September 5 Post

Hello Again,

 Looks could be deceiving. Common sense dictates that a storm like Harvey is extremely bad for property insurers. Past history shows a different story. State Farm the biggest with over $59 Billion in premiums, share price dropped from $94 to $92 last month. Second biggest Allstate (over $30 Billion in premiums) share price dropped only from $95 to $90.  Anyone expecting to follow in Barron Rothschild’s (around 1885) advice, “Buy when there is blood on the street”, would have been severely disappointed. All the real pros of the market are aware that insurance companies make use of these natural disasters to increase premiums for everyone and make much more money in the future. Since they have been down this road before and have no compassion for human beings, they know how to pay out the least. Adam Smith (“Wealth of Nations, 1723-1790) is the father of the free market economy. According to my former professor, in his last edition of “Wealth of Nations”, Adam Smith stated that if there are no government regulations and controls, companies will destroy most people (paraphrasing Adam Smith). “Absolute Greed”. Don’t forget what happened to Valeant Pharmacy (VRX). Their business model was to buy pharma companies with life-saving drugs and increase prices exponentially. Their first excuse, ”Others are doing it” and then the second excuse, “we are doing research”. Republican and Democrat candidates attached this company during the 2016 election. Hedge fund manager, Bill Ackman made many billions out of this process.

Warren Buffet, world’s best investor and 2nd richest man called Valeant Pharmaceuticals a “sewer”. On 5/1/10, their share price was around $15. On 7/1/15, it reached its peak at $257. Through sheer greed, most funds did not sell a part of their holdings to diversify-for which they paid a huge price later. When another Pharma CEO Martin Shkreli increased drug prices by 5,000% overnight, everyone started paying attention to Valeant Pharmacy.  First they blamed short sellers. Ex-CEO Pearson and ex-CFO Schiller were looked at by prosecutors. Within a very short period, the stock price tumbled from $257 to $9.25!!  96% drop!! When CNBC asked Carl Icahn if he shorted VRX, he replied, “I wish I did”. Then CEO Pearson who engineered this heartless venture got a heart attack. Through Goldman Sachs, Pearson had borrowed money on margin for the stocks of Valeant he held. Once Goldman Sachs gave a margin call and Pearson could not make the margin call so Goldman Sachs sold his holdings! Add to all that Pearson got fired from Valeant. Divine Justice? There is a “little” thing called, “bad karma”. “We reap as we sow”. In my past newsletters I covered this incident as it was happening.

 Storm Harvey did not trouble the stock market. Nuclear weapon tests and threats of North Koreas did not trouble the market. Feds on an ever increasing interest rates trend is not bothering the market. Historically August to October is the worst part of the year is not bothering the market. Welcome to a genuine stock market bubble!  Tulips, anyone?   In the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then dramatically collapsed in February 1637.  It is generally considered the first recorded speculative bubble or economic bubble (Wikipedia, “Tulip Mania”). This is not healthy for the market. This could end soon or go on for a very long time.

 Week ending 8/11/17, when stocks gave back 1.4%—the Standard & Poor’s 500’s worst week since November 2016—analysts picked up on the relatively large number of new 52-week lows on both the Nasdaq and New York Stock Exchange. Considering that both indexes were just a few percent off all-time highs, this was a concern. After all, if so many stocks were reaching new lows, it meant that the indexes were driven by only a small number of large stocks. This is called a narrow market, and it usually cannot continue climbing for long. Even worse, the number of new lows on each index was close to 5% of all issues traded. That conjures up thoughts of the infamous Hindenburg Omen, which looks for very large percentages of new highs and new lows at the same time. The theory is that when this happens the market is unstable and prone to a big selloff. Unfortunately for the bears, the number of new highs backed down to a very small number—which rules out a Hindenburg. Yet it still should be of concern that so many stocks are trading at such low levels when the major indexes are doing so well. With Monday’s rebound, the number of new lows dissipated, leaving the market in a bruised condition but still in a rising trend. Both indexes are back above their 50-day moving averages, too. (Michael Kahn, Wake Up Call/Barron’s,8/14/17).

 For 196 sessions, stretching back to before the election, The S&P 500 index had avoided falling in to oversold territory, essentially a standard deviation below its 50-day average. This was the 9th longest streak in nearly nine decades, and the longest since a 333 session run that ended in mid-1996, according to Bespoke Investment Group. This streak ended Friday when the S&P500 fell below 2429. Moderation of the bullish bent can be a healthy augurs well for the stock market’s health. On the other hand, it might mean the market’s Teflon phase, in which geopolitical risks and government dysfunction don’t seem to stick, is coming to an end (Barron’s Market Week, 8/21/17).

 It is hard to imagine with the major stock market indexes hovering near all-time highs, but there is a growing number of stocks whose market values have been cut in half. Bespoke Investment Group counted at least 20 Russell 1000 stocks that have declined 50% or more from recent 52-week highs.

 Once again, price of oil is nearing its recent bottom. We have to watch this closely. Due to low oil prices, we came close to having a meltdown in the bond market. Consider the ETF, “OIL”; it reached a one year low on 6/22/17 at $4.47. It went up to $5.33 on 7/31/17. On 8/30/17, it reached $4.72. This could provide us an opportunity to increase our holdings on Schlumberger, Exxon and Chevron- if the share price drops below our average cost.

 Due to greed, South Korean market was rising to new highs without taking tensions between the US and North Korea. A couple of months I was tempted to short sell the South Korean market by buying put options on the ETF, “EWY” but I did not follow through. From 7/24/17 to 8/10/17 (10 days), EWY fell from $71 to $66, that could have been a 100% profit on some put options. Since 8/10/17, EWY has been rising sharply which shows that they are not taking North Korea/US tensions seriously. With the hydrogen bomb test a couple of days, I placed an order for some put options on EWY (expiring January 2018) for a mere total cost of $65. In 1987, I was managing my father’s investment and since I was following the technical analyst Prechter, I knew that we could have a serious correction between August 2017 and November 2017 so I persuaded my father to buy put options on the US S&P500 Index. One day prior to the crash those were worth $1 per contract and the day after the crash the same options were worth $70 per contract! I asked my dad to do that as a hedge against all the stocks and mutual funds he owned.

GE- GE Cuts Wind-Energy Stock Stake by $30M. General Electric is big on natural gas and health-plan software, and less of a fan of a wind-energy stock. GE (ticker: GE), in some of its last investment moves under former Chief Executive Jeff Immelt, disclosed positions in Tellurian (TELL) and Castlight Health (CSLT) common shares while cutting its stake in TPI Composites (TPIC) by nearly two-thirds. GE unveiled in a regulatory filing that as of June 30 it held just under 900,000 shares of TPI, a maker of blades for wind turbines, valued at $16.6 million at the time. That’s a 2.7% stake, down from a stake of 7%, or 2.4 million shares, as of March 31 valued at $46 million.

The Journal has already noted that new GE CEO and Chairman-elect John Flannery has bought $2.7 million in shares for his 401(k) plan. But GE Vice Chair Beth Comstock has taken the opposite tack, selling 25,000 shares on Aug. 9 for $633,000, or $25.65 each. Why sell now? It’s Comstock’s first stock sale since Nov. 26, 2014, and she got a better selling price then: $26.82, on average. Our colleagues at MarketWatch have noted that she is seen by company insiders as a “close ally” of former CEO Immelt. Whether or not Comstock is less upbeat on GE, her transaction probably won’t take the wind out of the company’s sails.(Ed Lin, Inside Scoop.8/16/17) Warren Buffet’s Berkshire Hathaway dumped its 10.6 million share stake in GE in the 2nd quarter. Ge declined to comment on the move. The sale came in the same quarter that GE replaced CEO Jeff Immelt with GE executive John Flannery (Barron’s, 8/21/17).

IBM- Century-old IBM (ticker: IBM) has a product history that spans from punch-card tabulators to cloud analytics software, but over the past five years, it has been busy manufacturing disappointment on Wall Street. A remarkable 16 of the company’s past 20 quarterly financial reports have triggered one-day stock declines, averaging 4.5%. It’s a wonder that shares have lost only 28% of their value over that stretch. Now it’s time to buy. No, really. Three reasons: The shares are cheap. They pay a lot. And the main factor that has been pushing them lower is about to reverse. In short, investors could make 35% over the next year. IBM’s challenges stem from a long shift in computing power from hardware to software, and from local machines to the cloud. That has resulted in lower margins for many types of machines and limited growth for on-location technology services. IBM’s revenue has declined from over $104 billion in 2012 to an estimated $78 billion this year, while its profit has shrunk from $17.6 billion to an estimated $12.9 billion. Neither of those measures is an ideal gauge of IBM’s turnaround progress, however. Some of the revenue decline has been voluntary—the result of walking away from commodity hardware business. The profit drop has been skewed by tax swings, but even pre-tax profit has been pushed and pulled by things like restructuring charges and patent sales. A new analysis by Morgan Stanley finds that gross profit--that is, product- and service-level profits that don’t factor in corporate-level contortions—is both a relatively clean measure for tracking IBM’s progress, and one that has had a high correlation with its share price movements. It’s about to begin pushing higher for the first time in five years. IBM has invested more than $30 billion in what it calls strategic imperatives: social, mobile, analytics, cloud and security technology. Growth in these lines has been obscured by declines elsewhere, but is poised to begin shining through. Last year, revenue from strategic imperatives reached 41% of total revenue, up from 22% in 2013. This year, it could reach 51%. At the same time, a new mainframe developed to help protect financial services companies from cyber-attacks could bolster results in coming quarters. IBM’s most recent quarterly numbers, published last month, showed continued declines on total revenue and adjusted profit, and were poorly received by investors. But Morgan Stanley’s Katy Huberty saw something to like. Gross profit margin from incremental business came in at 90%, compared with 73% on average over the past three years. That’s a sign IBM is playing for profits rather than growth. She predicts a return to overall gross profit growth beginning in the fourth quarter of this year, and continuing into next year.(Jack Hough, “Ahead of the Crowd”,8/24/17).

Apple- Apple set a budget of about $1 Billion to buy and produce original content over the next year. The phone and computer giant could produce up to 10 television shows (Barron’s, 8/21/17).

 Have a great month!

Fernando

August 2 Post

Hi Again,

 For all the noisy drama in Washington, the stock market remains a picture of impenetrable calm. So far this year, there has been only four trading days when the S&P500 Index closed up or down more than 1%. That is just 3% of the time-well below the historical average near 24%, notes Mike O’Rourke. Jones Trading Chief Market Strategist (7/28/17).

 The stocks market had a strong first half (2017), with the S&P500 index gaining 8.2%-but less well known is that mutual fund managers cleaned up too. Some 54% of large cap managers beat their benchmarks in the first 6 months, the best showing in years, according to Bank of America Merrill Lynch. In fact, June 2017 marked the 4th consecutive month in which more than half the fund managers outperformed, the longest streak since BofA began tracking this data in 2009. The managers did it by overweighting 2017’s highflying sectors-technology, consumer discretionary, and healthcare. (Barron’s, 7/17/17).

 As tocks keep dancing around record highs, and the CBOE Volatility Index remains historically low, some investors are preparing for a violent end to one of the world’s most popular trades-shorting volatility. A one day S&P 500 correction of 3% to 4% correction could force some funds that short futures on the index, to cover their positions. That could make the Volatility Index (VIX) skyrocket. A chain reaction would likely explode across the volatility spectrum, and ultimately the stock market, pushing down share prices and boosting volatility further. (Steven M Sears, Dangerous Game: Shorting the VIX, 7/29/17).

 GSK (Glaxo Smith Kline)-  Britain's two big drug makers face very different challenges but they share a common problem: how to convince investors that their dividends are safe. With both stocks offering a dividend yield of more than 5 percent, AstraZeneca and GlaxoSmithKline provide islands of decent income in a sea of low returns. The chief executives of both companies faced a barrage of questions from analysts about future payouts and were forced to defend their dividend strategies at post-results meetings this week. AstraZeneca was grilled on the topic four times and GSK five times by analysts from lead Fears for AstraZeneca's dividend have been driven by its bombshell lung cancer setback on Thursday, while GSK's decision on Wednesday to overhaul drug research and move to a new dividend policy has raised doubts about its payouts.ing banks, including Goldman Sachs, UBS, Citigroup, Morgan Stanley and Deutsche Bank. For GSK shareholders the challenge is coping with a move back to the uncertainty of quarterly dividend declarations from 2019. In recent years, investors have enjoyed the safety net of a steady 80 pence a share annual payout, under a system put in place following the big $20 billion asset swap with Novartis that completed in 2015. GSK still plans to pay 80p in 2018 but thereafter payouts are uncertain and will be tied to free cash flows, after allowing for any acquisitions. M&A could become a more significant feature at GSK as it bolsters its pipeline in priority areas.(Helen Reid, Reuters,7/28/17).

 Twitter – Twitter looked like it had turned a corner since pushing close to an all-time low earlier this spring. However, its most recent earning report seemingly took away all the positive momentum. Analysts weren’t exactly positive about Twitter following the report. The company said that it had $0.08 in earnings per share (EPS) and $574 million in revenue, which compared with consensus estimates from Thomson Reuters $0.05 in EPS and revenue of $536.62 million. In the same period of last year, the social media company posted EPS of $0.13 and $601.96 million in revenue. Twitter is an investment in increasing social and mobile Internet usage, and could become the leading platform for real time multi-media distribution. However, slower user and ARPU growth than peers suggests Twitter's product strategies are not driving anticipated improvements. Also, video may prove to be a more competitive market for the company and growing EBITDA margins over product investment may cause company to fall behind competitors.(Chris Lange,24/7 Wall Street,7/29/17).

 GE- Shares of General Electric Co. (GE) continued their slide last week, losing about 1.5% on top of the 2.9% the stock lost in the prior week after a disappointing second-quarter earnings report. GE's year-to-date share price decline is now 19.21%, the worst performance of any of the Dow Jones Industrial Average's (DJIA) 30 components. Last week marks GE's second consecutive visit to the bottom of the DJIA rankings. Long-time worst stock, Verizon Communications Inc. (VZ) reported earnings last week and showed growth in subscriber numbers. That led to a weekly gain of 3.8% in the stock price. GE's headaches center around three issues: free cash flow, a weak forecast for sales in its Power segment, and remaining weakness in the oil and gas sector.(Paul Aisick,24/7 Wall Street,7/29/17).

 GM- Through the first half, U.S. auto sales were down 2 percent from a year ago, to about 8.5 million, analysts said. That's not too bad, considering last year was an all-time sales record. U.S. automakers have also shrugged off the decline in sales in part because most of the slowdown this year has been in less-profitable sales to fleet customers, including daily rent-a-car companies. While that’s true, it isn’t only fleet sales that have declined. According to J.D. Power and LMC Automotive, new-vehicle retail sales, not counting fleet sales, are expected to fall in July for the fourth month in a row. That’s a more accurate measure of true consumer demand, the research and consulting firms said.  General Motors said it reduced rental car sales by 69,000 units in the second quarter, in its second-quarter report on July 25. “Consolidated wholesales for Q2 decreased 99,000 units, primarily driven by decreased wholesales in North America related to the strategic reduction in daily rental car sales,” the company said.(Jim Henry, Forbes,7/29/17).

 Ford- Through the first half, U.S. auto sales were down 2 percent from a year ago, to about 8.5 million, analysts said. That's not too bad, considering last year was an all-time sales record. U.S. automakers have also shrugged off the decline in sales in part because most of the slowdown this year has been in less-profitable sales to fleet customers, including daily rent-a-car companies. While that’s true, it isn’t only fleet sales that have declined. According to J.D. Power and LMC Automotive, new-vehicle retail sales, not counting fleet sales, are expected to fall in July for the fourth month in a row. That’s a more accurate measure of true consumer demand, the research and consulting firms said.  Ford Motor Co. also cited lower fleet sales as a factor in slightly lower global market share in the second quarter, in a report on July 26. Ford’s global market share was 7.4 percent for the quarter, down from 7.5 percent a year ago, the company said. “Market share was down one-tenth [of 1 percent]. That was explained by the U.S., and that was explained by lower fleet, and that was explained by cars,” Ford CFO Bob Shanks said in a conference call.(Jim Henry, Forbes,7/29/17).

 Apple- Credit Suisse issued an “Outperform” rating on Apple on 7/21/17. Their message, “Our fiscal 3rd quarter 2017 revenue/earnings per share estimates are $45.4Billion/$1.60. We continue to see a high degree of pent up demand from the iPhone installed base, continuing in to the major iPhone 8 super cycle, with calendar 2018/2019unit estimates at 248 million/268 million, as well as a continued mix shift toward the highest end market. On the lower estimates, our calendar 2017, 2018, 2019 EPS go to $9.10, $11.89, $13.11 (from $9.50, $11.95, $13.16), respectively, but we reiterate our Outperform rating and price target of $170”.

Have a great month!

Fernando

July 3 Post

Hello Again,

Within the past 18 months, since our initial purchase, Bank of America, has risen over 83%. This was strategic. As the Federal Reserve increases interest rates to ‘normalize’, B of A is in a good position to take advantage of those moves.

 On 6/14/17, the Nightly Business Report announced that now 90% of stock investing is being done by machines or computers. From a contrarian perspective, this great for us! Why? Trends keep changing on Wall Street all the time and at times, history does not repeat itself so at such times, machines/computers/algorithms, go haywire and that creates opportunities for all of us. A good example is when the Shanghai market fell more than 8% in one day in August 2015. Algorithms could not foresee that it created many man-made disasters in the equity markets all over the world creating wonderful opportunities for human stock pickers.

 Margin debt (borrowing from a brokerage firm ‘through a margin account’ to make an investment) at the New York stock exchange reached a new high for the 4th month in a row, surpassing $549 billion (over a half a trillion dollars!!) in April 2017. Investors borrowing to buy stocks is a sign of bullish speculation. Yet it can be a poor market-timing indicator, since margin debt-like bullish sentiment-can stay high for a while. The last 2 bear markets occurred after margin debt reached records, notes Bespoke Investment Group, but 23.6% of margin-debt readings since 1959 have been record highs. (Barron’s, 6/5/17). This trend might continue for a while but this market is getting deeper and deeper in to bubble territory. As well all know, prior to 8% one day crash in Shanghai in August 2015, the margin debt level was sky high. Investors assuming that the market will continue to rise, borrowed against assets like houses and put all their savings in to the equity market. According to some sources, margin debt in China (PRC) in July was around USD $160 billion. Now the margin debt in the New York Stock Exchange alone is over a half a trillion dollars!!

