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Weakening Wednesday – Inflation Clouds Earnings Reports

Alternate Inflation ChartsInflation is everywhere.  

Coca-Cola (KO), Proctor and Gamble (PG) and others have discussed raising prices in response to rising input costs for their products including both labor and materials and that's the kind of permanent, long-term inflation that the Fed simply cannot ignore.  "Transitory" inflation has been the Fed's excuse for extending their easy-money policy because the Fed's own mandate REQUIRES them to take action to curb inflation but major corporations announcing price increases is not at all transitory – it's embedded, long-term inflation.  

As you can see from the ShadowStats chart above, the Fed mainly controls inflation by chaning the way we measure inflation – something they have done since they started messing with the CPI in the Reagan years in order to pretend giving money to rich people wasn't making poor people suffer.  That's why, for the last few years – even though you CLEARLY could tell the price of things you buy were going up, the Fed kept saying inlfation was low and they had to let rich people borrow money at 0% to help boost it.

When we apply a consistent measure of inflation for the last 15 years, our current rate of inflation is actually 10%, which makes perfect sense since the current devaluation of the Dollar over the last 12 months is also 10%.  That's why KO and PG HAVE to raise prices, they buy commodities and turn them into products and a lot of what they buy comes from overseas, where the weak Dollar doesn't buy them as much as it used to.  Both companies have indicated the price increses are earnings-neutral, so there won't be any better profits from this move – just higher prices passed along to the consumers.

Netflix (NFLX) is a company that has not been able to pass along higher prices because people don't NEED it and there's now a lot of competition.  This is something I predicted would happen to them way back in April as a result of the pandemic:

That then brings us to the question of what stocks are really worth in a World where no one goes shopping or leaves their homes?  While we all HOPE this will be over soon – what if it's not?  I had a fun theory in yesterday's Live Trading Webinar that Netflix (NFLX) may have a broken model as they expect you to watch maybe 4 hours a day of shows and, by the time you watch 1,460 hours worth of content (1 year), they'll have some new content for you to keep you interested. 

But what happens to NFLX if you watch 16 hours of shows a day for 90 days?  That's 1,440 hours right there and now, in months 4-12, you find yourself looking at NFLX and saying "I've seen it all".  Not literally ALL of their content but all the content that YOU are even mildly interested in and, by then, you have checked and the rest of the shows clearly do suck and you can't believe your Mom even likes the one she said you "must watch" – what is wrong with her?

CoronavirusAnyway, Netflix's subscription model assumes there's always going to be something to keep you interest but there are no shows in production and no films being released and people are chewing through content at a ridiculous pace.  I think that makes it very, very hard to justify NFLX's current $185Bn valuation at $421 as they only made $2Bn last year and $700M last quarter in which they added 16M subscribers but, rather than be all excited about the additions – how about we consider that during a global pandemic in which 4Bn people can't leave their homes, ONLY 16M of them were finally pushed to sign up for NFLX.

Even if we assume NFLX makes $3Bn this year (up 50%) and $5Bn next year as we remain shut in forever and they never run out of content, etc… That's still pricing them at 37 times ridiculously optimistic forward earnings.  I think the run above $400 is ridiculous so for our Short-Term Portfolio, let's make the following play:

  • Buy 5 NFLX June $480 puts for $72 ($36,000) 
  • Sell 5 NFLX June $420 puts for $33 ($16,500) 
  • Sell 1 Sept $450 calls for $40 ($4,000) 

That's net $15,500 on the $30,000 spread so our break-even is right about $450 and anything below that will be profit.   The ordinary margin on the short call is just $3,737 so the market hasn't totally lost it's mind but we should set a stop on those short calls at $6,000, which would be over $450 as it wouldn't be worth the risk and then we'd have a net $21,500 cost on the $30 spread that we'd either adjust or give up on.

So a bit risky but fun to play! 

