Clouds, bubbles, Economic noise, Fiber optics and more

Here’s the transcript of this week’s Trading With Cody Conference Call Q&A.

Hey everybody and welcome to the Trading With Cody live conference call, Cody Underground edition. I guess that makes it a potential podcast.

Let’s jump right in with the market. The bulletins are hitting right now as I speak that that the Fed is leaving interest rates unchanged. And that the Fed is calling first quarter weakness trends “transitory” according to the headline bullets hitting the top of MarketWatch.  Markets might move 50 points in one direction or the other because of that stuff, but don’t try to game it. Who knows? What’s everybody betting on? Is it good news or bad news?

You know at one time when I was on Fox, very early on like the second month into the show, we were still trying to figure out the format and how we would introduce the show and get started off on it each night. And, the night I am thinking of I had a guest host. It wasn’t Rebecca Diamond, it was someone sitting in for her. They just had her read through the headlines like “Stocks were up 60 points today because the Fed left interest rates unchanged and called the first quarter weakness transitory. Now, turning to economic news elsewhere unemployment was up 42 basis points.” And, I cut her off , as I went “wait, wait, wait.” I wasn’t trying to be rude, but I was trying to make the same point I am trying to make right now.

What is the idea for the average Joe or average investor or even Warren Buffet, great investor, or a day trader– what is the idea about them needing to know the month-to-month or quarter-to-quarter economic trends? The average person isn’t going to try to game the bigger cycles (although you know I am going to try and avoid the next crash and what not). But should the average person be doing anything like that or should they trim a little bit at the all-time highs and put a little in when people are panicking, especially at the lows, especially f you can catch the top and the bottom like we have over the last couple of cycles.

The point I am trying to make right now is that “The Fed leaving interest rates unchanged.” Is that bullish or bearish?

As you guys know, I don’t even the think the conventional wisdom about Federal Reserve rates is correct. The Wall Street saying is “Don’t find the Fed”. If the Feds leave interest rates unchanged right now, conventional wisdom is that that is bullish, that there is more free money out there. There is more cheap money for corporations to buy back stock and play balance sheet games.

On the other hand, if it was a strong Federal Reserve rate hike cycle, I’d personally would actually be probably more bullish about the markets near term or for the next year or two. The Fed, for the last twenty-five years has chased the bubble and then chased the crash (instead of fighting it or getting in front of it). I expect that is what we are seeing happen right now.

The Federal Reserve has cut back quantitative easing. They still haven’t unloaded their balance sheet, but they are no longer actively doing the buying back of worthless securitized mortgages and things from the investment banks and the “too big to fail” banks.  And, not just the mortgages, but securitized credit cards and all kinds of stuff that banks were heading to the Federal Reserve in the name of quantitative easing. That is no longer being done. That is a form of tightening then. If you take away a form of easing, then it is tightening. So we have already been in a tightening phase, as I explained to you guys in real time when four or five years ago when they stopped and cut back on quantitative easing.

Now, if the Fed were to unload their balance sheet and/or raise interest rates steadily from where they have been over the last 5, 7, 8 years at near 0%, it would probably mean the fuel for the stock market bubble we are living in right now would really be hot…catching fire. And, I think you’d really be bullish about the near term for the next year or two and really have the potential for a blow off top at some point.  The Fed leaving interest rates unchanged, same as ever was, I feel like we are in Groundhog Day.

Let’s use that for the market intro and I am opening it up for questions.

Q. Let me just cut to the chase. I just read your article today noting about $GIMO?

Cody:  Why am I not surprised it is a question about $GIMO (ha ha).

Subscriber:  I read everything you said and contributed to in the last questions that have come up over the last few days. I am not sure you answered this one? What has changed in your assessment, specifically on that stock? It isn’t my question specifically but from the chatroom. Here is the question the subscriber posted: “I don’t really know what has changed in Cody’s original thesis for the stock. I looked back, and Cody announced three tranches in $GIMO. Around Christmas 2016, we bought a ¼ tranche at about $47, then in early 1/2017, we picked up another 1/3 sized tranche around $4, then in the third week of 1/2017, we picked up another 1/3 sized trance around $32. The stock is now just under $31. Not a pretty picture, but certainly not a big step down when we were buying at $32. So, the question I have before I sell, is why the change in sentiment for TWC? If we are adding at $32 and dumping it all at $31, I would expect there to be some news. But, I haven’t heard any, so before I make my mess worse by selling and realizing the loss, I would kind of like to get Cody’s feedback on why we are selling. Has there been a significant change in the assessment?