 During the week that ended 6/16/17, the difference between the 10 year Treasury and the 3 month –the yield curve- fell to a spread of 114 basis points (1.14%), the smallest since July 2016 (Bespoke Investment Group). For stock investor such move could be scary because it suggests slower growth. Global central bankers suggesting that stimulus would be taken away triggered a global governmental bond selloff during the week that ended 6/30/17.

 The ‘Fab Five’ (Facebook, Amazon, Apple, Microsoft and Google/Alphabet) account for 56% of the $1.16 Trillion increase in market value for the NASDAQ 100 this year, and now make up 43% of the index. Back in 1999, the biggest five of that time (Microsoft, Qualcomm, Cisco, Intel and Oracle) also wielded colossal clout, making up 33% of the index. Their weight was pushing towards 50% in 2000-until the tech correction came. Will history repeat itself? (Mike O’Rourke, Jones Trading Chief Market Strategist, 6/12/17).

 Once again, on 6/14/17, the US Federal Reserve hiked interest rates again by 0.25% and expected to repeat the process 1 to 2 times in 2017. Historically, when short-term interest rates rise above long term rates, bull markets for stocks have ended and bear markets have begun. In recent months, the difference between short-term and long-term interest rates, called the spread, has narrowed in many countries across the globe. When the spread between these rates turns negative, it is referred to as “inverting the yield curve.”(Jeffrey Kleintop, Are bonds signaling a peak in stocks? , 6/14/17)

 It would be bad enough for the stock market if only the fabled Hindenburg (fiery disaster of 1937) Omen predicted a crash, but other technical market signals are also flashing that the market is at a cyclical peak. The Omen was triggered in October 2007 just before the crash of late 2008 and in March 2000, just before the dot-com crash. The Omen has its skeptics. A crash failed to develop three out of 4 times.(Bob Hoye, Vancouver Institutional Advisors/Barrons, 6/26/17).

This trend cannot last forever. Are we going to have a major but healthy correction to bring some of these investors to their senses or are we going to have a crash? No one knows. The Federal Reserve started increasing interest rates last year and till 12/31/17, they are expected to raise interest rates twice more. Current bull market is very old so the end could be near. Proposed Republican tax cut for the wealthy based on unrealistic economic growth projections would raise the deficit exponentially. With all these indicators showing up, I would be very surprised if we do not have a Trumpcrash within the next 3 years.

 GE- GE CEO Jeff Immelt will step aside Aug. 1 ending a 10-year career at the top of the conglomerate. He will be replaced by John Flannery; the head of GE’s health-care business. General Electric (ticker: GE) Chairman and CEO Jeff Immelt paid $2.8 million on May 15 for 100,000 more shares, his first stock purchase of the year. Immelt now owns 2.57 million GE shares directly. Immelt made the same pre-summer move a year ago, paying $2 million on May 20, 2016, for 67,600 shares, or $29.59 a share, slightly more than the $28-a-share price in his latest buy. Stock buys by the CEO aren’t iron-clad guarantees the stock will go up. In many cases, including GE, shares have already slipped from the purchase prices. But it is comforting to see the top executive make a splashy buy before jumping into the pool.(Ed Lin, 11 CEOs/Barron’s, 6/9/17). Now for my perspective on this issue; It is always a positive indicator when an insider buys his or her own stocks in massive quantities. They are not going to put their personal wealth at risk unnecessarily. This is very true with well-respected CEOs of some of our biggest companies. One such CEO is the CEO of JP Morgan, Jamie Dimon. After bottoming on Feb. 11 2016, stocks have had an enormous run in the past few weeks. What was so special about that day? It was the day JPMorgan CEO Jamie Dimon bought 500,000 shares of his company's stock. Jim Cramer now calls this day the "Jamie Dimon bottom." Cramer knows that Dimon did not intend to call a bottom that day, but not only is JPMorgan up  since then, but the Dow and S&P 500 have both rallied higher.

John Flannery, named General Electric’s new CEO on 6/12/17, told Barron’s that he knows he faces a daunting task. When Flannery, 55, takes the helm in August, he will have to guide one of world’s largest companies, a complex, global matrix of industrial businesses as well as a legacy finance arm. Since Jeffrey Immelt took over as CEO in September, 2001 through Monday, the stock has notched a total annualized return of 1.7%, six percentage points behind the S&P 500, according to FactSet. To be fair, Immelt inherited a company – and a highly valued stock – that had benefited from the 1990s boom. Investors cheered the shakeup, sending shares up almost 3.6% to $28.94 after the news was announced Monday. The stock now fetches 17.8 times the $1.63 a share analysts expect it to earn this year.(Lawrence C Strauss, New GE CEO, 6/12/17).

 Exxon- With the energy commodity price cycle recovering, we believe that a reduced cost structure, two recent acquisitions, and a more aggressive pace of capital spending position the company for a positive shift in reserves and production growth, and a multiyear recovery in earnings. Exxon arguably has the strongest balance sheet in the sector, which provides ample flexibility to pursue a more aggressive growth path or a higher return to shareholders. The dividend yield is currently 50% above the 10-year average, but growth averaging 3,2% over the past two years is 60%below the norm for that span. With improving coverage ratios, we believe that dividend growth could be poised for a rebound in the intermediate term. (Hilliard Lyons, Exxon Mobil, 6/6/17).

 Chevron-Appears well positioned to ride out a period of weak oil prices as its capital spending declines and its free cash flow increases. Its big Australian liquefied natural gas projects, Gorgon and Wheatstone, are moving towards completion. Chevron has a lower valuation based on enterprise value/cash flow than Exxon Mobil does, and a richer dividend yield : 4.1% versus 3.8%. Chevron is expected to cover its dividend and capital expenditures from cash flow in 2018 barring a collapse in crude oil prices. (Andrew Bary, Energy Shares, 6/12/17)

 IBM- International Business Machines seems to have impressive Internet of Things (IoT) capabilities and several use cases, based on commentary from the general manager of its IoT business, who spoke at our KBCM Industrial Conference. IBM (ticker: IBM) has made significant investments (about $3 billion) in Watson and positioned it to offer cognitive analytics. IBM’s IoT business is growing at 15% year-over-year with healthy secular growth characteristics. Companies are investing to take advantage of data generated (99% of data is unused today). IoT is viewed as critical to gaining a competitive advantage by using proprietary data. Organizations can: 1) improve operations (gain insight through data analytics) and lower costs; 2) enhance customer experience; and 3) transform and generate new revenue streams. The majority of use cases today are to improve operations, cut costs, and do break-fix analysis.(Arvind Ramnani, IBM is bog on IoT,6/14/17).       

Apple-HomePod’s performance focus highlights Apple’s lack of critical proprietary services. Billed as a “breakthrough home speaker,” the HomePod is attempting to differentiate itself as a premium smart speaker as opposed to current products that are generally either a premium speaker (Sonos) or smart ( Amazon.com (AMZN) Echo), but not both. The presentation focused on how strong the performance of the speaker is, with the smart assistant features presented almost as an afterthought. We view the performance focus as an indication that Apple lacks the proprietary services to match up well with in-home smart assistants from Amazon and Alphabet (GOOGL). We believe in-home voice assistants are a link to services that provide answers, entertain, allow you to organize or shop more easily, or allow you to control physical aspects of your home (lighting, security, etc.). Any assistant’s ability to efficiently serve these purposes should determine its value. Further, the ideal in-home assistant should be ever-present, but nearly invisible, meaning that the ideal hardware is likely to be small and unobtrusive. These factors make in-home assistants a terrible market for Apple to generate meaningful profits from, in our view. So, why is Apple even entering the market? We believe the answer is that it feels it has to in order to not be left out. This highlights a broader issue for Apple as consumers’ interaction with computing becomes even more fragmented; services in which Apple is weak are likely to drive the bulk of consumer value. At the extreme, this trend risks devaluing both mobile operating systems and hardware, which could create risk to Apple’s smartphone pricing power over time.(Pacific Crest Securities, Apple’s Home Pod, 6/6/17). May survey data indicate significant pent-up demand from new and existing iPhone users in China. While our data-driven approach has proven largely successful, we do note that for fiscal 2017, the magnitude of growth has disappointed relative to our initial data driven fiscal 2017 expectations (i.e. initially projected 16% year-over-year iPhone unit growth versus current trajectory of 3%), largely as a result of Greater China growth disappointing relative to our initial expectations (initial projection was 58% year-over-year iPhone unit growth versus on track for an 8% year-over-year decline). As such, we were surprised to find that our May survey data indicate that iPhone unit growth in Greater China will rebound by up to 170% year-over-year. The percentage participants that intend to buy an iPhone in the next 12 months in China increased from 29% in May 2016 to 37.1% in May 2017, and the percentage of existing iPhone users that bought an iPhone over the past 12 months that also indicated they will purchase an iPhone in the next 12 months dropped to 7.6% in May 2017, from 11.0% in May 2016. We believe this data point supports the anecdotal story we have heard that Chinese consumers are closer to the Apple supply chain and thus learned earlier in the iPhone 8 product development cycle the incremental capabilities than U.S. users, which has led to a much greater portion of existing and new to iPhone users in Greater China to delay their purchase of an iPhone by about a year.( Nehal Chokshi, Apple to see China unleash demand, 6/20/17).

Have a great month!

Fernando

June 1 Post

Hi Again,

 The Standard & Poor’s 500 index closed at its 16th record high on 5/12/17, and 74 New York Stock Exchange stocks made fresh 52-week highs, compared with 52-week new lows. But one measure of market breadth seems to be struggling, according to Bespoke Investment Group. The percentage of stock trading above their 50-day average peaked late last year at 80%, and has since shrunk to about 50%. The index is climbing, but half its stocks are struggling to keep up. That is isn’t something bulls want to see as the rally continues. Is there such a thing as a “curse of the Dow”. Intel and Microsoft was added to the DJIA in late 1999, just in time for the tech’s bubble bursting. Bank of America was added in early 2008-and you know what came next! Apple’s addition to the blue chip index saw two years of underperformance.(Barron’s, 5/15/17 and 5/29/17).

If we look at the volume changing hands on advancing and declining stocks we get further encouragement. The NYSE advancing volume minus declining volume line broke out to the upside from a three-month slide. What this means is the stocks that go up are getting more volume than stocks that are going down and, of course, that leans bullish. Buyers are more aggressive than sellers – the hallmark of a bullish market. There is more to like in the volume area as major market exchange-traded funds (ETFs) finally saw a positive change in their on-balance volume charts. This indicator keeps track of daily volume on up days minus volume on down days. For example, on-balance volume on the SPDR S&P 500 ETF Trust (ticker: SPY) started to fall in early March and continued lower until the May 17 market slide. The next day it started to rise and has now broken through the trendline that guided it lower for the past two months. That suggests money is finally flowing back into the ETF, confirming the new highs in price. That’s even better.

New highs in several major indexes, rising breadth and positive money flows into index ETFs together paint a rather strong picture for stocks. However – and there always is a however – the bond market does offer a warning. The spread bottomed in August and really started to climb after the election, when hopes for tax reform and an upswing in hiring were fresh. A steepening curve often begins when the economy is starting to warm up. Unfortunately, that trend reversed and the yield curve is now flatter than it was before the election. While the stock market has gotten its act back together, investors should keep an eye on the yield curve. The bond market seems worried about dysfunction in Washington putting the kibosh on such desired initiatives as tax reform. If they look to be in trouble, the stock market could be vulnerable. (Michael Kahn, Stocks point to strength; Bonds offer a warning, 5/30/17).

 Ford- Earlier this week, Ford Motor Co. replaced company veteran Mark Fields as CEO with Jim Hackett, a relative newcomer to the auto industry. Ford said it needed the change to speed up decision-making and reorient toward the future. Ford is highly profitable, thanks to strong sales of pickups and SUVs. But last year's profit of $4.6 billion was down $2.8 billion from a record in 2015. And Ford's stock price fell almost 40 percent in the three years Fields was CEO. Hackett, 62, is credited with reviving furniture maker Steelcase. He served on Ford's board for three years and for the past year was leading Ford's mobility unit. As interim athletic director for the University of Michigan, he was responsible for luring star coach Jim Harbaugh away from professional football. Hackett and Executive Chairman Bill Ford, the great-grandson of company founder Henry Ford, recently talked with The Associated Press about the changes. (Tom Krisher, Ford changes at the top, AP, 5/28/17)  A recent analysis by Goldman Sachs finds that even as ride hailing expands, private car ownership is likely to continue growing from here, albeit slowly, through 2030; that Ubers of tomorrow are likely to turn to today’s veteran car makers to produce and manage vast fleets of self-driving vehicles; and that the flee management business could be more profitable for companies like Ford than car making is today. As Hackette lays out his case to Wall Street in the months ahead, look for Ford stock to recover from the recent slide.  Shareholders could make 30% in a year. Ford stock sells less than 7 times projected earnings for the next 4 quarters. On one hand, that is a tantalizing discount. Over the past 2 decades, Ford has typically traded at a discount of about 25% to the total US market relative to earnings. Now its 60% cheaper than the market. Ford is in the best financial shape in decades. On the other hand, price is low enough to be suspicious. One reading of it is that investors expect car sales to turn lower in the next term. That is already happening. At the end of last year, light vehicles in North America were selling at 18.4 million (seasonally adjusted); by last month, the pace had cooled down to 16.8 million. (Jack Hough, Ford’s Future..,5/29/17).

 GE- GE traces its history back to Thomas Edison, but since the turn of the 21st century the industrial giant has been more associated with stagnation than innovation. Deutsche Bank analyst John Inch expects more weakness. He downgraded General Electric (ticker: GE) from Hold to Sell Friday (5/12/17) and cut his price target by $4, to $24. “Overall, we believe GE to be overvalued given weak earnings quality and the wide gap between non-cash and cash earnings,” he writes. “GE’s weak cash flow has become worse in recent quarters. GE offers an enticing 3.4% dividend yield. And at 15 times expected forward earnings, GE looks reasonably priced, especially as earnings are expected to climb 15% in 2018. But, again, earnings don’t tell the whole story. Some investors hope that CEO Jeffrey Immelt will soon be replaced, possibly lifting the stock. However, GE’s problems run deeper than leadership, and Inch warns that if GE were to replace Immelt (not a near-term move, in his opinion), a new CEO “could opt to significantly reset earnings targets lower: possibly closer to actual cash generation,” which he argues would hurt the stock.(Teresa Rivas, GE Falls to new 52 weeks Low/Barron’s. 5/12/17).

IBM- As it was announced on 5/5/17 by CNBC, during the first week of May 2017, the biggest shareholder of IBM, Warren Buffet (and one of the best investors in the world) sold 1/3 of his shares in IBM. He rarely sells anything as he likes to hold on to his portfolio for a very long time. Even though Warren Buffet lost confidence in IBM, I do not recommend selling IBM. He got in to IBM6 years ago at an average cost of $170 per share (per CNBC). Our average cost was $121.65 and we just started purchasing 15 months ago. In fact, at the time I started recommending IBM, I remember very well how most analysts used to laugh at Warren Buffet for getting in to IBM and holding his ground while the stock kept tumbling. I think he got in too early and got out too early. However this is something we have to watch carefully. By any means, this is not a sure thing!

HPE, Dell, IBM: Three Different Paths. The three looked similar a few years ago but HPE shrank, Dell grew, and IBM pivoted to verticalized solutions. Dell Chairman and Chief Executive Michael Dell also made an interesting comment that it has seen some customers that initially went to the cloud start repatriating back as they come to realize that the costs are “twice as much,” which is to our thesis that while cloud is having an impact on traditional infrastructure, it is not ideal for every workload, Looking at the IT Hardware sector, three companies that looked similar just a handful of years ago have now set forth on different paths. HPE is now smaller through divestitures,

Dell is now larger through its EMC acquisition, and IBM pivoted its focus to verticalized solutions by shedding/de-emphasizing most of its traditional hardware businesses. We think all three companies are in the early days of their respective transformations with Dell EMC still working through integration (we’d guess for at least another quarter), IBM’s strategy yet to be visible in the balance sheet, and HPE looking to stabilize its core server and storage businesses. Dell EMC’s key message and strategy is similar to that of EMC’s prior to acquisition -- taking a solutions approach to corporations’ digital transformations through an integrated portfolio of Dell, EMC and VMware (VMW) assets. While Dell EMC (including VMware) owns a good portion of its solutions stack hough also has a number of partnerships), HPE has a more transaction-oriented business and is looking more to partnerships to provide a broader solutions portfolio. (Barron’s, HPE,DELL,IBM, 5/11/17).

Disney- Disney reported fiscal 2nd qtr adjusted EOS of $1.50, ahead of $1.42 estimate. Revenue came in below forecasts in all segments, while the company’s operating income beat, relative to the forecast, was driven by it’s parks and entertainment studio units. We now forecast fiscal 2017 operating income of $14.63 billion versus our prior $16.66 billion, and EPS of $5.95, which is unchanged. We maintain our buy rating and $128 price target using separate values for the company’s Media Networks (Cable and Broadcast) and Consumer (Parks, and Resorts, Studio and Consumer Products) businesses. Our target consumer value uses a 21 times PE multiple reflecting the unique power of Disney’s brads, robust content slate, and theme park expansion plans in 2019 and beyond. (Guggenheim Securities, Walt Disney, 5/9/17).

Have a great month!

Fernando

May 2 Post

Hi again,

Be cautiously optimistic! On 4/19/17, CNBC announced that there has been a recent increase in smaller investors getting in to the stock market while the big institutional investors are reducing their holding in the equity market. For the past 30 years, this is another sign that the market is ‘topping off’. Small investors come at the end of a stock market rally and they are the last to leave; so the next time around, after getting previously ‘burned’ always miss the beginning of a market rally. By the way, I want to say a word about CNBC. In the 1980s first TV channel that created a 24/7 channel was called Financial News Network (FNN) which was very popular among finance professionals. Usually from 4am to 4pm Pacific Time, they only cover the financial markets with the ticker tape running on the screen.  