NFLX expired on June 19th at $453.72 so the short calls were $3.72 ($372) and the spread was $26.28 ($13,140) in the money for net $12,768 so we would have lost net $2,732 had we held on but we did hit our $400 target in May and exited early.  The up and down action was scary though so we didn't short them again, which is a shame because it just took longer than expected for people to get bored with Netflix.  At $550 yesterday, we certainly should have shorted them into earnings and the stock dropped 10% overnight.  Net profit for 2020 was only $2.7Bn – 10% LESS than I predicted but even if they make $6Bn going forward – how does that justify a $220Bn valuation at $500?  That's 36.66 times OPTIMISTIC forward earnings.  I stand by my $400 target – we'll just have to be patient.

Another huge earnings miss was United Airlines, who lost $7.50 per $50 share in Q1 and that's a $2.4Bn loss on $3.2Bn in revenues with Passenger Revenues down 67.2% from Q1 2020, which was itself a curtailed quarter.   Passenger Revenues are 72% of Operations so there's simply no getting around a disaster like that, is there?  Cargo Revenue sure tried to make it up with an 88.3% gain from last year but that only took it to $497M – not enough to make a dent in the losses.  

UAL forecasts Q2 to still be down 45% and the company is looking to cut $2Bn in Structural Costs to stop the bleeding but that's $2Bn less revenue for their vendors – so the economic suffering simply trickles down.  They do expect to get back to "normal" eventually and currently valued at $16.2Bn would almost be interesting as they can earn $2Bn in a good year – but that year won't be until 2023 at best and I try not to invest $16.2Bn into a company that's losing $2.4Bn a quarter – even if they promise to cut $2Bn in spending in 90 days – show me first!

These are the earnigns stories we're getting and, hopefully, they'll give us a little insight into what we should invest in going forward.  Certainly it won't be airlines for now….


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  1. Good morning. The webinar is regularly scheduled and the link is below. We would like to invite you to share the link with friends and family or anyone who you think would find it interesting and informative.

  2. Good Morning.

  3. Phil on NFLX the spread between the vertical put looks like 50  so where is the 30,000 spread come in. TIA

  4. Phil / INTC – What are your thoughts on them going into earnings…..  

  5. Phil / T: Any options play on T going into earnings?

  6. Good morning!

    NFLX/Yodi – That's not a new spread and it was 500 $60 spreads so $30,000 not sure how $480-$420 "looks" like $50 but maybe German math is different than US math….  wink

    This is interesting:

    • The Bank of Canada adjusts its target for weekly net purchases of Canadian government bonds to C$3B from C$4B, in line with its previous statements that it will end its quantitative easing programs.
    • The adjustment reflects the nation's progress made in the economic recovery, as its outlook for the Canadian and global economies have strengthened since its January report.
    • The Canadian dollar gains 0.3% against the U.S. dollar; iShares MSCI Canada ETF (EWC +0.8%) moves up as well.
    • The Bank of Canada's key overnight rate stays at the effective lower bound of 0.25%, with the Bank rate at 0.5% and deposit rate at 0.25%.
    • Update at 10:20 AM ET: The central bank now expects Canada's GDP to grow ~6.5% in 2021, up from the 4% rate it expected in January. For Q1, GDP growth is now expected to be ~7%, revised up ~9.5 percentage points. Q2 growth is forecast to be ~3.5%.
    • "Improved terms of trade, higher potential output and additional fiscal stimulus, combined with an earlier recovery of consumer confidence, will contribute to stronger projected domestic demand," the central bank said in its Monetary Policy report

    Should have made that bet yesterday:

    TD/Hicket – Well that's new.  That makes them playable then.  

    TD is at $65 and that's $120Bn in market cap and last year they dropped $12Bn to the bottom line so that's 10x BUT not really as that's $10Bn Canadian Dollars while their market cap is in US Dollars – you have to be careful with that stuff.  I think you need about 100,000,000 CAD for one USD or something like that – I was very drunk last time I was in Canada so perhaps I was over-tipping.  Yes, Google tells me you get 0.7913 USD for a CAD so we discount earning 20% and the p/e becomes 12 – still not bad but now we have to remember that our stock is subject to currency fluctuations BUT, since Canada is resource rich and the US is printing money on trees they import from Canada – the currency has a chance to go in our favor and boost our stock as well.

