast can that rebound? Said another way, how much upside will there be to the other three quarters of 2020? It may not be enough to sustain the current forecast that calls for a 8.2% increase year over year (which is already down from almost 10% at the start of January), but will it still result in a sharp tick higher vs. the current quarter? 

Let's find out shall we?

Position: None

Data and the Economy

From the Association of American Railroads (AAR) Rail Time Indicators:  

Total U.S. rail carloads fell 5.9%, or 73,110 carloads, in January 2020 from January 2019, their 12th straight decline.

U.S. intermodal originations fell 5.4%, or 71,081 units, in January and have now fallen for 12 consecutive months. 

More data that points to a slowing economy, and yes it is data that conflicts with the order rebound recorded in the January ISM Manufacturing Index that we received earlier this week.

Position: None

And the Oscar Goes to...

Harvard Applied Mathematics grad and "Oscarmetrics" author Ben Zauzmer, uses data from the year's earlier award ceremonies, like the Golden Globes and the British Academy Film Awards (BAFTA), to predict Academy Award winners "with near-perfect accuracy." Here are his predictions for Sunday night's Oscars:

Best Actor: Joker" actor Joaquin Phoenix

Best Actress: "Judy" actress Renee Zellweger

Best Supporting Actor: Brad Pitt for "Once Upon a Time in Hollywood"

Best Supporting Actress: Laura Dern in "Marriage Story"

Best Director: "1917" director Sam Mendes

Best Picture: "1917"


Let's see how he does this year, and if Zauzmer's system delivers the same accuracy as it has in the past then perhaps someone should talk to him about developing one for stocks.

Position: None

The Impact of Coronavirus on Economic Activity and Earnings

Alright folks, we've got a little over an hour until we close the books on the first week of February 2020. As we discussed this morning, the realization that there is another shoe to drop associated with the impact of the coronavirus on economic activity and earnings is being had. As we look at some of the Trifecta holdings that will report next week - Cisco Systems (CSCO) and Applied Materials (AMAT) - both have sizable exposure to Asian markets, especially Applied given that China accounted for 29% of its revenue in 2019. 

This means we could very well see soft guidance relative to expectations being issued next week as those two, plus another 498 or so companies report their latest quarterly results. 

The advice I have is this - recognize the near-term impact to be had, weigh it against the long-term tailwinds fueling your investment thesis, and pick your spots to scale in, hopefully at better prices. For Applied shares, the continued buildout of connectivity that includes 5G, gigabit fiber, data centers and the Internet of Things is a robust tailwind. Same goes for Cisco, which also stands to benefit from growing cyber security demands, which will be driven in part by that expanding digital infrastructure.

Position: The Trifecta Portfolio is Long AMAT, CSCO shares

Hairy Move for KKR?

I just saw that Sky News is reporting that KKR (KKR) may be lining up to make an $8 billion bid on Coty's (COTY) hair care business, that includes Wella, Clairol and Good Hair Day.

If true, it's a potentially interesting fit given that KKR has been linked to the buyout of Walgreens Boots (WBA) .

Perhaps a move similar to what Target (TGT) has done with Harry's, Quip and other brands is in the offing?

Position: None

It's About Time

FedEx (FDX) shares are trading up after the company said it is optimizing last-mile residential deliveries that will drive costs lower.

Funny what happens when you give customers what they want!

Position: None

Neeleman in Flight?

There are reports suggesting that JetBlue (JBLU) founder David Neeleman is starting a new airline called Breeze Airways to serve mid-size U.S. cities without many direct flights, and that it could take flight later this year. 

Of course, one question relative to Southwest Airlines (LUV) and other discount airlines is what Breeze's routes are? Another is how does the airline propose to compete. History would suggest on price, but we've already seen that move a few times over now. 

File under I am curious.

Position: None

Lunchtime Reading

Here we go, let's open up the lunchtime reading bag to see what I'll be perusing as I grab a later than usual quick bite: 


I'll be back post haste!

