Earnings (JCP, JWN, DELL)

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The market momentum seems to have stalled late in the week. I am not necessarily of the belief that it means that we will see a correction, but we could see a slight pull-back before moving higher. Getting long on any short-term pull-backs means also making sure to have the long Gamma to protect yourself in case that pull-back does turn into a correction. I personally don’t know how any trader does not use options; because of all its uses to hedge, increase yield, or take low-risk highly leverage positions. The VIX reflects a relatively low premium, but it is still not falling as one would expect with this rally. That reflects some trepidation about the current rally. Yet another well-known and respected investor, Ray Dalio, echoed Warren Buffet and also David Tepper, cash and bonds are a horrible investment and the Fed monetary policy is forcing investors to seek out growth potential and higher yields, which means the equities market. Like Buffet and Tepper, Dalio also warned that while it looks good now and may continue in the short-term, it is creating a leveraged (debt) rally and in the long-term that can turn negative. This is slowly becoming the general consensus, while we agree you can’t fight the Fed and the Fed’s monetary policy is driving up equities, there is a fundamental understanding this policy in the long-term is doomed to fail. What no one knows is when will this correction come? Dailo suggested that when the Fed raises rates (by force or by choice), that could be the tipping point. For now, get on board with the Fed and even though this is a Fed/Debt fueled rally, don’t fight it. That brings me back full circle and the point of owning long Gamma against long positions. We may not know when something happens, but isn’t being prepared far better than guessing at a top and when to get out? I have been in the business so long to know that when it comes, you least expect it. Earnings could continue to tell us the fundamental story.


The continuing theme we see in earnings is weaker top-line revenue from companies that are relying on the Western/Developed consumer (Japan, US, Europe). The problem, as I see it, is that consumers had seen a slight increase in access to credit, but it remains limited and they remain under a rather large debt load. While unemployment seems to be falling, the reality is that job growth has been tepid at best. Additionally, with companies running very high productivity levels to maintain strong margins, means that they are not aggressively hiring and current workers are not seeing raises that beat the rate of inflation or enough to start really paying down debt. Add in the fact that savers are receiving NO INCOME and thus have NOTHING to spend as cash pays nothing and bonds pay little to nothing, frankly Bernanke (The Fed) is screwing the savers, which means no income from bonds. This culminates in a weak consumer, relative to what is expected domestically and furthermore what is needed to boost company fundamentals to justify the rally of some of these domestic reliant retailers.

JCP earnings
Courtesy of wikipedia

J.C. Penney (JCP)

This has been an interesting story, and the changes seem to have come at the wrong time. The company was given a jump-start by a new CEO that came from Apple (AAPL) with a huge success with the Apple Stores. Personally, I think Apple could build a wood-shack to sell iPods, iPads, and iPhones and it would be a success, the product drove success, not the dude that designed stores. Anyway, the CEO was brought on to bring that Apple store magic to JC Penny. Stop the “LOL”; I know – silly – right? Sure was, he ignored the business model and they spent millions on changing the look and feel of the store, as if this would turn a mid-low tier retailer into something magical and profitable. It worked as well as New Coke and the CEO was fired, but was it too late. The company quickly reverted back to what it had done and successful for decades, offer quality products at a low price (what we always expected from JCP). When that happened, there was some hope that this company would halt the bleeding and find a floor. To some extent it has, but now as the domestic consumer continues to struggle, there is really no relief. The company earnings reported a loss of $1.31 a share, far wider than the $.89 that was expected. Revenue missed and same-store sales fell a whopping 16.6%. Of course all the blame has been dumped on the previous Apple Store genius CEO that has been booted, but I also think that the current consumer status is also weaker than expected domestically. We are seeing similar weakness in the domestic consumer in other earnings and same-store sales. The stock is down in the pre-market and this is a company I would stay away from for multiple reasons.

JWN earnings
Courtesy of wikipedia

Nordstrom (JWN)

The story is not nearly as bad or ugly as JCP, but the earnings also missed. The company reported earnings of 73 cents a share vs. estimates of 76 cents a share. The company lowered same-store sales and also mentioned concerns about top-line revenue. This is the common theme for the domestic consumer, even for this higher-end retailer.

