Bob Lang and Chris Versace outline the next era at Action Alerts PLUS, answer member questions and discuss the portfolio's positions in Facebook (FB) , American Eagle Outfitters (AEO) , Wynn Resorts (WYNN) , Alphabet (GOOGL) and Amazon (AMZN) .
KATHERINE ROSS: Good morning and Happy Tuesday Action Alerts PLUS members. I'm Katherine Ross. And I am of course joined by Bob Lang and Chris Versace. Yesterday, my inbox was filled with members sending in questions both about the portfolio names and the portfolio itself. I went through and tried to answer every single email. But if I did miss yours, please feel free to ping me again, and I promise I will get back to you.
But Bob and Chris, I think we can all agree that the transparency is key here. So I want to start today's episode off by discussing the state of the portfolio. And with that being said, let's just throw it to you guys. Can you explain what the new era looks like?
CHRIS VERSACE: Bob, do you want to lead off?
BOB LANG: Well, I think the whole new era looks like a whole completely different landscape here. In the past, we've just mostly relied on fundamental information and data to start making decisions. And now we're through this extra element in here that I'm responsible for, which is called the technical and chart condition. So as we spoke about a little bit briefly yesterday, it really is a check against fundamentals here. There is no emotions involved when it comes to charts and technicals. The numbers are what they are. The charts are what they are. It's history.
And it tells us what may be happening down the road in the future. So I think, Katherine, what we have here is we have an opportunity to blend two different sciences together. We have fundamental analysis. Chris is a brilliant analyst of fundamental data, and I'm throwing in there my viewpoint on technicals. And together, it's going to give us more of a stronger position and a stronger view of holding positions or cutting positions and adding new positions as well.
CHRIS VERSACE: I think that's right Bob. You and I were chatting yesterday afternoon as you were starting to tick through each of the holdings on a technical basis. And it's no surprise that there's a number of positions that I think we're going to start to revisit in the coming days. The last thing we wanted to do was jump in on the very first day and rock the boat, and spook or scare subscribers.
However, that said, we are going to take a measured look at a number of the different positions, some of which we know are underperformers. And we're going to be asking some tough questions about some others that are in the portfolio as well. But I think that subscribers are going to be pleasantly surprised as to how soon we're going to start to take action in a meaningful manner.
KATHERINE ROSS: And let's clarify one other thing, because I do want to get into options in just a second. But I was informed and I've been using the term model portfolio.
CHRIS VERSACE: Yeah. Well, I think where that comes from Katherine is prior to October 4th, let's say, the portfolio was run as a charitable trust, which is a wonderful thing. The idea of not only educating subscribers and helping them make great stock investments, but also giving back.
With the transition, we are simply going to be a paper or model portfolio as you talk about it, but is the mission any different from education, and driving returns, and picking out good stocks, and helping explain the rationale along the way so that subscribers can become better investors over time? No, that all remains the same.
KATHERINE ROSS: One thing from yesterday's show that members really picked up on was us mentioning options. So I want to bring this to you, guys, because I want to ask if options are now on the table and what our perspective is on long-term investing. Bob, I think we can start with you here.
BOB LANG: Yeah, I pick this one up. So options trading, something I've been doing for close to 20 years. And I've cut my teeth learning, using options, wins, and losses. And I try to share all the information that I've learned over the years to try and help people sidestep some of the mistakes that I've made in using options.
But I think the one thing out there about options trading that people don't really aware of it's a bit of a mystery out there about how to use options tactically in a strategically in a way to enhance their portfolio returns. There's a lot of people out there who think that options trading is like gambling.
And I suppose if you want to gamble, you can use options as a risk-taking tool. There's some great leverage with options. But I choose to use it as a way to enhance my portfolio returns, and for my clients, and for my subscribers, and we'll do things like we'll sell options against our stocks.
