Anatomy Of A Trade, How An Earnings And Economic Report Sent Me In A New Direction

The Earnings Report In Question was Levi (LEVI)

LEVI reported a 15% jump in sales, and they pointed to tourism as the source of this higher demand. Though retail sales are not my area, I found this factoid captivating. It was contrary to accepted wisdom; for one isn’t the world sick of “things” and is now embracing “experiences”? I am always on the lookout for exceptions to the rule and what it can reveal. Earnings reports are also windows into the economy, and since consumption is ⅔ of the economy the Levi’s report served to buttress what Friday’s employment report of 376,000 and unemployment at a nadir of 3.7% tells me. You can’t have a recession with such high job numbers. I have not heard of any hard data about a jump in tourism, which is counted as exports for the economy.

Leaving aside the notion that there is no recession right now, and there may not be one next year either, how can we use this sales intelligence to our advantage. Is this notion about tourists feverishly pulling 501 jeans off the rack limited to LEVI? I decided to survey my social network, where I could very unscientifically query about 10 fashionistas, and hear what they had to say. At first, I characterized this as a desire by tourists to get some classic American goods like a tourist might buy spices in India. A way of consuming products and perhaps reliving the experience of being there. I was quickly disabused of this notion. Of course, that wasn’t the first question, the first was whether they noticed or heard others comment about tourists at their local shopping haunts. So the gist of this was that yes there is plenty of tourists shopping, and they are not limiting their attention to American products. I heard that “Chanel bags are flying off the shelves, Tourists crowding into Hermes, Louis Vuitton, and Gucci. On the other side of the spectrum athletic clothing like Yoga pants, and Sneakers are also in demand like Adidas and Nike. I think I am on to something here that isn’t that widely accepted notion, actually several ideas, they are: There are tourists visiting in noticeable amounts, and are shopping despite the decades’ high value of the dollar. That the upper-middle class is likely mixed in with the tourists buying “things” and not only “experiences”. That there is demand for a wide range of attire and accessories. How do I know that it’s not just tourists? Very coincidentally I read an item in the NY Post, that the Chanel Bag is being viewed as a hedge against inflation. Whether a Chanel is an investment or not is not the purview of this commentator, I am just relaying what I think is another piece of the puzzle. One has to conclude that Americans and visitors want to buy nice new things. Perhaps, it is part and parcel of the urge to have an experience, if you are going somewhere why not do it with a nice new pair of kicks. Yes, I was told that sneakers are in high demand as well. So, now what to do with this information?

I have isolated a few choices, and unless I find an ETF to encompass all the growth opportunities, I will try and find an efficient way to express this speculation. I think trying to buy the individual companies that retail the single brands doesn’t make sense to me. I believe that focusing on a multi-brand retailer boosts the chances of successful stock selection. Right now I am considering three retailers Macy’s (M) which also owns Bloomingdale’s is one, another would be Nordstrom (JWN), and Dillard’s (DDS), then for sneakers I would look at Foot Locker (FL) which sells NIKE (NKE), and adidas (OTCQX:ADDYY). Also, Lululemon (LULU) was mentioned for athleticwear. One source particularly pointed out that Abercrombie & Fitch (ANF) is “hot” once again. It is notable that all these retailers have very low valuations so if this consumption trend has legs, the right selection has a good chance of generating alpha.

After all this thought, and research, I am still not convinced that the odds are in fact in favor of success. So as the title of this article says “Anatomy of a Trade” if I do allocate capital to exploit this insight it will be through Call options. Options allow me to limit my risk while at the same time providing leveraged results. At this point, I think I have taken this exercise as far as I can for now. Next week I can share what I actually do with this exercise if anything. I hope you aren’t scratching your collective heads why I am talking about this if I am not going to share what I am going to do right now. As you know, I am here to chronicle what I am doing, or thinking about doing. I’d rather not commit to action until I actually execute it. I hope that some of you will be inspired to pay more attention to earnings reports. Often there’s important information to glean that can be applied to future opportunities.

The picture is not clear, even if this facet of consumption appears to be very positive

On one hand, we see solid wage growth but moderating, and the hope that a soft landing is possible by the market. On the other hand, is that as the economy is chugging along Powell may feel emboldened to raise more and in the end push it too far and finally get that recession.

The U.S. labor market outperformed the estimate by more than 120K jobs last week, adding 372,000 new jobs in June with average hourly earnings in June rising 5.1% YoY. Hourly earnings for May were 5.3% so though June wages were elevated it was less than the prior month. Nonetheless, continued wage strength gives the Fed a green light to continue hiking aggressively in its fight against inflation. This is a very ambiguous economy, with strong job growth, with some moderation of wage growth. In conclusion, I have to admit that inflation is here, and Powell will keep raising rates. Even with the fantastic performance of the market last, we have the realization that the stock market is still going to have convulsions, all these contradictory data for inflation, economic growth, and then instances of slowing. The market will exhibit volatility that will continue. In response, will continue adding short positions to pair with my equity holding of high-quality, high-tech titans. I am hoping the opposing tactics will cancel out the losses, and protect the portfolio.

Next week will give us the CPI and PPI for June and a lot of downward pressure

I believe the coming week will exert downward pressure as these reports loom. Certainly, we don’t see the need to acquire long positions until we see the news on Wednesday. Right now, the expected result for the CPI will be 8.8% year over year, and .50% month over month. Ed Yardeni expects a headline of 1.1% month over month for the CPI. I don’t think the market will have enough time to discount 1.1% for the CPI. In the Dual Mind Research community, I exhorted members to follow the Cash Management Discipline and trim positions throughout this past week, so that members should have at least 10% cash. When we will deploy that cash, will be decided as the market unfolds. Many of our members have up to +20% cash, and we will look to add back cash to high-quality stocks at lower prices, raising the value of our portfolios.

My trades

I’ve initiated a position in ServiceNow (NOW). My hope is that the selling pressure this week will allow me to add more at a discount. I have added to Salesforce (CRM), Meta Platforms (META).

I also started a small position in Zoom (ZM) and added to Confluent (CFLT). I am adding to Exxon Mobil (XOM) as I believe that XOM will rise with oil going back to previous highs, and with its refining assets taking advantage of a huge and sustainable crack spread. Goldman Sachs (GS) has expectations of WTI approaching $140 per barrel. I also added shares to Adobe (ADBE), Intuit (INTU), and Microsoft (MSFT).

Shorts (most are expressed by Put options and not actual shorts)

The newest addition is Wayfare (W). I’m still short Bitcoin via Bitcoin ETF (BITO), right now it’s not working so well but I sold Puts to cushion the blow. I am taking the risk that Bitcoin will drop and test the 17,000. I am still betting against Digital World Acquisition Corp. (DWAC) which rose on the news that the Twitter (TWTR) acquisition by Elon Musk is canceled. I may add to that position. I am short Lucid (LCID) and Rivian (RIVN). I am looking at other short candidates to balance my longs and using the Cash Management Discipline to build cash to redeploy and acquire shares at better prices.