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Thursday, July 13, 2017


The dollar fell index ended up flat on the day yesterday but with some wild swings. It started out at 8 am at 95.75, spiked to a low of 95.56 by 8:40 am, then surged to 95.90 by 9:50. It then flopped lower but mildly for the rest of the day, closing at 95.77. So, 8 am open at 95.75, close at 5:25 pm at 95.77. Two points. Not a noteworthy move. 

Sorry for so much tedious detail but pay attention--all the FX commentary claims the dollar fell yesterday because of Yellen’s testimony. But the dollar did not fall! Also, Yellen started speaking around 10 am and the spike preceded her speech. In fact, against the euro, our standard benchmark, the dollar rose and it was the euro that fell. Between 9 and 10 am, the euro fell from 1.1470 to 1.1408 and thence to 113.91 during the next hour. 

This is an odd development considering that it was the US 10-year yield that dropped to 2.325% from 2.362% the day before and 2.393% at the end of last week—the biggest one-day decline in almost a  month. It’s the dollar that should fall on a drop in the US yield, not the euro. Besides, the 2-year, the most sensitive to Fed policy, is fairly flat. To be sure, the Schatz and Bund yields both fell, accounting for the euro’s drop, perhaps, but we can’t swallow the explanation that German yields fell because of anything the Fed chief said. Shouldn’t that be data, or Draghi? 

We saw one especially egregious “analysis” on yesterday’s euro price actions that said the euro fell as Bund yields fell because of Yellen’s speech. Again, the timing is wrong. Blomberg data shows the daily range at 0.576-0.619. The Bund opened at 0.615% from the close the day before at 0.550%, so a bit spiky, but then fell back to 0.579% at the close. Net-net, the Bund yield gained from 0.550% at the close on Tuesday to 0.579% on Wednesday. And the spiky fall from 0.615% to lesser levels occurred between 8-9 am ET, again before the Yellen speech. 

To be sure, the speech is released ahead of time at 8:30 am, so it’s possible, just barely, that one or two traders read it, jumped to conclusions, and made big trades that everyone else copied. 

So, we have the financial press and analysts all jumping to the conclusion that important price action in FX and Bunds occurred because of Yellen’s speech and it is, simply, not true. Maybe those price changes occurred because of expectations about Yellen’s speech or a quick reading of the 8:30 release of the speech, but probably not the speech itself. Now everyone should be itching to know what she said. First, the same stuff about full employment promoting inflation someday. Also, “We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.” There it is—the “dovish” idea that maybe we don’t get a third hike this year. Equities loved it. 

See the Outlook. A baseless or at least questionable move in the euro/dollar is not to be brushed off lightly. In fact, we should expect it to continue. 

• Elsewhere, the BoC rate hike was not priced in, after all. The CAD rose to a one-year high after the hike, the first in 7 years. 

• In China, the trade surplus is a healthy $42.8 billion, reflecting huge increases in exports to both the eurozone and the US. Exports rose 11.3%, more than expected, while imports rose 17.2%, hardly the expected downward slide everyone was forecasting earlier. High and rising imports are a good thing in an emerging economy.

The euro crashed in two waves yesterday from the overnight peak at 1.1477 to 1.1408 by 10 am. After the usual overnight bounce, the euro fell again to 1.1369 by 7:30 am ET today. As noted elsewhere, the drop in German yields is considered the culprit. On a technical basis, we may say it’s a normal pullback after a new higher high, but the ferocity of the move is startling and not normal. We expect the move to continue since this is what traders are expecting, but still, we don’t expect the pullback to reach the previous intermediate low, 1.1348 from July 5.

The Reuters 10-year yield index closed at 2.327% on a gap from 2.362% the day before and down from the high Friday at 2.396%. It’s quoted at 2.307% this morning from 2.345% yesterday morning and 2.386% the day before. 

The Bund yield is lower at 0.493% from 0.534% yesterday and 0.548% the day before. It was an 18- month high Friday at 0.58%. 

Market Outlook: As we describe above, the 8:30 am ET release of the Yellen speech could conceivably have triggered the big moves in bond yields and currencies yesterday morning, but it’s fishy. The spiky move down in the dollar index and Bund yield occurred before the speech itself, to be followed by a crash in the euro purportedly tracking the Bund. 

