What the Hell Happened to the Delta House I Used to Know?
* Looks like I missed something... * This could be the greatest night of our lives, but
"Hey, what's this lying around shit? The war is over man, Wormer dropped the big one What, over, did you say its over Nothing is over until we decide it is Was it over when the Germans bombed Pearl Harbor Hell no. And it aint over now. Cause when the going gets tough The tough get going. Who's with me? Let's go!" - Bluto, Animal House
I have recently written about the Robinhood "effect" in my diary.
There are a lot of stocks popular with retail traders (discussed on Reddit, heavily traded on Robinhood, etc.) that have started as penny stocks and gone up 10x-20x in the last month or two.
I am sure there are plenty of others but I found these with a quick search on Twitter (TWTR) . This obviously doesn't mean we peak today but this move is definitely starting to get speculative:
I have received a bunch of emails and inquiries about my price target for Zoom (ZM) .
On a discounted cash flow basis I come up with a $165/share price target which implies a (liberal) 21x enterprise value to 2021 calendar year revenues.
My price target of $165/share would still result in an implied $48 billion market cap for Zoom!
Below are yesterday's comments and follow-up afternoon update. As you can see, the S&P remained within the resistance band, while the Dow, thanks to Boeing in large part, shot up and out of the zone. But as suggested, a true breakout did not appear to occur.
Style of buying over the last several days in this rally suggest some of it is formula driven. Form chart suggest that the pause is possible due to slightly overbought condition.
Watch the S&P vs the upper end of the band, particularly area 3160 to 3200.
While the company substantially beat first quarter expectations, I am of the belief that, as a result of Covid-19 fears, Zoom (ZM) has substantially pulled forward its business opportunities and that comparisons ahead will be difficult. Indeed, it is quite possible that Zoom has pulled forward the demand for its video conferencing product by several years. Future growth will be a function of the company up-selling of its Phone product. Though the installed base upon which the upsell is made has increased measurably, that business is far more competitive. Moreover, Zoom is still ramping to full availability and functionality of the Phone product. I will have more on Zoom over the next few days.
* Speculation has run amok... again * And it should signal caution * Yesterday, in an extreme move, I sold my entire equity holdings in my personal pension plan
Please read this Bloomberg article from yesterday:
Bored' Millennial Day Traders Boost Airline ETF's Assets 2,930%
JETS held as little as $33 million in assets in early March
Young day traders behind ETF's explosive growth: CEO Holmes
(Bloomberg) --
A once-obscure ETF tracking airlines soared past $1 billion, largely bolstered by day trading.
The US Global Jets exchange-traded fund, ticker JETS, posted its 64th consecutive day of inflows on Tuesday, according to data compiled by Bloomberg. Its growth has been staggering: The ETF held just $33 million in early March as the coronavirus pandemic grounded global air travel. The fund's top holdings are the four major U.S. airlines, though it said last week that it will begin investing in Canadian carriers as well.
Much of that explosive growth in assets can be credited to day traders looking to "catch the bottom" in airline stocks, according to Frank Holmes, chief executive officer of JETS issuer U.S. Global Investors. After speaking with newly minted JETS holders, he says the boredom of being stuck at home and the strong rebound in carriers after the 2001 terrorist attacks and the 2008 financial crisis are luring young traders.
"All these millennials, being stuck at home with no bars to go to and no beaches to travel to, took their money and became day traders," said Holmes. "They're bored, they want to make money."
In particular, the growing popularity of JETS on retail trading platform Robinhood has "shocked" Holmes. The number of users holding JETS surged to nearly 30,000 this week, according to Robintrack, a website unaffiliated with the site that uses its data to show trends in positioning. That compares to 500 at the beginning of March.
Not even a warning from billionaire investor Warren Buffett has deterred the army of day traders. Buffett said in early May that Berkshire Hathaway Inc. completely exited its positions in airlines, cautioning that the prospects have changed as a result of the coronavirus outbreak. Since then, JETS has taken in roughly $294 million worth of inflows.