We'll create different structures, and vehicles, and so forth that are probably going to be new language for a lot of people in AAP. But I think these are ways to create new income streams. There's a lot of companies out there that, for instance, have cut dividends quite significantly over the past several years. So some have increased it, but some have cut them.
We can use options to create new income streams that are very similar to dividend streams and create nice income streams month after month after month while still retaining our stock. So having the stock is having a great leverage of power, but using the options as a second derivative is even a greater amount of power to create income in your portfolio. So these are some of the things that I know, really the language is out there. But I think there are ways that people can really take advantage of new use options in a very good way.
CHRIS VERSACE: Hey, Katherine, just circling back to your question about the model portfolio. Remember, the base offering is going to remain the same. And I think where some confusion might be erupting is we're going to start off introducing options in a very easy way, very informational, very educational.
Subscribers shouldn't be concerned that all of a sudden the portfolio is going to be taking on that much more risk or become that much more aggressive. Again, we're going to continue in the rich history of AAP being very long-term or longer term in our focus, something say six to 18 months long in terms of position, timing, and sizing.
KATHERINE ROSS: You are answering all the questions that I'm getting from members. So with that being said, I do actually want to turn a little bit to news, because as we go forward and as we clarify this transition to our wonderful members, we are going to go back to being focused on the names and the news that's impacting these names. So with that being said, guys, let's talk about the markets. We are seeing a little bit of a bounce-back from yesterday's trading session. Bob, I want to go to you first to get your technical approach to this market.
BOB LANG: Yeah. So what we saw yesterday was another severe breakdown like we had on Thursday of the markets, and we fell below some key moving averages. We had a nice bounce back on Friday after Thursday's huge reversal. It was a 7:00 AM reversal. But we have volatility in the 20s right now. So 22, 23%. So we could expect big moves.
Now increases in volatility, people seem to relate to, oh, the market's going to go down. It doesn't necessarily happen that way. What increasingly volatility means is the ranges are expanding. So instead of maybe an average range that we had like in August of about 15 handles or 15 points in the S&P 500, now we have an increasing range of about maybe 40 to 45 points.
Now most people, most everybody is risk-averse and they don't like to see big swings in their portfolios. And the feeling that we have when the market is going down, a large amount is far more overwhelming than the feeling we have when the markets are up. Think yesterday and today. So yesterday, at one point, the S&P 500 was down about 70 points. The Dow was down close to 450 or 500 and today we're bouncing back. I think the feeling of despair was far stronger yesterday than the feeling of joy and euphoria that we're having today.
So to answer your question about the technical condition of the markets, we're still in a downtrend over here. The markets have not turned around to done an about face to turn right back up again. And so we're just waiting for that to happen. And if that does happen, we can turn right back up. Maybe we'll have a nice rally into the end of the year. But until it happens, I need to wait and see the whites of their eyes so to speak, to make sure that I get on the right side of the market.
KATHERINE ROSS: So Chris.
CHRIS VERSACE: So I would take issue with the words a little bit of joy today. I don't know that we're seeing that. I think if anything what we're seeing is a little bit of a relief or recovery, if you will. If you look at what really drove yesterday, a lot of the big tech names sold off, some of the reproaching correction territory. There might be some bargain hunters out there.
But when we look at the news flow from this morning, everything from what we saw on the market services data for September to what PepsiCo said, McCormick & Company said last night, Pack are cutting their outlook. I think it's just a little bit of, maybe we'll get a little breath here. But I think, ultimately, we're going to continue, to as you pointed to, meander a little bit in the near term. We've got some big economic data coming later in the week.
Unfortunately, what we heard from the September services index from market, not all that positive. They said that hiring was up fractionally during September. I think people are going to wind up revisiting some of those expectations for September job creation that at last I looked for Friday's employment report, it was plus 500,000. So I think people might be getting a little more concerned about that.
We've also had some other ripple effects over China real estate overnight, with another company missing debt payments. And then of course, Washington continues to be a quagmire when it comes to the debt ceiling. So I think folks are understandably a little nervous, perhaps there's a little bit of fear in the market.