Position: None

The Dating Game

If anyone is wondering why Facebook FB is wading into the world of online dating, a new report from the Pew Research Center should help clear things up. The report finds 30% of U.S. adults have at some point used a dating app or website, up from 11% in 2013, and a majority of users reported an overall positive experience with online dating.


When a big fish, in this case Facebook, moves into a new pond, it tends to do so at the expense of the smaller ones. In this case that means Match Group (MTCH) and Meet Group (MEET) . To me this explains reports making the rounds that Match approached Meet about a potential takeover. 

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We've seen this phenomenon a number of times when Amazon (AMZN) moved its way into a new market. More often than not it was successful, but there were times, such as airline reservations, that it wasn't. One of keys for Facebook and online dating will be Facebook overcoming the privacy related issues that are plaguing it.

Position: None

No Easy Sleep for Casper Shareholders

After popping higher following the pricing of its IPO at the low end of the range, Casper Sleep (CSPR) shares have given all of those gains back today.

To me the red flag in the filing was the mounting losses in 2019 compared to 2018, and then there is the question of competitive advantage, especially since you can get great buys on mattresses from other online retailers as well as brick & mortar ones.

Stay away is my take.

Position: None

Coronavirus and the Move to Digital Commerce

According to an article from CNBC.com, more people are stuck at home in China as they wait out the coronavirus outbreak, giving some delivery and e-commerce companies an opportunity, even as they try to manage the risks of the disease. 

Of course my sympathies go out to the them, but when I don my investor hat and think about that pain point - as well as the comments above from other retailers - I think this will only jump start the shift to digital commerce. And while it's a no-brainer to think of Amazon (AMZN) or in China's case Alibaba (BABA) and JD.com (JD) , when it comes to the rising disposable income and the desire for luxury goods it means thinking of Farfetch (FTCH) , which we own in the Stocks Under $10 Portfolio. 

To be clear, we've owned the shares for a while now as a play on the intersection between digital commerce and luxury, particularly as luxury brands embrace digital commerce for both sales as well as marketing and branding via social media like Facebook's FB Instagram.

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Positions: The Trifecta Portfolio is long AMZN shares. The Stocks Under $10 Portfolio is long FTCH shares.

Position: See above

Eye on Monte dei Paschi and the Eurozone Economy

I suspect if not for the coronavirus related headlines we would be hearing more about this today... 

"Monte dei Paschi di Siena failed to meet European Union profit goals for 2019 agreed under the Italian bank's bailout terms after reporting a 1.2 billion euro ($1.3 bln) fourth-quarter loss on Friday due to tax changes....But the government must re-privatise Monte dei Paschi by the end of next year and the Treasury has been discussing a plan with the EU Commission to help cut the bank's problem debts below 5% of total lending to make it more attractive to potential merger partners." 

This was a sticky situation in 2017 when Italy bailed it out after years of mismanagement. The issue will be what can be done that hasn't already been tried while limiting the potential fallout to be had. 

And this seems like a good time to mention the following:

German Industrial Production slumped 3.5% month over month in December missing the expected 0.2% fall as capital goods output, intermediate goods and consumer goods all fell more than 2% and construction output fell 8.7%. This wider than expected drop for the month marked the biggest decline since January 2009. 

Following its flat November reading, December Industrial Production in France also fell more than expected, dropping 2.8% month over month vs. the -0.2% consensus. The drop, which was the largest since January 2018, was led by declines in manufacturing production, repair and installation of machinery & equipment, chemicals, rubbers & plastics, wood & paper products as well as textiles and machinery. On a year over year basis, the country's industrial activity fell 3%. 

December Retail Sales in Italy rose 0.5% month over month vs. the expected 0.4%. Non-food sales rose 0.8%, the first increase in three months, while food sales slipped 0.1%. On a year over year basis, however, December Retail Sales rose 0.9%, missing the 1.2% consensus. 

Note to self: Keep watch on Monte dei Paschi developments, the speed of the Eurozone economy, particularly Italy, and the ECB's upcoming policy meeting on Feb. 19.

