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Mexico Tariffs, a Black Swan? Trading Zuora: Market Recon



He saw the headline. It had to be some kind of joke. I thought. I waited. Are we not trying to get the USMCA (also known as NAFTA 2) ratified this summer? Did not it seem that progress had been made on the Canadian side? The reaction in the futures markets of the US stock index told the truth. This was not a joke. Asian markets and European markets would stumble. Short weeks are always long, they say? This one has just lengthened.

Using Twitter as a means to spread news, President Trump announced the escalation of the trade war … with Mexico. The United States, on June 10, will impose a 5% tariff on all imports (as in all that sucks) of Mexico. This tax on cross-border trade will increase in increments of 5% every month thereafter, the first day of the month, until reaching 25% on October 1. Of course, this is related to the crisis in the southern border of the USA. UU., And if Mexico, in the opinion of the Trump administration, adopt effective measures to alleviate the migration of illegal aliens through that border, then these tariffs will be eliminated.

By the way, Mexico is the second most important trading partner for the US. UU., Exporting $ 346 billion in goods across the border in 2018. Mexico is number one for agricultural products. The prices of your food (not just the food) are about to go up. Ah, and the United States Trade Representative, Robert Lighthizer, sent the necessary letter to the leaders of the United States Congress that opens the ratification process of the USMCA. The objective would have been to achieve this agreement before the summer break. Yes, Congress goes into summer recess, something like what the rest of us did before we grew up.

Black Swan? This marks the beginning of a new era, an era in which the president is willing to use tariffs for purposes other than commercial affairs. This has the potential to disengage a large number of partners on many fronts. It could be a real doozy. At some point, the branch breaks. Investors should observe the areas around the SMA for 200 days and / or the SMA for 40 weeks for both the S & P 500 (2775, 2769) and the Nasdaq Composite (7552, 7496). These are the most important large-cap indices, and have found recent support at these levels. This morning, we can look at those levels. If they can not be taken again, our twentieth-century Italian mathematician would make us see SPX 2720 and then 2650. Please, do not make me see below 2650 for help.

After a long time, small capitalizations and transports delivered them focused on the lines in the sand, and can expect to see a greater acceleration in those declines, since these actions will probably act to slow down even further the economic growth that is already slowing considerably. .

My thoughts on the further deterioration of the commercial condition? I can see completely where the position came from in front of China. At least there is longstanding evidence of anti-competitive and even abusive practices in commerce. I do not believe that any sensitive being can deny the crisis on the southern border. The problem is that a large part of the flow of illegal immigrants is not of Mexican origin, which also presents a problem for Mexico. Due to the environment created by the old NAFTA agreement, many US companies that include many small US companies are set up in such a way that they take advantage of the existence of a North American free trade bloc, and there may not even be a Domestic Option where these small entrepreneurs can appeal. It would probably have been extremely useful if such a move had been telegraphed long before the implementation. This is going to hurt, gang. Swans are graceful creatures. This will gracefully place a minus sign in front of your P / L.

Guy makes me wonder

What is trying to force the administration here? I want to say, in addition to the open reason to advance in the deceleration of the illegal traffic of human beings, drugs and potential terror in the border. Could this be an attempt to force the Fed to take action? To force inflation at the consumer level, yes? We have written here often about the security performance curve of the US Treasury. It is absolutely scary this morning. The 30-day T-Bill now yields 26 basis points more than the seven-year note, 17 basis points more than the 10 years (now giving up less than 2.16%), and incredibly only 27 basis points less than the 30-year bonus. years. Let me clarify that last point. Providing the Treasury Department with its mbad earned for an additional 29 years and 11 months will give the investor a huge 2.6% compared to more than 2.33% for a 30-day document. Again and again I noticed that the Fed and the Treasury needed to repair the yield curve. They have not paid attention to this message. Now, because of their negligence on this point, the mbades will suffer.

Since Thursday (yesterday), the probability of a cut made to the Federal Reserve Funds Rate (as established in futures trading in Chicago) has increased from 10% to 20% at the June 19 meeting. One has to wonder if that is really the intention here. Now, according to these same futures, there is a 91% chance of at least one rate cut this year, a 60% chance of two rate cuts and a 24% chance of three rate cuts. Even a market has been opened for the possibility of four. Federal Reserve Governor Richard Clarida spoke from New York on Thursday. Basically, Clarida delivered her speech without making headlines, then, during the Questions and Answers session, she freed herself. The high-ranking central bank allowed the Federal Reserve to be "very much in tune" with the risks to the economy and domestic inflation, and allowed there to be a reason for a more accommodative stance on monetary policy.

The Atlanta Fed GDPNow model has been a reasonably accurate model for economic growth in recent quarters. Much more accurate than competitors in my opinion. This morning, the Economic Analysis Office will publish its April data for Personal Income and Expenses, as well as data that is very focused on PCE data. That snapshot of GDPNow is now 1.3%, but Atlanta has not reviewed this image since last Friday. Surely they will do it this morning. Personal spending that is expected to decline from March will not help here. The central bankers will be attentive throughout the year Core PCE print. That line is running at 1.6%, and the expectation at this moment is that this is where it stays.

