On the One Hand, On the Other Hand
On the One Hand, On the Other Hand
I am often asked and wonder myself why certain things happen. Why did $AMZN get a nothing burger reaction to their lay-offs in December and hit a 52 week low? Why did $GOOGL get a very positive reaction Friday to their lay-offs rallying over 4%? Why did $MSFT reverse from up $3 on their lay-off announcement to drop $8 from Tuesday to Thursday and regain the entire $8 on Friday on no news? Why were Wednesday & Thursday both growth scare days with 1) retail sales for December disappointing handily down 1.1% 2) the NY and Philly Fed business outlooks continuing in negative territory 3) Citibank’s economic surprise index at -24.7, then followed by a soft landing narrative on Friday? Does $TSLA have a demand and margin problem or will price elasticity and low expectations cause the stock to rally once the bar is reset? Just how bad does $AMZN, $MSFT, $GOOGL, $META, $AAPL revenues and profits need to be for the stocks and the market to sell off?
On the one hand, on the other hand. At the low’s in $AMZN the narrative was retail bad, cost structure still elevated and AWS deceleration is skipping lower. A roughly $3 billion cost cutting plan is deemed noise relative to the unknowns of the jump from $71 billion in EBITDA to $82 billion in 2023 the Street is expecting. Let’s pretend we have a crystal ball and we conclude that the Street will call 2023 a lost year and EBITDA won’t grow from $71 billion. Does that make $AMZN a short? Or a long as 2024 will be the recovery year (2023 is supposed to be)! Well, I guess, on the one hand, 14x EBITDA for a lost year with hopes of a better 2024 seems quite rich by most accounts. On the other hand, AWS is still a 20% grower, very profitable and they can pull more levers eventually to make the retail business profitable? You say tomato, I say tomatoe! Maybe, like my twitter header says stocks are just like pieces of paper, tickers and narratives. There is one guy I follow on twitter who I especially like and think he generally has a good process and his best value added (yikes) on $AMZN has been:
See a pattern here? The markets are, especially these days, constantly running from one side of the boat to the other to keep it steady but often in a maniacal fashion. One person on our WhatsApp discussion told me he liked it because it was Game Theory. I replied, actually I think it is more like Chaos Theory. We both are correct. What is clear is that pain, discomfort, euphoria, and ambivalence drive the markets most days, weeks and years. If the narrative is a growth scare, then the down days are reinforcements to those trading and investing and losses create discomfort that cause them to sell to reduce the pain. As soon as that group has capitulated enough that they become ambivalent and resigned to seeing it through, the market stops going down. Then, some data point comes out that changes the narrative, such as peak inflation (3 rallies followed by failures last year on peak inflation). If the market starts to go up on that, shorts get the discomfort as do those who reluctantly sold and FOMO sets in. Magically, rallies seem to stop once the positioning moves back to neutral territory.
Case in point, Microsoft traded about 30 million shares a day during the declining days this week and only 35 million on options expiration day. One analyst said Azure is fine and one said it has a real growth problem ahead. Satya is reducing headcount due to a changing demand environment, but how bad is bad? The stock price keeps changing in such large increments that you wonder if the efficient market hypothesis is even valid any longer. Sure, the market takes the information available at any given time and discounts that into the price. But, the reaction to their EPS report Tuesday is going to be very, very rudimentary. Picture a bar with “sauced” sell-side analysts, mutual funds, hedge funds and retail players looking at the results and giving it only a brief thought (like CNBC Fast Money does): “It’s really bad and that’s why they are cutting costs” or “well it’s not that bad, currency helped a bunch and expectations were low enough.” Simply take the headline top and bottom line, the Azure growth number in constant currency and the after hours stock reaction and set your narrative! The stock trades at 25x FY 2023 earnings, not especially cheap if the top line slows. On the one hand, if it feels more resilient than the average person in the bar thought going in, perhaps we can look at FY 2024 and slap the 25x on that $11.77 number and say it has $45 upside to a price target? On the other hand, if the top line falls below 10% for 2023/2024, does this stock deserve more than 20x as we learn the pandemic led pull ins need to be digested? 20x calendar 2023 EPS of $10 (Street is $10.22) would be $200 or 17% downside.
If I had a third hand, perhaps we do a repeat of this week and Microsoft drops or rallies big and then reverses in the coming days. If you read our substack a week or so ago, we talked about incremental investing and how everything seems to move at the margin, until it doesn’t. We also highlighted using the technical TD Trend can give you good indications of when to buy, sell or short (with a reasonable degree of confidence) if the idea you have needs timing or an entry point. In other words, I like this stock long, but it is like a rodeo bull, so wait for the U (buy signal) for entry. We believe our substack readers are gaining appreciation how to use this tool along with their own personal views of names long and short. We will continue to highlight when we see these signals on the indices and individual names. To be fair, many TD (U) buys or D (sells) I do not react to, unless it fit’s my view of the fundamentals or valuation case. But, I share them as I do not know our readers style or positioning and whether they have an interest long or short in a name. What fascinates me is how often it is more correct in timing than human decision making given it is unemotional and looking for the patterns. (pain, discomfort and ambivalence). Please ask to be added to our WhatsApp distribution list as a sub to receive these daily in the chat.
As you can see below, the Trend signal does not need to be perfect to help in your trading and investing. If it helps you on entry, risk-reward, the ability to stick increases exponentially. If nothing else, it can help you not give up near the lows on a long or cover at the highs on a short and keep you patient in starting and building a position.