September 28, 2016

Disney optimistic on China

Walt Disney appeared at the 25th annual Goldman Sachs Communacopia conference... Here are some of the more salient points.

-    Disney sees a healthy consumer in the U.S. and no sign of a consumer slow-down or issues with consumer spending.

-   Lower fourth-quarter income due to the calendar.

-    Sees MLB BAMTech investment for ESPN as a high-quality acquisition. Twitter  did a good job last week streaming the live NFL game, and that platform was powered by BAMTech.

-    ESPN has a treasure trove of digital rights for 99% of sports it covers that are not currently being exploited monetarily on new platforms.

-    For primary leagues, deals with major sports leagues like the NBA offer barriers to entry for competitors. No one can monetize sports better than ESPN because of its subscription fees and ability to access multiple platforms. New entrants are interested in gaining rights, however, as direct competitors to current sports content owners (Fox (FOXA) , Time Warner (TWX) , CBS (CBS) , etc.), they will have difficulty monetizing rights because of how expensive sports rights currently are.

-   Moving forward with subscription-video-on-demand platforms, Disney aims to make access to content easier and all in one place because "the consumer doesn't want to look in multiple places for content."

-  The opening of the Shanghai theme park has been fantastic. The company is not updating specific numbers, however. If not for recent poor weather, the first 100 of days of traffic would have been best opening for any park in the company's history. Shanghai is a tourist destination for the rest of China, and attendance so far has been dominated by people visiting from outside of Shanghai.

-  Zika concerns have not impacted theme parks in Orlando whatsoever.

-  The company is currently building multiple large Star Wars attractions in Florida and California.

-  Success at the box office is due to the company's focus on creating quality over quantity. Tent-pole films work very well in China, and the company aims to create more of them. Disney believes in full ownership and full control of content. Outside money is of absolutely no interest to the company when it creates content and films. Since acquiring Pixar, Marvel and Lucasfilm, the average global box office gross from each film has been slightly less than $800 million. Disney is creating a Star Wars universe, continues to build on Marvel universe. Rogue One, the next Star Wars film, will debut in December.

-  Primary programming approach will not be all that different than it is today, this year the company will be presenting 55,000 hours of live sports. Live sports products will form the basis of ESPN no matter what platform ESPN sits on. Disney has discussed strengthening studio programming and has made some personnel changes to reflect new direction.

-  Company is looking to make it easier for consumers to access content on mobile platforms, and looking into different ways to make accessing content more personal.

I remain short Disney. DIS shares are trading about $1 lower today to approximately $92 a share. The chart looks awful, and the chart appears to be "rolling over," as I have consistently noted over the last few months.

The shares were placed on my Best Ideas List on Nov. 27, 2015, at $116 a share.

Position: Short DIS

September 27, 2016

Could Twitter be experiencing a short squeeze rally

I believe that Twitter could be valued at about $24 to $25 a share in a private transaction.

CNBC's David Faber has annouced that Twitter has received some expressions of interest for a takeover.

Takeover optionality has been an important reason that I put Twitter on my Best Ideas List at $14.60 in June.

As there is no assurance of a deal, I have sold the balance of my Twitter long at $22.50.

It should be noted that more than 50 million shares of Twitter are short. I suspect we are experiencing a short squeeze that could be exaggerating the upside move.

September 26, 2016

Not very interested in being long stocks

With a small net short position, I am not fighting the Fed in a sizable way, the seeds for a bear market are being put in place; however, the timing of that drop remains uncertain. 

Several questions and observations regarding the Fed and the market's reaction come to mind:

- What does the Fed know? We started 2016 with a consensus view of four interest rate hikes by the Federal Reserve (though I suggested there would be none!). Despite a halving in the unemployment rate and that the real level of core inflation has been running at about 2% for nearly a year, the Fed to date has balked at any rate increase this year.

- Who cares what the Fed knows? I and others have chronicled the remarkably poor forecasting record of the Federal Reserve. For four consecutive years that august body of more than 100 economists has been among the worse prognosticators extant. For now we are prisoners of the Fed's views with its pretense of knowledge.

- In all likelihood the Fed will find a way of not doing anything over the next year on the rate front.