In 1991 under pressure due to scandals, FNN went off the air for the last time at 6 pm on May 21, 1991. CNBC immediately took over FNN's satellite transponder space, more than doubling its audience at one stroke. It branded its business day programming as "CNBC/FNN Daytime" until 1992. CNBC incorporated features of FNN's ticker into its ticker. While most of FNN's employees were fired, a few FNN anchors and reporters including Bill Griffeth, Ron Insana, Allan Chernoff and Joe Kernen were retained. Sue Herera, who joined FNN at age 21 and very soon became an anchor, moved to NBC and the brand-new CNBC prior to the demise of FNN. Griffeth and Herera were later reunited at CNBC and co-anchored Power Lunch until 2011. CNBC adopted the "look", news style and stock ticker of FNN, so in a sense FNN's legacy continues in CNBC.(History of CNBC,CNBC,6/7/16).

Prior to December 2016, the market index was moving within a given range (17,900 and 18.500) for more than 18 months; and at that time, on several occasions, I wrote in my newsletters that when the market stays within a given range for 18 months, it is always followed by a big move to the upside. The market rally that started on 11/4/16 at 17,888 reached 21,115 on 5/1/17. Market runs on mass psychology. Prior to October 1987 I was following a market technician named Robert Prechter (who began his academic studies in psychology). He used a very mathematical theory called the Elliot Wave Theory. Elliot was an accountant by trade. According to that Theory there are 5 waves in a bull market (3 waves going up and 2 going down). In a bear market, there are 3 waves, 2 going down and one going up. Elliot discovered that the ‘golden ratio’ (1.618) applies to the study of universe as well as the study of financial markets. In 1987, Prechter predicted a new high in August 1987 and then a severe correction in September/October. In September, 1987, a friend of mine told me that his daughter just became a stock broker in NYC and I told her to get a different job as a ‘crash is coming’. Thereafter he used to tell his friends that I predicted the crash of 1987. However Prechter was wrong about the aftermath as he thought the bear market would last for decades and he did not see how Fed Chairman Greenspanbrought up the markets by pumping the money supply.

When the market passes a ‘psychological thresh hold’ (i.e.10000,20000 and so on), it is important to monitor how it will perform to make predictions about the future.  Usually crossing such a thresh hold, takes time. Market would go up, bump against it, drop down and so and then crosses it. We saw this with crossing the 20,000 level recently. At that time, 20,000 was considered as a ‘ceiling’. If the Dow can manage to stay above 20,000 for a long time with good volume, then we would be able to consider 20,000 as a ‘floor’ where the probability of the market staying above that is rather high. In a correct or a crash, all bets are off.  The week ending 4/28/17 was a classic example as the ‘market’ (Dow) keeps hitting the now ceiling of 21,100 but not being able to keep above that level-as it is said on Wall Street, ”it was testing the 21,000 level” . This does not mean that we will stay in this position for a long time. Usually the lowest drop is about 62%. Even though we have been above 20,000 since early February 2017, since 3/2/17, we have been on a slow descent.

There are so many saying and theories on Wall Street. Some strongly believe in the saying, “Sell in May and go away”. These traders sell in May and buy back in late Fall when (at times), the market is low. However if you did that in 2009 (one of the best years for the market), the opportunity cost would have been greater than 12% in 3 months! This is why I want you to have at least 50% in cash at all times. You cannot maximize your gains but that should not be your objective. There is another saying on Wall Street, “If you try to make a killing in the market, the market will kill you”. Slow and steady wins the race! September is the worst month for the market and all the crashes took place in October. Personally I have noticed that if we have a severe correction prior to September, even early Fall could be bullish for the market.

Ford- As you can see from our scoreboard, our historic gain on Ford is diminishing and it is getting closer to our average cost. Usually, when our prices go below the average cost, I suggest that you buy more to further reduce the average cost. “Plant the seeds now to reap the harvest later”. I remember 8/24/15 very well. The first hour of the market, it was brutal brining down most stocks. Ford was one of those stocks that got hit badly. However within minutes, tremendous amount of orders came from Europe that Ford rose so sharply, the market automatic circuit breakers went in to effect to stop trading for a few minutes! Times have changed since then. The Federal Reserve had 2 interest rates hikes and have promised much more in the future. Already loan losses in the auto industry have begun to rise.

Given interest rates close to 0 and since we had the global market in a major slump, most Americans have been buying expansive gas guzzlers. Now it is very likely the trend will shift in the future. To make matters worse, auto makers might have to give cash incentives to draw in customers that would cut in to their bottom line; which is not good for the stock price. Auto makers too shifted their small car production to Mexico while keeping the gas guzzlers in the US. When consumers shift from gas guzzlers to small cars again (as they have done in the past), US employees would be the first to lose their jobs. This time around if Ford goes below our average cost, we should be cautious in buying more but that does not mean we should not do it.

In a rising environment, to be in a bond mutual fund is suicidal. If you want to hold bonds, buy the actual bond where you get 100% of your capital; short term is better than long term. A couple of years ago, when the credit market was headed for a total disaster, Carl Icahn (one of the best on Wall Street), commented that investors were taking an unnecessary risk by going for junk bonds that were generating a 0.5% more than the rest. With investment grade you can get more than the treasuries but less riskier than the junk bonds. Consider investment grade corporate bonds. They are not important as treasuries to the global market and not exciting as the high yield market, so they are easy to overlook. Sitting in the middle of the risk spectrum, investment grade bonds could be the perfect compromise for an unsettled time.

Unlike treasuries or junk bonds investment grade bonds are positioned to perform reasonable well under most scenarios. If developed economies remain stuck in a new normal of low growth, inflation and interest rates, junk bonds could be the biggest beneficiaries. As it stands, investors are having hard time quitting junk bonds. Over the past 12 months, junk bonds returned 13.9% according to Bloomberg Barclays Indices data, versus 3.5% investment grade bonds and -0.2% for US Treasuries. The tax reform risk cuts both ways; if the tax deduction for interest expense is eliminated that could ultimately lead companies to carry less debt, but the process of getting from here to there is highly destructive.(Sam Goldfarb, “Current Yield”/Barron’s, 5/1/17).

 GE- Thomas Edison may have co-founded General Electric, but that doesn't mean the massive conglomerate isn't interested in selling its consumer-lighting division, according to a report from The Wall Street Journal. Sources tell the Journal that the company is interviewing investment banks about possibly selling the massive division, which the sources say could go for $500 million. The deal would not include Current, GE's commercial LED lighting company. As the Journal notes, the sale would be likely be less about the money and more about continuing GE's retreat from the consumer sector in favor of business-facing ventures. The most recent big move in this direction was the conglomerate selling its appliances division to Haier Group, a Chinese company, last year. A GE representative told CNBC that the company doesn't comment on rumors.(Mack Hogan,CNBC,4/5/17).

Chevron-Our $147 price target on Chevron (ticker: CVX) is derived from a discounted-cash-flow model, supported by a sum-of-the-parts and dividend-discount-model analysis. We hosted investor meetings last week with Chevron Chief Executive John Watson. The message was consistent with that from the company’s March analyst meeting: the cash cycle is improving; capital expenditure is being tightly controlled; production growth will accelerate, driven by Australian liquefied natural gas (LNG); and Permian will be a key growth contributor. Chevron’s capital spending falls to $19.8 billion in 2017 versus a peak of $41.9 billion in 2013, as the company’s major capital projects reach completion. Spending in 2017 includes about $2 billion for the final phases of the Gorgon and Wheatstone projects, which will be essentially completed this year; thus the go-forward capital spend rate is about $18 billion a year. The company is guiding for total capital expenditures to range between $17 billion-$22 billion in 2018-2020, and Watson commented that it is unlikely the company would reach the high end of that range. At the March analyst meeting, Chevron raised its guidance range for Permian production to 325-450 thousand barrels per day equivalent (kbde) by 2020, with potential for 700 kbde in the middle of the next decade. The depth of Chevron’s Permian drilling inventory provides for decades of activity -- which is not efficient from a net present value (NPV) standpoint. The company indicated that it had identified about 150,000 acres that it could use as bargaining chips, and could ultimately lease or joint venture this acreage to other operators. We expect that the company will be active in swaps to block up its acreage to allow for longer laterals.(Jason Gammel and Marc Kofler, Barron’s, 4/11/17)

IBM- IBM disappointed Wall Street with their earnings and revenue figures last month and the market punished them mercilessly with a 7% decline in the share price. In time, IBM will come around but no one can bet on the time frame. Investors get rewarded for being patient.

 Alcoa- Buy Alcoa Before It Gets Bought. Alcoa trades at a 31% discount to our estimated 2017 private market value of $49 per share, similar to the 30% discount post-fourth quarter. We recommend purchase as Alcoa’s (ticker: AA) discount to the PMV is material and could close by a merger transaction with Rio Tinto (RIO) or another metals player. Low cost bauxite/alumina assets and a capable management team give us confidence in the standalone company, and we model a near 10% free-cash-flow yield in 2017-2018 excluding environmental/asset retirement obligation (ARO) payments. Given recent moves in commodity prices, the filing of Alcoa’s 2016 10K, and ahead of the March results, we update our model. We continue value of bauxite and alumina (including Ma’aden interests) based on a 10% discount to Alumina (AWCMY), and Aluminum plus one-half of Cast Products based on a 10% discount to Century Aluminum (CENX) enterprise value (EV)/ton. The discounts reflect Alumina’s potential takeover premium and Century’s potential upside from lower U.S. corporate taxes. These proxies account for over 85% of our segment value. We are increasing 2017 adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) before special items increases to $2.10 billion from $1.95 billion, while 2018 Ebitda increases more modestly, to $2.030 billion from $1.997 billion, with 2019 Ebitda barely higher at $2.010 billion. Improved aluminum pricing is the major upside drive. Spot prices have improved from late January’s $1,800 to the current $1,950, reflecting in part Chinese environmental/pollutions constraints tightening supply and raising marginal cost plus a more inflationary backdrop. Our Aluminum segment Ebitda increases by over $150 million in 2017 and just over $10 million in 2018, as the forward curve has flattened. Catalysts to Unlock Value could be nearer now that Arconic has sold its Alcoa stake down to 7.1%, selling 23.4 million at about $38 per share on Feb. 15. Rumors on March 30 through TheFlyOnTheWall.com said that bankers were working with Rio Tinto on a potential bid for Alcoa, although there has been no company comment or news since. Ample cash flow in 2017 will be used to pay down debt and capital expenditure, with growth capital expenditure of $150 million versus a prior sub-$100 million earlier view. Alcoa will also consider shoring up its pension deficit before considering capital return. (Justin Bergner, Barron’s, 4/10/17).

Have a wonderful month.

Fernando

April 5 Post

Hi Again,

 As you can see from our scorecard, our overall gain for our total portfolio is at 34.69% (average) for the past 17 months (average).  If we manage to keep the same rate in the future, in another 4.5 years (at the 6 year level), we should be able to triple our money! Don’t hold your breath! That probability is very low.

 Recent talk about the stock market being in a bubble appears to be little more than just that—talk. At least that’s the conclusion I draw from a just-released study into the predictability of stock-market bubbles. In contrast to earlier studies, which consistently found that bubbles were impossible to identify in advance, this new one concludes that “there are times when one can call a bubble with some confidence.” This recently released study, titled “Bubbles for Fama,” was written by Robin Greenwood, a finance and banking professor at Harvard Business School and chair of its Behavioral Finance and Financial Stability project, and Andrei Shleifer and Yang You, a Harvard University economics professor and Ph.D. candidate, respectively. An essential first step in analyzing bubbles rigorously is defining precisely what they are. The researchers point out it takes more than a big price run-up to create a bubble, since not all big rallies lead to bubbles. Likewise, the mere existence of a major decline doesn’t automatically mean that the previous run-up was a bubble. This new study defines a bubble as a price increase of at least 100% over a two-year period followed within the subsequent two years by a drop of at least 40%. Most of us would agree that any market satisfying these conditions constitutes a bubble; the One consequence of the researchers’ definition is that, when applied to the overall market, very few episodes in U.S. history qualify as a bubble. Not even the housing boom, which ended so ignominiously in 2008, qualifies. Since 1928, there have been only two: The bubble that peaked in 1929, and the dot-com bubble, which topped out in early 2000.Nasdaq Composite in the late 1990s and early 2000s more than qualifies, for example.(Mark Hulbert, Barron’s, 3/23/17).

 Ford- Market Volatility is back, and it is on everyone’s mind, but Ford Motor is oddly disconnected from the maelstrom — even though the stock is about to face a significant event. Bob Shanks, Ford’s (ticker: F) chief financial officer, is hosting a forum with industry analysts on Thursday that is presumably intended to assuage concerns about the business and the stock’s weak performance. Shares are down 3% this year. Over the past 52 weeks, the shares, now around $11.72, have ranged from $11.07 to $14.22. Though it seems the stock could set a new 52-week low, Ford’s one-month options are trading near their lowest levels of the past year. This means the puts and calls are not priced with a fear or greed premium ahead of the CFO event, which is likely intended to get investors to bullishly rerate the stock. Ford’s one-month implied volatility of 18% is near an annual low and three points below three-month implied volatility levels. The difference between one-month and three-month volatility suggests the options market is not focused on the CFO chat, and is instead looking beyond to more traditional reports, including monthly sales data and the April 27 earnings report. Goldman Sachs ’ derivatives strategists are telling clients to “straddle’’ Ford stock ahead of the CFO presentation. This strategy is used when it is difficult to determine if a stock will rally or fall. The straddle is one of our least-favorite strategies, but one of Goldman’s preferred trades when volatility is unusually low. We prefer taking directional views on stocks instead of using nondirectional trading strategies. That said, many institutional investors find straddles appealing when implied volatility is so low that it seems to be underpricing events. With Ford’s stock around $11.72, Goldman advised clients to buy Ford’s March $12 put and call that expire Friday. The straddle cost 43 cents. The Friday expiration makes this very much a trader’s trade. If everything comes together as anticipated, the stock will make a sharp move in a short time and traders will realize profits. Should the stock barely respond to the CFO’s presentation, the trade will be a dud. Either way, the stock must move more than the cost of the straddle to prove profitable.(Barron’s, internet edition,3/22/17)

Schlumberger - After the market close on Friday, Weatherford International and Schlumberger announced an agreement to merge their North American onshore completions businesses into a new joint venture called OneStim, which will be 70% owned, operated, and consolidated by Schlumberger. Schlumberger (ticker: SLB) will also pay Weatherford (WFT) $535 million upon closing, which we expect will be in the fourth quarter. Given the asset-contribution ratio of 60/40 [Schlumberger/Weatherford, respectively], the $535 million that Schlumberger has agreed to pay for what is effectively an incremental 10% stake in the venture implies an enterprise value (EV)/hydraulic horsepower (hhp) of $2,140 for OneStim -- a 13% premium to the EV/hhp multiples of OneStim’s public frac peers and about 3 times the value we thought Weatherford would get for its business. 1) That Schlumberger expects to generate some cost savings and synergies from the combined entity, even though none were specifically identified. 2) That OneStim is likely to be IPO’d in 2018. Potential catalysts are still to come. Although the final chief executive decision and monetization of the frac business were, in our view, the two most meaningful catalysts for Weatherford short-term, we believe the stock has three meaningful short-term catalysts still in front of it, including the articulation of incoming CEO Mark McCollum’s vision, the cyclical recovery in revenue and upside surprise to incremental margins, and monetization of its international land-drilling business. Consequently, we do expect the profit-taking on the heels of the OneStim announcement to be minimal over the next few days. (Hot Research PM, Barron’s, 3/27/17).

 Bank of America- Any weakness in Bank of America ’s stock should be treated as an invitation to accumulate shares. The stock is in the early stages of transitioning from one of Wall Street’s primary trading vehicles for speculators and hot-money hedge funds into an investment favored by more stoic fund managers with longer time horizons. This shift has just started to become apparent in Bank of America’s (ticker: BAC) options trading patterns. After the stock declined a dramatic 6% on Tuesday, far sharper than the broad market’s weakness, investors essentially did the opposite of what was expected. Rather than hedging in anticipation of a deeper decline, or even to lock in profits, slow-money fund managers moved in. Those investors bought huge blocks of call options, telegraphing a shift in expectations for the stock. Rather than buying cheap calls to speculate on Bank of America’s next incremental stock move, the large call trades seemed pegged more to corporate themes than gambling on the stock’s momentum. If this slow money pattern holds, it represents a sharp shift in Bank of America’s equity flows that have largely been the stuff of fast, incremental gains ever since the credit crisis knocked the stock into the single digits. But now, with Bank of America poised to benefit from rising interest rates, and a multiyear effort that has left the company lean, and leveraged to perform in a normal banking environment, the stock is showing signs, at least in the options market, that it is more than a trader’s plaything. For years, the classic Bank of America trade involved speculating on the stock hitting the next whole-dollar. So if the stock were at $23, as it is now, investors would buy $23.50 or $24 calls that expire in a month or so. The calls were inexpensive, and profits were significant, in percentage terms, if the stock behaved as expected. Yet on Wednesday, and it has extended into the current session, trading patterns were dramatically different -- and it was surprising. When the stock was around $23 on Wednesday, a massive call spread traded, suggesting that a major investor, or a group of them, see the stock rising to $26 by June. The spread involved the sale of about 87,000 June $26 calls for 22 cents and the purchase of about 58,000 June $24 calls for 72 cents. Another investor bought 12,000 May $25 calls at 32 cents, while another bought 15,000 January $37 calls for 36 cents that expire in 2019. Buying the stock works for investors who want a simple approach. The bank will likely raise its dividend later this year, and probably buy back more stock. Both moves should secure the current stock price, and then some. Investors who want to get more exotic can consider selling Bank of America puts that expire in three months or less and that are no more than 5% below the stock price. The put sale positions investors to buy the stock on a pullback. Bottom line: We’ve recommended Bank of America’s stock since it traded in the single digits during the darkest days of the credit crisis. The story has more room to evolve.(Steven Sears, Barron’s, 3/23/17).