Dell earnings
Courtesy of wikipedia


DELL is going through some interesting changes. Initially it seemed that Dell was making similar moves into the server and Cloud Computer space. I had some hopes that it may make the transition and help boost revenue as the PC sales market continues to see stiffer competition and lower margins. However, in my humble opinion, DELL has fully derailed in this bidding war to take the company private. It has lost track of the big transitions and changes happening in the industry, which we have seen Cisco recently capitalize on. The bidding battle seems to be plagues with some big egos, chiefly with Michael Dell and also Carl Icahn. The company reported earnings of 21 cents a share, significantly below estimates and the company is not providing any guidance, forecasts, frankly NOTHING as the company and its CEO continues to focus on this rather odd bidding war battle. The stock seems to be stuck at the $13 dollar price which is approximately the haggle price in this game.

Down Grades

As the market is rallying and we are seeing some declines in top-line revenue on domestic reliant business. Now we are starting to see some downgrades. Walt Disney (DIS) was downgraded to “neutral” from “over-weight”, some concern about consumer lead spending. Deere (DE) was downgraded to a “sell” from “neutral”, based on a decline and further projected decline of 15% on US capital expenditures on agricultural equipment.

Share Buy-Backs

One common theme we are also seeing is “share buy-backs” by companies. This is usually not a sign of confidence by companies in such times, but rather concern about future earnings because of top-line revenue decreases. Share buy-backs will certainly help boost future earnings reports, even on declining profits and revenues.

I think now is the time to be more particular about investments. Look for companies that are playing into the new technology boom and emerging markets. Avoid companies reliant on domestic consumers; we are starting to see some downgrades and weaker fundamentals in this sector.

Support & Resistance

INDU 15,100
This is the short-term support on any pull back. We did have some consolidation in this area. After the recent break-out, we can’t presume resistance levels at this point, not until we do get a pull back on some volume.

NDX 3000
The NDX saw a break-out higher a couple of weeks ago from 2900 and then a steady march higher to 3000. The rally in this index reflects an over-extension based on most technical, however there is some great stories in expansion in the Cloud Base Computing sector, like the recent CISCO (CSCO) earnings and also Microsoft (MSFT). However, there are some troubled companies in the tech sector as well. I would look at 3000 as a straddle strike.

SPX 1660
The SPX is seeing a couple of days of consolidation in the 1650-1660 range, while it is not too long and the VIX is still holding up well, it could be a precursor sign of another gapping move. Either higher or lower. There are some strong signs in the tech sector as well as strength in the emerging markets, however domestic lead companies are seeing weaker top-line revenues and also down grades. Could we be in for a pause in this rally?

RUT 975
The market gapped up off the 975 level and is hovering in the 990 area. A short-term pull back to 975 could happen, and the market seems to want to pause and consolidate. I would treat 990 as a straddle strike and look at 975 as short-term support.

I don’t think we have seen a mass move into equities yet, even in this recent rally. There is still a lot in bonds and cash. I haven’t seen the euphoria yet and there is now some notes of caution (for the long-term) by Warren Buffett, David Tepper, and Ray Dailo. They uniformly agree that in the short-term, as long as the Fed continues with their monetary policy, we could see this Bull market continues. However, they all universally agree that we are on the cusp, if not already in, as leveraged debt rally fuel by the Fed that most likely will end badly. Tepper goes as far as warning that the Fed policy could create a “melt-up” (a parabolic rally built on massive leverage and debt) and that could feed even more euphoria, which can lead into a rather abrupt and painful correction.

We are starting to see some fundamentals in some sectors start to disconnect from the current rally, which has brought forth some downgrades based on concern that the fundamentals are not aligned with the recent rally.

Now, I am not trying to cause worry, but rather informed concern. Investors need to be acutely aware of what sectors and stocks they invest in, rather than blindly taking for granted this whole market rally. Additionally the use of options to hedge long positions at these cheaper premiums is warranted. Upon any correction, I would also look for opportunities in the strong fundamental companies.

I would continue to avoid domestically dependent companies, cash and bonds.

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