KATHERINE ROSS: I promised these members a debate and we're already getting it on day 2. So with that being said, I do want to continue to get a little bit of different perspectives when we move on to Facebook, because Facebook's been a laggard, the stock's been a laggard.
The new cycle around Facebook, I think we can all agree has been extremely negative between the whistleblower; and then Facebook, WhatsApp, and Instagram being down for over six hours yesterday. Chris, I'm going to start with you looking at the fundamentals here, I think I saw this morning that it's 15% off of its highs from September.
CHRIS VERSACE: Yeah, look, when you look at Facebook, it's a cult stock, You either, you love to loved it or you hate to love it. It's very polarizing in that regard. I think, though, when we look at it, one of the things we've been hearing about is supply shortages, input costs risings, and stuff like that. This is a company that isn't going to be impacted by that at all.
If you think about the service that they have and their revenue stream, it's really driven, at least today, based on advertising. However, that is where the whistleblower and the outage come into play. Just two quick thoughts there; one, the outage without a doubt is going to impact revenue for the current quarter. So there is a risk that revenue expectations are going to need to come down.
But the whistleblower, what that kicks out and the incremental cost to comply with any measures that might be had, whether they're mandated or their self-imposed by Facebook themselves, that's going to hit the cost line. And we've seen them react this way in the past. So I'm less bullish on them than I probably would have been a few months ago. And I know Bob has some concerns about the chart.
BOB LANG: Well, the technical picture of Facebook is extremely poor right now. Where we're in a no man's land. But heading downwards, we're right in between the 100 and the 200-day moving average literally right in the middle yesterday was a huge volume day, and huge amount of selling, institutional distribution clearly.
And today, we're getting a modest bounce back, but it's still just an inside day over here. So it's really not saying anything more than probably just a bit of short covering. And obviously, we know short covering can lead to rallies eventually. But for Facebook right now, once it broke that 50-day moving average, I'm looking at it right now, was about a couple of weeks ago. Once it broke that 50-day moving average, you never even really challenged it again to cross back upwards. It was really in trouble just a couple of weeks ago. So I would say that we have to take a real careful look at this.
The technical picture is not good. We would have to get back above the 50-day moving average for me to be satisfied that the stock is going to go back up, and that's coming in at around 362, Chris. So it's about 329 right now. We'd have to go up another 10% from here. And as Chris pointed out, the catalysts are not very positive right now for the stock other than maybe they're going to come out with a good blowout number. But are we going to wait for that? Is that something we don't really want to rely on? I'm not so sure.
CHRIS VERSACE: I think the other point to make on Facebook is at least walking into the portfolio, it's a relatively small position. It's racked up, credit where credit is due, monster gains. It's up about 400 some odd percent. So I think the question that I sit back and struggle with is, OK, how much better is it going to get? Are we better off in a turbulent market, perhaps raising some cash and thinking about positions we can do that with, so we can pick up better position companies for the next 6, 12, 18 months.
KATHERINE ROSS: I think that you guys both make good points and it's one thing if this was a one off. But we know that Facebook's had PR crisis after PR crisis in the last year, if we're not even going back the last five years. So it's definitely something that we haven't quite seen management handle yet. So I'll be waiting to see what you guys decide to do with that position in the portfolio.
But Bob, I want to turn back to your technical analysis, but I'm going to go to another name in the portfolio, and that's Salesforce, because yesterday you did put out a note looking at Salesforce chart. You did say that there's a risk of sellers coming in, but there's also the benefits of a potential move upward. When you're looking at Salesforce, how do you balance that risk with that possible benefit?
BOB LANG: Right. So what you'd have to do is, from a technical basis Katherine is, identify some levels where the stock can reach some support. And I'll give it a little bit of leeway, a little bit of liberal move, so to speak. And to let it go as far as it will. But once it reaches those levels, it's a red light. And you've got to just cut the position off.