Position: None

DiMartino Booth on Jobs

From the pen of Danielle DiMartino Booth as the market enjoys today's January Employment report: 

A) Continuing jobless claims continued to rise over the prior 12-month period; they're now up 1.5% in the first four weeks of January on top of the 1.9% rise seen in the last three months of 2019.

B) The improvement that started last August in Challenger layoffs was arrested in January. Over the past 12 months pink slip production is up 11%. Stereotypically, Retail was a big part of the story. (Nothing new.) Industrials, Autos and Transportation were also ugly. (Bandwagon-ing on the sell-side narrative, fade the irrelevant manufacturing sector.) But what of January's layoff leader, Technology, which outnumbered ever Retail?

C) Coronavirus will not be limited to the first quarter nor will it only impact Industrials.

Position: None

Tweet of the Morning

Position: None

OneWater Marine's IPO

Premium recreational boat retailer OneWater Marine (ONEW) has priced an initial public offering of 4.6 million shares at $12.00 per share, the low end of the targeted $12-$14 range. It will be interesting to see how this trades as well as listening to its first earnings report as a public company. Boats, particularly premium ones, tend to offer a pretty good beat on discretionary spending. 

I may not be a buyer of boats or ONEW shares (at least not until after the IPO lockup expires) but I'm more than happy to tap into the data to be had.

Position: None

The Battle Over 5G

Shares of mobile infrastructure companies Ericsson (ERIC) and Nokia (NOK) are catching a bid this morning for a different reason tied to 5G than you might initially think. Yes, so far this earnings season we've received a number of comments that point to the 5G market heating up, most recently from Qualcomm (QCOM) , but today the moves in ERIC and NOK shares reflect headlines suggesting the U.S. and its allies could take a controlling stakes in Nokia, Ericsson or both, to take on Huawei.

Keep in mind that yesterday Huawei filed two lawsuits against Verizon (VZ)  , alleging the U.S. carrier infringed patents held by the Chinese telecoms giant. Huawei said the alleged infringements relate to 12 patents in areas from computer networking to video communications.

Back to today... the notion of the U.S. taking a stake in Nokia and or Ericsson stems from the following comments made by U.S. Attorney general Bill Barr surrounding national security concerns with Huawei.

"There are only two companies that can compete with Huawei right now: Nokia and Ericsson..." and he went on to say that there are already proposals on the table for the United States "aligning" itself with either or both companies. Per Barr, the proposals involve "American ownership of a controlling stake, either directly or through a consortium of private American and allied companies." 

I'll put this in the "wait and see" file, and stick to the fundamentals, which are pretty compelling in their own right and it's why we own Nokia and RF Industries (RFIL) in the Stocks Under $10 portfolio, and Qualcomm, Apple (AAPL) and Cisco Systems (CSCO) in the Trifecta Portfolio.

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The Stocks Under $10 Portfolio is long NOK, RFIL shares. The Trifecta Portfolio is long AAPL, CSCO and QCOM shares.

Position: See above

The Jobs Report

Alright, the January Employment Report has been published and the nonfarm payroll number of 225K crushed the 164K consensus, the Unemployment Rate ticked up to 3.6% vs. the expected 3.5%, and the November and December job creation was revised to the upside albeit modestly.

While some of the upside can be attributed to warmer weather and the positive impact on construction, which added 44K jobs during the month (vs. the monthly average of 12K in all of 2019), I'd note that January tends to feel the pinch of post-holiday season layoffs but in today's report we find the "retail trade" was little changed.

Other big gains were had in healthcare, transportation and warehousing - I strongly suspect that last one reflects the accelerating shift to digital commerce, which likely means, we will be seeing more of that in forthcoming reports.

Inside the January report we find average hours worked was unchanged, but over the past 12 months, average hourly earnings rose 3.1% led by the 3.2% year over year increase for private-sector production and non-supervisory employees.

Heading into the report the Dow was down 96 points, the S&P 500 down 9 and the Nasdaq down 30-ish, and as Wall Street digests what will be called a favorable report that will boost GDP expectations, those pre-market losses have been trimmed.