- The Fed and other central bankers have encouraged the greatest distortion and speculative bubble in fixed income in centuries. This glorious bubble in bonds, when it bursts, will substantively slow down financial engineering that has buoyed our markets, produce the largest amount of investment losses and risk-off moves as the carry trade is reversed in history, and will likely bankrupt numerous large banks, especially of a European Union kind. .

- The Fed has turned its back from reality with a straight face and has lost its effectiveness and is soon likely to lose investors' confidence. It's the Ah Ha Moment.

Of Algos and Men

While numerous investors, particularly those that base their trading and investing on volatility and price-trending statistics, have rejoiced in the decision to hold rates and the Fed's dovish rhetoric, a Minsky Moment is likely at hand sooner than later.

This is what happens at inflection points in the market: The most obvious signposts of risk are dismissed because, after all, stock prices are advancing.

But greed is also rising coincident with rising stock prices and with the price/earnings ratio of projected 2016 S&P 500 GAAP earnings at nearly 25x and more than 18x non-GAAP earnings.

I have little interest in being long equities. The consensus view of 2017 S&P EPS for the fifth consecutive year is probably too high as profit margins are now clearly mean reversing in a period of subpar global economic growth.

Finally, political and geopolitical risks have never been greater.

The winter of our discontent may lie ahead.

Position: Long SDS; short SPY, TLT

via thestreet

September 20, 2016

Adding Chipotle to my Best Ideas List

Chipotle Mexican Grill's shares have declined all week after the announcement early this week that Bill Ackman's Pershing Square has taken a 10 percent position. The shares initially rose to over $444 and are now at $411.80.

I have steadily added to this (speculative) long on weakness. I do not shun in response to the last few days' underperformance; I look at this as an intermediate-term opportunity.

I am placing CMG on my Best Ideas List at $413 as the reward versus risk has now turned quite attractive.

Here is my projected 12-month updated upside/downside:

Upside $525 (+27%)

Downside: $385 (-7%)

Here is my investment thesis.

This is a speculative long, from my perch.

Position: Long CMG.

September 19, 2016

Avoid Wells Fargo stock

"Everything we do is built on trust. It doesn't happen with one transaction, in one day on the job or in one quarter. It's earned relationship by relationship." 
- Wells Fargo's Visions and Values

Let me distill my view on WFC stock down to one word: Avoid.

Wells Fargo's premium valuation is likely to be impaired over a period of time from the discovery of nearly two million fraudulent accounts.

I have never really understood the premium valuation of the bank. To be sure, Wells Fargo has a vast and dominant franchise and deposit base. It is involved in one out of every three mortgages in the U.S. But, given that over the last five years the company's pretax income (before loan loss provisions) has made no progress, others may now question that premium valuation. 

Importantly, given the broad involvement of more than 5,000 employees, I would not be surprised if more untoward transactions were uncovered in discovery in the next several months, which would provide a further case for a contraction in the bank's valuation.

Bottom line, I would stick with Bank of America (BAC) or Citigroup (C) if one is interested in exposure to the banking space.

Buffett Will Likely Soon Break His Silence on Wells Fargo

"Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."

-- Warren Buffett

And here is a contrary thought.

Given the size of Berkshire Hathaway's (BRK.B) Wells Fargo holdings (10% of the shares outstanding) and Buffett's previous comments over more than two decades regarding his confidence in the bank and its management, most believe that The Oracle will publicly support Stumpf and the management team sometime over the next few days/weeks.

I don't agree.

While I don't think Buffett will provide any indication that he will sell his stock (it's not his "style"), I do expect an uncommon and strong reprimand. I suspect that privately he is furious and, in the time ahead. I don't think Buffett will buy more or sell his WFC holdings. He will likely stand pat. (The sins of Salomon still likely lie in Warren's mind and thoughts.)

One final thought.

As I have clearly detailed in the last three years, it remains my view that Warren Buffett has lost his way in his investment portfolio as many of Berkshire's largest investment portfolio positions are moatless, "old economy" companies -- such as IBM, American Express and Coca-Cola -- that have been consistent market underperformers.

From my perch, Wells Fargo is yet another one of the aforementioned old-economy company, as the now heavily regulated banking industry moves ever closer toward delivering a commoditized and non-differentiated product ... and lower returns on invested capital.

via thestreet

September 13, 2016

Apple's new iPhone7 is not interesting

The terms that I would use to Wednesday's iPhone 7 introduction from Apple are "boring," "uninteresting" and "humdrum." Or as The Wall Street Journal put it, the iPhone 7 is Practical, But Not Jaw-Dropping.

