Weekly Update: 7.5.18

"Freaky Friday" RISK Comes WAY Down

Dear Subscriber,

With the market absorbing the Trade Tariff round on Friday, the Micron case limited to about its DTC products and NOT its OEM products (DTC is 1% ish), the ADP and other job indexes NOT running hot the biggest issue that remains is 3%+ hourly wage growth which we still rate more than likely.

Bottom line our Freaky Friday forecast has been de-risked with all the above and the Fed coming out saying "trade risks are growing and we will NOT raise rates if they escalate." There will be no miracle trade agreement on Friday but the Mexican/Chinese/EU targeting of Trump base industries IS starting to get the affected industries to start wailing about lost jobs. As we all know now Mr. Trump governs for the approval of his base AND he is depending on the growing economy to keep the House and Senate in GOP hands. 

That means the market is expecting him to step back the threats and tweets as the furor and wailing from the affected industries gains steam and becomes "the story." 

Action to Take: BUY MU under $55 with $90 target. Our Plan is to add QQQ put options that expire in late October.  But I want to execute that trade when we are closer to OVERBOUGHT than our currently oversold conditions. Here is the QQQ chart; it held support nicely. 


Here is the latest on Micron BTW. The temporary reducing of its Direct-to-Consumer brands will RAISE DRAM prices somewhat. Since Micron is 70% DRAM sales, they are NOT changing any forward guidance.

Here’s a roundup of the analyst commentary post the breakup announcement yesterday.

Morgan Stanley, Joseph Moore

(Equalweight, price target $75)
The short-term impact should be largely inconsequential, as the injunction appears to affect MU’s "Crucial" branded business, not its OEM segment

“Crucial” is MU’s consumer brand for selling its memory solutions at retail, so this seems to have little impact on MU’s business of selling memory to electronics customers

MU likely has low-single-digit exposure to “Crucial,” and the 26 products are probably a small minority of that; any lost sales would be compensated for by reallocating that memory to other customers or geographies

Stifel, Kevin Cassidy

(Buy, price target $108)

This could turn out to be a buying opportunity, as the injunction may be a “paper tiger” targeting less important MU products

China’s aim may not be to bar shipments of MU’s DRAM, but instead part of a strategy to push the firm toward partnering with China semiconductor foundries, which could speed up the country’s internal semiconductor industry development

Mizuho, Vijay Rakesh

(Buy, price target $72)
Investors should buy MU on the pullback, as this news may simply be “another minor blip on the radar” given MU’s market position and IP strength

A supply-chain disruption could be good for NAND/DRAM prices; if the scope of the injunction is narrow, it would have little impact, and if the block on sales is bigger, it could cause DRAM prices to spike given limited availability

The lawsuit only asks for compensatory damages for impacted products, IP and royalty of about $41.7m, which seems small relative to investor concerns.