One Last Bear Rampage in 2022: Communication Services

XLC Holdings

 This post will go through some of the holdings in XLC. Many of these have horizontals at gaps. Most look doomed, including Disney, but I'm here for a bounce, not a long-term hold.

Coronavirus Booster Wave Charts

If the booster shots are causing cases to explode, we can expect another round of lockdowns in the totalitarian Blue states. Here are the best looking stocks in the crosshairs of the commies.

Market Still Under Coronavirus Pressure

When will the bottom be reached? It seems that today, Wednesday, February 26, one month after China shut Wuhan down in the midst of Spring Festival, is the first day the average American is really paying attention to this story.

Three charts make the case for a rebound if this is a normal correction. The USDAUD cross looks stretched to the upside as SPDR Energy (XLE) is stretched to the downside. The VIX Index did not make a new intraday high on Wednesday.

If this was a normal correction, I'd be more confident in taking some long positions here, but I believe the bottom will be reached when the news-cycle hits peak fear. For the market, earnings revisions are only beginning today. After hours, Microsoft (MSFT) cut guidance: Microsoft update on Q3 FY20 guidance

On Jan. 29, as part of our second quarter of fiscal year 2020 earnings call, we issued quarterly revenue guidance for our More Personal Computing segment between $10.75 and $11.15 billion, which included a wider than usual range to reflect uncertainty related to the public health situation in China. Although we see strong Windows demand in line with our expectations, the supply chain is returning to normal operations at a slower pace than anticipated at the time of our Q2 earnings call. As a result, for the third quarter of fiscal year 2020, we do not expect to meet our More Personal Computing segment guidance as Windows OEM and Surface are more negatively impacted than previously anticipated. All other components of our Q3 guidance remain unchanged.

I still think an outbreak in the U.S. is likely. My hunch is at some point there will be far to pessimistic economic assumptions. Yesterday, I discussed a few positions I had. I'm out of Boeing today, but added shorts on Disney (DIS) and Expedia (EXPE), plus increased my TLT short as mentioned in the update to that post.

As long as the U.S. doesn't experience a widespread outbreak, the core of the economy should do well. Leisure will bear the brunt of a less severe outbreak because airlines, hotels, theme parks and movie theaters could be shut by government order. Even if there's no official quarantine, individuals may avoid these places because they fear contracting the virus. The market sold these stocks today. Below is a list of stocks I plucked out of the travel, hotels, airlines and leisure categories with good volume, market capitalization and poor performance over the past month (with a few others tossed in). These stocks have been heavily sold, making them the most likely to rally hard if fear lifts, but could also see much further downside if the U.S. situation deteriorates.

Bitcoin is taking a hit and likely to test $8,000. BSV (my favorite in the cryptocurrency space) will likely see sub-$200 price if that happens.

Barring a bad pandemic, I think the market is approaching the bottom in time. Prices could still plunge in a waterfall decline because of bad news, but I lean towards there not being an uncontrolled pandemic. Central banks are printing money. Fiscal stimulus is coming out of Hong Kong and Germany. If the U.S. somehow ends up relatively well-off because it acted in time, the onshoring of supply chains will accelerate. The rebound growth for the U.S. could be surprisingly strong. The Y2K comparison looks less similar right now because coronavirus is more serious threat, but if the fear lifts, the sense of relief will be stronger.

Disney Shouldn't Have Come to China

FINTS Headlines:

Dalian Wanda sets eyes upon confronting Disney

“Disney really shouldn’t have come to China,” Wang said on state mouthpiece CCTV when he was invited as a guest for a TV show recently, arguing that the foreign theme park would be unable to make a profit in China over the next 10 to 20 years.

Shanghai Stock Exchange to standardize M&A

According to statistics, the average appreciation rates of valuation on restructured companies in the A-share market between 2012 and 2015 are rated at 201%, 515%, 527% and 737% respectively, showing an upward tendency year on year. Furthermore, the figure between early 2016 to mid-May even reached 1,334%.

China cracks down on illegal overseas insurance products

The China Insurance Regulatory Commission urged in an official document, as cited by major domestic media on May 23, that watchdogs should rigidly tackle existing illegal sales of overseas insurance products across the nation, which has already given rise to a series of illegal issues covering several aspects. The request stems from potential threats of illegal cross-border capital flows, as well as to maintain the rigor and stability of the domestic financial market.

...Tightening rules on insurance sales would also help control illegal capital outflows, as some use outbound capital transfer to hide their illegal assets or incomes through buying overseas insurance products.

Coca-Cola splits: what does Coke's chart signal?

One of the most interesting charts to me, in part because I own the stock, is Coca-Cola. Unlike the broader stock market, shares bottomed during the bear market of the early 2000s, and formed a major cup and handle chart since the peak in 1998. The chart is interesting in itself, in what it might mean and also because I'm bearish overall and this chart makes me question my assumptions.

First, the cup-and-handle typically leads to a major rally when the previous peak (the first edge of the cup) is broken. This cup forming phase is a long basing pattern and fits into Elliot Wave theory as a larger order corrective wave 2 or wave 4. Second, the chart shows a different pattern from the broader market.

In trying to think of why Coca-Cola could diverge from the market, or how it could stage a breakout (it must exceed 1998's high of 88.94, a gain of 19% from the current price) when it already has a relatively high P/E of about 20, calls for some explaining. First, I fully accept that KO may not breakout and we could see shares tumble along with the broader market. In the examples below, KO actually lags some strong performance by McDonald's and Nike. Even in this case, however, the fact that these companies did not make new lows in 2008 is interesting and implies strength that is lacking in the broader market.

I have two ideas I'm mulling on Coke and other multinationals: since China's entry into the WTO, emerging markets have made up an increasingly large share of the global economy and U.S. firms that sell globally could decouple from the U.S. market, if the U.S. were to continue its slow growth (taking a long-term view of a decade and more). The performance of some brand name firms suggests this is already happening.

Thinking in negative terms (what would cause KO to breakout when there's no positive reason), another possibility is that we are on the verge of hyperinflation. Gold (precious metals) performs best in hyperinflation, followed by hard assets, real estate and stocks. A company such as Coca-Cola is more than a drink seller, it owns an intangible asset in its brand and if hyperinflation leads to stock buying, the public will probably overload on blue chips.

I believe the economy on the other side of this crisis will increasingly be built upon intangible assets as manufacturing costs decline and software increasingly controls and customizes our experience with products. Imagine a world where the cost of manufacturing drops to zero: what is left is the image, the brand. Apple is perhaps the best example of this today and the performance of major brand names may be evidence that the market recognizes this ongoing shift to an information economy.

Here are some other companies that rely on their global brand name. In comparing them to KO, I'm looking for firms that did not hit a new low in 2008 or 2009; firms making the cut include global brand names such as IBM, McDonald's, Disney, Pepsi and Nike. Two brands that fail to make the cut are Microsoft and General Electric.

Maybe a major deflationary wave will take all of these stocks below their early 2000s lows. One reason many firms may have not hit a new low in 2008 is due to rapid growth during the decade. However, this brings me back to Coca-Cola, which didn't put up massive growth during the 2000s.

I have owned Coca-Cola since 1994 and have no plans to sell.