A. It’s a great question and by the way I was going to get to it because that has been one fo those questions in the Chat Room that I need to address today. And, by the way guys, I am trying to be as active as I can in the Chat Room while I am traveling.

I am not saying I am running from $GIMO. I might buy it back in a month or two or six months even. More likely in a year, I could possibly buy it back if they do successfully get on to the Amazon Web Services freight train and start monetizing that. There are three factors that come together that made me sell it.

1. I got a little bearish about the markets when I heard Ben Bernacke doing victory laps and talking trash to the bears. Not just that, but the market in general.
2. And, I went back and read some of my articles from 2011 where I said, eventually, we will need to sell in this bubble. We are about to have a huge cloud bubble. I wrote an article in 2011 that I sent out the other day that I had read from and it made me think about that. We are six years into what I predicted would be a huge Bubble Blowing Bull Market and Cloud Bubble specifically in this case. And that is what $GIMO is in. It’s a cloud company. I also own $PANW. I own $AMZN. I own $GOOGL. All are having cloud service growth priced into their stocks now too. I have a lot of cloud exposure in my portfolio.
3. So, then I went “all right, let me step back and look at the portfolio?” What is the weakest part of my cloud exposure in my portfolio and it is hands-down $GIMO. $GIMO has disappointed Wall Street for two or three quarters. We’ve owned it every quarter and every quarter that stock has gotten hit hard. They are not doing a good job of managing expectations on Wall Street and we are basically betting on a ramp in growth in the latter half of the year and management hasn’t given me confidence to think “yeah, man”.

If I am sitting here thinking I need to reduce cloud exposure and management hasn’t given me much confidence. Let’s just step back. Let’s get out of it. Mea culpa. We are taking a 30% hit on it, 25% or 20% including the tranche and our lower end cost basis after it was hit last time. I tell you guys all the time that it is not science. There is an art to it. I am moving on. I can always revisit it. I don’t want to sit up at night worried about my cloud exposure. So, there you go. That’s what changed.

Subscriber response: So, with your note the other day and the information on cloud exposure, it’s more of a logic than I thought before, so thank you.

Cody: That is one of the problems with writing and communication in general. I wish I could have conveyed better when I wrote it up. I thought I did convey the logic, but obviously that is one of the things about doing this Q&As live now. I can really riff on it and not just hit 4-5 sentences. Speaking of which, we are going to start doing these live conference calls every other week. We will have the Q&A on the keyboard, or with the Trading With Cody app if you prefer, every other week.  You can always email me to at support@tradingwithcody.com or just hit reply to any of the alerts I send out and either Cathy or I will get back to you immediately.

What’s the next question?

A. Cody, $AAPL and $AMZN are both pretty much at all time high. I would like to lighten up a bit on $AAPL, since it is outsized relative to the rest of my portfolio and buy more $AMZN. While selling $AAPL near its all-time high is probably never a bad idea, is it basically a neutral move if I then use some of that money to buy more $AMZN near its all-time high? My thinking is that $AMZN probably has more % upside in the next couple of years than $AAPL does. Is this legitimate rebalancing move, i.e., to sell some of one and buy the other at the same time, or should I sell one and wait for a pullback on the other?

Q. No, it is not neutral at all because they are to very different companies. Whether both are at all-time highs and both are market mega caps — that doesn’t mean they are going to trade in tandem. You are reducing your risk in $AAPL and increasing your risk in $AMZN, clearly. If $AMZN triples from here and $AAPL falls 50%, you will feel like a genius and wonder why you didn’t sell all your $AAPL actually. But, if $AMZN and $AAPL both go up double in the next year or two it will feel like a neutral trade, but it is not. There is definitely a risk profile change in doing that.

I don’t disagree with the logic on the trade though. As you guys know, I’ve been really bullish  on $AMZN for the last six months at least and we have owned it for a long time before that. As you know I think that Alexa juggernaut and the potential for it to be a de facto operating system is huge and not to mention Amazon Web Services, Amazon Prime, Amazon Music and everything else Amazon is getting traction on. I actually like $AMZN more than $AAPL right now.  It doesn’t preclude the fact that I did trim 5% of my $AMZN this week, but that was because as someone else rightly noted in the Chat Room, I had recently trimmed $FB, $GOOGL and $AAPL in the last month or so when they were at all-time highs and I had not trimmed $AMZN because I remained so bullish on it for even the near term. But Amazon had run another 15% or 20% in the last month since then so, I just wanted to take off 5% and catch my breath on it. It felt good to trim a little $AMZN even though I am extremely bullish on it. [Cody says to himself: ‘But Cody, investing shouldn’t be about feelings’. I know, I know, I know.]