Disney- First of all, let me remind you that when I was asking you to buy Disney and more of Disney, most market analysts were asking investors to see it to the ESPNrevenue decline due to ‘cord cutting’. Disney’s park business is a stand out performer. After 5% growth last year, perk’s revenue is expected to rise by 8.7% this year on ticket price hikes, park expansions, and the swelling contribution from Shanghai Disneyland, which opened last June (2016). Disney’s goal there is bring in 10 million visitors in the first year. “We just hit 8 million” says Iger (CEO, Disney). That compares with about 20 million visitorsa year at Disneyland in California and Magic Kingdom, part of the Disney World cluster of parks in Florida. It bodes well that Disney is already expanding in Shanghai announcing in November it will add a “Toy Storyland”. “We have great land there, and ambitious plans we have not announced. And there are opportunities for other places in China given the responses we have gotten from the Chinese people”. Wall Street pays attention to a bigger moneymaker: television, especially the lucrative ESPN, cable sports network. This year profits are expected to decline due to the cost of pro basketball rights. Analysts are more concerned about the decline in subscriptions, although rising fees will keep overall revenue rising. Later this year, Disney will launch an over the top ESPN service because viewers can sign up outside of their cable packages. It will use technology from MLB Advanced Media, the internet arm of Major League Baseball. “You are seeing a lot of disruptions in television. Some people want their TV more mobile friendly”. Iger points out that ESPN is already being included in most over the top offerings. Investors seem cheered by recent developments Shares are up 21% in the past 6 months versus 11% for the S&P 500 index. JP Morgan analyst Alexia Quadrant has a price target of $124 by the end of 2017, suggesting another 11% on the upside. (Jack Hough, Barron’s, 3/20/17)

 Apple- Remember the time I asked you to buy Apple initially as well as the time I asked you to keep increasing your holdings if the price drops below our average cost? At that time most analysts were saying that the growth story for Apple is over and it was a good time to buy. About 5 years ago, Carl Icahn invested a lot of money in Apple and he really helped the price move higher. At that time he said that he will never sell Apple and if the price drops he will keep buying more. However at the time I was recommending Apple, he sold all his holdings of Apple saying that due to China’s interference and maturing IPhone market he is selling Apple. Now Warren Buffet is buying Apple in a big way! On 3/20/17, Barron’s paper had an article with the title, “Lucrative services revenue could propel Apple shares beyond $150”!!!  Our average cost so far is at $92.62! Some highlights from the Barron’s article:

Don’t sell yet. Wait at least till end of Summer 2017. With the 10 year anniversary of the IPhone it is likely to hit a peak. Apple shares could go up another 10% by then.

·        Rumors swirl around Apple’s planned devices, the company’s high margin services revenue probably will continue to race quietly higher.

So far the stock rally has hinged on two factors : (1) Apple just traded at 12 times earnings (2) 35% discount to the broad market.

Cash and investments worth $38 per share.

I-Phones which bring in 2/3 of revenue show little sign of falling out of favor.

 During the past month I received 2 nice reviews on my stock newsletter:

From a former stock broker and former head of Credit Management at Sempra Energy of San Diego, California, Anthony Molnar:

 Again, thank you for your valuable work. It issuperior to other commentators on themarkets!

 Tony Molnar

  Current co-CEO and co-Owner, Capital Partners of Carlsbad, California, Richard Sariff:

Yes, great compliment Fernando.

You really do have a knack for this. Hope you are making money on your own recommendations!

 Richard Sarif | Co-Chief Executive Officer

Have a great month!

Fernando

March 8 Post

Hi Again,

 For the last 2 years, every Sunday, I have been trying to make predictions for the “Dow” for the following week-(1) Dow high for the week (2) Dow low for the week and (3) Dow close for the week. Then the following Sunday I compare my predictions to the actuals. I have a good ‘batting’ record but nowhere near perfect; yet quite impressive (if I may say so).

I keep all this on an excel sheet. On Sunday, 2/19/17, my predictions were off 0.53% for the Dow High, off 0.09% for the Dow Low and off 0.10% for the Dow Close. On 2/26/17 Sunday, my predictions were 21,500 for the Dow High (going over 21,000 for the first time in history). 20,774 for the Dow Low and 21,005 for the Dow Close. My Dow Close was off by 0.45%, prediction for the Dow Low was off by 0.13% and even though I predicted correctly the Dow would go over 21,000, my prediction of 21,500 was off by 1.54%. If I can get more consistency with my accurate predictions then I would be able to earn some good money on index option trading.

 From 1/31/17 to 3/1/17, our portfolio had a gain of 5.64%; that was after a gain of 4.5% from 12/31/16 to 2/1/17 for our portfolio.  According to Barron’s of 3/3/17, the average gain for the average investor during February 2017 was 1.44% (1.35% for the under 25 investor and 1.98% for investors over 64).  What were our best performers for the first 2 months of 2017?  Number 1 : Alcoa with a 25.82% gain. Number 2 :Apple with an 18.67% gain. Bank of America with 11.67% takes the Number 3 slot. Number 4 and 5 : IBM and Glaxo Smith Kline with 8.8% and 8.3% respectively. The worst performer was Exxon with a 9.16% loss. GE and Chevron both had losses over 4% during the first 2 months of 2017.  Most probably, within the bull market, a sector by sector correction or a rotation is taking place.

According to technicians and chartists, the market has got greedy or getting in to a bubble. Warren Buffet, the famous value investor says that the market is not too pricey and he keeps buying-especially Apple! When I recommended Apple, all investors hated Apple!  Sooner or later we will have a correction and that is a good thing and not a bad thing. In my opinion, it would not last long. Why? Many fund managers and investors missed this bull rally since the election (Trump Rally?) and they are patiently waiting for an entry point to get in!

 Have a great month!

Fernando

February 10 Post

Hi Again,

Now that Dow hit 20,000 psychological mark, people are talking about Dow 30,000. As a contrarian, this is alarming. I would not be surprised to see Dow at 10,000 before it gets to 30,000. According to technical analysts bond market and the foreign currency markets are sending danger signals to the stock market. Monetary, Fiscal and political situation is undergoing huge changes and to expect the stock market to go smooth sailing for a long time is nothing but a pipe dream. However this is good for us as it will us opportunities to add more to our portfolio.

Removing Dodd Frank and other regulations open up the market for massive fraud schemes and this time around the Federal Reserve as well as the Federal Government would not be able to bail out the system. Most to suffer would be the average Joe and not the Wall Street billionaires.  Removal of the Glass Steagall Act of 1933 was a huge mistake and more deregulation could do us real harm. The pain the country felt in the 1930s led to the Glass Steagall; I guess we did not feel much pain from the recent mortgage crisis. 

Glaxo Smith Kline-GlaxoSmithKline Plc (GSK) reports fourth-quarter earnings Wednesday, with investors looking for guidance on the fate of its key Advair drug in the U.S. and the recent pace of organic growth for new products sales. The group is expected to announce earnings per share of £0.24 on sales of £7.48 billion ($9.25 billion) for the three months ending in December, according to Factset estimates. Net profit for the quarter is forecast at £1.1 billion, up from a £354 million loss in the year-ago period. For the full year, analysts see sales of £27.7 billion and earnings per share of £1.01. Currency tailwinds are expected to play a significant role in the company's top and bottom line, however, with the company's reporting currency, the pound, falling 4.77% against the U.S. dollar over the October to December period. Glaxo takes one third of its sales from the United States. "We expect GSK to deliver 16% Core EPS growth in 2017 but 14% of this will be FX tailwind... We therefore forecast 2.6% [constant exchange rate] growth as strong high single-digit underlying growth is impacted by generic Advair in the US," said Roger Franklin at Liberum Capital. Perhaps more importantly, investors will be keen to hear further guidance on expectations surrounding Advair sales, because the drug maker has seen a growing line of competitors threatening to encroach on its blockbuster asthma treatment over the last year. (James Skinner, The Street, 2/7/17)

GM, Ford- Auto industry sales volume slipped 1.9% year over year in January, from 1.16 million light vehicles sold during January 2016 to 1.14 million last month. On the bright side, January's seasonally adjusted annualized sales rate (SAAR) of 17.57 million outpaced Wall Street's consensus forecast of 17.3 million, even if it was slightly below last year's 17.62 million result. "It's tricky to use January as a bellwether for how auto sales will trend for the year," said Jessica Caldwell, Edmunds executive director of industry analysis, in an email. "It's the lowest volume month and only accounts for 6 percent of annual sales on average. But 2017 is already proving to be a year unlike any other -- expectations were that sales were going to level off or decline, but the president has proven a bit of an X-factor..." Among full-line automakers, Nissan Motor Co. and Honda Motor Co. were the only ones to post year-over-year gains; Detroit automakers Ford Motor Co. (NYSE:F), General Motors(NYSE:GM), and Fiat Chrysler Automobiles (NYSE:FCAU), among others, were left behind. (Daniel Miller The Motley Fool, 2/5/17)

Disney- Walt Disney Co. (NYSE:DIS) reports its first-quarter results for fiscal 2017 after the market close on Tuesday, Feb. 7. The entertainment giant is going into the report on a solid note from both a business and stock momentum standpoint. Rogue One: A Star Wars Story, released in mid-December, has been dominating box offices around the world. After struggling for more than a year, Disney's stock has moved steadily upwards since November, gaining more than 16% since Nov. 1 -- about double the S&P 500's 8% gain, as of Jan. 26. That said, investors should be prepared for Disney to post headline numbers that don't look so magical because it's facing extremely tough year-over-year comparables. Revenue rose 14% and adjusted earnings per share (EPS) soared 28% in the year-ago period, driven largely by the phenomenal success of Star Wars: The Force Awakens, which opened before the holidays in 2015. Disney doesn't provide earnings guidance. Analysts are expecting The House of Mouse will earn $1.50 per share on revenue of $15.29 billion, representing a year-over-year earnings decline of 8% on approximately flat revenue growth. Long-term investors shouldn't pay too much attention to analysts' estimates since Wall Street is focused on the short term. However, these expectations can be helpful to know as they often help explain market reactions. Within media networks, Disney's largest and most profitable segment, investors should continue to focus on the cable networks business. This lucrative business has been under pressure due to declining subscriber counts as a result of cable cord-cutting and cord-slimming. ESPN's loss of subscribers has been the most concerning because the leading sports cable network is a cash cow.(Bet McKenna, 2/4/17)

Apple- Driven by strong demand for the IPhone7 and 7 Plus, Apple reported first quarter fiscal 2017 results with revenue and EPS above our and consensus estimates. We believe double digit percentage growth in the installed base of IPhone users positions Apple for strong sales and earnings growth with the IPhone 8 upgrade, dye later in calendar 2017. Apple ended first quarter fiscal 2017 at the low end of its target inventory range of five to seven weeks, with demand for the IPhone Plus remaining above supply. But supply reached demand during January, yielding a larger presence of 7 Plus in the total IPhone mix, and with an average sale price of $695 versus the consensus of $685. Adding to that the Samsung Galaxy issues, we see Apple extending its market share in the premium tier smart phone installed base, exceeding 570 million as we exit calendar 2016. We see a stronger upgrade cycle in fiscal 2018 with the 10 year anniversary IPhone 8 likely in September 2017 (Barron’s, 2/5/17).

Have a great month!

Fernando

New Years Day 2017 Post

Hi Everyone,

 Happy New Year!!

 During 2016 (1/1/16-12/31/16), “Dow Index” rose by 13.5%, while our portfolio rose by 31.38% during the same period. In 2014, only 16% of fund managers beat the “market”.  If we did not have Twitter, we would have done better but most prudent analysts are optimistic that eventually Twitter will rise above previous highs.

 Now we are so close to that big number 20,000 on the Dow! As one analyst stated, the market has to keep knocking to get through ‘big numbers’ that have a big psychological impact on the investor psyche so now the market keeps knocking on Dow 20,000.  In January 1987, for the first time the “Dow’ hit 2,000; in less than 20 years, it has gone up by 10 times. When Trump won, a co-worker asked me whether I could recommend a stock based on the Trump victory and I stated that US Steel would be a good bet. US Steel is running a very tight efficient operation but due to Chinese cheating on international agreements and dumping (selling below cost), US Steel has been having a difficult time for the past few years-the very thing Trump ran against. During the last couple of months, US Steel share price tripled!

 As a contrarian, this market scares me. Everyone is overly bullish. That is a big red flag for investors to be cautious. According to the National Association of Active Investment Managers (NAAIM), the bullishness among investors has reached it’s 2nd highest point EVER! Also this has been above the historical average bullishness for 4 consecutive weeks-longest such streak in 2 years (Barron’s December 2016). I advise investors to put a small portion of their portfolio in to put options on the Dow Index (DIA) and if the market go sailing higher, buy more puts. This kind of a bull market is not healthy. Since Trump’s victory, not only interest rates went up but the Feds promised more will follow soon and the dollar has been rising sharply; which is very bad for most companies but investors ignored all that. This is too is a bad sign. Why is it bad for everyone to be bullish? Less money on the sidelines to come in to the market and also one unexpected blow, could send all investors rushing to the exit. As Barron’s put it, “When everyone zigs, the market tend to zag”.

 In 1930. Smoot Hawley brought up legislation to impose high tariffs on imports which led to a trade war among nations which decreased US foreign trade by 40%.  We are living in a different world now where we are more dependent on foreign trade. Technology companies get 70% of their revenue from other countries. In 1930, total US foreign trade as a percentage of US GDP was 0.6%. Now we are much more dependent on foreign trade and a trade war will take us to a place where we have never been.

 One thing we are sure of over the next 4 years, with a Republican President and a Republican Congress is that we will have lower tax rates. This will make tax free muni rates go up as local governments try to compete for funds. Since we are close to full employment and with fiscal policies adding fuel to the fire, the Federal Reserve will have no choice but increase interest rates at a faster rate than previously anticipated. This too will make the tax free muni rates go higher. As muni or other bond rates go up, the principal will keep going down; and unlike equities, the probability of making a full recovery is close to zero.

Now is not a time to buy equities or bonds. It is a good time to start hedging against a bear market in the future. Whenever the next correction or crash comes, we can add to our holdings.

 Have a great January!

Fernando

December 8 Post

Hi Again,

 From my 12/1/16 newsletter.

For the past 18 months I have been saying that if we are patient enough till the market gets in to another bullish run we would see impressive results on our portfolio and that is taking place. Due to the post-election (or Trump) rally the Dow Jones (DJIA) went over 19,000 in November 2016. From 10/30/16 to 11/30/16, the market index (Dow Jones) went up by 5.21% and during the same time period the average gain for our total portfolio was 6.9%!! During the past 14 months, the average gain on our portfolio is at 18.9%!! 

 Last month reminded us of how the market tends to move so we could behave accordingly. Prior to the presidential election, the conventional wisdom on Wall Street was that most probably Clinton would win (as expected by everyone-including the Trump camp) and if she wins with the US Senate going Democrat or both chambers of the Congress going Republican, the market would go up but if Clinton wins both chambers of Congress going Democrat, the market would go down. Not a single analyst expected Trump to win with both chambers going Republican. According to this expected scenario, the market was supposed to go down. When election results started turning in Trump’s favor our US market index futures went down by 800 points on the Dow at its lowest. By 4am the next day, the same futures were down 200 on the Dow. The day ended with Dow up 200 points. The cardinal rule: When we expect the market to go down depending on a future event, buyers wait to pounce and buy bargains so even if the market goes down creating bargains in some of the stellar stocks they have been following. This has happened over and over again.

 As Alan Greenspan once said, “Big long term crashes, if it was in the late 1700s or in 2008, take place when no one expects them to happen”. He said this about the US industrial giants who suffered a huge loss in the late 1700s but they made use of it to buy more. As Baron Rotschild said in the 1800s “Buy when there is blood on the street”. Or as Warren Buffet put it ,”Buy when are others are fearful and sell when others are greedy”. One of my co-workers who does not have much money and who has never invested in the market came to me on the day after the election (even though very sad that Trump won) asked me if it was good to buy stocks now as the market would go down as Trump won. Just before the 1929 crash a shoe shine boy tried to give stock advice to Joseph Kennedy so he knew that a market crash was close at hand so he sold all his holdings. When the BREXIT vote went in favor of nationalists, the market went down and Jim Cramer said it was the beginning of the drop and asked his followers to wait to get bargains but the market started climbing the next day. When in August 2015, Chinese market crashed and took our market with it, I asked you all to start buying but Jim Cramer asked his followers to wait for a bottom that came much sooner than he ever expected. Live and learn!

 Also prior to the election, expecting a Clinton victory, Big Pharma, Healthcare and Biotechs went down sharply and consumer staples were getting overvalued. Trump victory reversed this trend so violently, hedge funds lost billions! During the past 8 years, every time Obama started talking about gun controls, people would rush to buy guns and those stocks would go up. Now that we have a Republican President and both Congressional chambers in the hands of the Republicans mean that no more gun control legislation for 4 more years, there will be no more panic buying of guns so all gun maker stocks went down sharply. Infrastructure stocks went up as Trump ‘says’ he is going to spend billions on infrastructure. That is pure Keynesian Liberal economics and always we had a gap between Trump promises and actions so if that does not go through, all those stocks will come down fast as they went up. What we could get for sure would be tax cuts for individuals and corporations that would raise the debt level by $6 Trillion. 90% of the people would get a tax cut of about $100 per year and millions and billions for the top 1%.

 In order to accommodate this fiscal move, the Federal Reserve will have to increase interest rates significantly over the next few years-which will hurt the middle class in buying houses, cars and other credit purchases. Bond market is much bigger than the stock market and it moves ahead of the Federal Reserve. According to one theory, if the bond market does not move first, the Federal Reserve is afraid to surprise the market as that would send all global markets in to turmoil. The bond market went down sharply (almost a crash) after the Trump victory. Three months ago the 2 year Treasury rate was about 0.75% and it was expected to go down to 0.50%; but the Trump victory increased it to 1.12% and thereby causing a big loss on the value of the holding. Now the conventional wisdom on the ‘street’ is that finally investors will see bonds and buy equities; if that happens or not, it is a slippery slope. If the 10 year Treasury (now around 2.5%) go much higher (i.e.4%), trillions will flow from the equity markets to the bond market. This is what happened in 1987 and the reason is obvious; why not get 4% on a risk free investment. The Trump camp is talking about replacing most of the debt on the 30 year Treasuries with a 100 year bond!

 Even though most investors say that the stock market has gone up too extended that one technician, Jonathan Krinsky states that the bull run is just starting. While these records may have led some investors to "think the market is 'too stretched' or extended," Jonathan Krinsky, chief market technician at MKM Partners, explained in a note that the Value Line Geometric Index could suggest "the breakout could be just getting started." "This [index] is actually just now at the same level it was at in 1998. So we've basically gone sideways for 18 years, if you're talking about the average stock," Krinsky said on CNBC's "Halftime Report."