    Everything is just peachy:
    • As of Tuesday, ~5.24M COVID-19 cases around the world were reported over the past week, surpassing the record of 5.04M set the week of January 4, 2021, according to data from the World Health Organization ("WHO").
    • Cases increased in all regions, except for Europe, which saw a modest 3% decline.
    • An outbreak in India is responsible for 28% of new cases worldwide.
    • The total number of deaths from COVID-19 also surpassed 3M in the last week.
    • Vaccine names in premarket this morning: Johnson & Johnson (NYSE:JNJ) -1%; Moderna (NASDAQ:MRNA) -0.4%; AstraZeneca (NASDAQ:AZN) +1.2%; Pfizer (NYSE:PFE) -0.3%; and BioNTech (NASDAQ:BNTX) -1.1%.

    • Rising COVID cases in India and Japan are putting pressure on the broader market as the S&P (SP500) -0.2% and Dow (DJI) -0.1% ease back from last week's all-time highs for the third-straight session.
    • U.K. Prime Minister Boris Johnson says this morning the U.K. would experience another COVID wave, but he is still committed to lifting lockdown measures.
    • J.P. Morgan advises looking past the current COVID headlines, as the reflation and reopening trades will be back and stronger than the start of the year.
    • Brian Levitt, global market strategist at Invesco, agrees that there are tail risks like COVID, but "the base case is still very promising for the U.S. economy and financial assets."
    • The Nasdaq (NYSE:COMP) -0.3% is weaker as Netflix slumps after it missed subscriber numbers by a wide margin, which is also hitting stay-at-home names.
    • Communications Services (NYSEARCA:XLC) is the weakest of the seven S&P sectors that are lower, as other streaming-sensitive names like Discovery and Fox also slide.
    • But Stifel upgraded Netflix, calling the pullback an attractive entry point.
    • And Fios strength helped Verizon to a small gain post-earnings.
    • The rise in COVID cases and concern of new variants is keeping stock index futures in check this morning. Cases are rising in Japan, a new variant is already hitting India with a devastating second wave and there are worries about vaccine-resistant variants as well.
    • S&P futures (SPX) (NYSEARCA:SPY) and Dow futures (INDU) (NYSEARCA:DIA) are off slightly. Nasdaq 100 futures (NDX:IND) (NASDAQ:QQQ) are the weakest.
    • The 10-year Treasury yield is up 1 basis point to 1.57% (NYSEARCA:TBT) (NASDAQ:TLT).
    • But with a broader progress on the COVID front, the recovery and reflation trades will be back and stronger than they were to start the year, J.P. Morgan says.
    • That will be accompanies by yields rising and rotation from growth, quality and defensives to cyclicals and value,  accelerating into late spring and summer.
    • Reopening and reflation "are not priced in, as we can see a strong reaction on incremental news flow related to reopening and COVID-19," J.P. Morgan strategist Marko Kolanovic writes in a note. "In the last few weeks, the reflation trade reversed, with yields dropping on technical flows (e.g., CTAs), increase of cases (primarily India and Turkey) and re-grossing of long-short growth trades at the back of the decline in the VIX."
    • "With US and Europe cases now declining, the fast pace of vaccination and seasonal tailwinds (northern hemisphere), we believe that the reopening and reflation trade will resume with a move that will be bigger than we saw early this year. COVID-19 recovery this spring/summer will take place in stages with the US recovering first, followed by Europe and finally Emerging Markets."
    • The S&P is now about 5% below J.P. Morgan's year-end target (which was the highest on the Street when issued late last year), but there is more room to run in certain sectors, Kolanovic says.
    • Those are: Energy (NYSEARCA:XLE), Financials (NYSEARCA:XLF), Materials (NYSEARCA:XLB), Industrials (NYSEARCA:XLI), small-caps (NYSEARCA:IWM) and high-beta stocks.
    • Brian Levitt, global market strategist at Invesco, agrees that there are tail risks like COVID, but "the base case is still very promising for the U.S. economy and financial assets."
    • Financial conditions are still very easy in the U.S., corporate bond spreads are still tight and the yield curve is still steep, he told Bloomberg.
    • William Blair, which is also recommending going overweight cyclical sectors, outlined yesterday three things creating a "perfect storm" for reflation.
    • COVID-19 vaccine supply is expected to exceed demand in the next two to four weeks, and that could pose a problem for vaccination efforts, according to a report from the Kaiser Family Foundation.
    • When this "tipping point" in vaccine enthusiasm occurs, "efforts to encourage vaccination will become much harder, presenting a challenge to reaching the levels of herd immunity that are expected to be needed," the report says.
    • The concern is that vaccine supply outstripping demand may lead some people who are on the fence on getting vaccinated to continue to wait, harming efforts to reach herd immunity.
    • KFF reports that around one-fifth of adults say that they will not get vaccinated or will only do so if required.
    • Anthony Fauci, President Biden's chief medical advisor, has agreed with other public health officials that the U.S. must achieve herd immunity of between 70% and 85% to stop the spread of COVID-19.

