Apple’s New Products, The Inverted Yield Curve — Explained

👋 Hello, in today’s update:

  1. Apple debuts four new products
  2. What is an inverted yield curve? And what should investors do about it?
  3. What else is happening?

1. Apple Debuts Four New Products

Apple is expanding its service line-up with four new products set to be released throughout 2019.

Watch the keynote

  • Apple TV+: Not many specifics, didn’t say how much it would cost??? They will have original content from Oprah, Spielberg, and Reese Witherspoon. That’s about all we know.
  • Apple News+ (The Netflix of magazines): Cost $9.99 per month. Combination of magazines like Time, Sports Illustrated, and Rolling Stone. In addition, they added publications like the WSJ, The Skimm, and TechCrunch.
  • Arcade: Made for gamers. One subscription, no ads — you can jump from your iPhone to your iPad — to your mac, and pick up where you left off. I took a peek. Their games look cool, but I doubt we’ll be seeing Madden, Call of Duty, and other popular games with this bundle. It seems they are curating the best indie games you find in the app store and sticking them in Arcade.
  • Apple Card: Apple’s take on a credit card. Built on simplicity, transparency, and privacy.
    • Looks great. Just like you would think an Apple product would look. Minimal design, no numbers, and limited text.
    • No fees, no hidden cost.
    • Real-time fraud protection.
    • Coming this summer.

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What We’ve Been Working On

ETF Database

ETF database

There are almost 2,000 ETFs in the U.S. Trying to sift through and figure out which ones are worth investing in is arduous.

So we’re building a resource that will surface the top three ETFs in a category and present basic information like AUM, expense ratio, top ten holdings, etc.

We include an ETF’s top ten holdings because it’s important to know what stocks your money is invested in, and ETF titles can be misleading.

For example,

If you were bullish on homebuilders, the top two ETFs are ITB (iShares) and XHB (SPDR). But their make-up is totally different.

ITB’s top five positions are Lennar, D.R. Horton, NVR, Pulte Group, and Toll Brothers. All those companies are actually “homebuilders.”

XHB’s top five positions are Masco (building supplies), iRobot (makes robot vacuums), A.O. Smith (makes water heaters), Whirlpool (makes dishwasher), and Fortune Brands (makes faucets and security systems).

There are only TWO homebuilders in the top ten positions. Those companies are in related industries and should benefit if homebuilders prosper but it’s not the same as investing in companies that actually build houses.

The bottom line is there are nuances in these ETFs and we’ll help you parse them out.

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Video: These oil companies offer attractive dividends; Facebook keeps humming

Good Evening! One housekeeping item before we get to today’s update.

I am trying out shorter emails, delivered two to four times per week, instead of one long email, delivered once a week. Each email will contain two to three items, instead of 10.

Let me know what you think.

Oh, and I am introducing videos!


Oil Companies are Printing Money, Again…

 

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Companies mentioned in the video

  • Exxon (XOM)-Div. yield: 4.74%
  • Shell (RDS.A)-Div. yield: 4.79%
  • Chevron (CVX)-Div. yield: 4.12%
  • BP (BP)-Div. yield: 5.66%

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A Look at Atlassian — Opening a Nail Salon — How to Stay Focused

Good morning, hope your week is off to a good start.

On to the update:


1. A $22 billion company you’ve probably never heard of

An overview

Atlassian develops software that helps teams collaborate on projects. They are a SAAS company (software-as-a-service). This means their products are stored and accessed via the cloud.

The next few slides are from a presentation they gave in 2017. You can view the whole presentation here.

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Rally Road…

Hello. Glad to be back! Hope you all had a great holiday season.

Table of contents.

  1. The S&P 500 tends to rally after big drops.
  2. EWA is holding on…barely.
  3. Buyers have stepped up again for Skywork solutions.
  4. Apple holds the average + some cool charts.
  5. Cheer up, the world is getting better.
  6. Fred Wilson’s predictions for 2019.

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Stability Leads to Instability

Important: We categorize investments in two ways. Strategic or tactical; occasionally, they can be both. Most of the trades we cover fall into the tactical bucket.

  • Strategic: Occasionally, we believe we have an insight into a company or theme and are willing to make a five to ten year investment to see if we are right. We are looking for businesses that have the potential to dominate their category and create a product or service that is not easily replicated.
  • Tactical: For these trades, we have a specific price target to take profits at and a stop to protect our downside. In simple terms, we try pick stocks that have the highest chance of going up in price, in a one to three-year time frame.

 

1. Stability leads to instability

The headline is part of a quote by the economist Hyman Minsky. He was referring to the economy in general but we can also apply it in the context of business.

When a business reaches a certain level of success, they can, if they aren’t careful, become complacent. They can lose focus on serving their customers and meeting their needs. And if they aren’t careful, competitors will come in and start encroach on their territory. This process could happen so slowly, that upper management might not notice.

