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Wednesday Weakness – Broader Indexes Can’t Close the Deal on New Highs

Image result for water freeze animated gif"Water freezes at 32 degrees

That's a FACT we can all agree on, right?  Unless, of course, you are using Celsius, in which case 32 degrees is 90 degrees (89.6 for your sticklers) Fahrenheit and -402.07 Farenheit if your 32 was in Kelvin.  But water doesn't care, it still turns from solid to liquid at the same temperature – no matter what your opinion of measurement is.  It's not the FACT of water changing that is in dispute, it's how you choose to interpret that fact but that does NOT mean that "everyone is entitled to their own opinion" about what temperature water freezes at.  

So there can be an absolute fact but there can be endles confusion about how to report the fact and that then leads to many interpretations of what the facts actually mean and the more facts you are using the more complex the interpretations can become – and that's the stock market.  Not only are the measurements used by Economorons always in flux but there is even the added challenge that we don't have consistent measuring tools. 

Image result for facts and figures"For example, trade could be up 3% from last year but, if the Dollar is 5% weaker, then our Import Spending would rise 8% while our Export Revenues would fall 0.2%, leading one to conclude that the trade gap had widened by 10%.  Of course, it's much more complicated than that because each trading partner has their own currency exchange and some goods are price flexible and some are not and some, like Oil, are priced in Dollars anyway.  All in all it's enough to make your head spin if you think about it – so most people don't.  

Companies do have real value – it is just distorted through so many lenses that most people think it's difficult to determine as, not only do you have to adjust for current business measurments, currency fluctuations, taxes, etc. but you also have to determine if the past is directly comparable to the future and you then have to predict the future for the company, which means predicting the future of their particular sector and perhaps the overall economy locally, nationally and globally.  

Image result for facts and figuresStill, like the freezing point of water – there IS a fact in there somewhere – you just have to discover it.  Yesterday, for example, Lowe's (LOW) dropped 1.4% because Home Depot (HD) had disappointing earnings and lowered guidance but, this morning, LOW reported great earnings and they are up 5% pre-market but, on the whole, only just a bit over the $117 mark they were at two days ago – before this nonsense started.  

  • LOW made $1.36 per share for the quarter, which was 0.01 better than expected but Revenues were "only" $17.39Bn, missing by $300M as same-store sales rose only 2.2% vs 3.2% expected.  They also raised their guidance to $5.70 per share for the year from $5.63, that's up 0.07, which is 1.2% more!  
  • HD, on the other hand, fell 5% yesterday as earnings were "in-line" at $2.53 per share for the quarter and Revenues were "only" $27.2Bn, missing by $290M and same store sales rose only 3.6% vs expectations of 4.6%.  Their guidance was flat at $10.03 per share.  

LOW trades at $118 per share and HD trades at $225.  $118 divided by earnings of $5.63 gives us a price/earnings ratio of 21 which $225 over $10.03 gives us a price-earnings ratio of 22.4 so the bottom line is, HD was priced higher than LOW, who are in the same business in the same territory and they both adjusted to be more in-line with each other.  That gives us a pretty good idea that both should be priced at about 21.5 times earnings – given the current market conditions.  

But those conditions may change over time.  Cheap Chinese lumber used by Lumber Liquidators (LL) for example, has been subject to a 25% tariff this year, that's helped LOW and HD maintain their margins on lumber.  Tax rates have been favorable with HD paying $3.4Bn (23%) on $14.5Bn in 2018 vs $5Bn (36%) on $13.7Bn in 2017 so almost 100% of their $1.5Bn increase in earnings came from tax breaks, not growth. 

LOW was also better, paying just $1Bn (29%) on $3.4Bn in 2018 vs $2Bn (36%) on $5.5Bn in 2017 though, overall, LOW's total earnings dropped from $3.4Bn to $2.3Bn DESPITE the $1Bn tax break.  There may have been other factors like one-time gains or expenses etc. but you can easily see how hard it is to value a company – even when you have all the "facts".  That's why the PRICE of a company can vary wildly month to month – even when the business is fairly steady.  

