A Short Seller Says the Basement is Flooded

Morning Watchlist: Sunday Edition             

The Week in Review A quick note from Behind the Markets

The clocks fell back overnight, so you're reading this with an extra hour in your pocket. Good — you'll want it. The week ahead carries the heaviest exam schedule of the season, and here's the twist: most of the papers being graded are ours.

Monday after the close, Apple reports — and with it, the fate of a chipmaker we own. Tuesday, the country votes, and an annuity seller we own answers a short seller in public. Wednesday morning, McDonald's tells us how the value war is going. And Friday at 8:30 AM, the October jobs report all but settles whether the Fed hikes on December 9th — as of Friday morning, futures priced that hike near 90%.

Four catalysts this week. Four pairings.

Let's get into it.

1) The $113 Billion Question

Monday after the close, Apple hands in the biggest report card of the week — Wall Street expects roughly $113 billion in quarterly revenue — and for once, the suspense isn't about the quarter just ended. It's about the whisper that preceded it.

Supply-chain reports in October said Apple has asked suppliers to scale back component production, including cuts to chip-foundry orders reportedly equal to 15 to 20 million iPhones next year. The suspected culprit: memory chips. The AI buildout has made memory so scarce that iPhone prices went up, and higher prices appear to be cooling demand. (One aisle's cost is another aisle's boom — it's the same memory squeeze we own through Western Digital.)

We have skin in this game. On September 2nd we bought Cirrus Logic, the company whose audio and touch chips live inside the iPhone — 91% of its sales come from Apple — at about $109.51, arguing the fear was already in the price at 13 times earnings. The fear got louder: the stock printed a new 52-week low of $105.10 in mid-October, and KeyBanc walked away on the 19th. By Wednesday it had crawled back to about $114.

The pairing: Cirrus Logic (CRUS) — Buy (reaffirming September 2nd)

Here's our rule for weeks like this: a supply-chain leak is the neighbor telling you the bakery cut its flour order; Monday night, the baker speaks. Until then, the math hasn't changed — roughly 13 times next year's expected earnings (the S&P 500: 21), with about $1 billion of net cash on a $5.7 billion company that keeps shrinking its own share count. Cirrus takes its own exam Wednesday night, with the Street expecting about $540 million in revenue — inside the company's own guided range. The kill, plainly: Apple's holiday-quarter guidance confirming the cuts. If the baker says demand is fine, this stock is priced for a problem it doesn't have.

2) The Short Seller and the Jobs Report

The week's labor data arrives like a drumroll: job openings Tuesday, ADP's private payrolls Wednesday, layoff announcements Thursday, and the October jobs report Friday at 8:30. On Thursday we learned the economy grew 3.4% last quarter with core inflation at 3.1% — which is why December is now priced as a hike, not a cut. Higher for longer isn't a threat to everyone. For the companies that sell annuities — you hand them a lump sum, they pay you an income for life, and they earn the gap between the two — a higher rate is a wider gap.

We made that bet on August 25th: Jackson Financial, one of America's largest annuity sellers, at about $132. It closed Thursday at $135.76 — a quiet 3% — while the thesis got louder. Last quarter it earned $7.30 a share against the $5.72 expected, and the Street wants $7.24 more on Tuesday night. Against a $135 stock, that's under 5 times earnings. The S&P 500: 21.

So why is it still this cheap? Because a short seller moved in. QVT Financial has published two reports — September 17th and again Tuesday — arguing that Jackson's reinsurance subsidiary faces liquidity trouble. The analysts at KBW read them and said they contained "nothing new"; Barclays raised its target to $151 anyway.

The pairing: Jackson Financial (JXN) — Buy (reaffirming August 25th)

A short seller says the basement is flooded. Tuesday night, management opens the basement door with everyone watching. We stay with the Buy because the Street's own plumbers have inspected and shrugged, the dividend pays 2.7% while we wait, and the rate backdrop is the best this business has seen in years. The honest risks: QVT's math proving right — that's the kill, and we'd act on it — or Friday's payrolls coming in weak enough to knock December's hike off the table and the "higher for longer" premise with it.

3) The Burger War Comes to the Potato Aisle

Wednesday morning, McDonald's reports — and the number to watch isn't earnings. It's U.S. same-store sales, which slowed to +0.8% last quarter from +3.9% at the start of the year. Management's response was a declaration of war: "We will not get beaten on value." Every big chain is now fighting for the budget-stretched customer with discount menus and meal deals.

Price wars are terrible for the people fighting them. But notice what every value meal, from every chain, has in common. Fries.

The pairing: Lamb Weston (LW) — Buy

Lamb Weston is the giant of frozen french fries, and McDonald's is one of its biggest customers. In a burger war, the potato farmer sells to every army. Discounting is designed to drive traffic, and traffic is fry volume — whoever wins. On October 6th the company beat expectations and raised its full-year outlook on exactly that: North American volume gains. At about $53, this $7.3 billion company trades near 16 times next year's expected earnings — the S&P 500: 21 — pays a 2.9% dividend, and sits closer to its 52-week low of $37.62 than its high of $67.07. The wart we'll name: Europe's expensive potato crop dented profits last quarter and could linger. The kill: the value war failing — if discounts stop producing traffic and restaurant volumes shrink outright, the fry order shrinks with them.

4) Travel Week, and the Promise We Made

The travel industry files its papers in a cluster: Marriott Monday morning, Booking Tuesday night, our Expedia (an October 22nd Buy) Wednesday night, Airbnb Thursday night. And we owe you a grade — in Saturday's review we promised to read Norwegian Cruise Line's report closely before any upgrade to our October 1st Watch.

The headline was a clean beat: earnings of $1.12 a share against the 90 cents the company itself guided, ships 106.5% full, and a raised full-year outlook. The stock jumped about 11% by Thursday midday — call it 14% above our flag.

Then we read the yield line, as promised. Net yield — what a cruise line actually collects per passenger, per day — fell 6.5% last quarter, and the company expects another 6.5% drop this quarter, with a small loss to go with it. A ship that's full because the tickets got cheaper is a sale, not a comeback. Add $15 billion of debt — fresh money borrowed in October costs 8.75% a year — and the beat gets quieter.

The pairing: Norwegian Cruise Line (NCLH) — Still Watch (from October 1st)

The entrance we want: evidence that 2027's promised return to rising prices is real — bookings firming, not just beating a lowered bar. Until the yield line turns, the discipline holds.

Before You Go

That's the watchlist. Apple's Monday verdict on our chipmaker, a basement inspection at our annuity seller Tuesday, the fry maker that wins Wednesday's burger war either way, and a cruise line we're still not chasing. One theme this morning: next week, the market grades our homework — so we showed you the answer key in advance.

Housekeeping for the rest of the card: OPEC+ meets today, the midterms are Tuesday, and our own exam calendar runs Viper Monday, Modine Tuesday, CVS and Expedia Wednesday, and Brookdale Thursday. But the week's biggest moment comes last: Friday, 8:30 AM, the October jobs report — the final big number before the Fed's December 9th decision, with a hike priced near 90%. A strong print locks it in. A very weak one reopens the whole argument. Either way, it sets the table for the rest of the year.

Have a wonderful Sunday.