While the Bund (and Schatz) yields did fall, the US 10-year fell, too, and by the biggest one-day drop in nearly a month. It’s the dollar that should fall on a drop in the US yield, not the euro. Besides, the 2- year, the most sensitive to Fed policy, is fairly flat. To be sure, the Schatz and Bund yields both fell, accounting for the euro’s drop, perhaps, but we can’t swallow the explanation that German yields fell because of anything the Fed chief said. Shouldn’t that be data, or Draghi? 

The biggest issue is that Yellen’s comments were viewed as dovish—and the equity crowd loved it— but we say her comment about a possible persistent undershoot in inflation requiring policy adjustment is just the usual two-handed economist talk. Feds always note uncertainty about forecasts lest the market idiots get it wrong and misinterpret a “likely” as a “definite.” In this case, Yellen and other keep saying low inflation is temporary. To suggest “temporary” might be a longer time than we think is nothing new. 

Another curiosity is the Bund supposedly moving on the Yellen remarks while the US 2-year, the fixed income instrument supposedly most sensitive to central bank policy perceptions, is little changed. It’s quoted at 1.355%, down from over 1.40% earlier in the week but not showing a spike yesterday.

Now compare to the German 2-year Schatz and 10-year. Granted, the 2-year (below) fell but the 10- year (next chart) is actually stable after the morning fall. You have to ask why a Yellen comment, and a likely misinterpreted one at that, would move German yields more than the US ones? 

As we said, fishy.

Assuming we have the data and the timing of developments right, the market is unusually jumpy and willing to jump to conclusions. If and when traders perceive they got it wrong, do they reverse with equal ferocity? And if so, what does it take? 

We get the usual jobless numbers and PPI (plus Canadian housing, one of the BoC’s primary targets but going forward). We have to wait for CPI tomorrow and again everyone will forget that it’s not CPI the Fed looks at, but the PCE inflation numbers. So, if the market is jumpy—and probably unwilling to admit it made a mistake and overreacted to a cautious Yellen—a low number should propel yields and the dollar lower. Golly, what happens to the Schatz/Bund/euro then? Alternatively, CPI could show an uptick. Then Yellen’s “gradualism” will stop being seen as dovish and become just the usual economist’s cautiousness. The third rate hike, even if in December, will be back on the table and the dollar’s firmness can proceed. Yellen has a chance to adjust perceptions in the second round of testimony. 

Bloomberg threads the needle very carefully, writing that its version of the dollar index “tumbled to its lowest level since September after Yellen told the U.S. Congress Wednesday “there was uncertainty about when and how much inflation will respond to tightening resource utilization”. The euro led gains on expectations the European Central Bank could send hawkish signals at its meeting next week while the pound also rose after the Bank of England’s Ian McCafferty suggested in an interview with The Times he favored faster unwinding of quantitative easing.” 

What “expectations” that the ECB will send hawkish signals next week? As far as we can tell, nobody has said any such thing. It’s a fiction. As for the BoE, we already knew about three dissenters. Not new. The Yellen caution is real enough, but is it right to call it “dovish”? Brainard speaks again today and she actually is dovish. This bodes ill for the dollar.

This is what we call a big fat mess. We have circular reasoning, illogical deductions, fiddling with data to make it fit the narrative, and wishful thinking. 

The lesson is “Be careful what you read” but it’s also that traders will respond to facts seeming to expectations. When you have a hammer, everything looks like a nail. 

On the political front: Russia here, Russia there, Russia, Russia everywhere. We like the comment that it’s not China, France, or a selection of other foreigners intruding on US politics or seeking favor. Just Russia, all Russia, all the time. Some commentators say there is smoke but no gun, while others say the gun is all to visibly present and it’s a cannon. Meanwhile, the White House is isolated, mismanaged and getting nothing done. Trump is off to Paris to celebrate Bastille Day tomorrow. He can’t embarrass the US any more than he has done already, can he? 

There is a whisper that Macron may try to change his mind about climate change. Bon chance. Trump is old, fat, repulsive, boorish and wears bad clothes. Macron is young, trim, good-looking, suave and well-dressed. The comparison brings despair. Besides, Trump welcomed Russian interference in the election while Russia’s interference in France favored Macron’s opponent, LePen. Perhaps Macron can remind Trump that if Russia changes sides, he will like the interference a whole lot less. He might also point out that denying it is not doing Trump any good. 

Overall, we are betting Macron will manage Trump very well. Trump keeps sleazy company and resents being excluded from upper crust society. The high-class gang think Trump has glitzy bad taste as well as bad manners, including the groping. Trump knows they look down on him. Macron can use his charm and apparent acceptance of Trump as an equal to get concessions from Trump. The nasty little boy from Queens will lean over backwards to be “accepted” by a genuine member of the French upper crust. (We say Macron should invite Renzi in to help.)