Yahoo Finance tech writer David Pogue noted that "by now, everyone recognizes that the annual cycle of adding an earth-shattering life-changing feature to each new smart-phone model is over."

Indeed, I'm reminded of an old saying: "Risk-taking is inherently failure-prone. Otherwise it would be called 'sure-thing taking.'" But as Peter Drucker also once famously said: "If you want something new, you have to stop doing old."

Frankly, it was little surprise to me yesterday when Apple revealed, for example, that it had eliminated the headphone jack with the iPhone 7. The company described that move as an act of "courage," but that's a phrase usually reserved for more meaningful and serious events. You know Apple has a potential problem when even sports bloggers are making fun of this.

From my perch, Apple is running a big risk that consumers who are already a part of the company's ecosystem will figure out at some point that they're getting ripped off by all of AAPL's expensive, proprietary peripherals. Many want the freedom to use any wireless headphones that they want--including expensive ones they might already own--and could easily switch away from Apple products.

And to reiterate a point that I've made previously, other companies have already long offered many of the "additions" that Apple unveiled for the iPhone 7. For example, Apple proudly stated yesterday that the phone is water and dust resistant "for the first time in the iPhone's history." But some rival phones are already water-resistant, and I'd note that the iPhone 7 isn't actually waterproof.

As for the iPhone7's "new" dual-lens camera, some competitors began offering this feature around a year ago. And as for the camera's other features--a wide-angle lens, image stabilization, an image signal processor, etc.--they don't seem like a big enough deal to me to justify upgrading to the new phone.

What about the iPhone 7's much-touted vibrating home button? Apple proudly noted that this new button is "force-sensitive"--meaning that rather than knowing you pressed the button because it clicked, it will vibrate instead. The company's marketing chief said this creates "new feelings and experiences that could not have been created before."

Nonsense! Competing products have had vibrating keys for years. Apple finally does it with one button and the company has the gall to try to spin that as some sort of innovation?

Apple also remains behind Alphabet (GOOG) , Amazon (AMZN) and others in terms of developing artificial intelligence.

Lastly, the upgrades that AAPL announced to the Apple Watch are a big yawner. The new watch is essentially the same as the prior version, except that it can be used in a swimming pool and features some fitness-related features. Zzz.

I'll have more to say about this a little later, and will give my 12-month risk-vs-reward forecast for Apple.

Position: Short AAPL

September 12, 2016

A nasty day when things fall apart

I have long thought that the disruptive impact of quant strategies had turned our markets upside down, to the extent that their models and algos chased priced and volatility.

This meant, at least to this observer, that buyers have lived higher and sellers have lived lower.

Today we see the sour fruits of their strategies that are agnostic to private market value and ignorant of balance sheets and income statements.

It can be debated what tipped over the markets and changed their momentum -- hawkish Fed Speak, the disassociation of a weakening real economy with higher stock prices, Wells Fargo's boatload of bogus accounts, recalls at General Motors and Ford, the avoidance of taxes by Apple and other multinationals, or something else.

But it is happening nonetheless, and with a vengeance not seen in months.

Several days ago I decided to move more aggressively to the dark side based on my perception that the downside was dramatically greater than the upside. I abandoned the notion of being reactionary in favor of being anticipatory for that simple reason.

I also would note that Friday was a vivid example of why I am so against the idea of selling naked puts, as we discussed earlier in the summer.

There will be no "Takeaways" as I plan to leave early for a few cocktails, and it won't be a rendezvous with some cheap tequila on the cold linoleum floor.

Long SDS
Short AAPL, SPY, GM, F. 

via thestreet

September 8, 2016

Twitter takeover rumor pushes stock price up

Twitter rallied ....on vague takeover rumors.... I have no idea whether these rumors are true, but I put TWTR on my "Best Long Ideas" list a few months ago at about $14.60.

I did this partly on the possibility of a takeover deal, while we've subsequently gotten news that Twitter is finally moving more aggressively into live streaming and sports. The company's large subscriber base should provide a valuable launching pad for growth once this strategy kicks in.