You can use the AI at WolframAlpha to (sometimes) find the historical p/e of a company and you can see on this chart that HD's p/e ratio, for example, has fluctuated between 17.17 and 28.62 over the past 5 years but, oddly enough, the high and the low came just one year apart from each other:

Notice HD's improving stock price is mainly a function of the 25% increase in the p/e ratio since March, not because they are particluarly earning more money or have better prospects – just better sentiment…

Just imagine that's a chart for what temperature water freezes at or what you are worth as an employee on a monthly basis.  11.45 is 66.6% of 17.17 – that's a HELL of a variation, isn't it.  In fact, that's about the "normal" range of value uncertainty that stocks experience over a 5-year period.  There are no perfect valuation models but, given that FACT, we can then determine the best strategy for selecting stocks is when they are low in their valuation channel (providing we still think they have good future prospects) and ignoring them when they are high.  Whichever one you are hoping for, your stock will get there eventually.  

Here's Macys (M), which we picked in our Hemp Boca Portfolio and our Earnings Portfolio yesterday:

Yes, Macys is making 33% less money than they made in 2015 but that money is also being valued 1/3 as much in the p/e ratio – that's led to a devastating 78.5% decline in the price of the stock but did it really change the VALUE of the company by that much?  Probably not.  So there are two ways to win with M:  #1 is that they simply make more money and even with the current 6x price/earnings ration the stock would rise.  B is that sentiment changes and the p/e moves towards a more reasonable 10x earnings – even 8 would be a 33% bump in the stock price – silly as that may seem.  

So remember what Einstein taught us – everything is relative and, while there are indeed FACTS in the universe – we are all observers of those FACTS, looking through our own lenses, which may be nothing like the lenses others are using to observe the same FACTS and our conclusions from observing those FACTS are also clouded by our own systems and beliefs – leading two intelligent people to reach very different conclusions about something that is absolutey true – whether it's the freezing point of water, the value of a stock or the guilt of a President.

Keep that in mind next week when you gather with your family to argue about the best way to carve a turkey…


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  1. Happy Wednesday, All!

    Join Phil at 1pm for this week's webinar, here:

  2. Israel strikes Iranian targets in Syria; 11 reported killed

  3. GOP-requested witness rejects Trump ‘conspiracy theories’

  4. Yesterday one member asked if it was good to enter Phil’s T play at 38. Today it looks like 37 so here again always be patient with your entry. I entered at 21!!!

  5. Great article today Phil, you had 8 hours last night!

  6. Good morning!

    T/Yodi – Our target on T was just $35, I always thought it would pull back 10%.

    T AT&T Corp. 1000 10/25/2019 26 $36,950 $36.95 $0.62 $36.95     $37.57 $-0.43 $620 1.7% $37,570
    T Short Call 2022 21-JAN 35.00 CALL [T @ $37.57 $-0.43] -10 10/25/2019 (793) $-4,600 $4.60 $0.03     $4.63 $-0.28 $-25 -0.5% $-4,625
    T Short Put 2022 21-JAN 30.00 PUT [T @ $37.57 $-0.43] -10 10/25/2019 (793) $-2,800 $2.80 $-0.17     $2.64 $0.14 $165 5.9% $-2,635

    Still good for a new trade.  

    CTL/Pstas – That was inevitable.

    Big Chart – Straight up for a month – will it ever end?

    Thanks Advil.

  7. PAGS  is a Brazilian company focused on supporting payments in small vendors, street vendors, independent professionals, etc.  they are in NASDAQ and have options too., what do you think?

  8. Good morning. Any thoughts on GPS as they are at the level they bottomed in the past?

  9. A very Good Morning!

  10. Phil / LABU – well above 40 now…. any thoughts on this?

  11. PAGS/Advill – Well they just tanked Q3 but really small misses.  Growth looks good but hard to play a Brazil stock as currency and economy is all over the place.  