Despite a nearly 21% rebound over the past month, JETS is still nursing a year-to-date plunge of over 45%. The bulk of the fund's losses came after mid-February once lockdown measures took effect around the globe in an effort to contain the spread of infections.
JETS's recent recovery has further evaporated demand to bet against it. Short interest as a percentage of shares outstanding on JETS -- a rough indicator of bearish bets on the fund -- is currently 0.5%, according to data from IHS Markit Ltd. It reached 7.8% in February 2019.
However, JETS's methodology deserves a second look from investors pouring into the fund, according to DataTrek Research.
Instead of using a market-cap based weighting system employed by most sector-focused ETFs, JETS seeks to assign a 10% weighting to the top four largest U.S. or Canadian airline companies. Additionally, the fund doesn't have Boeing, despite holding General Dynamics and Airbus, co-founder Nicholas Colas noted.
"JETS may work from here, or it may not, but the important thing to know is that it's not a passive fund with weightings based on market caps and it can entirely exclude mega-cap companies associated with air travel," Colas wrote in a note Tuesday. "While the whole airline group may trade with a correlation of 1.0 for some time to come, you can't just assume you know what's in this product."
Now read this Business Insider column:
Boeing soars 11% after being named a monthly 'winner' by Dan Loeb's firm Third Point (BA) 2020-06-03 18:33:42.682 GMT
* Boeing soared as much as 11% on Wednesday after a performance update from Dan Loeb's Third Point Offshore Fund listed Boeing as one of its winners for the month of May. *Although initial media reports characterized Loeb's Boeing position as equity, it was later reported by CNBC's Scott Wapner that the Boeing position was in fact in debt, not stock. * "There's a rumor going around that Dan Loeb of Third Point has bought Boeing stock. I can confirm Dan Loeb bought Boeing debt, not Boeing stock," Wapner said on CNBC's Halftime Report. * Despite the clarification, Boeing's stock held on to its gains in afternoon trades.
Read these articles carefully - it was the debt Loeb was positive on, not the equity.
But the Robinhood traders don't seem to know the difference.
What is amazing to me is the market power they have. I don't think it is the aggregate dollars, but maybe it is their sloppy trading when there is not a massive amount of liquidity. They are just an indiscriminate marginal buyer, when at the same time apparently they're are not much in the way of sellers. They may not even know how to put a limit order in, they just sort of hit the buy button, like pulling a lever on a slot machine. Boeing (BA) is a massive market cap stock, and for it to be able to get yanked around like this on nothing, I never would have thought possible.
In many ways this is goofier than 1999. I keep saying the worst thing that could ever happen to the market is Covid-19 goes away, and the Robinhood traders need to go to work.
But maybe they are all billionaires at this point so they won't have to!
*The next big problem for the economy: Businesses can't pay their rent. Nearly half of commercial retail rents were not paid in April and May (Washington Post). See also, Are we heading into another Depression? (Financial Times)
* Future returns: Investing to further social justice (Barron's)
It was the individual investor that remained the biggest bear over the past month as bullish sentiment built elsewhere as markets recovered. Now even they are throwing in the towel on the bear side according to AAII although they still remain higher than the bulls. Bears fell for a 4th straight week, by 3.3 pts to 38.9 which is the least since February 20th. That print is now only just above the one year average of 35.7. Bulls rose for a 3rd week, by 1.5 pts to 34.6, the most since mid April. Bottom line, as bears are still more than bulls, the individual investor is still the last hold out on this rally but they are coming around to embracing it. From a contrarian standpoint, that is something worth noting as it begins to join the other stretched sentiment gauges as mood follows price.
AAII BEARS
AAII BULLS
While it will take time for sure to bring Vegas back to what it was, let's all hope with today's opening that it gets off to a good start.
I will say this about how ad hoc and sometimes the silly rationale for how the country is reopening with different states going about this in different ways, as a resident of NJ I'm disappointed that Las Vegas is opening today, Costco, Target and Walmart never closed and the NJ barber owner still has to wait 2 1/2 more weeks to open up their shop.