Position: Long TWTR

September 7, 2016

Indications that US consumers struggling

I continue to contend that the U.S. economic outlook is deteriorating rather than improving relative to expectations, and that the much-heralded consumer "recovery" might soon fade.

The evidence out just this morning includes:

-    Weak same-store comparisons for Costco (COST)

-    More signs of "Peak Autos."

-    Weakness in both the Purchasing Managers Index and the ISM Manufacturing Index.

-    Falling oil prices, coupled with a number of other declining commodities.

Add it all up and I continue to expect no Federal Reserve rate hikes over the balance of 2016.

September 6, 2016

Short US Real Estate (IYR)

My largest short add-on Friday is in the REIT sector in the form of the iShares Dow Jones U.S. Real Estate ETF ( IYR) . Here was the short thesis I presented recently.

Today the iShares 20+ Year Treasury Bond ETF (TLT) reversed rather dramatically even after the weaker-than-expected jobs report. Now down by $1.20 and with yields on the long end up five basis points, I expect the speculative bubble in fixed income to lose air even though I hold to a more pessimistic domestic economic view.

I would repeat that I believe we hit a generational bottom in bond yields in the early summer. I expect interest rates to slowly but steadily advance in the next two to three years.

Investor sentiment towards REITs is at a bullish extreme owing to the new REIT designation grouping put in effective this week. With the group trading near 10x earnings at an historically high relationship relative to net asset values and with yield under 4%, REITs represent one of my largest short commitments now.

I am now placing IYR short ($83.05) on my Best Ideas List!

Position: Short IYR, TLT 

September 5, 2016

Some predictable things

Some things are just so predictable:

-    The business media will inundate us with hours of "analysis" of Mylan (MYL) this week. Yet, though time-consumptive, the dialogue on Mylan will not likely be particularly revealing. (Thirty minutes would have sufficed).

-    I will remain bearish.

-    Wharton's Dr. Jeremy Siegel will remain bullish.

-    The faith in the Fed will continue to erode. Even the cheerleaders are losing confidence in our central bank.

-    Buyers live higher, sellers live lower in an investment backdrop dominated by volatility trending and risk parity strategies and by other quant strategies that chase price.

-    Market volume will dry up in the last two weeks of August.

-    Market volatility will continue to drift lower.

-    Investors will become ever more complacent.

-    And, most importantly, Olympian Ryan Lochte will be seen on this fall's "Dancing With the Stars." That was quite predictable!

September 1, 2016

Risk Reward not favorable for stocks and bonds

I issued a warning recently about the market's direction in autumn, writing:

"Nearly to a soul (with the exception of the perma-bull cabal), my bearish, neutral and mildly bullish friends are all frustrated by the absence of natural price discovery in the bond and stock markets.

And based on the last few trading days, the 'invisible hand' might be here for a while longer. At least, until it isn't.

Besides the fundamental and economic risks, the suppression in interest rates and volatility are leading to the loss of ever more market participants -- something not in the Fed's textbooks.

I'll have more to say about my "Sell in September" mantra next week, but here are some additional observations for now:

* The 10-year U.S. Treasury yield is unnaturally low and has been moving in its narrowest range in a decade.

* Stocks' volatility and volumes have been artificially suppressed. The S&P 500 has seen just six daily moves of more than 0.5% up or down over the past 30 trading days. That's the lowest number since late 1995. The VIX is also just slightly above its July 2014 record low.

* The only thing that's really moving are earnings ... which are heading lower. That is, GAAP earnings before taking into account bad things like stock-based compensation, depreciation, reserves, etc. And according to FactSet, even non-GAAP earnings are declining on a trailing-twelve-month basis since peaking in November 2014.

* The Fed's policies are politically vulnerable, economically ineffective and distorting to markets. (Check out this Wall Street Journal op/ed from former Fed Gov. Kevin Warsh.)

* Traders and investors are increasingly accepting of the interest-rate distortions that have led markets to revalue stocks upward. But distortions are rarely healthy -- and if history is any guide, this will all end badly.

* Fears of possible stock-and bond-market downturns have all but disappeared. I call this the Bull Market in Complacency.

Add it all up and I see a materially unfavorable risk vs. reward for both stocks and bonds right now.

Of course, the timing of a correction and return to natural price discovery remains unknown. However, the potential downside's magnitude seems to me to justify making anticipatory moves now instead of staying reaction-oriented and waiting for a downturn.