Position: None

No ICE for Ebay

Shares of eBay (EBAY) are falling in pre-market trading following the comment by Intercontinental Exchange (ICE) that it will "no longer explore strategic opportunities with the company."

Maybe I was missing something but I never saw the synergies to be had between the two.

Next up, the January Employment Report!

Position: None

Foxconn China Factories Update

Foxconn, one of the key assemblers for Apple's (AAPL)  iPhone, announced it will gradually restart operations at factories in China next week but it could take one to two weeks from Feb. 10 to resume full production following the coronavirus outbreak.

Position: The Trifecta Stocks portfolio is long AAPL shares

Viral Retail Pressure

The impact of the coronavirus continues to be felt, especially among retailers.

Shares of Canada Goose (GOOS) are under pressure this morning as the high-end outerwear company cut its 2020 outlook in response to the coronavirus outbreak.

The company reported:

"The health crisis has resulted in a sharp decline in customer traffic and purchasing activity. Retail stores and e-commerce across Greater China have and continue to experience significant reductions in revenue. Due to global travel disruptions, retail stores in international shopping destinations in North America and Europe are also affected. No supply chain interruptions have occurred. The Company believes that this is a temporary change in consumer behavior due to health precautions in extraordinary circumstances. However, the extent and duration of the disruptions remain uncertain and prolonged disruptions may also negatively impact future fiscal periods."

Meanwhile the Financial Timesreports luxury fashion group Burberry Group (BURBY) said "the sales impact of the coronavirus outbreak in China is more significant than the civil unrest that halved sales in Hong Kong during its last fiscal quarter." Burberry, which derives roughly two-fifths of its revenue from Chinese consumers, shut 24 of its 64 stores in China, with the balance running on reduced hours, which have seen an 80% drop in foot traffic.

Also this morning V.F. Corp (VFC) shared that the coronavirus will impact its financial results in the Asia-Pacific region in the near term.

My position has been that despite the market's rebound this week, there would be another coronavirus-related shoe to drop. I believe we are seeing it.

Position: None

Friday Morning Update

Good morning and welcome to this Friday edition of Doug's Daily Diary! I'm Chris Versace, and I will once again be sitting in for Doug. We've got a number of earnings reports to be had this morning, including Canada Goose (GOOS) , CNH Industrial  (CNHI)  and a few others. We also have the January Employment Report coming our way at 8:30 a.m. ET.

So far Friday morning we've learned:

Due to the ongoing coronavirus outbreak,

--China delayed publishing its January trade data and will combine the data with its February release.

--Melco Resorts & Entertainment (MLCO) announced its decision to reassess all non-core investments to be made in 2020.

--Toyota (TM) will keep China production suspended through February 16 as coronavirus impact is evaluated.

--41 people quarantined on a Carnival (CCL) cruise ship tested positive for the virus.

ViacomCBS (VIAC)  plans to join the ranks of Netflix (NFLX) , Disney (DIS) , AT&T (T) , Apple (AAPL) and Comcast (CMCSA) in video streaming as it will introduce a new streaming service that would combine its media assets and build on CBS All Access. The new service would have an ad-free version as well as a premium one that would bundle Showtime.

As I write this, U.S. equity futures point to a down open, which is more than likely driven by profit taking following the sharp run in the market over the last week. It's my view that once we have the January Employment Report in hand, we'll have a much better sense as to how we'll start off the trading day.

Position: DIS, T and AAPL shares are owned by the Trifecta Portfolio
Doug Kass - Watchlist (Longs)
ContributorSymbolInitial DateReturn
Doug KassVKTX4/2/24-35.69%
Doug KassOXY12/6/23-14.96%
Doug KassCVX12/6/23+10.20%
Doug KassXOM12/6/23+12.04%
Doug KassMSOS11/1/23-28.97%
Doug KassJOE9/19/23-16.61%
Doug KassOXY9/19/23-26.35%
Doug KassELAN3/22/23+33.30%
Doug KassVTV10/20/20+63.03%
Doug KassVBR10/20/20+76.55%