Behind the Scenes and Under the Radar (SO,NFLX,FXI)
It’s a political world, friends. Has been for a while.
Everything that’s done or said or written these days, it seems, is employed to further an agenda.
Truth be damned, is what it’s all about; let ‘the story’ carry the day, whatever it may be.
If it makes me look good, so be it.
If it makes him look bad, so be it.
If it makes my team more popular, so be it.
If it hides my wrongdoing, so be it.
All that matters is that it’s done artfully and remains undiscovered.
Because truth is relative.
And if I win, it means my truth is the real Truth.
It has become so difficult today to discern between what’s real, what’s psy-ops, who’s the good guy and who’s the criminal behind the lines we’re being fed. Even what’s at stake and who’s to profit from the stories we’re told is unclear.
And we’re not just talking the world of geopolitics, friends. The markets are equally drenched with stories that don’t hold water.
Take, for example, the following –
As we come to the close of the first half of 2018, the size and velocity of the flows into tech/eCommerce stocks are unprecedented.
While at the same time, all other sectors are taking it on the chin.
- Last week’s stats show $12.9 billion in global equity outflows and nearly 6.0 billion in bond outflows.
- Not only that, but as U.S. equities experienced a $5.1 billion net weekly inflow, that same $5.1 billion was flowing out of Emerging Market equities, the largest pull from that sector in nineteen months.
- Three months of data from Europe show a net $38.6 billion drained from the old world, while Japan has experienced a net $1.9 billion drawdown.
- Locally, the losses were felt most dramatically by our financial sector, where the latest weekly exit numbers amounted to $1.4 billion in losses.
So is it a bull market or a bear market?
And the question is, with all the world’s funds apparently moving toward our fair shores, and once they arrive, concentrating themselves in just a half dozen U.S. tech stocks, where does it end?
The chart above shows eight bubbles going back some forty years, with the latest push by the FAANGs in red.
And according to the numbers, the gains to date in this set of stocks has already bested all but two of those previous blow-off busts – all of which ended in cataclysmic losses for those who purchased near the top.
What we see, Grasshopper, is not always what is.
First, we know that the economy is cooking. There’s no denying it. It may not last, but the current 3.5 to 4.0% GDP growth we’re experiencing will provide strong tail-winds both for sentiment and for earnings.
Two, underlying what is clearly a concentrated flight toward a handful of overbought internet schemes lies another truth: that there has been an ongoing rotation amongst the ‘losing’ sectors since the broad market stalled back in January.
These rolling losses are purging some of the lesser lights from each market group; we saw it in the telcos and consumer staples at first, and it now appears the financials are taking their turn. And that’s a very healthy development. Declines of up to 20% make for a less risky reallocation into some of these torn-down groups.
Three, it’s all happening under the cover of a very lively, show-stealing performance by the FAANGs.
So no one’s noticing.
So if the big tech names are lining up to take their turn, it’s not all doom and gloom. We could very well be in the midst of a general bull market.
And that’s, indeed, our belief.
We suggest that the slow roll into more defensive names that we’ve seen of late – the telecoms, consumer staples and utilities mentioned above – is a setup for the techies to slide.
Indeed, it has been happening globally – the charts are showing that both Japanese and European defensive names are on the move, relative to their more cyclical brethren. And that’s a sign that the big money is positioning itself for a correction.
If we’re at a turning point, we could see big tech follow the rest of the cyclical pack down toward support, a development that could offer us a healthy profit.
‘Cause it’s all in the money flow, friends.
Wrap up that fish, Huey!
Before we get to our trade for the week, have a look at our February 27th initiative, from a letter called China Needs to Chill. There, we urged you to purchase the FXI January 18th 40 PUT for $1.32 and sell two (2) FXI January 18th 36 PUTs for $0.68 each. Total credit on the trade was $0.04.
Today, the long 40 PUT goes for $1.23 and the short 36s trade at $0.55. Sell off the former and buy back the latter and you net $0.17 on nothing spent. Adjusted for minimal commissions gives you a gain of 11%.
And that beats mold on your produce.
Despite the outside chance of further gains on the FAANG stocks, we’re going to hedge ourselves this week with a calendar-based trade that we believe is tilted massively in our favor.
Based on a wildly overbought read on Netflix (NASDAQ:NFLX) – our tech-foil-for-the-moment – we’re going to play the current eCommerce mania against the above-mentioned defensives, with a long/short trade employing the staunchly conservative Southern Company (NYSE:SO), an electric and gas utility operating in Florida, Alabama, Georgia and Mississippi with a market cap in excess of $45 billion, a P/E ratio of 41 and a 5.24% annual yield.
We would also add that SO currently has a massive outstanding short position against it.
Hahaha!- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the SO November 16th 46 CALL for $1.61 and selling the NFLX July 6th 450 CALL for $1.67. Total credit on the trade is $0.06.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
And note well: the SO CALL is at-the-money and expires in five months, while the NFLX CALL is 10% out-of-the-money and expires in ten trading sessions.
With kind regards,
Hugh L. O’Haynew