Expect to see the 'Covid' surcharge in some places as things reopen. FedEx said they are following in the foot steps of UPS in adding a fee to certain sized packages. A spokeswoman for FedEx said "As the impact of Covid-19 continues to generate a surge in residential deliveries and oversized items, the peak surcharges will help us manage the demand while maintaining strong levels of service for our customers."
The ECB meets today and there is speculation that they would add to their Pandemic Emergency Purchase Program (PEPP) from the current size of 750b euros of which they've spent about 250b. As I don't believe the cost of money or the amount of liquidity is the issue right now, I can't give any good answer why this would be necessary. Also, at the current pace of buying it won't run out until October. The euro is down today after a 7 day winning streak with sovereign yields mixed and stocks down.
This morning Deutsche Bank reduced (GS) to hold from buy. When GS traded to $240+ (pre-Covid-19) I profitably sold my entire GS long holdings. As the share price cratered, all the way down to about $135 during the coronavirus scare, I aggressively bought back GS in recent months, virtually buying every week. I sold my entire GS last week at about the current levels ($206ish). GS has been berry berry good to us. Separately, Deutsche Bank raised its rating to "Buy" on Wells Fargo (WFC) , delivering a $34/share price target.
* The pivot from growth to value is starting to work * Again, that pivot - or changing market complexion - historically, is not a good market tell or signal
Yesterday, in my Diary, I offered out a pairs trade idea:
* Fundamentals, political risks and mean reversion represent my rationale
A Pairs Trade (long X, short Y) is a market neutral trading strategy which attempts to profit from virtually any market conditions: uptrend, downtrend, or sideways movement.
Currently, I like the idea of going long banks (XLF) and shorting the Nasdaq (QQQ) :
* Thematically, I see the inevitability of a pivot from growth to value, see here and here. * On the long side, the outlook for bank profits and bank stock prices remain very attractive. * On the short side, the outlook for technology could deteriorate under the specter of political change in November in which surveillance capitalism comes into legislative focus.
As I have mentioned over the years, short selling is not for most individual investors. But this Pairs trade might be a more conservative and profitable course of action!
Yesterday the Nasdaq rose by +0.78% and the (XLF) increased in value by +3.74%.
So far, so good...
As to the investment ramifications of a pivot - several on our site and elsewhere suggest a rotation into value is not a market friendly development, I demurred on this conclusion on May 28th, in "More on Market Pivots and Change of Character":
There is not enough historical data to determine as to whether a meaningful pivot out of growth and into value could be seen as a bearish, or bullish, market factor.
According to my pal Tony Dwyer, the only two other times of reversal in such extreme outperformance of growth towards value produced two entirely different outcomes.
One was a peak and the start of a Bear Market in 2000, and the other was a month after the Generational Low in March 2009, and the start of a Bull Market.
Position: Long C (large), PNC (large), BAC (large), JPM (large), WFC (large), Short QQQ (large)
Danielle DiMartino Booth addresses job losses (now viewed by some as temporary) as becoming permanent -- a theme of mine over the last three days:
The Business Activity and Employment spread in service sector surveys is a proxy for profit growth; second quarter S&P 500 operating earnings estimates are much more pessimistic than higher frequency data points project
Markit and ISM data both indicate that productivity is increasing which should translate into more optimistic profits than bottoms-up analysts are projecting; May data illustrates a significant rebound, which - if proven correct - will begin to be reflected in analyst revisions
While productivity has rebounded in the near-term, structural changes are occurring in businesses that will create permanent displacements of workers; consumer confidence will wane as job losses viewed as temporary become permanent
In 1587, some 410 years before Al Pacino and Keanu Reeves' horror flick, Pope Sixtus V formally established what came to be known as the office of the devil's advocate. The term itself was not introduced until the early 15th century by Pope Leo X. In the Roman Catholic church, Advocatus Diaboli, acted as the promoter of the faith who critically examined the life of, and miracles attributed to an individual proposed for beatification or canonization. In keeping with its modern-day connotation, this individual was charged with presenting arguments that were unflattering to the candidate in opposition to (of course) God's advocate, Advocatus Dei, whose job was to make the affirmative case in favor of canonization. To the dismay of debaters worldwide, the office was abolished when Pope John Paul II revised the procedures in 1979.
