Forget Black Swan, Just Look to the Mandarin Duck: Taking Stock

(Bloomberg) -- So how’s everyone feeling about their tech holdings?

The most common answer to this question from your everyday trader probably wavers between "better, but not great" and "pretty nervous" -- and probably the latter right now with S&P 500 futures peeling back by ~15 handles this morning -- I mean, who’s to blame them after the roller coaster that we’ve all been through over the past month and change?

The feeling I get about tech right now is like the feeling a lot of people in New York City have right now about that rare Mandarin duck squatting in the ponds of Central Park.

I realize not everyone who reads this column lives and/or works in Manhattan, and so may have zero clue as to what I’m referring to, but just click the blue links in the story and you’ll get the gist. I also realize that this may be one of the worst analogies ever (or the best), but stay with me.

Basically, our colorful feathered friend with the hot pink bill has been a gorgeous spectacle for a nice length of time, like the parabolic uptrend in the FAANGs over a nine-and-a-half year stretch of the bull market.

Then, in a flash, it disappeared and gave everyone a heart attack, similar to what happened during the meltdown in October when the XLK agonizingly pulled back by ~14% from its peak to trough.

Shortly thereafter, that magical duck that’s native to East Asia and most certainly not Manhattan reappeared again, untouched and in all of its regal-looking glory, ready to absorb all of our undivided attention once again, just like where we stand right now with the wannabe-trillion-dollar tech megacaps of the world.

But I digress. Let’s not get all philosophical with the pheasants. It’s Friday and many brains on the Street are fried from what we’ve all gone through of late, from the onslaught on equities during the month of October to the recent stomach-churning bounce in the tape that no one can really trust to the culmination of an earnings season that dug up more questions about the future than answers.

We have another busy week ahead (as the next section tells us) so please take a few deep breaths, enjoy the weekend and if you’re a tech bull for life, maybe take a stroll to the southeast corner of Central Park over the next couple days just to make sure that cheeky-looking fowl is still perched in its favorite spot, soaking up the sun and loving life.

On Tap for Next Week

Earnings season is more or less over, but we’re still awaiting on tech behemoth in Tencent (the ~$340 billion market cap "T" in the BAT complex) as well as several companies whose fiscal quarter ended in October, like Cisco, Nvidia, and Applied Materials in addition to a slew of retailers from Walmart and Home Depot to Macy’s, Nordstrom and J.C. Penney.

Meanwhile, four of Canada’s largest pot companies (yes, that includes Tilray) will give their lay of the land ever since the country legalized recreational marijuana nearly a month ago. Recall that the group had a mini-resurrection Wednesday after steadfast cannabis opponent Jeff Sessions got the boot.

But with earnings winding down comes the beginning of conference season, where we’ll get a couple of major health-care events in addition to many tech and consumer heavyweights presenting at UBS and Morgan Stanley, respectively. Names like Kellogg, Liberty Media, 3M, Shutterfly, and BB&T will hold analyst and investor meetings.

On the macro end, we’ll get plenty of Fed speak, now that one of the most drab meetings of the year is out of the way and all eyes are on the expected rate hike in December -- Quarles testifying before Congress, Powell talking at the Dallas Fed event, and Daly giving her first full-fledged speech since getting the job are the likely highlights.

We’re also waiting for Italy’s new budget and a pair of Asian summits, where we could see commentary surrounding the trade war make waves, though Trump is sending Pence in his place.

Lastly, next Wednesday is the deadline for funds to file their third-quarter holdings. These 13-Fs should give us some insight into who may have been left holding the bag when tech got wrecked in October, but it won’t tell the whole story in terms of who panic sold, who doubled down, and so forth.

Sectors in Focus Today

• Energy sector with crude oil entering a bear market and headed for its longest losing streak ever
• On the oil theme, watch TransCanada and any others involved with the Keystone XL pipeline after the project was blocked by a federal court last night
• Metals/steel companies with Germany’s Thyssenkrupp plummeting as much as 12% on a profit warning
• Luxury space after $39 billion market cap Richemont from Switzerland sank 7% on an unexpected decline in first-half profit
• Tobacco stocks (Philip Morris and Altria) may be volatile on reports the FDA may impose limits on the sale of most e-cigs in the U.S. as soon as next week
• Optical networking peers, like Fabrinet and Acacia Communications, after II-VI said it will buy Finisar in a deal valued at $3.2 billion
• Sectors that may outperform on earnings: Auto rentals (Hertz +21% after CAR missed on Monday) and cloud software (Dropbox +8%)
• Sectors that may underperform on earnings: Internet/social media (Yelp -30%), semis and Apple suppliers (Skyworks -7%), video games (Activision -10%), digital advertisers (Trade Desk -10%), toys (Funko -8%), online real estate (Redfin -6% after Zillow’s recent blowup), and dental (Dentsply -5.6%)

Notes From the Sell Side

JPMorgan’s Steve Tusa, who has been the axe on the downward spiraling stock, is back again to unleash more pain. He reiterates his long-held underweight rating (since May 2016!) and slashes his price target to a Street low $6 (just days after Gordon Haskett’s John Inch said the stock has potential to tank to $5), and GE is down >3% in the pre-market so far. Here’s what Tusa is saying:

• GE results were worse than expected on almost all fronts, with forecasts for free cash flow and Ebitda moving materially lower
• A material change in language from the 10-Q suggests a "negative step down" in the leverage situation
• "Some sell-side bulls now point to ’liquidity concerns’ as the driver of share price weakness, though this misconstrues the Real Bear Case (RBC) - namely $100b in liabilities and zero enterprise FCF even after a 95% dividend cut"

Elsewhere, UBS downgrades TripAdvisor to a sell on its premium multiple vs peers (shares surged 15% Thursday after an earnings beat). Goldman upgrades Cree to a buy after a more in-depth round of field work in addition to market analysis on the silicon carbine opportunity. And Morgan Stanley now has Gardner Denver at an overweight as the "disconnect in valuation between upstream energy in what GDI could realize in a sale vs. a SOTP is too wide given trough in activity in 4Q/1Q."

Tick-by-Tick Guide to Today’s Actionable Events

• Today -- NKTR/BMY data for NKTR-214 expected (see our preview)
• Today -- GILD to release data at American Association for Study of Liver Diseases Meeting (see AASLD preview)
• 7:00am -- ADNT (roughly), MGI, STWD, PBPB (roughly) earnings
• 7:30am -- SSP earnings
• 7:30am -- DIS CEO Bob Iger on Bloomberg TV
• 8:00am -- ICON earnings
• 8:30am -- Oct. PPI
• 8:30am -- Fed’s Williams and Harker to speak at workforce development event
• 9:00am -- Fed’s Quarles speaks on stress testing
• 9:55am -- JNPR investor day
• 10:00am -- University of Michigan Sentiment, Wholesale Inventories
• 10:30am -- Alibaba President J. Mike Evans on Bloomberg TV
• 12:00pm -- Fed to release inaugural supervision and regulation report

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger

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