 Exxon & Chevron- Energy stocks have been on a tear this year, and Wall Street's top-rated analyst thinks they've got more room to run in 2017 — roughly twice as much room to be exact. Big oil earnings are poised to double next year as crude prices continue to march higher and oilfield services costs remain depressed, said Doug Terreson, head of energy research at Evercore ISI and Institutional Investor's top-rated analyst for integrated oil. That would be a welcome change for integrated oil companies, which handle everything from drilling for crude to marketing fuel. They have seen their earnings decline significantly from last year as they grind through an oil price downturn now in its third year. Terreson's top picks are Royal Dutch Shell, BP, Exxon Mobil and Chevron. But he also sees upside for smaller independent exploration and production companies and oilfield services firms.

 Ford-(per Wall Street Journal, 12/1/16), Ford Motor Co. will shift small-car production to Mexico despite repeated criticism from President-elect Donald Trump and a pledge from the incoming American leader that companies face “consequences” for leaving the U.S.. Ford Motor Co. plans to lobby President-elect Donald Trump to soften U.S. and state fuel-economy rules that hurt profits by forcing automakers to build more electric cars and hybrids than are warranted by customer demand. “In 2008, there were 12 electrified vehicles offered in the U.S. market and it represented 2.3 percent of the industry,” Mark Fields, chief executive officer of Ford, said in an interview at Bloomberg’s Southfield, Michigan, office Friday. “Fast forward to 2016, there’s 55 models, and year to date it’s 2.8 percent.” This is not a formula for success, he said. “At the end of the day, you’ve got to have customers, so obviously, there would be pressure on the business if there’s not a market,” he said.

 From my 11/1/16 newsletter:

 York Capital Management founder Jamie Dinan told CNBC on 10/18/16 that a Clinton victory would be good for all global equities. TRIAN Funds Peltz (who had already given $50MM to Trump) told CNN that it seems like Clinton is going to win. However this is before the FBI sent a letter to congress about finding more emails on Clinton. How things have changed! On 10/13, CNBC was reporting that a Clinton victory would be good for the market as it loves the ‘status quo’ but if due to ‘Billy Bush/Trump’ tape, Clinton wins with Democratic victories in the US Senate and the House then the market could down sharply.  Some analysts are already selling their assets. If that happens, it would be a buying opportunity! Now the market is stuck in the mud for 3 reasons, the presidential election, expected Fed rate hike in December and the on-going earnings season on Wall Street. Since the 1970s, OPEC was thought of as something bad for the US. At the recent OPEC meeting, most oil producers agreed on cutting production to stabilize prices. Whether they can achieve that goal with member states cheating on their commitments is another matter. However this is good for the US as it would allow the fracking industry to function again without defaulting on their bond debt. Renowned energy trader Mark Fisher, stated on 10/21/16 that the crude oil market could establish a new baseline in the $55 to $65 range (for WTI) barring some kind of unseen geopolitical problems. How things have changed!

 Exxon/Chevron- On 10/28/16, with their Wall Street earnings call, Exxon and Chevron saw their profits drop compared to last year but investors liked what they heard from Chevron. After having 3 straight quarters of losses, Chevron posted a profit as they reduced their costs by $10B during the first 9 months of 2016. This showed that Chevron could operate profitably in this low priced and tough competitive environment. This also show that the dividends at Exxon and Chevron are safe.

 GE- On 10/28/16, GE announced that it is in talks with Baker Hughes for a partnership between the two companies. However GE denied that it is not for an outright purchase of Barkers Hughes. This announcement led to a share price hike of 8% for Bakers Hughes and 2% for GE on 10/28/16. This clearly shows that despite previous losses, GE is trying to double down on its energy investments.  Technical analysis of the GE stock shows a different story; on 10/11/16, a chartist coming on CNBC Mad Money stated that the GE share price has gone below its 40 day moving average and that is an indication that the ‘big boys’ are getting out of GE.  When GE had their earnings call on 10/21/16, they missed their earnings expectations and they lowered their projections for the future due to continued losses in the oil and gas sector. They expected a growth rate of 15% but they only achieved 7%. Goldman called it a weak operational quarter. GE CEO was optimistic about the long term horizon.

 Ford- On their 10/26/16 earnings call Ford announced a 56% drop in earnings for Q3 but did better than expected in China. Most of the decline came from North America. Reasons for the decline (1) Recall costs (2) Reduced dealer inventory (3) Changes in the mix of F 150in North America. However this is the 2nd highest profit since the year 2000. Ford CEO Mark Fields said, “Industry is at a relatively strong level but retail market is softening and the pricing environment is getting tougher”.

 Twitter- Corvex Management founder Keith Meister stated on 10/21/16 that suiter companies such as Google, Disney and Salesforce that looked at Twitter for acquisition purposes did not succeed as the shareholders of those companies put pressure not to go ahead with the acquisition of Twitter. Salesforce CEO stated that “Twitter wasn’t the right fit for us”. On 10/14/16, trader Dan Nathan stated that although Twitter has a broken model as a stock he does not think there is a lot of risk to its current valuation. Trader Tim Seymour said the social media company Twitter’s earnings report on 10/27/16 could be a very big announcement. Which was true! On 10/26/16 Twitter beat Wall Street expectations with earnings of $616MM and new users grew by 7%. They also announced they restructured with a 9% staff layoff.

 Disney-CNBC technical analyst studying charts of Disney stated that Disney could go down in a dramatic way as big funds get out of Disney. This wound give us another buying opportunity.

 Alcoa- During October 2016, Alcoa had a 1 for 3 reverse split so we multiplied our cost by 3 to reflect the true performance. However this brings down our true performance for the month of October 2016.

 Apple- World’s most valuable company, Apple, reported its first decline in annual revenue and profits since 2001! Revenue fell for the 3rd consecutive quarter as IPhone sales dropped.  Still Apple is the most profitable US Company. CEO is optimistic about the future IPhone sales due to innovations, switches from Samsung and other smart phones and also due to the growth in emerging markets such as India where it grew by 50%.

 Until we meet again, I wish you all the best.

Lalana Fernando

September 18 Post

Hi Folks.

 This is from my 9/1/16 stock newsletter (as of 9/1/16)

During the month of August 2016, stock market (the Dow Jones Industrial Average) went down by 32 points or 0.17% but at the same time our portfolio went up by 1.91% in 31 days. Annual return on the 10 year US Treasury is 1.6% and the yield on the 2 year treasury is at 0.75%. In 2014, only 14% of fund managers beat the market index.  However we just started the month of September; historically, September is the worst month for the market and all market crashes took place in October. Also in September the Bank of Japan could decide to change course with respect to interest rates that could spook markets all over the world.

 The US Federal Reserve could raise rates in September too which would be a blow. OPEC once again meets in September and that too could send jitters around the world. However some believe that OPEC has become impotent.  Technical analyst Spiro of ORIPS Research Studies who studies oil charts say that a barrel of oil (WTI) could easily go up to $72- a 50% rise! Recently we went back down to $39 and rose sharply to $50 due to short coverings.  However he see oil going down during the first 2 weeks of September. Technical analysts believe that gold will go much higher but that is not a good sign for other markets; historically speaking. At the same time, historically, October to December or October to May is the best for the market. We do not have to fear a correction or a crash; if that happens we would be able to increase our holdings in good stocks and decrease the average cost per stock. Eventually we will have a huge return on the total portfolio. After all, our GE holding grew 61.9% in 373 days or approximately 1 year! At the current rate, it would take about 40 years to get that on the 10 year US Treasury!

 Hedge funds usually cater to people who have hundreds of millions or billions of dollars. Last month, while equity fund inflows grew, hedge funds saw their largest outflow since 2009. On 8/22/16, per CNBC, cash inflows in to stock funds was at an all-time high with most going to index funds. During the first part of 2016, $160B went in to index funds while $200B came out of managed funds. On 8/18/16, Chief Investment Officer for Wells Fargo, James Paulson stated that he believes that the global economic recovery is in its early stages. On 8/10/16. Jeremy Siegel, professor at Wharton School of Business who correctly predicted his market rally predicts it has another 15% on the upside. CNBC experts who study market trends say that finally money on the sidelines is coming in to the market and it will be stronger after the Labor Day when everyone returns to work after summer vacations.  Technical analysts are the best when it comes to making predictions about the market. After we have been in a narrow range for the past 2 years, tech analyst Chris Verrone now states that the market is ready to go up much higher. The fact the semiconductor index PHLX has risen more than 20% in 2016 is seen as proof of future market upside by Chris. On the other hand, technician Steve Grasso stated that if the Feds have an interest rate hike, the market (S&P 500) could go down to 2043. To me that is only 2% and it is not important at all-just another buying opportunity.

 Digesting all this information, my conclusion is that during the next couple of months we could see a correction in the market but the probability is high that we could see new highs in the market prior to January 2017. However this bull market is getting close to its end. The next bear market could be very brutal. When the interest rate on the US Treasuries go up, most investors will sell equities and buy bonds. This is what happened during the 1987 crash.

 June 2016 to July 2016, new home sales grew by 12.4%-highest since 2007. At the same time existing home sales fell by 3% as there were less homes available for sale. Most of the new home sales took place in the south.

 Apple- Apple will introduce its newest products (IPhone 7) next week. It is difficult to say how the market would respond. On 8/16/16, Apple announced that it would invest more money in China. On 8/21/16, Samsung surprised the market with their Q2 earnings; reporting a 56% increase in their mobile phone revenues-compared with Apple’s meager 2.3% for the same period.

 Disney- On 8/5/16, Jim Cramer stated that over the long run ESPN is not going to have a negative impact on Disney’s share price. He went on to say, ”Those who think more short term may end up trading this thing right in to the poor house”.

 Twitter- Twitter which plans to stream 10 Thursday night games has set its sights on a bigger screen to capture more viewers, the company is creating an app for Apple before the NFL season kicks off in September, a person familiar with this matter told San Jose Mercury News on 8/16/16.

 GM and Ford- Three of the biggest car makers saw their sales revenue decline 3% to 8% from June 2016 to July 2016. Car sales dropped by 25% as most of the sales were for SUVs and trucks. Most experts believe that the 6 year bull run on auto stocks is over. Ford alone saw an 8% decline in sales from June to July 2016 while GM saw a 5.2% drop for the same period. When interest rates start rising, autos being the classic type of cyclical stocks will see a bear market.  Also as it has happened so many times in the past, people have got addicted to low gas prices and buying gas guzzlers. Within the next 12 months if the price of a gallon of gas goes up to $6 to $10, these people are sure to have a difficult time paying for their monthly expenses.

 Wish you a nice September!

Fernando

August 2 Post

Hi Again,

 From 6/30/16 to 7/31/16, the market (Dow Jones Industrial Average) rose by 2.87% but our portfolio went up by 4.04%!! Remember 86% of the active money managers failed to beat the market in 2014.

 After 18 months, the market hit an all-time high on 7/12/16! According to the historical data that I have studied, the probability of market rising another 10% to 20% from this point is very high. However on 7/14/16, Blackrock announced that they have concerns about the US market as international markets are down and there is so much money on the sidelines. They also expect the 10 year US Treasury to go down to 0.75%.  For many years it was around 2%. Markets always climb a wall of worries so this is good (bullish) for the market. Also if there is a lot of money on sidelines, it is extremely good (bullish) for the market. Low US Treasury rate has all to do with negative interest rates in most countries (Europe, Japan and so on). However when this range reverses, we could have a big bear market in the US. On 7/12/16, Julian Emanuel, Executive Director of UBS stated that he expects the S&P500 to go up another 20% to 2500. Technician Sebastian, who correctly predicted the BREXIT market bottom stated on 7/19/16 that he expects the S&P 500 to go up to 2200 within the next 30 days (that is another 1.99%).  Now the market is rather expensive with a PE of 20. For the longest time, it was hanging around 15. Just prior to the market crash in 1987, the PE was at 29. Unless there is a rapid increase in corporate profits, we could have a market correction.

 Glaxo Smith Kline- On 8/1/16, Google (Alphabet) announced that they will work with Glaxo Smith Kline to create a new company to develop Bioelectronics Medicines. The joint venture will be named Galvani Bioelectronics and it will be headquartered in the UK- 55% of the equity owned by Glaxo and 45% of the equity owned by Google (Alphabet).

 Twitter-  Q2 earnings were reported on 7/27/16. Their profits beat Wall Street estimates but once again their revenue figures were lower than Wall Street estimates. This is the 4th consecutive revenue miss. This news brought down the share price by 13%. New users increased slightly- by 100,000. Snapchat is killing Twitter. On 7/19/16, CNBC announced that more people got information on the political campaign from Twitter more than Facebook but still Twitter could not use this to raise revenue. Takeover talks are back again so this could shoot up overnight. Technically, chart shows a double bottom around $14 which is very good (bullish) for Twitter.

 GE- Per Barron’s, on 7/16/16, biggest increase in short interest for the week 6/15/16 to 6/30/16 took place in GE. It went up 65% in 2 weeks to 188 million shares. No wonder GE rose so much in July. Also in July, GE and Microsoft announced a partnership with respect to the ‘cloud’ businesses.

 Exxon & Chevron- Per Doug Terreson on 7/29/16, the Q2 earnings just reported was the worst in a decade but the bad news was well known; and we should expect the same for the next few quarters as well. He is optimistic about the long term future and he believes that the dividends are safe. He expects Oil (WTI) to rise to $60 by year end. He recommends Shell with a 6.6% dividend rate. Barron’s recently featured Shell on their front cover as a great buy.

 Apple-Reported Q2 earnings on 7/27/16. Smart phone revenue was down 23%, China sales were down by 33% and PCs were down 13%. The good news was that their services sector was up by 20%, and if this sector keeps growing, it is going to change a lot of bears in to bulls. Earnings call was not bad as expected so the share price rose $6+ to $103. Last week, for the first time they went over 1 billion phone sales.

 Have a great month!

 Fernando

July 11 Post

Hi again folks,

We do not have to care if the market goes up or down-even how far it goes down. We just have to wait for opportunities when ‘our stocks’ (listed on the scorecard) go below our average cost; then we can increase our holdings and be patient till we make a profit in the long run. Since December 2014, the market has been in a range without making new highs. Looking at historical data, once the market has not made a new high for more than 18 months, when it makes a new high again, you can expect the market to move up significantly. Our investments will eventually pay off.

 Over the past 30 years I have noticed that when experts expect the market to go down due to a certain future event (i.e. the BREXIT that took place a couple of weeks ago), you also get many money managers who wait for the opportunity to invest new money in the market. The BREXIT mini crash took down the Dow Jones Industrial average by about 870 points in 2 days ending on Monday, 6/27/16. On 6/27/16, market volume went up to 5 billion shares and the volatility index (VIX) went down which was a clear indication that all the sellers got out and the market is ready to go up-which it recovered most of the 870 points within the next few days. Also as it always happens, most of the rebound was due to short covering. One must never sell in to a crash when others are in to panic selling. That is a time to go shopping and buy.

 This mini crash gave us an opportunity to increase our holdings in Apple, Bank of America, Disney and Glaxo Smith Kline on 6/27/16. Where will the market go from here? There are many who expect the market to go down in a big way. On 6/10/16, the bond king, Bill Goss stated that all financial markets are in a supernova close to explode and be vulnerable. He also stated that oil, stocks, bonds and gold all have gone up so the market is very confused. He is invested in top oil company bonds. On the same day it was announced that Carl Icahn is saying that stocks and gold is up due to negative interest rates in many countries but he is net long on stocks. On 6/9/16, CNBC reported that George Soros is selling stocks and buying gold. As he did in the 1990s, he correctly predicted the downfall of the British pound if and when Britain exits the European Union. In one day the pound dropped by 8% to $132 to the US Dollar after the BREXIT vote but we have to wait and see if Soros’s prediction of $115 will come true. Paranoia among billionaires could be due to the fact that they lost $570 billion in 2015 and 200 billionaires lost their billionaire status in 2015. 85% of all trading in the market is done by computers and algorithms and as with the unexpected 8% drop in the Chinese market months ago, the computers did not know how to react to the BREXIT mini crash. Robo money managers of the Betterment Fund froze all trading on 6/27/16 and thereby they missed a huge buying opportunity.

 Humans can always beat computers! On 6/8/16, oil (WTI) hit a multi-year high of $51. On 6/17/16 it was announced that oil rigs were up by 9 and gas rigs were up by 1. Natural gas which was not expected to go up for decades has gone up more than 25% in one month. We may never see the February 2016 lows and we may never be able to buy our oil stocks at a cheaper price. Some expect oil (WTI) to hit $80 within the next 6 months. I have relied on technical analysis to assess the future of the market but what happens in the next moment can reverse all previous predictions when it comes to technical analysis. For example, world’s best technical analyst, Ralph Acampora, when the market was crashing on 6/27/16, stated on CNBC that we could see the February lows once again the ten year yield on the US treasury could even go down to !% (it has been around 1.5% to 2%).  He wanted to see more fear in the market prior to making a return to new highs.

 Apple- On 6/17/16, Beijing (China) Intellectual Property Court ruled that Apple infringed on Chinese patents. For now Apple can sell in China. Unlike in the US, Chinese courts are not independent and it seems like the Chinese government is out to get Apple and bully them. This is why Carl Icahn sold his holdings in Apple. It is no surprise Apple promised to invest billions in China. On 6/10/16, Brian White of Drexel stated that he expects the stock to rise by 90%. He also stated that innovation at Apple is still alive and growth will continue but not as it has done in the past. On 6/16/16 JP Morgan cut the Apple price target to $105.

 Disney-We made our first purchase of Disney on 1/10/16 when most analysts were negative on Disney due to ESPN and ‘cord cutting’ by consumers. Now many analysts are recommending Disney as a buying opportunity. On 6/20/16, Anthony DiClemente of Nomura Securities issued a buy recommendation on Disney with a price target of $115(our average cost is $94.28). He also stated that ESPN problems are well documented and no further cord cutting is expected. On 6/16/16, per CNBC, Disney opened its theme park in Shanghai, China with 33 million people living within 3 miles of the theme park. Disney CEO Igor stated that this was Disney’s best investment since they bought land in Florida. Their world’s biggest castle is in China.

 GE- Per Josh Brown, CEO, Ritholtz Wealth Management announced on 6/15/16, that the price of GE just moved above its 50 day moving average and if it goes over $32, it could go much higher.

 Twitter- On 6/15/16, Twitter went up by 6% in 4 hours due to their acquisition of Sound Cloud (online music); and also due to the acquisition of LinkedIn by Microsoft, there were rumors once again of Twitter being taken over by another company. It is difficult to find anyone who wants to buy the stock but analysts say not to short it due to M&A rumors. On 6/10/16, CNBC reported that Instagram is attracting more ad dollars than Twitter and they cannot understand why Twitter cannot make use of the presidential campaign (with Trump so Twitter happy) to monetize more.