BUY GBP/USD- no position recommended
SELL EURO/USD- recommended entry @ 11407 ( DAY TRADING)) STOP- 11441, TAKE PROFIT- 11372
BUY AUD/USD -recommended entry @ 7724 ( DAY TRADING)) STOP- 7694, TAKE PROFIT- 7755
SELL USD/JPY- no position recommended
BUY USD/CHF- recommended entry @ 9666 ( DAY TRADING)) STOP- 9639, TAKE PROFIT- 9695
SELL USD/CADrecommended entry @ 12729 ( DAY TRADING)) STOP- 12759, TAKE PROFIT- 12696

CME/Globex FUTURES--SEP 2017 Contract: BUY MEX PESO- ENTRY @ 5576, STOP- 5551, TAKE PROFIT- 5606



With exposure to online travel in Asia, Europe and the U.S., Expedia (EXPE) is among the top online travel agents. Expedia’s brands include Egencia (corporate travel management), Expedia, HomeAway, Orbitz, Travelocity, Hotels.com, trivago and Hotwire among others.


With exposure to air, hotel and rental car bookings in Asia, Europe and the U.S., Expedia is one of the best ways to invest in the online travel industry.  With such brands as Hotels.com, Orbitz, Expedia, Hotwire and a joint venture with Air Asia, we expect Expedia to benefit from the increasing number of bookings made online. We believe prospects for 25% growth over the next several years warrant a high forward multiple.


On April 27, the company posted operating earnings of $0.05 in the first quarter, down from $0.09 in 1Q16. On a reported basis (GAAP), the loss per share narrowed to $0.57 from $0.72 in the prior-year period.

First-quarter revenue increased 15% year-over-year to $2.2 billion, above the consensus estimate of $2.14 billion. Gross bookings rose 14% year-over-year to approximately $24 billion. Online travel agency revenues grew 10% year-over-year to $1.7 billion. EXPE said that the company's lodging supply comprised 385,000 properties, a 36% increase year-over-year.

Trivago revenues soared 62% year-over-year in the first quarter to $286 million. Growth was strong in all regions with the highest rate of growth in the Asia-Pacific region, and was accompanied by solid growth in Europe and North America.
Egencia revenue grew 12% year-over-year to $123 million. To increase bookings and revenue growth, Expedia plans to add to this segment’s sales team.

HomeAway revenue  rose 30% year-over-year to $185 million. The increase reflected property night growth and higher revenue per property night. HomeAway property night bookings rose 48% from the same period a year earlier.

By geography, approximately 57% of Expedia's first-quarter revenue came from the U.S., while the international business contributed 43% of revenue and was up 19%.
Lodging revenue constituted 64% of revenue and grew 12%, primarily reflecting a 12% increase in room nights at Brand Expedia, Hotels.com and HomeAway.
Air travel revenue was up 4%, reflecting an 8% increase in air tickets sold, partially offset by 4% lower revenue per ticket.

Advertising and media revenue grew 47% in 1Q17, driven by continuing growth in trivago and Expedia Media Solutions. Other revenue was up 15% due to growth in car rental products and travel insurance. The adjusted gross margin increased 90 basis points year over year to 81.9%. The improvement reflected a lower cost of revenue. Adjusted EBITDA rose 18% to $208 million. Egencia and trivago EBITDA rose 76% and 169%, respectively. Core OTA increased  5%, while HomeAway adjusted EBITDA decreased 66%.

In 1Q17, Expedia paid $39 million to buyback 300,000 shares. About 6.9 million shares remain authorized for repurchase under a February 2015 authorization.


We project revenue to grow from $8.8 billion last year to $10.2 billion in 2017, aided by the acquisitions of HomeAway and Orbitz in late 2015. The increase also reflects growth in domestic and international hotel room nights (number of rooms times days stayed) booked by Brand Expedia and Hotels.com. In 2018, we forecast a 14% gain in revenue to $11.6 billion.

We expect the EBITDA margin to improve 160 basis points year-over-year to 20%, driven by cost savings from the Orbitz acquisition and growth in the higher-margin advertising business.  In 2018, we expect the EBITDA margin to increase 130 basis points to 21%, driven by incremental business from the company's high margin advertising business. We look for earnings to increase from $4.49 last year to $5.50 per share in 2017. In 2018, we project earnings of $6.95 per share.