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue BRLm 0.000 325.8 674.9 1,138 2,523 4,335 5,046 5,842 7,402 +91.0%
    Operating Profit BRLm 0.000 50.6 68.7 230.3 800.1 1,257 1,683     +123.3%
    Net Profit BRLm 0.000 26.0 35.1 127.2 478.8 909.3 1,165 1,513 2,046 +143.2%
    EPS Reported BRL 0.000 0.084 0.11 0.41 1.83 2.86 3.59     +141.2%
    EPS Normalised BRL 0.000 0.084 0.11 0.41 1.83 2.86 3.59 4.62 6.18 +141.2%
    EPS Growth %     +35.1 +262.5 +341.3 +56.6 +12.0 +61.6 +33.8  
    PE Ratio x           53.9 42.9 33.4 25.0  
    PEG x           0.88 0.70 0.99 0.92

    I wouldn't over-think it.  You can just sell the 2022 $30 puts for $8+ and, if they got to $12, just take the loss and walk away but, otherwise, when they get to $6 you can add a bull call spread.

    Catching up from yesterday (sorry but things are non-stop this month):

    APHA/Yodi – Are you saying I called a trade on them?  Can't find it and don't remember it.  

    Hemp Boca/Pat – It's just a portfolio for that show, like Money Talk.

    EIA not as bad as feared – /RB hit our target entry at $1.585 and straight up since!  

    • EIA Petroleum Inventories: Crude +1.4M barrels vs. +1.5M consensus, +2.2M last week.
    • Gasoline +1.8M barrels vs. +0.9M consensus, +1.9M last week.
    • Distillates -1.0M barrels vs. -0.7M consensus, -2.5M last week.
    • Futures +0.78% to $55.78.

    TAP/Vidt – The Jan $50s are $3 so you lost $2.50 and there's not much you can do about that but I would salvage that and roll to a 2022 $45 ($11)/$52.50 ($7) bull call spread at $4 and, when the short Jan $60s expire, you can sell 1/2 the April $55s (now $2) and, if you pick up $1 per Q selling calls, you will add $7 to your returns over 2 years.  Also, of course, I'd sell 1/2x the 2022 $50 puts for $7.50.

    LABU/Batman – I think I said (and now I'm saying again), I'm not that keen on the LABU basket compared to identifying Biotechs doing exciting stuff at a good value.  The Biotech ETFs are driven by relatively few winners dragging the rest along.  We did a trade when they were cheaper in early Oct but too chasey now for my taste:

    Submitted on 2019/10/03 at 11:39 am

    LABU/DC – I'd make it an income play:

    • Sell 5 LABU 2022 $25 puts for $11 ($5,500)
    • Buy 15 LABU 2022 $30 calls for $13 ($19,500)
    • Sell 15 LABU 2022 $45 calls for $9 ($13,500) 
    • Sell 3 LABU Jan $34.87 calls for $3.80 ($1,140) 

    That's a net $640 credit on the $22,500 spread and you should be able to pick up at least $1,000 a quarter for 8 quarters so $8,000 even if you don't end up making money on the long spread.  

    That's good enough for a Top Trade!  

    Submitted on 2019/11/14 at 11:26 am

    LABU/Sun – Actually I'd go in if they get over $40 and hold it for a week.  LABU is only a 3x tracking (kind of) XBI so you are better off watching XBI's resistance zones to get a handle on LABU but LABU is also 1/10th the size (asset-wise) of XBI, which is why you're not getting the advertised replication accuracy.  

    XBI is very diversified with the top 10 just 20% of the total assets:

    Name (p/e) Symbol % Assets
    Seattle Genetics Inc (-)  SGEN 2.48%
    Arrowhead Pharmaceuticals Inc (98)  ARWR 2.18%
    Biogen Inc (28) BIIB 2.05%
    AbbVie Inc (40)  ABBV 1.84%
    Ligand Pharmaceuticals Inc (28) LGND 1.82%
    United Therapeutics Corp (-)  UTHR 1.81%
    Vertex Pharmaceuticals Inc (25)  VRTX 1.80%
    Incyte Corp (46)  INCY 1.79%
    Mirati Therapeutics Inc (-) MRTX 1.79%
    The Medicines Co (-)  MDCO 1.79%

    So not one p/e under 20 which is why we played CELG in the last down cycle and not LABU.  I want to see the whole sector out of favor before I decide to pick up a basket play (like OIH) rather than go through the list and find my own individual gems.  

    Even with this pop, by the way, CELG's p/e is now $14 so you can ignore EARNINGS all you want but I'll stick with my antiquated notions that I'd rather buy companies that ACTUALLY MAKE A PROFIT and, if they have growth potential – so much the better – but I won't trade one for the other unless the potential is spectacular.