Have a great month!

Fernando

June 12 Post

Hi again,

 As you can see from our scorecard, our portfolio rose by 17.49% between 4/30/16 and 5/31/16 !! During the same period, the stock market or the S&P500 index (top 500 companies) rose only by 1.5%. Even our worst pick Twitter rose by 5.95% between 5/1/16 and 5/31/16.  In order to have a general idea where we are headed for the market, we have to consider what the technical analysts (chartists who are in to Fibonacci ratios etc.) say and when most of them agree, then it is very credible. For the past 18 months, the market has been range bound. If the market has been range bound for more than a year, and it breaks it to the upside we could have a big gain (i.e. even 20%). Also if the market does not have a break through to the upside, once again we could have another severe correction.

Chartists say that small cap stocks (Russell 2000) is indicating that it is ready to move much higher. However, many money managers are selling their stocks and waiting for the market to make new highs to get back in to the market. I personally think that is a stupid idea. We can buy more as the market moves lower and reduce the average cost. So what is the magic level all these technicians are watching for? It is around 2134 on the S&P500; the S&P500 has to go over 2134 and stay there for a while or else it would be risky to assume that the market is going to go much higher. May 2016 is different from May 2015 as the market is technically stronger. As of now, 75% of the stocks are above their 200 day moving average.

When a stock goes below its 200 day moving average, it is in dangerous territory and most prudent investors would stay away from those stocks. International markets and economies are in better shape now than in May 2015. Oil reaching $50 per barrel in May 2016, is too a very good sign. On the negative side, per Barron’s, Carl Icahn, one of the best activist investors, had a net short position of 149% at the end of first quarter 2016; at the end of 2015, his short position was net 25% and a year ago it was only 4%. So Icahn is betting the farm on a big correction or a crash!

 Schlumberger- According to Bloomberg News, on 5/24/16, Goldman Sachs after being bearish on oil for years, added Schlumberger to its conviction buy list. Analyst Waqar Syed reiterated a $94 price target- nearly 30% above the stock price of 5/24/16.

 Twitter- On 5/18/16, Ronnie Moas, issued a buy recommendation on Twitter as their cash position is at $3.6B and their market cap was at $10B with a PE of 23.  Then on 5/10/16, Bob Peck of Suntrust, stated that the lowest we could see for Twitter should be $12 per share. He also stated that it is a candidate for getting acquired by another and Google is a possible suitor. He expects the price of Twitter to go up during the second half of 2016.

 GM and Ford- As analysts have been expecting it was announced that auto sales have peaked. Car sales for some automakers were down as much as 30%. Due to low oil prices, most of the demand is for SUVs and trucks-globally. Hedge funds are getting out of GM. On 5/11/16, GM announced that it has finally turned a corner in Europe.  Even though we cannot expect growth from these automakers, the auto market is expected to remain stable and profitable for a long time to come. GM is a PE of 5 and a yield around 5%, the stock is a safe place to park your money.

 Apple- Right now this has the biggest risk and the biggest reward. “No risk, no reward”. Day by day, the nay sayers are growing. More and more, pundits are saying that Apple will take the same road as Nokia, Xerox and Eastman Kodak (or even IBM). Latest is that Apple will take 3 years and not 2 to come up with a major change in the IPhone. Shark Tank’s billionaire Kevin O’Leary who used to be a big fan of Apple for years and who also started his own ETFs known as O’Shares states that his new Samsung can do everything but wash his laundry and it will take ages for Apple to come to that stage. The most bearish people on Apple expect the share price to hit $85 by the latter part of 2016. To me, that is not bad at all. It hit $89 in May 2016. If it goes to $85, I suggest you buy 5 more shares and another 5 shares at $75.

Carl Icahn got in to Apple years ago when it was a dud and he got Apple to be more shareholder friendly. During the past few weeks, he sold all his Apple holdings with a net profit of $4 Billion! Carl was worried that Apple might have more problems in China. In fact, one year ago, Carl said that he will never sell Apple.

Then should everyone get out of Apple too? No, not by a long shot. I still have faith in Apple and more than that the greatest investor this world has ever known and the 2nd most richest man on Earth, Warren Buffet just bought $1 billion in Apple shares! For many decades, he avoided technology stocks till he got in to IBM which has been a dud for the longest time. IBM too is showing signs of turning around. On 5/12/16, Apple dropped below $90 for the first time in 2 years  giving us another chance to increase our stake in Apple; also after a long time they dropped below Google aka Alphabet in market cap to $496B. On 5/13/16, Apple announced that they were going to invest $1B in China. Their profit margin is at 23% while the profit margin for their competitors is around 7% which could lead to a bigger problem for Apple. Apple makes a big deal about going in to India for the first time and how India is going to take over China as the most populated country; however keep in mind that per capita income of India (GDP/# of people) is US $1,500 per year and the monthly average wage in India is US $295. I cannot see a mad rush to buy a $700 IPhones. People will kill each other to steal an IPhone! On 5/2/16, Tim Cook, CEO of Apple, on CNBC show Mad Money stated the following:

·        In China, other smart phone users turning to Apple is huge.

·        In 2 years, Apple grew 70% in China.

·        The middle class in China is growing from 50 million to 500 million in 5 years.

·        India will be the most populous country in 2020 and most young people in India wants to own a smart phone.

Good luck!

Fernando

May 2 Post

Hi Again,

For the month of March 2016, our portfolio had a gain of  9.59% but for April 2016 had a loss of 1.79%; however if we remove Twitter and Apple, we have a gain of 12.89% for April 2016! For more on these 2 stocks see at the end of blog.

For the past 30 years I have noticed that technical analysis is the best method to predict the immediate future of the stock market. When most of the technical analysts agree on the future path, we can have a lot of confidence that is the correct path of the market. When the technical analysts do not agree, we could go with one(s) with a good track record. Now we have a very unique situation-most of the good technical analysts are very confused! Remember, technical analysts do not look at fundamental like earnings, economic growth and so on. Most technical analysts study charts. 

Different experts have different theories. One theory that has been effective for years is “Sell in May and go away (to buy back in the Fall)”. In order for us to be bullish, the market (S&P500) index has to go over 2130 and stay at that level for some time. However, the fundamentals and technical analysis show that the long term future for the market is very rosy. Therefore, if we have another correction, it would be another buying opportunity. 

Over the past year or so, banking stocks have been moving within a given range so if you are trader and not an investor, consider banking stocks. In technical analysis, in a chart, when a stock or an index is below the 200 day moving average, it is in a very risky territory and most prudent investors avoid such stocks and industries. The ETF, “XLE” that monitor the oil industry (biggest oil companies), for the first time since 2014, moved above the 200 day moving average in April 2016 which is an indicator that the worst is over for the oil industry. Since January 2016, when most expected Chesapeake to declare bankruptcy, it has risen over 245% in 4 months!

On 4/26/16, on CNBC, Jeff Curries, Goldman’s head of commodities, upgraded oil to neutral (reduction of risk) with a long term price goal of $45 per barrel. Everyone expected the demand for steel in China to decline but it increased slightly! SO much for the experts! However Goldman does not expect commodity (except oil) prices to rise for many years to come. Goldman wants traders to short gold-especially if the Feds raise interest rates. On 4/28/16, Doug Terreson of Evercore recommended Exxon and Chevron as buys. As they are cash neutral at $50 per barrel; and these companies are expected to cut costs in the short term and raise prices over the next few months. They are not expected to cut dividends. BP currently has a dividend rate of 7%! Apart from Exxon and Chevron, he also owns Conoco Phillips and Schlumberger. 

On 4/6/16 I attended a very good seminar titled “Legends of Technical Analysis”. The panelists were Ralph Acampora, John Murphy, Charles Kirkpatrick and Paul Desmond. I do not care for Kirkpatrick and Desmond but Acampora and Murphy are true legends. Ralph Acampora is the demi-God of technical analysis. He has over 50 years of experience. I was surprised that my hero John Murphy was initially taught by Acampora. Acampora did not do his degree in business, economics, mathematics and so on; he did his degree in theology! Here are some of the highlights:

•    Transports hit a low in January 2016 and Industrials hit a low in February 2016- This could be the end of the bear market
•    Moving from a bull to a bear market is a slow process and does not happen overnight.
    1st rollover: Small Caps
    2nd rollover: Mid Caps
    3rd rollover: Big Caps
•    What stocks to sell first: Highest beta stocks (highest volatility stocks; higher the beta,   higher the volatility)
•    GE will double in the long term (per Ralph Acampora)
•    Per Ralph Acampora, we will not see the big caps going down
•    Per Tech Analysis, we have a sell sign on gold but this is not a good time to short sell gold
•    Per John Murphy, we are still in a bull market. We did not get in to a bear market.
•    Per Ralph Acampora, we could have a correction now but it will be shallow. After that we   will see higher highs, we will go to all time new highs in 2016. We will not go to February 2016 lows but if we have a 50% decline to the February 2016 lows, it would be very healthy.

•    Optimum word in investing: Always be willing to change.
•    If we go below February 2016 lows then we will go in to a bear market.
•    John Murphy does Relative Strength Indicators-comparison to other markets or stocks
•    All of Tech Analysis work some of the time
•    If most tech analysts agree, then it is reliable.
•    Don’t fall in love with one system of tech analysis
•    Nothing works all the time
•    Per Ralph Acampora, study of stocks and markets
    1st: Economics
    2nd: Industries
    3rd: P/E etc.
    4th: Tech Analysis

•    50% of all traded on NYSE are not stocks; they are close end funds, bond funds, preferred stocks etc. It is important to subtract these items when looking at advance/decline line etc. Watch your data!
•    Per Ralph Acampora, the weekly MACD is important and not the daily MACD. Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.
•    Per Ralph Acampora, Emerging markets bottomed and commodities bottomed too. 
•    Per John Murphy, All commodity currencies (Russian, Brazilian,Australia and so on) have bottomed too.

Have a great month!

Fernando

TWITTER- This is dragging our whole portfolio down but I am still optimistic about Twitter. Even the former CEO of Microsoft sold his holdings. On 4/15/16 they announced an exclusive deal with NFL. On 4/6/16, GFI Group announced that they are optimistic on Twitter as they have 360 million users and they said that Facebook had the same problem many years ago. That is when I sold my Facebook at about $25 after buying it at $18! Now FB is at about $100! On 4/27/16, it was announced that losses were not as most expected and there was a pickup in users. If the price drops under $10, buy 100 shares and bring down the average cost by 50%.

EXXON- On 4/26/16, after 6 decades, Exxon lost their AAA rating downgraded to AA+ - due to its debt level and refusal to cut the dividends. On 4/30/16, despite losses, Exxon raised its dividends by 2.7%-slimmest hike in 30 years. 

APPLE- Last month we had a 14%+ gain (from day one) on Apple. At 4/30/16, we have a loss of 1.65%-in just 31 days! Now it is trading below our average cost and some believe that it could even go down to $80 prior to August/September 2016. I suggest buy 5 more shares at the lowest available price on 5/2/16. In the future, if the price drops to around $85, buy 5 more and if the price drops to around $75, buy 10 more shares. This is the next best thing to a sure thing! In the future, Apple is going to be like an ATM!

On 4/30/16, Apple announced that it would cut $2B in IPhone inventories. Last week Apple raised its dividends by 10% to 57 cents per share-total dividends paid by Apple is at $12.6B which is 3.21% of all dividends paid by the S&P500 companies. This makes Apple the biggest payer of dividends overtaking Exxon Mobil. Apple earnings went down by 22% and they missed revenue guidelines(for the first time).  First sales drop in 13 years! Sold 12 million watches. Their IPhones fetch a margin of around 40% when others have a margin of around 0. On 4/26/16, Per Toni Saccibaughi of Sanford Bernstein analyst Apple product cycle will come in September 2016 so the stock will start going up July 2016. Only 60% of handsets in the world are smartphones. Apple just entered the market in India and in a few years India will overtake China as the most populated country on Earth. Per Barron’s article on Apple on 4/9/16:
•    Stock could rise to $150 in 12 months
•    Current pessimism due to slowing growth of IPhone sales that account for 2/3 of revenue
•    Total revenue projected to decline by 2.4% to $228.1B pulling profits down by 6.3% to $50B.
•    Apple service already brings in 15% of Gross Profit., and could reach 29% by 2020. 
•    Apple has a long term potential to reach 1.5b active devices with stable free cash flow if $67B a year up from 1B devices now and $56B in free cash projected for this year.

 

 

 

April 2 Post

Hi Again,

During March 2016 our portfolio gained 9.59%-in other words if you bought all the items listed in the scoreboard (stock listed @ # of shares), you would have gained 9.59% in 31 days! However our overall gain from day one is 10.2%. If not for Twitter, the overall goes up to 17%.  And the gain for March 2016 goes up to 14%. We are still in the bear that started on 8/25/15 (see below). When we get in to the next bull market, I would not be surprised to see an overall gain of 30% to 50% within the next 3 years.

 The market has been gradually moving up over the past few weeks.  In order to prove that we are not in a bear market, the S&P 500 has to go above 2125-that is another 3% from this point. In other words, we should expect a lot of resistance between this point and 2125 on the S&P500 so the probability is to the downside and not to the upside. If the Dow Jones (DJIA) hit a new high (18,312) with another new high on the Dow Transport, then we know for sure that the bear market is over (Dow Theory). For the past 3 months, the market has been acting in a very predictable manner-according to technical analysis. On 3/1/16, Ralph Acampora, one of the best technicians that I have been following for decades stated that the market hit a short term bottom on 3/1/16 (SP500 at 1978) and he expects the market(S&P500) to rise to 2050 to 2100 within a few weeks. On 3/30/16, the market(S&P500) hit 2070 on 3/30/16-4.7% increase in 30 days! Yes, technical analysis could be that accurate. However since 85% of trading is done by computer generated programs, it is safe to assume that they too follow technical analysis.

Oil (WTI) hit a bottom around $33 in January 2016. Since then it has risen to $38 and most analysts believe that this is just a short covering rally and it is not possible for WTI to go over $40.  That too might send the stock market lower. On 3/11/16, the industry reported the lowest level of rigs for the past 150 years. In North Dakota Bakken, rigs dropped from an all-time high of 235 to 33 as of now.

GE-On 3/23/16- It was announced that the digital business is just getting started so the stock has a long way to go. This week GE hit an all-time high since 2008.

Twitter- For the past 3 months I have been wondering if we should sell Twitter as it is bringing down the whole portfolio down but for now, I intend to stick with Twitter. On of its greatest fans, Steve Bahlmer, former CEO of Microsoft tweeted on 3/10/16 that he sold his holdings of Twitter saying, “Twitter taught him not to be an investor”. As Ihave said before, if the share price drops below $10, we should consider buying another 100 shares so as to bring down the average cost to $12.52 (50% reduction)

Chevron and Exxon- On 3/8/16, the CEO of Chevron addressed analysts and stated the following: (1) They are going to cut capital expenditures (2) They will increase dividends (3) They will increase production. On 3/10/16, Paul Sankey of Wolfe Research stated that Chevron is a better buy than Exxon. Exxon has losses in Russia. Chevron will cut capital expenses by 50% from peak so the dividend is safe and sustainable. Chevron need not make any acquisitions to make money in the future but hat is not true for Exxon. Most good assets of other companies are overpriced as they are expecting Exxon to go on a buying spree. No risk to the dividend at Exxon either. Exxon also have problems in the Middle East. Companies close to insolvency have assets (oil fields) that are not that attractive to buyers like Exxon.

Good luck till next week! Fernando

March 9 Post

 Hello again,

 We are still in the bear market that was started on 8/24/15 and in another 2 to 3 years our portfolio should have an average gain of 25% to 50%.

 The stock market has been going in the same direction as the oil market for a long time now. Everyone has been waiting for the ‘decoupling effect’ but it is not in sight.  The fate of the high yield bond market depends on the US oil companies that depend on the price of oil.  As stated in a previous newsletter on 1/20/16, oil (WTI) hit a bottom of $26. According to conventional wisdom, we will not test that low again but it is always a possibility as this was a technical low and not according to oil fundamentals. For that to happen we must see about 1/3 of all US oil companies declaring bankruptcy.  On 2/16/16 Saudi Arabia announced that it has agreed with Russia and other major oil producers to freeze production and the market was buzzing with the rumor that by this summer they would start cutting production but a few days ago the Saudi Arabia announced that it would not cut oil production.

 85% of all stock trading is done by computer programs and now there is talk that these computers might even use artificial intelligence to move markets. On 2/18/16, Roy Niederhofer of the Quant Fund, stated that using computers with no human intervention and just following trends, his fund had a gain of 16% from 1/1/16 to 2/18/16. His computer tracks trends that go from one minute to another.  He also confirmed that this is a bear market and he recommended buying gold. I have my doubts about gold. I think the gold rally is going to be short lived.

 Even though most believe that the market has been unreliable since 1/1/16, I believe that it has been quite predictable. It has been moving to technical analysis without missing a beat.  For the past 3 months, most technicians agreed with one another but that is not so now. Unlike astrological predictions, predictions made by technical analysts could change from day to day depending on what happens in the market. For example, they could say that if the S&P500 goes below 1820, the market could lose another 25% but if it manages to stay above 1820, it could rally to 1900 (or so)-just an example.  For the past 30 years or so I have had a knack for following good technicians. The technician I like these days (no one is 100% correct) is known as the ‘Fibonacci Queen’ or Carolyn Boroden. Fibonacci is the ancient mathematician who discovered the golden ratio (2/3 or 3/2) to study the universe but now it is used to study market moves as well. These days most technicians say that the market is close to a top (even a big decline like 2008 when the S&P hit 2000 and Dow at 17,000 which it did today, 3/4/16!!) but Carolyn disagrees and her record is quite impressive. On 2/29/16, on CNBC, Carolyn stated the following (after doing her chart analysis):

·        On 2/11/16, the market hit a low of 1810 which could be a pivotal low.

·        Now, the very next day, the market could start to rally in a substantial way.

·        Short term rallies have lasted 8 to 10 days.

·        From 3/1/16, if it goes up and continue to go up might hit new highs. We have not had a new high since 5/21/15. However if the market goes down the next day (3/1/16), expect the market to repeat old trends by going down significantly.

·        NASDAQ rally will be stronger than the Dow/S&P500 rally.