Competition from Amazon, Facebook, and Google could hinder Expedia's growth, particularly in the U.S. where Expedia generates more than half of its sales.
Weak economies usually lead to less travel. Unfavorable foreign currency translations could hurt Expedia’s revenue and earnings.


In our opinion, EXPE shares are undervalued at 27.6-times our FY17 EPS estimate. Our $185 price target implies a multiple of 33-times our FY17 earnings estimate. Over the past three years, EXPE has traded at forward multiples between 23 and 36. We believe a multiple approaching the top of this range is justified by Expedia's position as a top OTA and ability to acquire and increase market share as travelers migrate online. Our target, if achieved, offers investors the prospect of an approximately 21% return.

Expedia Inc. (EXPE)
Current Price: $152.34
Target Price: $185
Current Valuation: 27.6 times FY17 EPS
Target Valuation: 33.6 times FY17 EPS

NetApp Inc.(NTAP): ABOVE $41.50, with a $45.50 first target, a $51.75 second target, and a $37.25 stop loss. Confirmation Volume Area= 2.8M, Risk Rating= 5, Industry= Data Storage Devices
NTAP TRADING TIP: Watch this VOLATILE formation as it sets up for another stage higher, while the market posts gains. Any further accumulation may break this stock higher, helping it take a run into ‘uncharted territory’. When reviewing new trading ideas for purchase, pay the price that coincides with your desired exit strategy; being patient by waiting for desired prices may drastically reduce trade risk. NOTE: consider bidding for wanted Money Trade Plan Picks; the markets generally charge for impatience.

NetApp Inc.(NTAP) rose $1.21, to $41.38 on a more than 40% increase in its recent average daily volume today! NTAP provides software, systems, and services to manage and store computer data worldwide. NTAP offers flash; flash arrays that support data management; hybrid arrays to deploy the speed of flash storage; hybrid cloud; ONTAP cloud storage data management service; NetApp cloud sync hybrid data management Software as a Service; NetApp private storage for cloud; and AltaVault cloud-integrated solutions. NTAP also provides ONTAP storage operating system for data protection and security; SANtricity storage operating system, which provides performance, reliability, and data protection for application-driven workloads; SolidFire element operating system; NetApp StorageGRID Webscale software that allows customers to store and manage massive amounts of data on premises and in the cloud; NetApp integrated data protection solutions; OnCommand management software and management integration tools; and FlexArray storage virtualization software. Further, NTAP provides software and hardware maintenance, professional, and customer education and training services, as well as support solutions. NTAP serves energy, financial services, government, high technology, Internet, life sciences, healthcare services, manufacturing, media, entertainment, animation, video postproduction, and telecommunications sectors through a direct sales force and channel partners.


Covered Calls: Alphabet (GOOGL)

Still, it is getting pricey in a pricey market. GOOGL stock trades at 29x net income, if you back out the net cash position. On a 19% annualized growth rate estimate, that’s not at all unreasonable.Truthfully, I see Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) as a growth stock but not necessarily as a momentum stock. I think of those as rising in a totally irrational manner with no real fundamentals behind it. GOOGL stock has excellent fundamentals, and on a net-cash basis, is trading at a fairly reasonable multiple.
GOOGL stock presently trades at $967 and has $150 per share in cash, meaning its net-cash price is $817. I’d love to find a very high priced set of covered calls for GOOGL stock.
If you sold the 15 Dec $960 covered calls, you would get a whopping $61 per contract, or $6,100 in cash. That’s 6.3% for a five month holding period and a nice downside hedge.

Covered Calls: Netflix (NFLX)

It is burning cash at a rate of $1 billion a year or more. It barely has a profit. It keeps having to issue debt to fund its programming. I love Netflix as a product, but as a stock, it’s just nuts to own it. You have to be careful with NFLX stock. The market is over the moon about it these days, but that love affair could end in a heartbeat.The granddaddy of momentum stocks without supporting fundamentals is probably Netflix, Inc. (NASDAQ:NFLX). I see no justification for NFLX to have a $68 billion market capitalization.
Still, investors have bid it up to $159 per share as of Wednesday’s close. The 15 Dec $160 covered calls have a very generous premium of $14.50 per contract. You pick up $1,450 per contract, which is a 9% return, better than the other previous ideas.
Notes: You’ll need all the downside protection you can get if you insist on holding NFLX stock.


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