October 23, 2016

UBS on Apple performance in Asia

UBS Group (UBS) hosted its Asia telecom analyst, Jinjin Wang, for an investor call to discuss Apple (AAPL) in China. 

According to the analyst, China has been weak for Apple the past two quarters despite growth in domestic brands; the firm estimated 8% iPhone increase in fiscal 2017, which assumes a more moderate decline in China with new-to-Apple customers down 10%. China might be about half of new customers.

UBS will see what Apple reports next week and management's commentary; greater China is almost 25% of revenue at an above-average margin.

Apple knows it lost market share in China this year. It has blamed the product cycle and macroeconomic conditions, suggesting the losses may be temporary.

Jinjin said macroeconomic factors might be contributing factors, but more important are (1) lower-cost offerings from OPPO Electronics, Vivo and Huawei, which are gaining share thanks to advertising and strong offline distribution, and (2) less consumer embarrassment in owning a domestic brand.

UBS says Apple's brand remains strong, but the Apple Store can be difficult to access and slow.

Position: Short AAPL.

October 19, 2016

Dangers of embracing inexpensive stocks like JC Penney

From my perch JC Penney is a several-year investment and not a trade. I have made the point several times and in my more lengthy analysis on the company.

JC Penney is one of only a handful of longs for me. By my calculation it possesses good upside/downside over a one- to three-year period if it can execute its stated goals.

I have observed that the current quarter will likely be adversely impacted by unseasonably warm weather, so expectations, from my perch, are low/limited. 

However, I think we are setting up for a better fourth quarter for the company if the weather cooperates and its merchandising strategy gets customer transaction.

I hold several low priced stocks with attractive upside/downside but I don't discuss these investments in my Diary because I understand the predilection of many to fly to these stocks like bees to honey.

But higher-priced stocks can be rewarding. As an example, I have made it clear that DuPont (DD) is my favorite large-cap long. The shares have risen by nearly 50% in a relatively flat market since I purchased it. But I know for sure that subs have neglected this $68 stock (which was $52 in early 2016) in favor of JC Penney (by a multiple factor!).

Bottom Line: Subject to risk profiles, there is a role for speculative stocks in everyone's portfolio. But low-priced stocks like JCP (and others) are almost always speculative and should be weighted accordingly and relative to your appetite for risk. My advice is to always do your own homework and pay more attention to attractive priced higher-priced stocks that I (and other contributors) are long, consider buying deep in the money calls if you want the "high."

Position: Long DD, JCP (large)

October 16, 2016

November elections will not be good news for the markets

In light of the news over the last week, the odds of a Clinton presidential win have risen considerably according to the London betting parlors.

At Paddy Power, Clinton's odds have improved further to 1-6 odds as Trump's odds have eroded to 5-1. In other words, if this was a horse race the race track likely would take no win bets (and take it off the board) because it is a near-guarantee that Clinton will be the next president of the United States.

My baseline election expectations remain:

* A Clinton presidency

* The Democrats regain the Senate

* The Republicans retain the House of Representatives

As I wrote previously:

"A Clinton presidency will likely produce fiscal (legislative) gridlock (Democratic control of the Senate and Republican control of the House) and inertia at a time in which monetary policy has lost its effectiveness. There will simply be too much animosity between the parties to assure compromise following such a heated campaign that has been filled with personal and party attacks on the part of both Republicans and Democrats.

A Trump presidency will likely produce a broad swath of uncertainty as it related to ambiguities and the absence of details of policy. As well, passage of Trump initiatives could prove too debt-heavy and hard to legislate, with opposition outside and even within the Republican Party.

From my perch, both outcomes are market-unfriendly, have not been priced into the markets, will produce additional uncertainties and ultimately might lead to a contraction in valuations."

We must get fiscal.

With monetary policy losing its effectiveness, after the election and in early 2017, everything will come down to how smoothly and successfully a Clinton administration is capable of negotiating toward fiscal policy compromises with a Republican House led by Paul Ryan.

Indeed, a successful baton pass from stimulative monetary policy to a substantive expansion in fiscal policy might hold the single most-important key to the stock market outlook next year.

Unfortunately, given the increasingly vocal and hostile right wing of the Republican Party, I am not very optimistic.

Ergo, the November election will not likely be market-friendly and could provide another important headwind to equities.

October 11, 2016

Expecting economic growth to show signs of decelerating October 2016

Bank and insurance company shares have had a spirited advance this week based on better-than-expected U.S. economic data and talk of the ECB tapering its QE. That said, over a three- to six-month time frame I remain unequivocally bearish on both stocks and bonds.

Bonds have declined in price, and yields have risen to multi-week highs.

Given my negative market outlook and my view that economic growth will show signs of decelerating in the weeks ahead, it appears unlikely to me that the move higher will carry much further.

Which gets me to Hartford Financial Services Group ( HIG), my "Trade of the Week." Hartford's shares have risen from $42 to $44.30 -- over 4% in a lackluster market -- since I discussed the idea on Monday.

Today I plan to reduce HIG from a large-sized to medium-sized position (on a scale higher), and at the same time I am going to expand my insurance short book of Lincoln National (LNC) and Metlife (MET), which are currently small-sized positions.

I am also watching Financial Select Sector SPDR Fund (XLF) for an entry point on the short side in the days ahead. Goldman Sachs and Morgan Stanley, on further strength, will also be short candidates.

On the ProShares UltraShort S&P500 ETF (SDS) , I live at under $16.40 as another entry point, which would imply one more surge higher in the indices. Same for $217-ish for a short re-enter.

I plan to add to gold on any further weakness as a hedge against central bank lunacy.

Finally, I plan to maintain a large short on iShares Barclays 20+ Yr Treas. Bond ETF (TLT) , reflecting my continued view that bond yields made a generational low in July and will track a slow but steady rise higher in the months ahead.

Again, I am trading opportunistically and will remain flexible, though I have a negative market outlook over the next six months; I do not plan to take on many long-term leases.

Position: Long HIG (large), Short MET, LNC (small).