Markets, Semiconductor and Defense Stocks, Real Yields, Netflix, Trading Disney

Heavy is the hand that wields the hammer. How heavy? We shall find out. Groovy Tuesday. Equity markets here in the US found a bid from bell to bell, even closing at the top of the day’s range. Another bear market or relief rally? Something to build on? Perhaps the story remains incomplete (of course it does)… too incomplete to assume a neat and tidy ending that makes sense.

Ending? For the ending is always out there, hunting its prey (us), even as we hunt for ourselves. If we could fill in the blanks, we would be there by now, waiting for everyone else, and everything else to catch up. So be ready. Ready for victory, or ready to whack the mole. I often teach understanding in order to identify, so that we might adapt in the effort to overcome.

So, what if one can not understand? What if one can not identify? Caution. Agility. Staying a bit cashy in the era of inflation rots. It’s still a whole lot better than misguided recklessness. The answer? Have we learned nothing? No, the answer, my friend… is not blowing in the wind. The answer is to trade more than invest when unsure. Shorten your window, and narrow your book, until you think you know.

You all know that I have been adding to my portfolio of semiconductor stocks as the wheels of pain have turned, and I have. That portfolio includes Advanced Micro Devices (AMD) , Nvidia (NVDA) , Marvell Technology (MRVL) , Micron (MU) , and Lam Research (LRCX) . (LRCX reports tonight.) Is there some ugliness there? Enough to share. Yet, I feel excited. For I know that is where the demand will be, not just for this part of this cycle (China may present a slowdown there), but for the medium to long-term, perhaps for the rest of my days, or perhaps until something is created that replaces CPUs, GPUs, DRAM, NAND and the lot. I have narrowed elsewhere.

But not my book of defense (not defensive) names. Lockheed Martin (LMT) had a less than spectacular quarter. Okay. Next week brings a bevy of quarterly numbers across the space. This is 2022. Aggressive people are killing people perceived as less able to defend themselves (so they thought), and destroying their homes and their economies. For what? For power? Who would bet against increased defense spending in and around almost every corner of planet earth? Not me. Despite Tuesday’s LMT beat-down, this space has been the saviors of my P/L this year. On top of LMT, I remain long Northrop Grumman (NOC) , General Dynamics (GD) , Raytheon Technology (RTX) , AeroVironment (AVAV) , and Kratos Defense (KTOS) . That last one hasn’t done much, but the rest have done well. I also have the “Stocks Under $10” portfolio in RADA Electronic RADA, which has been a dandy.

Basically, I act when I think I have a clue. I play Othello when I know that I do not. Simple as that. Anything else would be gambling, which is just fine if gambling is your thing. It is not mine.


Oh, the sweet tea went down easy on Tuesday, as the good cheer and flow of capital moved with smiles from ear to ear. The Dow Industrials, Dow Transports, and Dow Utilities gained 1.45%, 2.76%, and 0.52%, respectively. The S&P (large-cap) 500, S&P (mid-cap) 400, and S&P (small-cap) 600 popped to the tune of 1,61%, 2.25%, and 1.9% in that order. The Nasdaq Composite and Nasdaq 100 each ran 2.15%, as the Russell 2000 tacked on a cool 2.04%. All while 10 of the 11 S&P sector-select SPDR ETFs shaded green for the Tuesday session, with Discretionaries (XLY) , the REITs (XLRE) , Communication Services (XLC) , Technology (XLK) , Industrials (XLI) , and Staples (XLP) all gaining at least 1.5%. Only Energy (XLE) shaded red, down 0.81% on Tuesday, which makes sense as both crude and natural gas futures spent Tuesday morning in free-fall. (XLE is up 46.1% year to date.)

Winners beat losers at the NYSE by more than 2 to 1, and at the Nasdaq Market Site by a rough 5 to 2. Advancing volume took a 76.8% share of all Nasdaq-listed trade, and an even 70% of all NYSE-listed trade. The good news is that trading volume increased on Tuesday from Monday in the aggregate for both NYSE and Nasdaq domiciled stocks, as well as for S&P 500 and Nasdaq Composite constituents. That said, trading volume remained well below 50 day simple moving averages. What that means is that there was greater professional participation, but not great professional participation. Interestingly, the Nasdaq Composite, even on a 2.15% run… failed to retake any key technical ground.

Markets, Semiconductor and Defense Stocks, Real Yields, Netflix, Trading Disney

It has now been six consecutive sessions that the Nasdaq Composite has not so much as kissed any of my three main moving averages. The S&P 500 tells a different tale.

The S&P 500 took back both the 50 day SMA (matters for portfolio managers) and the 21 day EMA (matters more for swing traders) on Tuesday, and if the index could hold those levels (which could be tough this morning), would not be all that far from it’s 200 day SMA, which is the king/queen of moving averages for portfolio managers.

Same As It Ever Was

One huge takeaway on Tuesday and through the overnight session has been the move in real yields. As the IMF was taking its (always inaccurate) projection for global GDP down to growth of 3.6% from 4.4% three months ago, and 4.9% six months ago (it’s okay to say you don’t know), investors flew out of US Treasury securities. The US Thirty Year Bond paid more than 3.02% at one point, while the US Ten Year Note gave up more than 2.97% and the US Two Year Note yielded more than 2.63%. In Asian trade, the yield for US Ten Year TIPs tiptoed briefly into positive territory for the first time in two years. Just a heads up, the US Treasury Department’s resource page shows the US Ten Year Par Real Yield going out at 0.00% on Tuesday.