The Treasury could help here, even if the Federal Reserve reduces short-term interest rates, by overdrawn 10-year and 30-year debt, while yields are depressed. As perverse as it is, and I understand that it is, the time has come to seriously consider a broadcast of 50 or even 100 years. The problem is that such behavior would only allow even more irresponsible behavior on the part of policy makers, especially if it developed well. It has to be considered through, in my opinion. Too late to buy gold? Probably not.

Addressing Zuora

I was on a conference call when Zuora (ZUO) reported financial results for the first fiscal quarter. EPS – $ 0.11, good enough for a penny. Income of $ 64.11 million (+ 22.2% YoY) that met expectations. Good. I thought, as I tried to continue my call from the back of a car and work with the other hand … maybe this will be fine. The markets quickly let me know that this was not going to be the case. Yes, I'm long ZUO. Yes, I named this action my 2019 selection for the year, and this action was winning the market until a couple of weeks ago. The fun stops there. This name, for me, especially in this environment of risk reduction, moves from my list of "hot tickets" to what will be for now … a project for risk management.

As followers know, I often work to reduce my net base in my long positions by selling positions at levels I think I would be willing to add, as well as in the calls that I hope will not be exercised against my position. These options expire. I keep the dough. My net base is reduced. This is the plan. In Zuora's case, the plan had worked well so far. Over time, I had managed my net base, below the $ 15 level. The $ 15 level had been my point of panic. More on that in a moment.

Although shares have fallen almost 30% since the close of Thursday in the first operations, there are some positive aspects. Subscription revenue increased 32% year-on-year to $ 47.3 billion. Customers with an annual contract value equal to or greater than $ 100K increased 24% year-on-year to 546 in total. The key negative conclusion would be a very important guide in the expectations of income for the whole year, in a range between $ 268 million and $ 278 million. The Wall Street consensus had been close to $ 292 million. The firm blames the lack of effective execution by new sales contracts. That sounds horrible, but the company is taking proactive measures to address this deficiency. Interestingly, the year-round EPS is still expected to print somewhere between – $ 0.40 and – $ 0.44. The Street is looking for – $ 0.42, so now there is a real downward guideline, which means that CEO Tien Tzuo should expect a margin expansion later in the year. The firm has not reduced either, but in reality it has slightly improved its expectations for cash flow throughout the year.

In summary, it would seem that reducing the guidance for year-round revenues by approximately $ 20 million has cost the company about $ 660 million in market capital. Unless the markets see something that I am missing completely, this liquidation is an exaggerated reaction to this news. So, how do I react, being my skin in this game?

A good pickle

First of all, I come in the long term on equity in a now disadvantageous betting base. Secondly, I need about $ 17.50 posts that will expire this afternoon. Obviously, either I have to buy them again at a loss, or buy the shares at that exercise price. Either way, my net base is heading north with a name that heads south in a market that is not helping. My point of panic had been $ 15. My two rules here are that I always respect the points of panic, and that I always try to limit the losses to 8% unless they happen due to overnight. On the basis of a brand for the market, this is a serious negative, as my P / L already reflects. In terms of real wind and losses, which was a 10% gain on Thursday, it looks like 6% of hickeys on Friday, even less than my 8% rule, if I can properly manage those positions. Fortunately, I also receive short calls of $ 22.50 and calls of $ 25 that also expire today. That helps, since they will expire without value, providing a 100% benefit individually.

For those who are not so entrenched in the options trade, obviously you will also have a problem here this morning. I do not worry about myself since I am quite sophisticated and consider myself a risk manager. For you, people, I deeply regret having brought you here. I made the call, I still think that the cloud and subscription economy are paramount for the economic future of the still young generation before us. I also like Tien Tzuo. I think he is a serious leader with a good idea. I will be slow to sell shares with this discount. In fact, I'm not selling shares to be honest. I'll have to manage those options, so I'll probably add at least some of those actions in what once looked like an attractive discount. I will almost certainly guarantee that I sell both the offers and the calls on the due date of at least three months if the premium is there. It may not be, especially on the call side, which is the safest side for those who are long, if they keep the size of that position in correlation with the share count of the equity stake.

It's Friday

They will come for us today, gang. They will try to hurt us. They will try to defeat us. They will never defeat us. They can not defeat us. For those who know us, we know that we are the wrong door to call. We do not know fear, fear is only for the wicked. Our hearts are pure. Now fight Fight as I have taught you. Fight next to me God bless.

Economic Sciences (All times of the east)

08:30 – Personal income (April): Expecting 0.3% m / m, Last 0.1% m / m.

08:30 – Consumer spending (April): Expecting 0.2% m / m, Last 0.9% m / m.

08:30 – PCE price index (April): Waiting 1.6% YoY, Last 1.5% YoY.

08:30 – Core PCE Price Index (April): Expecting 1.6% YoY, Last 1.6% YoY.

09:15 – President of the Fed: Atlanta Fed Pres. Rafael Bostic.

09:45 – Chicago PMI (March): Waiting 54.2, last 52.6.

10:00 – U of M Consumer Sentiment (March-F): Flashing 102.4.

12:00 – President of the Fed: New York Fed Pres. John Williams.

1:00 pm – Baker Hughes Rig Count (weekly): Last 797.

The highlight of today's earnings (Consensus expectations EPS)

Before the Open: (BIG) (.70), (GCO) (.03)

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