I noted yesterday in Salesforce chart, it had pulled back below the 20-day moving average, but recaptured it last week and followed through real nicely on Friday. So until it breaches that, and maybe even a little bit below there to some more support levels, it's still making higher highs and higher lows, which is what you want to see in a strong stock that's making moves towards all-time highs. So I do like, Salesforce, is probably one of the better-looking charts that we have in the portfolio.
And unless and until it breaks down, I think we've got to stay with it. In addition, some of the other competitors like a Workday, or Datadog, other names, IBM, has actually been fairly strong. Oracle's another strong one, but it's also a competitor, have not fared quite as well as Salesforce in 2021. So I'd give Salesforce the benefit of the doubt here being the big dog, the big leader in the space of cloud and computing. And I certainly think that as long as the chart is supportive of it, I think that we'll probably stick with it for a bit longer.
KATHERINE ROSS: OK, so Chris I'm going to turn to you, but I'm going to change names on you. I was reading your morning note and I did see that you noted about McCormick CEO, Lawrence Kurzius, talking about supply chain issues and basically saying, at the end of the day, the issue that they're facing is getting supplies from point A to point B. That's obviously a paraphrase of his direct quote. But there's only so much that a company can control when members are looking at earnings season and companies earnings reports, are supply chain issues a big part of this earnings season?
CHRIS VERSACE: I think they hit the nail right on the head, Katherine. It's probably one of the top two items that people are going to be focused on and what it means, not just talking about it but what's the impact for the September quarter, and what's the risk to the expectations, more importantly, for the December quarter.
Remember, this is really moving and it's really come on stream in the last 4 to 6 weeks. We haven't really seen estimates, whether it's for individual companies or the S&P 500 really moved down aggressively to reflect the comments that we're now hearing. This is one of the harder things in assessing a company, because we can track rail car traffic, we can track what's going on at the ports, we can track monthly truckload data as well.
But exactly how it's impacting each individual company, what they're doing to offset that i.e. paying premium freight or doing something as drastic as what Costco did, which is announced that it is actually increasing the number of tanker ships it's using to bring product over in time for the holiday shopping season. So I think this is probably one of the biggest risks, and it's going to result in probably some downside expectations for companies as they report their earnings.
KATHERINE ROSS: OK, so let's turn our attention to Washington, Bob. Yellen on CNBC This Morning said that she doesn't really support the trillion coin. She also reiterated that the US could face a recession if Congress doesn't raise the debt ceiling by October 18. Is this a concern to you?
BOB LANG: No, not really. I think that politicians once again playing politics. We've had Treasury Secretary in the past get caught in the crosshairs here more recently when President Obama was in office. His Treasury Secretary Jack Lew also ran into the same problems that Janet Yellen is. So dealing with the very stubborn Republican Senate at the time, the Democrats tend to be just as stubborn. So fair across the aisle.
But I think at the end of the day, they're going to get a deal done. They're going to come in with a sweeping 11th hour decision to say, OK, we're going to raise the debt ceiling. They use this as a tool to try and look good in front of the voters and also try to get certain legislation passed or certain legislation not pass too.
But at the end of the day, Janet Yellen is supposed to be out there raising the red flags and telling everybody that this is very serious. Of course, it is. But in 240 something years of our United States of America, or 250 years of the United States of America, we haven't not paid our bills. So I don't think 2021 is the year we're going to start not paying our bills.
KATHERINE ROSS: So we answered a couple of questions that I've gotten out of the 100 at the beginning of the show. But I want to bring our questions back from members, because I do now want to focus on the names-specific questions. With that being said, two names came up the most that members are looking at, and that is AEO and Wynn. A lot of members have told me that these are the two names causing their portfolios to go into the red currently. So they're wondering how you two plan to approach these two names, and is it time to exit?
CHRIS VERSACE: Great question. I think when you look at the performance in the portfolio, there's a lot of good things in there. But I think we can all agree that those are probably the two biggest dogs inside the portfolio. And as we talked about yesterday, I am concerned about cotton prices, I'm concerned about supply chain issues.