    So it's not for lack of discussion that you are missing out on this!  cool

  12. Phil APHA I guess you entered a trade as I do not easily smoke pot alone. Only took some others based on MO CRON and they doing good!!!

  13. Phil / LABU – thanks…. 

  14. Really Yodi, I seriously don't think I ever called a trade on them.  What was the date?

    You're welcome Batman.

    M managed to hold $15 and is improving a bit!  

    Target can't save all of retail

    • Retail store stocks are getting pulled in two different directions after Target (TGT +13.3%) dazzled with its earnings report and guidance, while Urban Outfitters (URBN -14.3%) disappointed.
    • Dollar General (DG +2%), Dollar Tree (DLTR +1.2%), Ollie's Bargain Outlet Holdings (OLLI +1%), Five Below (FIVE +2%) and Costco (COST +0.2%) are riding on Target's coattails a bit, while a host of mall names are following URBN lower. Those decliners include L Brands (LB -6.2%), Express (EXPR -5.5%), Nordstrom (JWN -3.4%), Abercrombie & Fitch (ANF -4.9%), Children's Place (PLCE -4%), Tailored Brands (TLRD -3.3%), Gap (GPS -2.7%), Genesco (GCO -3.8%), Guess (GES -2.4%), Ascena Retail Group (ASNA -7%) and American Eagle Outfitters (AEO -3%).

    Target +9% after smashing quarter

    • Shares of Target (NYSE:TGT) are pushing higher in early action after the retailer tops Q3 estimates and lifts full-year profit guidance.
    • Comparable sales were up 4.5% in Q3 vs. +3.5% consensus off a 3.1% increase in traffic. Digital sales rose 31% during the quarter to account for 7.5% of all sales.
    • Gross margin improved 110 bps to 29.8% of sales. Operating margin was 5.4% of sales vs. 4.6% a year ago.
    • Looking ahead, Target anticipates FY20 EPS of $6.25 to $6.45 vs. $6.17 consensus and $5.90 to $6.20 prior view.
    • Shares of Target are up 9.09% premarket to $120.30 (record high).
    • Previously: Target EPS beats by $0.17, beats on revenue (Nov. 20)

    Greatest trade part deux? Icahn shorts mall debt

    • Via the WSJ's Greg Zuckerman and Esther Fung
    • The "death of malls" isn't exactly a new story, nor is it an accurate one judged by the performance of an index (the CMBX 6) aligned with the value of 25 commercial mortgage-backed securities.
    • A slice of that index tied to some of the riskiest part of that debt is up 20% this year, suggesting at least some optimism on the future of malls in the age of Amazon. Among the largest losers from that move is a hedge fund (now shuttered) run by a Carl Icahn protege.
    • Now Icahn (NASDAQ:IEP) himself has stepped in, purchasing credit-default swaps on the CMBX 6. He stands to make $400M or more should some mall owners begin having trouble paying their debts.
    • Shorts are peddling a "false narrative," says AllianceBernstein's Brian Phillips. "They are focused on momentum rather than credit fundamentals."

    This is fun:

    Aravive rockets 263% premarket on promise of lead candidate

    • Thinly traded nano cap Aravive (NASDAQ:ARAV) jumps 263% premarket on robust volume in reaction to positive data from a Phase 1b clinical trial evaluating lead candidate AVB-500 in platinum-resistant ovarian cancer.
    • High serum levels of AVB-500, what the company calls a decoy protein that starves a certain signaling pathway essential for cell migration and cancer proliferation, were "strongly predictive" of anti-tumor activity with statistically significant correlation to progression-free survival (PFS), the primary endpoint for studies in this patient population.
    • Specifically, patients receiving a dose of 10 mg/kg every other week and who achieved at least the minimal level of efficacious concentration (n=17/31) experienced greater than a four-fold increase in median PFS compared to those with low exposure (n=14/31) (8.1 months vs. 1.8 months; p=0.0016) and double the response rate  (29% vs. 14%).
    • Patients with sufficient AVB-500 exposure also showed increases in duration of response (7.6 months vs. 3.9 months) and clinical benefit rate (responders + stable cancer) (82% vs. 43%) with significantly less risk of cancer progression (18% vs. 57%).