End of an era? Or perhaps the beginning of a healthy part of normalization. You tell me. Not now. Down the road. We’ll see how healthy normalization feels, and if there will be the political will to sustain what is healthy, or was once normal.

Streaming Armageddon

In case you only watch baseball and listen to music, Netflix (NFLX) released the firm’s first quarter results on Tuesday evening. The firm put together quarterly (GAAP) EPS of $3.53, walloping expectations. Nobody cared. The firm posted revenue of $7.87B, which was good enough for annual growth of 9.9% despite falling short of consensus. Then again, growth of 9.9% is not good enough. Never has been. In fact, this would be the weakest quarterly year over year revenue growth for Netflix since either the beginning or since the cows came home. Not sure. The headline number was the global streaming paid net “additions” of -200K (after turning off Russia), which fell more than a country mile short of “reigned in” guidance of +2.5M. It gets worse. The firm also now expects to lose another 2M subscribers during the current quarter.

The acute miss for Q1 and new expectation for a poor Q2 were not even close to being “priced in”, despite the stock’s poor 2022 performance. NFLX rallied 3.18% during regular hours on Tuesday to close at $348.61 (-42.1% year to date, -50.3% from the November high). The last sale that I saw overnight for NFLX was $255.10, -26.82% from that closing price. Is the beat-down overdone? Even with the guide-down, Netflix still expects to have almost 220M subs at the end of H1 2022. That said, the competition is fierce, and more than competitively priced. Does Netflix have pricing power. They thought so. A lot of investors thought so. Obviously, they do not.

Netflix creates its own programming out of necessity, as all of the upstart streaming services have brought their legacy content home. The programming might be of good quality. That is neither here nor there. What does eight or 10 episodes of a “good” show do? The competition has the franchises with the core or fanatical fans that will remain loyal. I like sci-fi, so I think of Star Trek and Star Wars, but they do not stand alone.

Those kinds of franchised products are treasure troves of legacy content that will keep their fans in place, and perhaps provide for a kind of pricing power that Netflix, by virtue of streaming being its entire world, just can not match. Am I saying the party is over for good at Netflix? Describe “the party”. I would think that the days of wild growth most certainly are, even if Netflix goes ahead with tiered ad-supported offerings, some kind of related video game product, or somehow manages to capture a part of that estimated 100M non-accounts that have been missed due to password sharing.

I can say something nice. The balance sheet is in better shape than it was a year ago. The firm is sitting on a net cash position of $6.008B, down small from a year ago, while current assets have more or less held at $8.098B. This provides for a current ratio slightly better than 1.0, as current liabilities have dropped to $7.739B, as the firm has wiped out its short-term debt. That said, long-term debt is still a bit large at $14.534B, that makes up more than half of the firm’s total liabilities (less equity) of $27.786. This number is dwarfed by total assets of $45.331B. To the firm’s credit, the balance sheet bears no entry for “goodwill” or other intangibles.

Buy the dip?

I think I’ll give this one the old “Three Day Rule”, and then we’ll take a look. Even then, it may just be a trader, not a keeper. Just one old dude’s opinion.

Speaking of The Competition…

The Walt Disney Company (DIS) , which has been a Sarge fave, sold off hard after Tuesday’s closing bell as well. That stock had also rallied during the regular session. I saw DIS trading at $125.10 in pre-opening trade. That puts my long position -3.6%, even with all of the tricks and silly traders’ games I play in order to whittle down net basis when I need to.

Buy this dip?

It’s complicated.

I think that if Disney were only down in sympathy with Netflix, that I would have pulled that trigger overnight. Disney has issues though, and I’m not even talking about the gaudy forward looking PE ratio. Florida Gov. Ron DeSantis said on Tuesday that he was extending the scope of this week’s state legislative session on congressional redistricting to include special districts like the one (Reedy Creek) that includes Disney’s four theme parks, two water parks, sports complex, hotels and resorts in the Orlando area. These special districts were set up in the mid-1960’s as perks for builders such as Disney to attract economic activity.

The special districting essentially allows Disney to govern on Disney property. Dissolution of the “special district” could hamper the firm’s ability to borrow cheaply, and could place regulatory hurdles in front of Disney projects. In short, losing this districting would be expensive for Disney.

In other words…

I may watch the opening, without executing an add. I may sell new calls against my position in order to reduce net basis once I see where they are priced. Earnings are in three weeks. If the shares open or trade 8% below my current net basis prior to my taking any new action, I will take some risk off, even down here. Even though I don’t want to.

Economics (All Times Eastern)

10:00 – Existing Home Sales (Weekly): Expecting 5.81M, Last 6.02M SAAR.

10:30 – Oil Inventories (Weekly): Last +9.382M.

10:30 – Gasoline Stocks (Weekly): Last -3.649M.

13:00 – Twenty Year Bond Auction: Last $16B.

The Fed (All Times Eastern)

10:30 – Speaker: Chicago Fed Pres. Charles Evans.

10:30 – Speaker: San Francisco Fed Pres. Mary Daly.

13:00 – Speaker: Atlanta Fed Pres. Raphael Bostic.

14:00 – Beige Book.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: (ABT) (1.47), (ASML) (1.70), (PG) (1.30)

After the Close: (AA) (2.91), (CVNA) (-1.57), (CSX) (.37), (LRCX) (7.52), (TSLA) (2.26), (UAL) (-4.21)

(AMD, NVDA, MRVL, and DIS are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

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