Then the very next day 3/1/16, within the first 3 hours, the Dow was up 270 points (or 1.65%) and NASDAQ was up by 2.18%!!!

 Many technicians say that short term gold might go down a bit but long term it would go by 25%. I find it difficult to believe that I have got burnt by gold so many times and I know. Also if you look at the chart going back to 1900, gold seems to be in a long term bear market.

Schlumberger- We had a gain of 18.35% in just 38 days! That is amazing as we are in the middle of a big bear market in stocks and oil! On 2/22/16, a chart analyst showed a ‘reverse head and shoulder’ formation in the Schlumberger chart. This is an extremely bullish sign that you can take to the bank! We were so lucky to get in on 1/25/16. To make matters better, on the chart, the current line moved over the moving average-another very bullish sign in the chart. According to that technician, Schlumberger has a better chance of rallying than Exxon or Chevron!

 Exxon Mobil- We had a gain of 23.65% in 193 days. On 2/16/16, an analyst announced that he expects the credit agencies to cut ratings for Exxon in 2016. Due to their large refinery business they are not very sensitive to changes in crude oil prices. After lifting of the oil and gas export ban, for the first time, there was a shipment of liquid natural gas from the US to Brazil on 2/24/16 and this was done by the only company that has the capacity to do it- Cheniere Energy (LNG). Carl Icahn is one of the major shareholders of Cheniere. Since Exxon is a major player in this area some think that they might even buy Cheniere in the future. On 3/2/16, the CEO of Exxon Mobil made these announcements:

  No more layoffs in 2016.

 He intends to increase the dividend as he wants the investors to hold the stock for a long time.

He did NOT borrow $10 Billion to pay dividends or buyback stocks; even though they temporarily stopped the stock buyback program.

Exxon Mobil has collected a ‘war chest” of $30 Billion to go on a future buying binge. Per analyst, Doug Terreson of Evercore, their balance sheet is only second to J&J and crude oil (WTI) has to go down $15 and stay there for long for Exxon and Chevron to cut their dividends

Chevron-  We had a gain of10% in 53 days! Chevron (and Exxon) are the least sensitive to crude oil prices as refiners account for a good part of their operations.

 Apple- For many years everyone on Wall Street loved Apple. It was impossible to find anyone who would say anything negative about Apple. However about 6 months ago, bulls became bears and it kept on increasing till recently when almost everyone was negative on Apple. Carl Icahn got in Apple years ago as an activist and due to the changes he got management to make, the share price increased by 400%+. About 6 months ago when most people were negative about the market and Apple, Carl Icahn said that as the price of Apple drops, he will buy more. It is said that in 2014 alone Icahn made over $1Billion on Apple. On 2/16/16, Icahn announced that he was going to trim his stake at Apple by 7 million shares.  He has been losing a lot of money (billions?) on Chesapeake Oil, Cheniere Oil and Freeport McMoran. Over the past 3 weeks, some analysts have come forward to recommend Apple as a buy and also with their new phones coming out the price could easily go up to $120 by year end-another 25%.  In my opinion, in another 3 years, we could easily see Apple around $150. After all the PE is only 10.96.

I wish you all, good luck!

Fernando

January 27 Post

Hi Folks,

As of 1/24/16:

As I predicted, we had a ‘dead cat bounce’ in the stock market last week. In a time like this with technical analysis we can find some direction.  On 1/19/16, Carolyn Boroden the technician known as the Fibonacci Queen made some remarkable predictions on CNBC. She said that we might have a short term bottom this week at S&P 500 at 1832 but if the market goes below that we might see a world of pain and the market could go down another 20% to 30%. The very next day, the S&P 500 hit 1812 (Dow was down 550 points) for a short time with volume rising 20% and market started rising. Reaching a low with higher volume is very good as it means that the market is running out of sellers.

 Ralph Acampora is one of the most respected market technicians that I have followed for decades and he is extremely pessimistic about the market right now and on 1/22/16 he made the following statements on CNBC (1) Russell 2000 or small cap stocks have been going sideways for the past 2 years and this is a very bad signal for the future (2) The stock market is tradeable but not investable (3) If the Dow Jones goes below 15,666 or the S&P500 goes below 1820, it could go down 75% - that will bring the Dow to $3900 (from over 18,000 in 2015) !! There have been many times he has been wrong too.  According to some technicians, the S&P cannot go higher than 2000 for some time to come and if it falls below 1880, then the decline would start again. From 1/1/16 to 1/20/16, stock markets around the world lost $7 Trillion! This is why it is always good to have some put options on indexes as a hedge against Armageddon. Prior to August 1987 I was following technician Robert Prechter and he predicted a market top during August 1987 and severe correction during the Fall of 1987. The puts I got my dad to buy were worth $1 before the 1987 crash and after the crash they went up to $70 (7,000% gain in 4 days or so).

 When the market hit a bottom I bought a few call options on the market index and within 4 hours they doubled in price. Investor sentiment is at a 30 year low so taking the contrarian view, this is bullish and good for the market. One reason why the market went up over the past few years is due to huge buyback programs of many big companies but what most people miss is that due to SEC regulations they have to put a hold on those buybacks 5 weeks prior to an earnings call so during the past few weeks when the market went down by 2,000 points these companies could not intervene with buybacks. Very soon, we will see these buybacks coming back in to the market and lifting some of these stocks.

Here are some of the companies that will have earning reports soon- (1) Haliburton on 1/26/16 will give us a good picture of the oil industry (2) Apple will report on 1/27/16 (3) Chevron will report on 1/29/16. Next week is the Super Bowl of Earning Reports! Also on 1/27/16 Janet Yellen will have their FOMC meeting. Will they soothe markets or add fuel to the fire? My concern is that this will also open the door to insiders to sell their stocks so if that happens in a big way, the market will go down more than going up. It is a wait and see situation. We are in a bear market where the main trend of the market is down and not up. In my opinion, bear markets are good as it gives opportunities for the fearless long term investors to get in to good companies and make money in the long run. Between 2010 and 2015, there were no corrections and only a handful of stocks kept creeping higher-which is very unhealthy for everyone. Most countries are in deep trouble due to recessions, currency problems, and credit problems and so on. These countries have huge sovereign funds with US stocks. Over the past few weeks they (i.e. Saudi Arabia) have been selling to meet the daily needs of their government. Over the past 7 years due to 0 Fed interest rate, emerging markets borrowed $7 Trillion in US dollars. At the time the Dow was down 550 points on 1/20/16, oil also hit a bottom of $25 and started rising sharply. On 1/21/16, oil (WTI) was up 6% and on 1/22/16, it was up 9% to $32.25 (28% from the bottom). Some say that oil has to go down to $10 or so for companies like Exxon/Chevron to cut their dividends. Recently the Saudi government came up with their 2015/2016 budget and they prepared that assuming the price of oil (Brent/WTI) at $29 per barrel.

 Start nibbling at these stocks but know that initially for a long time, you might see the price decline sharply giving you opportunities to increase your holdings:

IBM- The most hated stock on the Dow Jones 30. It has been going down (Jan 2013 at $213 to $122 on 1/22/16) sharply. It has a PE of 9 while the industry average is 18 so the value is twice as much. Buy 2 share at this price, when it goes under $110 buy 3 shares and another 3 when it goes under $100 and so forth.

Schlumberger Limited (SLB)- It was a huge pleasant surprise when they had their earnings call last week. They said that they will not increase the dividend amount at this time but the dividend is safe for 2016. They also expect the price of oil to rise sharply in 2016 and the biggest surprise was that they announced a stock buyback! Most analysts were saying that even companies like Exxon and Chevron should suspend their dividend to get ready to buy when other oil companies go insolvent in 2016. Now it is trading at $65 so buy 2 shares, 2 more shares when it drops below $50,  and let us keep buying as the price declines so when it goes down to $14, we can buy about 1,000 shares.

On 1/19/16, it was reported that US freight tonnage was up by 1.1%. The Chief Economist of the International Monetary Fund or IMF or the World’s Central Bank on 1/19/16 stated that the stock markets all over the world are overreacting to energy prices; and he expects global growth rate to be around 3% and that is a reduction of a mere 0.2%. China reported a growth rate of 6.9% but most believe that the real rate is around 4.5%. However as expected retail sales went up by 11% as the market is moving from manufacturing to the service sector. Banks in the US are safe due to the Volcker Rule and Frank Dodd but that cannot be said about the banks in other countries. European banks are very exposed to commodity markets and sovereign debt. There are rumors that UBS and Credit Suisse might go insolvent-if the worst happens. Even Deutsche Bank (they just reported a loss of $7.2B) could lose over $700 Billion; too big to fail but too big to be saved.

 Given the information that came out, here is an update on our holdings:                                                                        

Apple- As I have stated before, for many years all of Wall Street loved Apple and then a couple of months ago, all on Wall Street started hating Apple. Earnings estimates kept going down. At that time I asked you to start nibbling (buying) Apple. Last week 2 major firms issued buy recommendations on Apple. Where were they when I asked you to buy Apple? On 1/19/16, Goldman Sachs gave a buy recommendation on Apple with a future price target of $150. On 1/22/16, Gene Munster of Piper Jeffries came out with a buy recommendation on Apple with a price target of $150 in 9 months and on that day alone Apple went up by 5%. On 1/20/16, Apple hit an intraday low of $93.42 and rose to $101.42 on 1/22/16. If Apple goes to $150 in 9 months, from the low of 1/20/16, it is a 61% gain in 9 months in one of the most valuable and the biggest company in the world. Scott Kessler of S&P Capital IQ issued a very strong buy recommendation on Apple. For the past year or so everyone in the market knew that Apple was stealing employees from Tesla and as with everything else they were secretly working on a car. Elan Musk used to joke that Apple hires their fired employees. Around 1/20/16, Elan Musk stated that Apple is developing their own car. Some say that Apple should buy Tesla but Elan Musk may not be willing to sell Tesla. I personally do not think that Elan Musk would be able to stand in the way of Apple if they decide to have a hostile takeover. All insiders and 5%+ owners own only 22% of Tesla. Tesla is extremely over-valued but their market cap is at $26.5Billion and Apple’s Cash and Short Term Investments come to about $50Billion and you add NetAR and you get about $80 Billion. Can Apple buy Tesla? You do the math! In my opinion, Apple should wait for a stock market crash or the bear to make a dent in stock prices where Tesla market cap drops to about $12 Billion and then make a hostile takeover. The guy in charge of the car division at Apple resigned around 1/22/16.

 Twitter-On 1/18/16, Scott Kessler of S&P Capital IQ stated that Twitter is now a value stock and expects revenue to go up by 40% this year.

 Get ready for an eye opening week on Wall Street. Will the market go up more before it falls down again? Some say that this bear rally could even go on for a couple of months but remember the bear market is not over and the general trend is towards the downside. It is good to have some money in S&P 500 puts as a hedge against a huge market decline over the next 6 months. Good luck!

Fernando

January 18 Post

Hi Folks, Welcome to a normal stock market!!

 Seven years, starting 2009 we had a market where a few stocks went up but not even a 10% correction-like the Chinese market prior to the summer of 2015. A value investors did not get opportunities to buy till 8/24/15. Now we are close to those lows. For the past 4 years I have been asking everyone to keep 50% of your portfolio in cash but now that we are close to getting in to a bear market, keep 50% to 75% in cash. Stay away from the bond market till the bond market implosion is over.  Many expect two-thirds of the junk bonds to go insolvent in 2016. Due to liquidity problems in the bond market, professionals are shorting the equity market as a hedge.  The manufacturing sector in the US is only 13% and that sector is in a recession but the other 87% (service sector) is doing well. Bear markets that do not lead to a recession lasts only for a short time- about 6 months; a very good example would be 1987.  I do not believe that we are headed for a recession. There are some technicians who believe that we got in to a bear market in the summer of 2015. When I issued the January 2016 initial newsletter I stated that even though we lost over 1,000 points on the Dow (DJIA or Dow30), I saw no fear among professionals in the market. Why? Put (for shorts) option prices did not rise as it used to and the put/call ratio (percentage of bears compared to bulls) did not rise either. That was extremely unusual. However there was fear among retail investors as well as 401K account holders. This week which just ended on 1/15/16, there was a significant rise in put call option prices.

 As I see it, now there is fear among the professionals but no panic. Over the past 7 days, the put call ratio doubled and over the same period, % of investors who are bearish (pessimistic) went up from 23% to 45% and the investors who are bullish (optimistic) went from 25% to 18%. The market has to go to a panic mode for it to make a meaningful bottom. As investors get more and bearish and the market keeps going down, selling pressureswill get exhausted and then we will have mostly buyers in the market for a ‘dead cat bounce’ rally. It will NOT reach previous highs. It will be a mere bear trap. On 1/15/16, Larry Fink, CEO of Blackrock stated, “There is not enough blood on the street so we are not near a bottom yet”. As many say, no one will ring a bell when the market bottoms out. For the past 35 years I have paid a lot of attention to technicians (people who study stock and market charts, sentiment etc. and not the fundamentals like revenue and earnings). Even though they are not 100% correct, they are pretty good in making predictions. Three weeks ago, there was not a single technician who was bullish and they all were saying that the market is ready to go down in a big way and stay that way for a long time to come.  However a significant event can change the opinion of technicians as they can only go by the ‘present moment’. Most of the trading is done by algorithms and computers and they follow technical projections. For the past 5 years or so, the mantra in the market was to ‘buy the dips’, starting 1/1/16, the mantra changed to ‘sell in to the rallies’. Last week trading showed that each time the market went up, selling pressure took it down to a new low. Now wait till millions of 401k and other mutual fund holders start making massive redemptions! Most technicians say that from this point, the market would fall another 20% to 50%. However the market is very oversold right now so before this market makes a real bear market bottom, we might see a rally in the market that might go on for a few weeks or months. Then as soon as people think that the bull market is back, it will go down again.

 This is called a bear trap. In a bear market, good stable companies that pay a high dividend (as long as the future is safe), will do better than other stocks.  Right now, the dividend yield of AT&T is at 5.65% and the prospects for AT&T looks very good. If AT&T goes down 50% in a crazy bear market, the yield will rise to 11%! People all over the world will sell stocks and bonds and buy AT&T! One can easily expect a return of 100% within a year or so while getting such a yield for waiting when the 10 year treasury is getting 2.03% (as of 1/15/16). One analyst believes that when this stock market bottoms, the yield on the 10 year will go down to 1.5% as investors will sell stocks and other bonds and rush to the safety of the treasuries. Last time we were at 1.5% was in 2012. If that happens, hopefully the Federal Reserve will unload some of the $4 Trillion treasuries they purchased over the past few years on the QE (quantitative easing) program. This all came to a climax after the Federal Reserve raised rates in December 2015 to normalize rates and there are all kind of debates on why they did that. In my opinion, they did it for 2 reasons: (1) To drain the excess liquidity it created all over the world by keeping interest rates at 0 for so long in the US (2) To have some ammunition when there are signs of a recession-They want to start the process of increasing rates so that when there is a fear of a recession hitting the US, they could lower rates again-even go in to another QE program or have negative interest rates as done by the European Central Bank. Every day, markets start tumbling down in China and Asia and then infects Europe and finally hits the US market as it opens at 6.30am Pacific Time. I have noticed that as soon as the European markets close, we stabilize our markets in the US. The Chinese government is not interested in having a huge growth rate as it used to as one of their leaders put it,” we prefer to have blue skies”.