    • Bank of America lowers its rating on AutoZone (AZO -1.4%) to Underperform from Neutral with all the good news said to be priced in. The firm warns that sales comparison will start to get even tougher for AutoZone in the period ahead.
    • Analyst Elizabeth Suzuki: "AZO's share price has risen 29% year-to-date, outperforming the S&P 500 by 18ppt and outperforming auto parts retail peers AAP, GPC, and ORLY by 8ppt on average. Auto parts retail spending has been tracking above expectations as discussed in our recent report, but we believe that this is now more than priced in to AZO shares. AZO is now trading at a P/E well above its 3-year moving average, and trades in line with peer Advance Auto Parts which we view as having a more attractive multi-year earnings growth algorithm."
    • Compare Quant ratings, dividend grades and valuation marks on AutoZone and Advance Auto Parts side by side.
    • Grubhub (NYSE:GRUB) fell 1.9% in premarket trading as the Just Eat Takeaway (OTCPK:TKAYF) CEO tweeted that the "consideration" for the Grubhub purchase is final.
    • Just Eat CEO Jitse Groen tweeted "Dear arbs. We have already said that our consideration for $GRUB is final. Try to keep up."
    • Last week, Just Eat said it expects to close Grubhub acquisition soon.
    • Recall that Uber (NYSE:UBER) tried to acquire Grubhub in June. Grubhub instead opted for a merger with Just Eat Takeaway (OTCPK:TKAYF), whose offer to Grubhub was "dramatically better than Uber's."
    • Toyota (NYSE:TM) and Chevron (NYSE:CVX) announce a memorandum of understanding to explore a strategic alliance to catalyze and lead the development of commercially viable, large-scale businesses in hydrogen.
    • The goal of the partnership is to advance a functional, thriving global hydrogen economy. To that end, Chevron and Toyota plan to collaborate on hydrogen-related public policy measures that support the development of hydrogen infrastructure and explore opportunities to jointly pursue research and development in hydrogen powered transportation and storage.
    • "We are excited to collaborate with Toyota. Working towards a strategic alliance on hydrogen presents an opportunity to build a large-scale business in a low-carbon area that is complementary to our current offerings," says Chevron exec Andy Walz,
    • "This is another important step toward building a hydrogen economy," says Toyota rep Bob Carter.
    • Source: Press Release
    • Last week, Nikola inked a hydrogen infrastructure deal in Germany.

  7. GMO LLC (Grantham) released their 7 year forecast yesterday, estimating -7.3% annual real return.  I dont remember how low their forecast got in 2007 but I think it was around -8%.  So party on all good!  (LOL :) )

  8. Phil you right GERMAN MATH !!!!!! Got up to early today

  9. Oil with a net build but not terrible:

    INTC/Batman – No way to know with the chip shortage and shipping issues.  Might be a bit ahead of themselves up here anyway.  Our Trade of the Year target was $50 – that I feel good about!