Q. Does Jack Dorsey recent purchase of $TWTR stock make it more or less likely that the stock gets taken out at some point?

A. Dorsey had bought more recently, but I didn’t see a headline that he had been quoted with some logic behind his buy. And, yes Cuban did buy and I did click through an article on that where Cuban said he did buy because he thought the company had finally figured out artificial intelligence (AI). You guys know, I’ve talked about the big data concept being the biggest driver for me owning $TWTR since we bought at $14-$15 a few months ago.

To go back to your question about Dorsey buying several million dollars makes it less likely $TWTR will be sold any time soon —  Dorsey would make plenty of money if $TWTR is actually going to be bought and it would look really bad if he was selling his stock in $SQ and buying stock in $TWTR and then $TWTR gets a bid. I can’t imagine that is that greedy to do that and to do that that blatant in a public forum for  a couple of million dollars extra if you were about to make a billion dollars anyway.

[Cody says under his breath: ‘Your honor, I object to $GIMO. Your honor, I object to $FIT.’ Just a little court humor, folks (ha ha)].

Q. I was wondering your thoughts about $AAPL’s earnings yesterday and $FB’s earnings coming in today after the bell?

A. $AAPL made tens of billions of dollars and it’s just amazing the amount of revenue and cash that these guys generate. When I bought the stock again, they were trading for less than the cash they had on the balance sheet because they were not generating any cash. It’s great. What else is there to say? It is amazing. $AAPL is at an all-time high and I certainly wouldn’t want to chase it right now. I do think it becomes a trillion-dollar company and gets to $1000. I do think it gets to a trillion-dollar market cap. Are they going to do another market split? I don’t care about that either. It just changes the numbers, their numerator and denominator.

$FB…It is coming up and it’s at an all-time high and it’s a big position for me. I hate it when it gets hit 5%, 10% or 15% after earnings. I’d love for it to pop 20% tomorrow and go to $170 and everybody freak out that is worth half a trillion dollars. More likely, I think it is down 2% tomorrow. They’ll beat by a little bit on the top line and a little bit on the bottom line.  Someone will not like the engagement numbers on Instagram because that looks bad compared to $SNAP and it will be down 2% or 3%. I trimmed some recently around $150 and if it goes down to $125 I might buy that back. If it goes to $175, I might trim some more.  But for now, steady as she goes and I wouldn’t try to game the earnings. My feet to fire is down 2% tomorrow.

[Cody says under his breath: $HUBS..Your honor, I object to $HUBS shorts, too. Yes, I do. It is painful. I’ll probably have to cover. I said I’d cover around $65 and now it’s over $65. It’s painful. I don’t have a huge short in it and we did short some recently and that’s painful. I’ll send out a trade alert if and when I cry uncle, which the elbow is twisted already so we will see.

Cody: Boy, did you see $AMD get slammed yesterday? Down 25% or something. I should have shorted it. We talked about it several times and I thought it would be a good pair trade for our $NVDA long.  Let’s see how $NVDA’s report goes and how the market treats it.]

Q. I would love your thoughts on the fiber optics space. A few of the stocks have gotten blown up lately because of the China showdown and I’d love to hear your thoughts. Is that why you don’t like that space other than it is commoditized too?

What’s the difference? It’s all the same thing right? I hold the fiber optic near and dear to my heart because it was the first industry that I really dove into and analyzed stocks. I was at JDS Uniphase and Cienna..there were so many of them that I can’t think of them all. Many of them went bankrupt or dropped their stocks, I’m not joking, 90% including JDS Uniphase and never came back.  You answered your own question.

I typically stay away from the fiber optic space because it is commoditized. You don’t end up owning your own platform. They can switch from one vendor to the next. They can start sourcing their components from someone else. There is always someone else leap frogging their technology. $CSCO for example has its own platform, its installed base is huge and they use fiber optics components from a lot of companies. You’ve heard of $CSCO and you’ve seen its sustainable success, but you’ve never heard of its fiber optics suppliers or their sustainable success. So, no, I don’t own of them right now and I don’t really have very much interest in digging into them very much for that reason. Boy, I am looking at some of these stocks down 20%, down 30% in a hurry.

If I were going to own any fiber optics”ish” play, it would probably be $CIEN. They are like $CSCO in that they have an installed base of fiber optics switches out there in the telecom network itself and some enterprise stuff too obviously. That would be my favorite fiber optic play still.

With that ladies and gentlemen, I am going to go get something to eat. Thank you all for joining today.  We will get this out today and probably get it published as a podcast to. Thanks for calling in.