 All is not bad in China. According to Jim Cramer, one of the best run companies in the US is Starbucks. CEO is determined to give great benefits to their employees; including free college education-even going against analysts and investors. Starbucks is doing so well in China that they are opening 500 stores all over China in 2016. Being the second largest economy it is not rational to have a 8% rate of economic growth forever. Now there is a significant slowdown in the Chinese economy. China will report their GDP stats on this coming Tuesday. Another fairy tale from the communist party? Whatever they state, you can assume the real rate is lower. Most expect China to grow at 5% or so. Compared to last year, their loans have gone down by 50%. With the immense amount of capital outflow, the Chinese government is having a difficult time stopping the depreciation of the Yuan. Most traders are shorting the Yuan in offshore accounts have spiked up the dollar for a few days and then the dollar will decline over the next 2 years which is very good for US multinationals, commodity markets, and all emerging ‘countries’. A win-win for all!  Extremely respected Art Cashin of UBS Financial Services who was always against the Fed rate hike of December 2015 now states that we will see the Fed rate go down to 0 prior to going up to 1%. In December 2015, the Feds raised the Fed Rate after having it at 0 for 7 years but on 1/14/16, the 30 year mortgage rate declined from 3.97% to 3.92% and it was the 2nd straight weekly decline. The market does not believe that the Feds would be able to raise rates 4 times in 2016 as they have indicated in their ‘dot projections’ (how they announce future increases). The commodity markets rose sharply over the past few decades (ending in 2014) over the huge hunger China had for those commodities. Many countries like Brazil and Australia benefited immensely from that growth period. Some of that will never come back. On 1/15/16 Goldman Sachs Jeff Currie broke commodities in two categories (1) Commodities consumed by humans- i.e. oil, coffee, sugar etc. (2) Commodities used mainly for industrial use. #1 will have a good future while the fate of #2 is in great doubt.  This is why I asked you to sell Freeport McMoran (FCX) on 12/31/15 and last week the market dealt a deathly blow to FCX with the share price dropping to $4.35. On 12/23/15 it was at $7.53 and 2 years ago it was around $37! Now the Market cap is at $5Billion and the bond debt is at $20 Billion! Chapter 11 is getting closer! Last week GM had a fantastic earnings call with (1) 80% increase in their buyback plan (2) Raised its revenue and earnings outlook for 2016 (3) Raised the quarterly dividend. What happened? The share price shot up by $1.50 for a couple of hours and then it was negative again. Welcome to a bear market! Last week, JP Morgan too came out with a fantastic earnings call and the market treated it with a big yawn. Talk about throwing the baby with the bath water. Citibank which has the biggest exposure to the international scene stated that their energy funded exposure was $20.5B which is 3% of their total loans; and they expect their credit costs to be around $600MM for the first part of 2016 assuming the price of oil will remain over $30 but if the price of oil drops to $25 their credit costs could double. 75% of their loans are to investment graded companies and they also reported that India is doing great.  On 1/15/16, Wells Fargo CFO stated that oil is only 2% of their loan portfolio and 1% is on oil drillers. Their energy losses were at $118MM and energy loans at $17B- all loans over a Trillion dollars. They have repayment plans with all and he stated that even with oil at $30 per barrel but most need oil to be at $50 per barrel to survive. According to Goldman Sachs Kostin, for the first time in 48 years, oil companies will report losses for 2015. Well known Dennis Gartman of the Gartman Letter stated on 1/11/16 that China has filled up its oil reserves and Iran is entering the oil market in a few days so he expects the price of oil to drop to $16 or $18-that is almost a 50% further decline! Why is oil dropping now as it is bottomless pit as we all expected this for 18 months? Reason 1- Till recently oil futures were selling higher than the current price and there were storage places for hedge funds to buy on the current market, store it and sell futures. It was a no brainer! Now there is no more places for storage. Reason 2- Iran entering the market this week or so. Reason 3- Banks have been very lenient with oil companies. If not, we would have seen bankruptcies and big oil gobbling up the smaller ones. Now it is in the interest of the oil companies with good balance sheets to wait for bankruptcies so they can descend on these companies like vultures and buy assets for a few cents on the dollar. Reason 4- Oil companies have become more resilient and efficient than no one ever expected. Per T Boone Pickens, they are pumping oil only to pay banks. Once we see a lot of US fracking companies go bankrupt we would be able to call a solid bottom to the oil prices. On 1/11/16, Fidel Gate of Oppenheimer stated that he expects 50% of US oil companies to go bankrupt but he is expecting the price to go up to $70 in 2 years. In my personal opinion, by watching the boom and bust cycle for more than 40 years, I feel that everyone is underestimating what could happen to oil prices in the future. Globally we are increasing demand due to low oil prices (buying gas guzzlers like SUVs and trucks) while destroying our capacity to provide supplies so in a couple of years prices are headed higher. Add geopolitical unrest in the world and I would not be surprised to see a barrel of oil over $150 and the price of gas at the pump going over $10 in 2 to 3 years. Oil companies all over the world are not spending on maintenance or investing in drilling and this will come back to haunt all of us! Expect the unexpected! Over the past 30 days I have been wondering if to issue a sell recommendation on Alcoa but I am hesitant to do so for now but I might change my mind very soon. Alcoa started the earnings reporting season for January 2016 and it was good. They are going to split the company in to 2 parts-(1) commodity (2) Engineering. They beat market estimates and they say that 2016 demand is strong. They even made money on the commodity side and they expect a 9% rise their commodity business in 2016. My concern is that their CEO like most CEOs is a very good salesman and he might be overstating what they could really deliver but intuitively for now I feel good about their future. During the last hour of trading in the stock market, even if the buy order exceed sell orders by 200 MM, the market moves up but on Friday 1/15/16 during the last hour of trading in the NYSE, buy orders exceeded sell orders by 2 Billion and yet the market did not go up and closed at a minus 390 (while having an intraday low of around minus 547)! The market is struggling to find buyers. I noticed that Exxon Mobil and Chevron did not go down as much as one would have expected and every time Apple went down to $96, it would rise to $97 or more within a few minutes. This shows a lot of potential for Apple in the future. Even if Apple falls to $50, if you buy a little along the way, you will make money in 1 to 2 years. All FANG stocks went down. Jim Cramer is the one who coined that term and now he says that he wishes he got a copyright on that! Prior to the crash of 8/24/15, mostly the FANG stocks were going up. What does FANG stand for? Facebook, Amazon, Netflix and Google (now known as Alphabet). I want to end this with a Wall Street joke (per Leon Cooperman of Omega Advisors):

 “ A technician and a fundamental analyst were sitting at the dinner table when a knife fell from the table. The fundamental analyst asked the technician, “why didn’t you catch the knife?. The technician replied, “ Technicians do not catch falling knives and why didn’t you pick up the knife from the floor?” The fundamental analyst replied, “We cannot see the floor”

 Get it? Technicians believe that they can estimate the depth of a fall in the market so they are not going to rush in early and buy which is known as catching a falling knife. In the same way fundamental analyst has no way of even guessing (which only technicians can do) when the market might have reached a short term bottom-not 100% accurate though.

On my personal account, last summer, I made good money shorting the Chinese market using ETFs in the US (ASHR, FXI) but then the Chinese government turned it in to their personal casino. Then I had some put options to short it again but those expired in December 2015. If they expired in January I would have made a lot of money. I had some calls (to take advantage of rallies) and puts (to short) on the US market but with 1/15/16 expiry date. Around 12/15/15 I could have sold my calls with a 400% profit but instead of doing it I bought more puts to preserve my gains. Unfortunately from 12/15/15 to 12/31/15, market fluctuated in a narrow range (under 0.5%) and due to the time value all option prices went down in a big way. During the first week of January 2016, I made a profit of about $1,000 in my put options by shorting the market but if I waited a few days my gain could have been about $5,000. However I did the right thing as it is not a good thing to wait till the expiry date. Live and learn! Lessons we learn today will enable us to make money till we die!

 Tighten your seat belts and get ready for an interesting short week in the market. Some US professionals will have an unnerving Monday as all international markets are open on Monday. In my personal opinion, oil and US equity market could go down in a big way and hit a short term bottom within the next 2 weeks. Also we could see a decoupling of the US equity market to oil as well as China-in other words, oil and China might go down while the bargain hunters send the US equity market higher. In a couple of week’s Janet Yellen will come up for congressional hearings and if she says that they are going to go slower than expected on raising rates, market could go up by 1,000 to 2,000 points-just my take on the story.

 Start nibbling (buying) in to these stocks/ETFs:

 iShares MSCI Canada (symbol: EWC)

The Fund Summary-The investment seeks to track the investment results of the MSCI Canada Index. The fund will at all times invest at least 90% of its assets in the securities of its underlying index and in depositary receipts representing securities in its underlying index. The underlying index may include large-, mid- or small-capitalization companies. Components of the underlying index primarily include energy, financials and materials companies.

Canadian economy and markets are deeply connected to the oil industry. Oil and gas companies make up 20 to 30% of the value of the Toronto Stock Exchange (TSX), One way to invest in the future rises in the oil sector is to buy in to the stock market of Canada.

This ETF, “EWC” has gone down from $32 on 7/31/14 to $18.97 on 1/15/16 which is a 40.72% decline in 17.5 months. There is a possibility that it could even go down to the technical support level of $8.60 (in 2002).

At this time buy 3 shares at $19 or the lowest on 1/19/16. The strategy is to keep on buying as the price drops to have a very low average cost when the ETF starts to move up. For example if you buy 3 shares at $19, 7 shares at $15, 10 shares at $10 and 100 shares at $5, you will own 120 shares at an average cost of $6.35. In 3 years, if this ETF goes back to $32, you would have made a 403.94% profit!!

Risk: The ETF could close as they cannot keep up with the needed liquidity. Canada could go in to a 10+ year bear market like the Japanese market. No risk, no reward!

Valley National Bancorp (VLY)

This is very different from my other sections. This is a small cap bank with $2.1Billion. On 1/15/16, the stock closed at $8.68 with a dividend yield of 4.98%.

Valley National Bancorp operates as the holding company for the Valley National Bank that provides commercial, retail, insurance, and wealth management financial services products. As of December 31, 2014, it operated 224 branches in northern and central New Jersey; the New York City boroughs of Manhattan, Brooklyn, Queens, and Long Island; and southeast and central Florida. The company was founded in 1927 and is headquartered in Wayne, New Jersey

Initially buy 5 shares of VLY at $8.68 or the lowest possible price on 1/19/16. If the price drops below $6, buy 25 shares.

Good Luck! Do not give in to fear!

Fernando

January 11 Post

Happy and Peaceful New Year to Everyone!

 I want you to begin 2016 with the following purchases by nibbling at these stocks hoping to buy more as the price declines further:

·        Chevron

·       Bank of America

·        Disney

Add more to the following holdings:

·        Apple

Be prepared to purchase more of the following:

·        Glaxo Smith Kline

·        Twitter

·        GM

·        Ford

·        GE

·        Exxon Mobil

On 12/31/15 I issued a sell recommendation on Freeport McMoran when it was down 15% or $12. The reason is that due to the debt crisis and the commodity market which keeps going down endlessly, this company might go insolvent. I had faith in this company because Carl Icahn purchased a major stake in the company but most of his purchases are in doubt now (i.e. Chesapeake Energy).

 What I expected the market to do or finish doing during the Fall of 2015, it started doing as it opened for the new year in 2016. The first day of trading was the worst first day of trading since 1932 and this has been the worst first week of trading EVER! The Dow Jones Ind. Avg. went down by 6% or 1072 points in one week and now it is in correction territory as it is down 11% from its all time high. None of the top 26 international stock markets had a gain during the first week of January. DJ Europe was down 6.8% and DJ Asia Pacific was down 5.7%. S&P 500 companies lost $1 Trillion in market cap during the same period.  Initially when the market was going down I noticed that the fear index was not going up as it did in August and the put option prices did not go that up as it used to do in the past. Later some analysts noted that the fear factor was less and it was not really panic selling but there were no buyers. Today’s Barron’s paper shows that the put call ratio went down and not up. This is the first time in 35 years I saw that! This means that professionals were not in a panic mode to buy insurance against their holdings. Some professionals are in 100% cash so I suppose they do not see a need to buy hedges. I also saw more call option activity so many professionals are bullish. On the other hand all the technical analysts expect another 10% to 20% decline –at least!

 George Soros told a newspaper in Sri Lanka that he sees a repeat of 2008. Carl Icahn and others have been predicting this for some time. Very interestingly the utility index or the ETF for Utilities (XLU) had a slight gain over the first week of January-flight to safety? Jim Cramer and some others were talking about the fear factor but I suspect that they are talking about the retail investor and not the professional. I take technical analysis seriously so it is reasonable to expect another 20% decline. The problem with technical analysis is that a huge directional change in one day can change the whole story. For example, around 8/24/15, when the market dropped more than 1,000 points I asked all of you to start ‘nibbling’ at some stocks mentioned in my newsletter but Jim Cramer, technical analysts and most professionals were asking people to stay away from the market. Last week, George Soros told a newspaper in Sri Lanka that this market reminds him of 2008. This is really more like 1997 Asian currency crisis. Let me explain; when the US Feds went to 0 on interest rates around 2008, most Asian currencies pegged to the dollar had high interest rates to attract capital. With interest rates and US dollar going up, there is a huge outflow of capital from those countries. It is said that China alone lost half a trillion dollar in the recent past due to capital outflows. Some fear that the Chinese have run out of ammunitions when it comes to reviving their economy-which I do not believe. China had unrealistic circuit breakers on their stock market so last Monday when the market fell 7%, it closed the market for the day. Two days later, in the first 30 minutes the market went down 7% and so it closed for the day again! People were selling to beat the 7% decline. In the US, the market has to go down 20% (about 3200 points) for the circuit breakers to stop trading for the day. This has not happened for the past 20 years or so.

 The real danger to the market is the ever declining oil prices which is putting the bond market at risk.  A few weeks ago Chesapeake (CHK) bought back some of their bonds at 50% of their face value. That could be the way out of this crisis for some of these companies-especially the ones not exposed to commodities. Banks are supposed to be very lenient with them.  If Glencore goes insolvent, international banks (mostly non US like Deutsche Bank) are expected to lose over $100 Billion. In 2016 alone, $300B in oil junk bonds could go insolvent. On 12/18/15, CNBC reported heavy redemptions from investment graded bond funds which could mean trouble for all markets. Due to Dodd Frank Act, banks and brokerages cannot make markets by holding on to assets as it was done prior to 2008 so this will add to illiquidity and we could see explosive down days in the future. Then we will see ‘throwing the baby with the bath water’ which would create buying opportunities for the long term. In such a scenario, a company like

Verizon with a very high yield would look attractive. On the bright side, 87% of the US economy is domestic-lowest in the world. Even though there is so much focus on China, India is expected to grow faster than China for a long time to come.  The jobs report that came out on 1/8/16 shows that 292,000 jobs were created and 230,000 was in the service sector. Despite what is happening in the markets, this kind of data will persuade the Feds to increase interest rates 4 times in 2016. Also a Fed Governor said that he thinks that oil might rise up suddenly which is an inflation fear.

 Now it is 9pm Pacific Time on 1/10/16 and the Dow future are down about 200 points if that does not change we could start 1/11/16 with the Dow going down about 200 points. We are getting in to the oversold area now and one of these days we could see a ‘dead cat bounce’ in the market. That could happen next week but that could be short lived.

 Glaxo Smith Kline- As of 1/9/16, the dividend rate is at 5.91% and this is a solid company with a PE of 6.77-compare that with the industry average of 26! If the price drops to $37, then the dividend rate or yield will go up to 6.3%. If the price drops to $30, the yield will go up to 7.77%. This alone will attract investors in the future. The only concern is that the government might come up with price controls for this industry and that is a valid risk.

 Twitter- Most prudent analysts believe that ‘ultimately’ Twitter would make a comeback but the question is ‘when’ and by ‘how much’. Management has not come up with a plan yet to gain the confidence of the market and due to weak financials I am not purchasing any more at this to reduce the average cost; but I might come to regret that decision in the future. This is not a Gopro!

 GM/Ford- Currently the stock market is going through a correction (or a bear market). Now everyone is in fear so it is a time to nibble a little bit-if we see our price targets in the market. As Warren Buffet says, “Buy when others are fearful and sell when others are greedy”. Please be forewarned that we could lose 25% to 66% in a bear phase and this could take many months or years; and that is the worst case scenario but very unlikely. Even during a bear market, we see market rallies. As of 1/9/16, the dividend yield on GM is at 4.88% and if the share price drops to $25, this yield will go up to 5.76%. and if the price drops to $20, the yield goes up to 7.2%! When the 10 year Treasury has yield of 2.5% or so, buying GM is a no brainer for the long term. Can the world go back to the 2008 stage and destroy GM?  Yes but very unlikely. There is no reward without taking a risk.

 GE- Since the market started crashing after 1/1/16, GE started moving lower but on 12/31/15, GE was at $31.49 and on 12/31/15, we had a gain of 62.57% in 129 days! S&P500 had a flat year for 2015 and the 10 year Treasury yield is at 2.5% or so. With all this volatility in the global financial markets, GE could go down to $20 or so but I expect GE to be around $40 or more by 1/1/18.

 Exxon Mobil/Chevron- What Goldman Sachs predicted many months ago is finally happening. A barrel of oil is below $35 and most say that it could go below $20 as there is no room for storage anymore and supply exceed the demand. Saudis are operating at full capacity and they have no incentive to cut production to benefit others. However tensions are rising in the Middle East so that could upset the apple cart. Surprisingly when tensions rose between Iran and Saudis as they got close to a face to face war, the price of oil did not go up at all. One year ago, that would have sent the price of oil sky high. Experts are divided on the future prices of oil. Some say ‘low for long’ while others say that we are close to a bottom and then prices would shoot up soon. Prices always over shoot so I think that when most small fracking companies go insolvent, when the over supply problem gets resolved, as demand grows we might see a rapid increase in the price. In December 2015, Republican Party agreed to extend the credit for solar energy so as to get President Obama to agree to lift the 40 year ban on crude oil. I think that this is a mistake for the long term. Due to this lifting of the ban, now there is no difference between WTI and Brent (US and International prices). If this is true for natural gas, as there is a huge variance between the prices we pay for it and what it costs in other countries, in the years to come, most people in cold states will have a problem paying for heating bills. 

 On 1/6/15, T.Boone Pickens was on CNBC Mad Money and he said that this price decline is solely due to an over-supply problem but the supply exceed the demand only by 1 million barrels per day when in the 1980s when we had the problem, we had an over-supply of 20 million barrels per day. Also the demand is growing as European economy keeps growing and US consumers are going back to gas inefficient vehicles. Pickens is predicting the price of a barrel of oil rising to $70 by year end. John Dowd, who manages Fidelity Select Energy Portfolio wants to invest in oil companies with strong balance sheets who can manage themselves well whatever happens to the price of oil.  Exon Mobil is his top holding (or 12.4% of his portfolio. Other companies on his portfolio includes Schluberger (7.9%), EOG (6.6%) Valero (5%) and Chevron (4.8%).  Between 8/24/15 (market crash) and 11/3/15, Exxon rose by 18% and Chevron rose by 40%; even the oil prices going below $35 did not bring these share prices to the 8/24/15 level. Therefore it is extremely likely that we could see Exxon and Chevron going down sharply soon but in about 2 years we would be able to reap the rewards. This is why I want to add Chevron and start nibbling at it now so we could lower the average cost in the future by buying more when the price drops further.

Bank of America- For the past 2 years, all analysts were waiting for the Feds to increase interest rates to see the financial sector out performing other sectors but after the initial rate hike in December 2015, banking stocks declined. Why? Despite what the Feds have indicated (4 rate hikes in 2016), economists believe that due to the international economic and currency crisis, rates will not go up as previously expected. For banks to make money, the Fed rate has to be over 1%. Also there is a concern about the loans that the banks have made to the energy sector. Already Wells Fargo announced that their energy loan portfolio is stressed. This is a good time to start nibbling at Bank of America!

 Disney- Even with Star Wars movie, Disney has been on the decline. Interestingly the day the movie came out, an analyst came with a downgrade and the share price started declining again. Why? All the pessimism is about declining earnings at ESPN. I do not think that this is serious at all. I have confidence in Disney management with one of the greatest CEOs. On 11/20/15, the share price was at $120 so this is a good indicator of what kind of growth we could expect from Disney in the future. We might see the price declining for 6 to 12 months giving us a chance to decrease the average cost of our purchases.

 Apple- Even though everyone invested or traded in Apple as if this was a growth company it is really a value company. 13 months ago, Apple was trading at $133 so now it is trading 27% below its all time high of 2015.  It has a dividend yield of 2.15%-which is close to the 10 year US Treasury. The PE is at a very low 9.22 (industry average: 19.82).  Apple has the biggest cash balance with $21.12Billion and $20.48Billion in short term investments. It is a well-known fact that Apple is getting in to the auto industry and has been stealing employees from Tesla. Some even suggest that they might even buy Tesla or another strategic company. A newer version of the watch is expected. Most are afraid that China might disappoint Apple with IPhone sales but I have my doubts. The reason is that China is moving from a manufacturing economy to consumer based economy. Nike had good sales revenue from Apple and the last report from Apple from China was quite good so I think Apple might surprise everyone to the upside.

 Until we meet again, I wish you all the best.

Lalana Fernando