    Exxon's credit rating outlook cut to negative by Moody’s

    • Moody's lowers its outlook for Exxon Mobil's (NYSE:XOM) Aaa debt rating to negative from stable, reflecting the company's "substantial negative free cash flow and expected reliance on debt to fund its large growth capital spending program."
    • The credit rating agency expects XOM's credit metrics will weaken over the next few years as it pursues a rebuild of its upstream portfolio, as well as new chemical facilities and refinery upgrades.
    • The company's "high level of growth capital investments cannot be funded with operating cash flow and asset sales at projected levels given Exxon Mobil's substantial dividend payout," Moody's says.

    That's it for /RB – Failed at $1.65 – no sense in being greedy. 

  15. Phil APHA I entered the trade 2/5/2019

  16. Sorry Yodi, the only person who mentioned APHA was a news item on 1/11 and then it popped up on a list from you on 2/17 and, after that, the next mention was a news item on 9/19.  

    Oops, looks like the indexes are taking a power dive.

    Just in time for our Webinar!

  17. 'Phase One' U.S.-China trade deal may not be completed this year: trade sources

  18. Phil not to worry as you know every one makes his own decission to buy or sell. I did not bet the farm!!!!

  19. China / albo – And tomorrow Kudlow will be on saying that good progress is being made. A total joke now.

  20. Phil if you wanted to stash $100K somewhere for a couple of years and forget about it what would you do?  Not using options just buying stocks.

  21. STJ – Like watching a ping pong match..

  22. Trade – I knew it!  And we're right back to where we were pre-Kudlow on Friday.

    Betting the farm/Yodi – I know you didn't. 

    $100K/Tangled – IBM, NLY, CLF, SKT, GOLD and, of course, $1,000 worth of NAK!  

    Trade on again (that didn't take long):

    U.S.-China trade talks make headway, but are still fragile

    • Trade talks between the U.S. and China are making progress in key areas even amid rising concern that efforts to complete the first phase of a broader deal are stalling, Bloomberg reports.
    • Looming over the negotiations are the continuing protests and violence in Hong Kong. The U.S. Senate passed a bill supporting Hong Kong protesters and the House plans to vote on the legislation today before sending it to President Trump for his signature. China has threatened to retaliate.
    • Progress is being made on the text of a phase-one deal with China and talks are continuing, White House spokesman told Fox Business.
    • Stocks pull up from session lows. The Nasdaq, down 0.6%, had fallen as much as 1.2% earlier. The S&P 500's 0.9% decline fades to -0.5%. The Dow, also down 0.6%, had dropped as much as 0.9%.

  23. Not enough of a comeback to get the RUT green but a nice try:

  24. Phil/ET – On Nov 14th, you had added a play on ET

    Here's one for the Dividend Portfolio:

    ET is a nice Nat Gas Pipeline business and $11.10 is only $29Bn for a company making well over $4Bn a year so a very nice deal in a solid industry with good growth potential.

    Because they pay a big $1.22 dividend, they are great for the Dividend Portfolio:

    Buy 1,000 shares ET for $11.10 ($11,100) 

    Sell 10 2022 $10 puts for $2.65 ($2,650) 

    Sell 10 2022 $12 calls for $1.50 ($1,500) 

    My question is — Do they send a K1 at the end of the year or are they just plain dividends and I can use this in a retirement account? 


  25. Does this say anything about the Macy's investment?

  26. Good morning! 

    Futures were way down last night but now up as the back and forth continues on China Trade.  Trump, however, is a sinking ship – can't believe the market is just ignoring it.

    Schwab buying Ameritrade! 

    ET/Vkat – Yes they issue a K1 but I don't know what the rules are for a retirement account – you'll have to check with your accountant or broker.  

    M/Tangled – If you notice, in the article, it specifically mentions Herald Square, which is M's main store.  

    If M's main store is "only" down 10% (chart indicates 5%), it's obviously is/was worth more than Sack's $3.7Bn in 2013 so, even if it declined to $3.3Bn – that's a nice chunk of M's total $5Bn valuation but, again, the Sacks store is 1M sq feet (impressive) and M's 36th st is 2.5M sq feet and a square foot RENTS for $776 around there!   So, if M moved out and rented the space – there's $2Bn a year right there….