And I think that Bob has some concerns on the charts for both of those, and I would say that we-- remember, what I said earlier, Katherine? That we're not going to sit by and we're going to let stuff just happen, that we're actually going to do the right thing, be prudent investors for the subscribers, stay tuned.
BOB LANG: I think people have to understand, when I do chart analysis, I'm going to teach this hopefully down the road, that the price action tells you what is going to happen in the future. I think there's a lot of people out there who don't believe that. I certainly do. And so I think when you see the action in the chart, when you see the price action, the volume and so forth stepping up, it's telling you a story. It's telling you something that is going to be happening down the road.
So if you look at a chart like AEO or the previous name that you guys are talking about, McCormick, or if you look at Wynn, a stock is showing patterns of lower highs, lower lows, a downtrend pattern, a channel, and so forth, all the negative bearish types of patterns that we have out there, it's telling you something. And what it's telling you is that the big money is coming out of the stock and creating a lot of excess supply.
When it comes down to a technical analysis, is all just the basic economics principle here of demand and supply. So when there's a lot of supply and there's not a lot of demand, you see prices falling. And that's just what we've seen happen with these two stocks. And why is there a lot of supply created? It's because big institutional money, large hedge fund managers, mutual fund managers, pension funds, charitable trusts, banks, European banks, so forth, they don't want to hold this stock anymore. And if they don't want to hold the stock anymore, why should we?
And so these are names that we have on our list to review carefully here and to see if-- listen, if big institutional money doesn't want to hold it, our AAP subscribers shouldn't be holding the name either. Period, end of story. And that's what we see in the charts.
CHRIS VERSACE: Stay tuned, Katherine. Stay tuned.
KATHERINE ROSS: I'm staying tuned. But with that being said, Michael P, who is 63, and I specifically want to say that because it rhymed, he has been looking to get answers to a simple question, which is that he's got a lot of cash on the sidelines right now and he's wondering whether or not it's time to deploy that cash and put it to work or if he should wait a couple of weeks.
CHRIS VERSACE: Bob, you want to go first?
BOB LANG: I would say, listen, we're in a Fed-driven market, liquidity-driven market. The Fed has been providing a lot of liquidity for this market, and we're right on the cusp of a policy change that's going to be happening. I know they've been telegraphing things. They've been talking about taper possibly coming up. I think Chris said as early as November.
And when the market sniffs out these changes over here, there's going to be a dramatic shift in how we have to attack the market. And I think I spoke about this yesterday, and it's best to be a little bit more patient here. So I would suggest and recommend being patient, wait and see how things shake out here. If they do start tapering, the market is not going to like it at all. If they announce it, maybe towards the end of the month at their next meeting.
There could be some changes in the Fed too. We don't know. I think yesterday they announced that the Inspector General is going to be investigating the trading that was going on among the Fed governors, and something that's not being talked about quite a bit at all. And could Chair Powell be replaced? Did he do something wrong? I don't know.
We'll soon find out. Maybe two or three of the other Fed governors have done something wrong and they may have to make some drastic changes to the-- I know two of them are out, or soon to be out. But these are things that we have to think about. And so I think maybe a pause right here, just to step back and wait instead of throwing capital in there right now would probably be the best way to go.
KATHERINE ROSS: and the two Fed presidents-- sorry, to cut you off, just one second. Just going to clarify really quickly. It's the Dallas Fed President Kaplan and the Boston Fed President Rosengren who are set to retire this month. Oh, sorry Rosengren retired at the end of September, I believe.
BOB LANG: And then there was another Fed governor, Vice Chairman Clarida came out and released some trading that he did prior to Feb 27 of last year. So it's just he did some trading with his mutual funds or so forth, shifted money in, shifted money out before Chair Powell came out with a big bazooka that they came out with to put a floor underneath the economy. So a little skeptical from my viewpoint.