    INTC Short Put 2022 21-JAN 30.00 PUT [INTC @ $62.84 $-0.79] -10 3/12/2020 (276) $-3,000 $3.00 $-2.73 $7.00     $0.27 $0.01 $2,730 91.0% $-270
    INTC Short Put 2022 21-JAN 50.00 PUT [INTC @ $62.84 $-0.79] -20 7/24/2020 (276) $-17,000 $8.50 $-6.29     $2.22 $0.05 $12,570 73.9% $-4,430
    INTC Long Call 2023 20-JAN 35.00 CALL [INTC @ $62.84 $-0.79] 50 11/17/2020 (640) $67,000 $13.40 $15.53     $28.93 - $77,625 115.9% $144,625
    INTC Short Call 2023 20-JAN 50.00 CALL [INTC @ $62.84 $-0.79] -50 11/17/2020 (640) $-31,250 $6.25 $9.98     $16.23 $-0.58 $-49,875 -159.6% $-81,125

    Those are our old short puts from the older dips, we already bought back the new short puts and we'll sell some more if we get another nice dip.  

    T/Rick – Still underpriced at $30.05 so I'd just buy the 2023 $30 calls for $2.50 and, if T goes up, you can either take a quick profit or sell $35 calls (now $1.15) and turn it into a cheap spread.  If it goes up a lot, that's all there is to do but if it's flat or down, then you can also sell puts like the $27 puts, which are now $2.70 and then you have a free set of $30 calls or a credit if you do the bull call spread or you can spend the credit and have the $25/35 spread with the short puts for about even.

    GMO/EMike – That's not very encouraging.

  10. Comment content omitted because it is too long.

  11. There were some rays of sunshine in Minneapolis yesterday, and I am not just talking about the weather. You could almost feel the tension leave the air as everyone breathed a collective sigh of relief. This was the original press release from the police. What might have happened without the cellphone video of a 17 year old taking her cousin out for some snacks? Thanks to Axon as well for the body cameras.   Derek Chauvin is the 8th police officer convicted of murder since 2005, there have been around 15,000. deaths by police in that time- according to the Washington Post. That is not including abuse and other acts. I can not imagine other professions using qualified immunity, like a Doctor that goes against training and uses a rock instead of advanced surgery technique. Some other countries have longer training and qualifications for their police and have fewer incidents. I am sure that we are all weary of the coverage, but I can not think of another event that had people protesting worldwide.

  12. So, the care and feeding guide for the Magic Money Tree (MMT) advises that fiat currency governments can spend freely up to the point of full employment where inflation begins to take hold. To offset the inflation effect, taxes are to be raised to reduce aggregate demand. Now, we are not near full employment and if inflation is, in fact upon us, while the newest harvest of free money has not yet been spent and tax increases are promised what is next? Perhaps inflation may be the Dutch elm disease of MMT. 

  13. CHL- update- the transfer from TDA to IB of my ADR's is completed. Next step is to convert to the 194.HK.

  14. Pstas Good for you. still not sure did you transfer the shares or did TDA converted your shares to ADRs. ?

    how long did it take to transfer? TIA

  15. Yodi- stock position transfers from one brokerage to a different brokerage are initiated through the new/destination brokerage. In this case, Interactive Brokers (IB). The transfer is done from IB once you have an open/new account. This process usually takes a week to 10 days. 

    There still seems to be some misunderstanding on your part about the issue of ADR's. My CHL position was and still is in the form of ADR's (which are proxies for the actual China Mobile shares listed on the Hong Kong exchange as 0194.HK). If you hold CHL then you also have the ADR's. For me, TDA is now out of the picture. I am dealing with IB on the CHL ADR's and will request them to exchange my CHL ADR's for the underlying China Mobile shares symbol 0194.HK. I do not know how long that exchange will take but will update accordingly. Let me/us know if you have further questions. 

