Trouble Under the Hood

Good Afternoon,
                      I’m starting to realize something. Something that I’ve been acutely aware of for quite some time, but maybe due to my exposure to the mainstream media became less sensitive to. With what has been gradual improvement in the economy across a broad spectrum of data-points, the economy is still wildly inconsistent, and still badly underperforming. Nine long years, and we are not really right yet. The markets may have taken off after the US election in a bold step toward hope, but the economy itself still has to catch up to those markets.
Cold November Rain
                      The November macro is pouring in right now, and the month is starting to look awful… one major step back from the progress that we thought we were finally starting to make. This morning, Housing Starts severely disappointed. True, October brought us the best numbers for Housing Starts since 2007, but that bright spot is now sandwiched between the two worst months since June of 2015. How inconsistent is that? Yesterday, Core CPI also disappointed, printing at 2.1% y/y. That’s is above the Fed’s goal, but this item typically runs about half of one percent higher than Core PCE, which is the Fed’s focus. This 2.1% print also equals the lowest rate for core consumer level inflation for this entire year.
                      Let’s go back to Wednesday. That’s the day that November Retail Sales disappointed, bringing lowered revisions to October’s data along with it. That report also showed a profound lack of fun. What do I mean by that? Yes people spent on gasoline, rent, medical care, but what did they stop spending on? Hobbies, sporting goods, music, and books… that’s what. Nobody spent on anything that they didn’t have to buy. Industrial Production kept pedaling backwards on Wednesday as well. November Industrial Production hit the tape at -0.4% m/m, and -0.6% y/y on not just manufacturing weakness, but weakness in the utilities as well. Capacity Utilization plummeted to 75%, after having rebounded from a multi-year low of 74.9% earlier in the year.
                      We’ve heard so much about our improving labor market, with it’s misleading 4.6% headline Unemployment Rate. First and foremost, wages have struggled to grow. Over the year average hourly earnings are indeed up 2.4%, which I guess is better than we have become accustomed to, but let’s not lose sight of the fact that those hourly earnings actually contracted in November from October. That does not happen in a tight labor market, and it does not happen in an economy that is approaching full employment. To cement just how tough it is out there… Participation is now 62.7%, which is a 2016 low. The number of multiple jobs holders now exceeds 8,107,000, which is an 18 year high. Those people now comprise 5.3% of the labor force, which itself is a seven year high. With a “non-participation” rate of 37.3%, this means that a whole lot of people are not working at all, while more people than have had to in a generation are working harder than ever. I imagine holding down second jobs is not something most people do for fun. I know, I’ve been there.
                       The bottom line is that this recovery, if you even want to call it that, continues to be painful for most of America. This is why 98.4% of the counties in this country rejected the status quo on election day. Is the election of Donald J. Trump a “Hail Mary” pass? A desperate attempt to change something…anything? The perception is already in place that the economy will improve on the pillars of lower taxes, repatriated money, and deregulation. The way to navigate this is to be in the right spot, at the right time. That means being invested in what are now being referred to as “Trump stocks”. Too late? the markets may pause, but we’re going out at least six months here, probably even longer. From the financial space (banks, capital markets, consumer finance, and insurance). to the Industrials. If you believe in the growth – reflation story, then this is where business will be done. Examples of what may do well in finance, but still be affordable to the retail investor would be BAC, KEY, V, and DFS.  Within that Industrial sector, I think the Transports will continue to do well as businesses become more aggressive, and the president-elect begins to push for spending on infrastructure. I like the airlines, and delivery services to some degree. I like the railroads more, especially those that would be exposed to the coal space.  My favorites in this group are CSX, and NSC, but do think UNP still does well going forward.
Positions in stocks mentioned: Long equity in BAC, KEY, and CSX

Doh !! Survivng a Goof

True Story.
                          The story you are about to read is true is one of those “Only me” stories. For those of you who don’t know me, I’m an Irish Catholic kid from Queens, NY. You can go ahead, and put the emphasis on Catholic. I practice the faith. I’m working all day today, and I’m having a good day, a really good day. Almost as good as yesterday. This market has made good days easy to come by of late. That is where the story makes an unexpected turn.
                           My wife (nice lass that she is) reminds me that today is a Holy Day of Obligation. Well, she’s right… it’s the Feast of the Immaculate Conception. I check the nearby church’s website, and I see that there is a 12:10 Mass, so I place a few bids and offers well away from the market in some names that I either am involved in, or am willing to be involved in. Then I hold my breath for about an hour and a half. One of those orders was a $73 bid for Express Scripts (ESRX). At the time, the last sale was around 74.25, so I wasn’t extremely worried about it. You can probably figure out the rest. I had an errand to run after church, and got back to the office at 13:20. I sit down at my desk.  Poof… the first thing I notice is that while my P/L for the day is still quite respectable, it’s not what it should be. No position of mine had moved all that much. Then I saw it. I had indeed paid 73 for ESRX. Citron Research had been tweeting while I was at Mass. Andrew Left was apparently going to lay the hurt on this stock, and do it after today’s close on CNBC. The stock was trading at $68. What do I do?
                          Do I buy more to lower my average price? Do I sell the shares, and chalk it up to a lesson learned? (Don’t go to church ?? … Don’t take your eye off the ball ??) Do I go the expense of buying puts, and rest easy that I have at least controlled my potential for loss? Maybe I close my eyes, and hope the problem goes away? I actually tried that last one. Doesn’t work. Having an otherwise decent day/week does allow one to properly think through a course of action. So think I did.
                           With Citron Research tweeting about a $45 target, and knowing that the greatest potential for risk in either direction would occur between tonight’s close, and tomorrow’s opening bell, I took the best course of action I could come up with. I got long Dec 9 (tomorrow) 70 straddles for a net debit of 2.50. That’s lost money, but it’s also peace of mind. If ESRX gets hit by a Tsunami, I’m out at an effective price of 67.50. A kick in the pants for sure, but worse things have and will continue to happen. On the other hand, if the public rejects this negativity, and we see an overnight move higher, however unlikely…. I can load up for an effective cost of 72.50. Either way, I will be flat this name by tomorrow (Friday) night’s closing bell. I also have the option, should the stock go higher today, of taking a profit on the calls, knowing that I have downside protection due to my holding of the corresponding puts.
                            Stupid? Not really. Careless? Probably. Survivable? Definitely.