KATHERINE ROSS: So, Chris, let's go back to you.
CHRIS VERSACE: Oh, I was going to say that I agree exactly with what Bob is saying. But I would also say that this earnings season is probably going to be one of the more volatile ones that we've seen. The last couple, we've had the excitement, the euphoria of the wane in the virus, the excitement and euphoria of rising vaccinations and reopenings. And now we're contending, not only with some impact of the Delta variant, the economic data has been coming in lower than expected.
We touched on that in a note to subscribers last night. We saw it again this morning. And again, the litany of comments that we're getting from companies regarding those same issues we talked about earlier, Katherine, supply chain, transportation costs, rising input costs, I would suggest that subscribers do what we're going to do, which is reevaluate some of the existing positions that we have, as well as build our shopping list so we can pounce when the market finally stabilizes in the coming weeks.
KATHERINE ROSS: So speaking of building shopping lists, Sheldon H is curious about your thoughts on Amazon and Google, and whether or not you guys would nibble at these levels?
BOB LANG: Well, from a technical standpoint, Amazon's just been, it's really neutral to bearish right now. It's below a lot of moving averages, which you don't like to see. And big institutional money has been plowing money into this thing up until the middle of 2020, and it's been going sideways right now. So I'm not inspired by any confidence of the price action in Amazon.
Google on the other hand had a really nice run up to all-time highs recently around 2,900 or so, but it's cool off quite a bit, and it's had some fairly large distribution over the past couple of weeks, pulled back under 2,700 yesterday, and it's making a little bit of a comeback today. But these wild swings are not anything that this stock is used to, 2% to 3% moves in a day. So we'll have to see what happens if it can settle out over here.
One thing I never really want to be short, many things, especially Google or Amazon going into earnings season, the chart is, for Amazon, is probably telling us that the expectations are rather low. And correct me if I'm wrong, Chris, I think they lowered guidance for this coming quarter back in July. So maybe the expectations are so low there that maybe the bar is set where the stock can maybe pop right after earnings, who knows?
CHRIS VERSACE: I think that's possible. I think we always have to remember that the risk to Amazon's earnings is not so much on the top line historically. It's on the expense line where they really talk about ramping up the number of warehouses, or other services, or investing for future businesses.
And it's possible that given the risk to the holiday shopping season, again, from the supply side, not Amazon but just in general from the things we've been talking about, that they might look to step things up again in order to do what they do, which is, in tough times, back up, roll over their competition, back up, roll over them again and allow them to gain market share down the road.
Long-term? Continue to like Amazon. I think the one business that they're increasingly focused on that is not getting as much attention is what they're doing in the health care space. And from my perspective, when you-- well, one of the things Amazon's awesome at is they remove transactional friction. It's so easy. And pairing that in with health care, I think is a secret weapon.
Also too, we know Amazon Web Services is going to continue to benefit from the overall adoption of the cloud and the big JEDI contract that was canceled with the DOD is being able to rebid in individual contracts. So that's another potential upside for Amazon. But I would not necessarily jump in right here right now. As far as Google goes, look, take my comments earlier. If Facebook is going to have some issues with advertising and companies want to continue to reach consumers where they are, that's increasingly digital, where else are they going to go?
KATHERINE ROSS: All right, members. We did go a little long, but I think that this show has been incredibly valuable, not only to hit on some of the portfolio names but also to get you guys clarity. And with that being said, if you do have questions, please reach out. You can reach out to us on Twitter, @TSTALert and @bykatherineross. But you can always email me at Katharine.email@example.com.
Bob and Chris, thank you as always for your insight. I do feel like we got a really good mix of both technical and fundamental insight, and I'm excited for tomorrow's show. And I'm excited to see, and I think that I can speak for members here. I'm excited to see what happens with this portfolio going forward. So thank you guys for joining us today.
CHRIS VERSACE: Thanks, Katherine.
BOB LANG: Thanks, Katherine. Thank you, everyone.