  16. Police/Randers – John Oliver has been going on for years about how the militarization of the police in the US is a very bad thing.  That comes from his observations as a World-Traveling Comedian who is a pretty socially observant guy – it generally doesn't go well for the population.  I know we all have a lot of things to deal with in 2021 but Biden and Co need to address the fact that the previous President attempted to stage a coup and that means we have some very serious, deep-seated problems that need addressing from the police to the military.  Unless we figure out how to better educate the voters or figure out how to have more than 120M people vote in an election so the fanatics don't get their say – we could be right back in the same situation 4 years from now.    That's right, Biden's only been President 3 months so far – seems like Trump was just a bad dream but "Never Forget" should be the revived slogan for the Dems.

    Inflation/Pstas – It's necessary to pay down the debt (or at least reduce debt to GDP) but pretending inflation doesn't exist is how they keep SS and Medicare costs down as well and that's still a nightmare we haven't addressed.  I'm 58 and the last year of the baby boom so max strain on the system comes over the next 7 years and supposedly they are going to be able to run it until 2035 (14 years) but what if inflation doubles the payments?  

    When I'm 65, there will be over 60M people over 65 in this country and more like 80M if they cure cancer (so that would be a bad idea) that's up about 10M from where we are now so a 20% increase in people who need SS and Medicare money while the overall workforce decreases.  That's something we aren't dealing with and we're only kind of dealing with our Infrastructure crisis and THEN we have to do something about climate change WHILE all the changes in the weather will send disaster relief costs through the roof.  

    There's no out other than doubling the GDP and that's going to come from a decade of 7% inflation – China style!  

    CHL/Pstas – Congrats.  Let's see how the next part goes.

  17. Oops, Webinar time!

  18. Quiet day, so….

    PSY is old hat (although his "hangover" vid with Snoop Dogg was hilarious).

    There's an old folk story about a tortoise who is a bureaucrat and ordered to go out and bring in a rabbit who has not paid his taxes or some such. So he goes out, cold weather, searching for the rabbit. He searches and calls, gets tired, and starts slurring his words some – so that it sounds like he's saying "tiger" instead of "rabbit" (this works in Korean). The tiger hears this, and is flattered that someone's actually calling him – never happened. So down from the mountain he comes – and here's the video:

  19. Pstas Thanks for the expliced info. Well the acc with IB is opened and I did even tried out their platform today. The only thing I noticed they charge 1.00 per 100 stk or 1 option!!!! Expensive!!!!  100 stk 1 call 1 put total 3.17.

    As I said the acc is opened. What I did ask how long did it take to transfer the ADRs? 

  20. Yodi- I initiated the ACAT transfer from TDA to IB on 4/14 and it was completed as of this morning, so 7 days. 

  21. I like that Snow!   As to Psy, I hope he is doing well.  I always feel bad for one-hit wonders though maybe he's got other stuff that just didn't go global.  I identify with writers and can imagine what it's like to create such a hit and then no be able to do it again – got to be so annoying!  Like the time I made a great souffle – you'd think you have learned but 12 tries later you realize it was mostly luck…

    RUT up 2% today.

    We were talking about KMI in the Webinar.  Earnings this evening – could be a good play – fat dividends ($1.04):

  22. Thanks I did use the FOP method as with TDA we have a joint and with IB a single acc. It is also 7 days ago now. Patience is the possible word. The mosaic platform is tough.

  23. Snow

    I have no idea what I just watched — but I couldn't stop for 5:34.  That refrain will be stuck in my head for several days I'm sure.

  24. Phil – IBM,

    What's your target for them after earnings.  Last time they hit $150 you bailed.  Same this time around?

  25. Heh. Glad you enjoyed it, Jeffl. They're a talented crew and it's an interesting new direction with Korean music. The refrain in English is something like "the tiger comes down, the tiger comes down, paws padding, shaking his great head…."

  26. Here is the replay of this week's webinar.