Then one day… boooooom…They’re in a fight for their lives and their very existence is at stake. (think Netflix and Blockbuster or the demise of Sears)

Victoria’s Secret

Shares of Victoria’s Secret’s parent company, L Brands (LB), has fallen 45% this year and is one of the worst performing stocks in the S&P 500. In addition, they slashed their dividend and the leaders of both Victoria’s Secret and Pink resigned, reports Bloomberg.

How did it come to this?

Ed Yruma, a retail analyst at Keybanc Capital Markets, points out that making push-up bras, long a Victoria’s Secret staple, is something of an engineering challenge and a unique supply-chain capability. But newly popular styles like bralettes and sports bras can be made by many factories, he notes, and that has made it easier for new competitors to get in the game and tread on Victoria’s Secret’s turf.

In other words, they got complacent and didn’t innovate on the product that made them famous (push-up bra) and other companies introduced cheaper alternatives.

Dollar Shave Club

A good comparison is what happened between Gillette and Dollar Shave Club (DSC).

Gillette had firm control of the razor market, but many men just wanted a good enough razor at a fair price. DSC sourced cheaper blades from a South Korean Company, Dorco, made a viral YouTube video and sold directly to the consumer.

The result… They started taking share from Gillette. And eventually, Gillette started their own subscription razor business.

Today, any entrepreneur can build a Shopify store, source a product on Alipay, and set up shop in a few weeks. The advantage pre-internet companies had is slowly being eroded.

Down, but not out

All hope is not lost. They still have a dominant share of the underwear market and the most recognizable brand in the space. They have to get back to listening to their customers and serving them on their terms.

To conclude

Victoria’s Secret was built when the world was supply constrained (pre-internet). Meaning, the only place you could buy a push-up bra was a Victoria’s Secret store in your local mall or from their catalog.

Today, supply is infinite. There are a million places you can buy a product that meets your needs. In today’s world, the companies who are closest to the customer will have a leg up on the rest of the competition.


2. Toll Brothers tops analyst expectations

How a stock reacts to information is often more important than the actual information.

Toll Brother (TOLL) beat both revenue and earnings estimates from analyst but offered weaker guidance for the 1st quarter of 2019. Initially, this was seen as bad news, but the losses have been recouped and the stock is trading higher on the week.

How to trade it

Since 2013, this stock has traded in a $30-$40 dollar range; with a few spikes above and below those levels.

If you are aggressive, you could be a buyer at the lower end of the range ($30). Stopping out with a weekly close under $30, and looking for a rotation back toward the top of the range ($40). Or hold and look for a breakout and move back toward the 2018 high print near $52.

• The reward/risk if you target $40 is 1.28 (not great)—Meaning you would make $1.28 for every $1 dollar risked.

• The reward/risk improves to 3.97 if you hold until the 2018 high print near $52. You just have to estimate how probable that is…

Other ways to trade

If you want exposure to a basket of homebuilders (recommended), there are two ETFs you should look at.

  1. iShares U.S. Home Construction | Ticker ITB
  2. SPDR S&P Homebuilders | Ticker XHB

Important: The top three holdings for XHM are Lowe’s, Home Depot, and Williams Sonoma; only five homebuilders round out the other seven. ITB is a better pure play on homebuilders as five of the top six holdings are homebuilders.

Let’s take a quick peek at their charts.

iShares U.S. Home Construction | Ticker ITB

Thirty dollars is a crucial level of support for this ETF. A break below could see a move toward $22.50.

SPDRs S&P Homebuilders ETF | Ticker XHB

This chart is similar to Toll Brothers. Price is trapped in a narrow range between $32 and $38 dollars. And remember, this ETF is not a pure play on homebuilders. Home Depot is this ETFs largest position.


3. Technical analysis

XLE | Energy Select SPDR ETF

Where are we at?

XLE has been trading between $64 and $78.50 since March 2016. Currently, the price has tested the bottom of the range—$60—and held. For now…

Reward/Risk

  • Buying at the lower end of the range, $64, stopping out with a weekly close under $61.50, and holding for a rotation back toward $78.50 produces an attractive R/R of 5.8 (make $5.80 for every $1 dollar risked; in % terms it’s 22.60% on the upside and 3.90% on the downside) (see chart above).
  • A break under $64, could lead to losses down to $50, a -22% move to the downside.

Quick facts on XLE

  • Seeks to provide exposure to the energy sector of the S&P 500 index.
  • Gross expense ratio: 0.13%—You pay 13 cents for every $100 dollar invested.
  • Options available: Yes.
  • Dividend yield: 2.90%.

Important

Exxon Mobile (XOM) and Chevron (CVX) make up 42% of this ETF. Those two companies will have an outsized impact on its performance.

Additional information

XLE home page.


That’s all for today. Thanks for reading,

Caleb