Today, QI plays Devil's advocate to ourselves. The context is illustrated by the question posed in today's chart: "What if second-quarter earnings estimates are too bearish?" Analysts polled by Standard & Poor's are pegging 2020's second quarter S&P 500 operating earnings 42% below last year's level. At -43% over the prior year, FactSet has an extraordinarily similar projection via the analysts it tracks.
We have business surveys from IHS Markit and the Institute for Supply Management (ISM) to thank for helping us formulate arguments against such downbeat profit expectations. The proxies depicted above from the Markit Services report (orange line) and ISM Non-Manufacturing survey (green line) were built as higher-frequency, monthly guides for quarterly productivity statistics.
Both look at the dynamic movements between top-line output and labor input by taking the difference between Business Activity and Employment indices. The distinction - Business Activity approximates revenues and Employment is a guide for the largest cost, labor. Ergo, the Activity-Employment spread is a gauge for profit growth.
The crux of the argument against the pessimism built into the second-quarter earnings expectations stems from record swings in both productivity/profit proxies in May. We've written before of the differences between Markit and ISM samples; the former includes 'C'-suite perspectives from businesses of all sizes and the latter aggregates views from procurement professionals in predominantly larger corporations. At the moment, both metrics are saying the same thing: surging productivity and positive profits.
We purposely plotted quarterly profiles for all three series knowing the last two data points for the proxies cover April and May instead of the entire second quarter. The cratering in April is more consistent with the depressed earnings profile that's barely bouncing in the second quarter (purple line). The May moonshot could be the precursor to upgraded earnings calls by the Street.
Might that just be the capitulation needed for the S&P 500 Index to fully regain the 1148.75 points that were lost from the February 19th high to the March 23rd low? As of yesterday's close, the S&P had retraced 885.47 points, or 77% of the total decline.
When playing Devil's advocate, there must be a counterpoint. An improvement in the path for corporate profits should not just be about a widening spread between revenue and labor costs. Should top line pressures persist, they would feed through to the bottom line, forcing more labor dislocations. To inform this theme, let's look to the microeconomic world through a key macroeconomic sector that defines business cycles, namely autos.
AutoNation (AN) is the number one auto dealer in America, period, end. About half its revenue comes from new vehicle sales, a quarter from used cars and the balance from parts, service, finance and insurance operations. AutoNation ended 2019 with 25,000 employees. In April, it furloughed 7,000 of them (think "temporary"). And then yesterday, it announced that 3,500 of those unlucky folks will be permanently laid off. The back of the envelope math puts its labor capacity at about 86% versus last year. The company also returned a $77 million Paycheck Protection Program loan. Guess there was no need for those funds after deciding on the hard cuts.
The permanent narrative is not unique to AutoNation. It's evident in other service industries of entertainment, professional services and education.
Last Friday, the Arizona Diamondbacks laid off more than 25% of their staff with the remaining employees taking a pay cut. Deloitte & Touche's CEO warned its employees of 2,500 job cuts. And earlier last week, Stanford University's President Marc Tessier-Lavigne shared the message that his institution won't suffer a temporary budget blip; workforce reductions are unavoidable, news of which will be communicated in late July.
Playing Devil's advocate did not yield a convincing enough argument for our discerning minds. The Coronacrisis is creating permanent damage that will accumulate with time. It is doing so in small increments and will spread out over weeks and months before forming a critical mass. Until then, the reopening steamroller continues to push forward in technical fashion for equity bulls. Enjoy it while it lasts.
