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Retail earnings are a tale of 2 markets

Aug 17, 2022

Good morning!

The markets are pushing lower in pre-market trading after earnings from Target and Lowes that didn’t paint the picture most expected. Or at least that’s the official story.

I think it’s far more likely traders are simply booking profits and using the news as an excuse to get the ball rolling.

Here’s my playbook.

Earnings, a tale of two markets

The fabulous Dagan McDowell asked me for my thoughts on retail earnings this morning during an early morning Word on Wall Street.

My take. There’s a very defined split developing. (Watch)

A trade idea. Lowes and Home Depot are very different stocks. The former caters primarily to retail shoppers while the latter does more business with professional contractors. If the homebuilder “recession” you’ve been hearing about so much recently in the mainstream media has teeth, that makes me think HD stock is at risk. Putskies? A bearish spread? Straight short?

BBBY call options not what Apes think

The meme stock crowd went nuts after Ryan Cohen’s (founder of Chewy) venture capital firm RC Ventures reportedly purchased call options on Bed Bath and Beyond in the $60-$80 strike price range. (Read)

Why this made headlines. The Ape community - self-styled social media traders fighting institutional investors and dark pools - elevated Cohen practically to demigod status in the last year when he took large stakes in two of their favorites: GameStop and Bed Bath and Beyond.

Now, many are beside themselves following reports that he purchased deep out-of-the-money call options expiring in January 2023 with strike prices between $60-$80 because they believe he’s betting on a massive run-up. Not surprisingly, Apes are piling on. Bed Bath and Beyond stock jumped 29% yesterday with multiple halts along the way. It’s up another 25% as I type in the pre-market. Options have exploded, of course.

There’s another side. Unfortunately, it’s as ugly as it gets. I’ll bet dimes to dollars that Cohen bought those call options as part of a delta hedging strategy intended to hedge his exposure or create a run higher that would allow him to use Ape FOMO as an exit.

By the numbers. Cohen made his purchases on April 21, 2022, according to SEC Form 3. At yesterday’s peak, the $60 calls were up 471% while the $80 calls had risen 600%+. I would not be surprised in the least to learn that he used yesterday’s action to harvest profits with more on tap today.

Between the lines. If you’re going to be an Ape – and there’s nothing wrong with that – be dang certain you understand the risks. The institutional players you’re fighting against often layer strategies in ways that are not readily apparent to retail investors.

Use position sizing to control risk before you buy.

Boom’s bet

American Airlines has inked a deal for a maximum of 60 jets with Boom Supersonic and, in doing so, become the company’s biggest customer yet. The company’s Overture jets promise to cut travel times in half with a cruising speed that may be as high as 1,300 mph. The hope is that these things will prove popular for business travellers... or at least that’s the theory. (Read)

A fly in the ointment. Supersonic jets can presently be used over water only because of the window-shattering, ear-splitting sonic booms they create over land. So that’s a problem that’s gotta be addressed first.

Ironically, I’ve already recommended a company doing that research in One Bar Ahead™ and believe that Boom will piggyback on that research when the time comes. Shares are up 23.95% over the past 12 months versus a -9.67% drop in the S&P 500 over the same time period. (Learn more)

Worth keeping an eye on: Air travel is moving away from the jumbo jets of yesteryear with both Airbus and Boeing retiring the A380 and 747, respectively. Instead, the entire industry is moving towards smaller long-haul flights to more destinations as efficiency has improved.

Boom remains a private company for now.

Thought bubble. Unfortunately, direct flights are probably going to cost a whole lot more money in the future, assuming you can find one. I’m not looking forward to short-haul travel to get to long-haul destinations!

Tencent revenues tank

Chinese tech giant Tencent just posted its first ever revenue drop as newly enacted gaming regulations and Covid 19 take a bit … err, a bite … outta results. (Read)

Why you should care. There’s a changing of the guard underway in mainland China. Authorities have cracked down on what Beijing’s calling “reckless expansion” but the real rub is a land grab for financial information, consumer data and intelligence gathering.

Net-net. I’ve avoided Tencent for some time now and will continue to do so. Alibaba, too.

Credit Suisse in firm command of the obvious with Apple

The company just called Apple a “top pick” and says that Team Cook has “double digit” profit potential based on the vertical integration of components that create “stickier” customer relationships and more spending. (Read)

Gee, that sounds familiar. It’s not like we’ve been talking about this for years or anything??!!

I had a particularly good laugh when I read that the analyst believes that Apple’s installed base of 1.8 billion devices accelerates market adoption and higher wallet share. Both of which, again, you and I’ve been talking about for years!

Why you should care. Sell-side analysts are almost always a day late and a few dollars short because they’re more concerned with driving business to the firms they work for than they are about making you money. Apple has already run up from $135 a share to ~$173. Calling for $201 a share at this point isn’t a stroke of brilliance … just another “me too” move.

Action to Take. Most investors could double shares and still not have enough Apple.