Hi Again,
The correction we had was extremely healthy for the longevity of this bull market. A market that shoots up with no pullback is very dangerous. The late Sir John Templeton often reminded us that "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." Prior to the recent correction, euphoria among retail investors was so high, people were sharing pictures of their 401K statements. As with any correction/crash, many analysts will find many causes and reasons for the correction and this correction was no exception. One main reason was not only the 10 year treasury went over 2.85% but 4 more interest hikes were expected in 2018. After making a lot of money in the stock market for the past 9 years, some bought bonds (NOT bond funds) to keep their capital safe. In 1977, writing about the power of interest rates, Warren Buffet, one of the best in the stock market and one of the richest in the US stated, “1% increase in interest rates lower the S&P 500 market cap by 16%”. Over the past 60 years, US Presidents have taken credit and also got blamed for market activity but it is monetary policy that drives stocks and other markets as well as the economy. Using mathematical economics, it can be shown that monetary policy is much more powerful than fiscal policy in energizing the economy. When Bill Clinton was President, he said, “Whatever I do, it is the bond market that is determining my fate; this is unbelievable”. At that time James Carville, who was a top aide to Clinton said, “If reincarnation was true, I always wanted to come back as the US President but now I want to be reborn as a bond trader’.
What we had since 2008 was an abnormal bond market and interest rates. US Reserve Bank and World’s central banks had to do go in to this untested territory to save the world from a depression after the mortgage crisis. However, the US Federal Reserve should have moved to higher interest rates to ‘normalize’ rates long time ago. What is going on is the normalization of rates. Fixed-income heavyweights are also wading into the discussion with investors such as Bill Gross suggesting the bond bear market is indeed here. The panic we saw was nothing as the 10 year old Treasury could double or more to 5% or 6% in the near future. To make matters worse, to their own detriment, Chinese have stopped buying treasuries as they used to do. The US Federal Reserve is in the process of unloading what they bought in quantitative easing so all these factors and the Feds raising interest rates to avoid inflation, we should expect the 10 year Treasury to rise in the future.
There are two main methods to analyze stocks or financial markets-(1) Fundamental Analysis (2) Technical Analysis. Most investors mainly use fundamental analysis. Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. When it comes to a stock, it involves considering financials, sales, sales growth, future expectations, price to earnings, management and so on. A similar method is used for economies, the macro markets and so on. Technical analysis of stocks and trends is the academic study of historical chart patterns and trends of publicly traded stocks. Technical analysis of stocks and trends employs the use of tools such as bar or candlestick charts and trading volumes to determine the future behavior of a stock. I do not believe that this definition does justice to technical analysis. Anyone who wants to study this subject should read the 530 page book by John Murphy titled, “Technical Analysis of the Financial Markets”. It is said that investors and traders who employ fundamental analysis at the total exclusion of technical analysis put the cart before the horse. I have been a big believer in technical analysis since the mid-1980s. Most market pundits would agree that the world’s best market technician is Ralph Acampora. On 2/13/18, talking about the recent unexpected volatility, this is what Ralph Acampora stated (comparing historic S&P500 chart with the historic interest rates chart):
· The past 30 year trend for interest rates broke recently and for the next 30 years, you can expect interest rates to go up.
· He disagreed with most fundamental analysts that this means the end of bull markets for the stock market. As evidence, he showed how interest rates rose from 1941 to 1982 but the stock markets also moved up from 1941 to 1982 (with corrections and bear markets)
· This secular bull market is not over.
· If the stock market go sideways or down from time to time, it is a very good thing (as it only contributes to the longevity of the overall bull market)
All people, even the greatest market pundits make mistakes and we all learn from our mistakes. One of those pundits is Leon Cooperman (75 years old), CEO of a hedge fund of $3.5billion.A couple of days after the two 1.000 point drop days on the Dow, someone asked Cooperman, “what did you learn from this correction?: He thought for a minute and stated, “I found that I am stupid”: and he continued, “I teach others that arrogance is a luxury we cannot afford”. Why did he see himself as stupid? That was another reason for the recent correction. As I was stating in my newsletter for many months, now there is an ETF for Volatility called VIX and most people were getting a false sense of security by hedging on VIX. It is like credit insurance without considering the counterparty risk. On the other side of the equation, there were others who were making a lot of money for the past 3 to 5 years betting that low volatility will continue and not reverse with no notice. Cooperman was one of those people. Every time the market went down 1.000+, not only these people lost more than 80% in a day; that also contributed to the ‘mini crash”. Some experts are asking the SEC and the government to ban these instruments. I do not agree as their errors give us opportunities to get in to good stocks at low prices.
Rick Santelli has been an expert on the commodity markets that includes the treasury market, foreign exchange market and so on. He reports from the Chicago Board of Trade where commodities are traded. Politically I do not agree with him as he is on the extreme right wing of the Republican Party. Rick was in opposition to the Federal Reserve that went down to 0% plus quantitative easing that was employed to save the economy after the 2008 mortgage crisis. However I feel that the Federal Reserve waited too long to normalize rates. When the market went down 1,000+ pints as the 10 year treasury rate went up to 2.85%,Rick Santelli was shouting (he really does!), “This is nothing. This is going towards normalization and normal rates are around 5% to 6%. For the past 10 years what we had were artificial rates created by central banks around the world”. I totally agree. If the stock market fell more than 10% for the 10 year Treasury yield going over 2.85%, imagine what the market would do when the 10 year yield is over 6%-most investors will sell stocks to buy bonds. At the same time, people in bonds will lose most of their capital. All experts agree that the bond market is much more dangerous than stocks right now. If you are in bonds, be in the actual bond and not in bond funds; that way if you wait till the bond matures, you will get 100% of your initial investment.
Since the 1980s I have had a lot of respect for Carl Icahn as a demi-God (over 60years of experience in financial markets) when it comes to market activity. He has made his share of mistakes too but we all learn from our mistakes. Once an inventor stated, “I love making mistakes as whenever we make mistakes, we learn valuable lessons”. On 2/6/18, soon after the two 1,000+ point drops in the stock market, Carl Icahn made the following points (words of wisdom!):
· What we experienced was a rumbling that comes before the big earthquake. At times, the earthquake comes soon after the rumbling and at times, the earthquake comes after 10 years after the rumbling. No one knows when!
· Derivatives, ETFs, double or triple the index ETFs are very bad for the long term health of all financial markets.
· There is too much leverage in the market; there are too many people involved in the market. Market will implode!
· There is no difference between the current time and 1929. Mr. Icahn kept repeating “1929”. “Eventually what will happen to us will be worse than what happened to us in 1929. (The index took 30 years to get back to the previous level held in 1929 and that was around 1959.).
· People are using the market as a casino.
· Our market is a casino on steroids.
· No one knows when this market will blow up.
· Banks and markets should be regulated. Deregulation always lead to disasters. Even Blackrock (World’s biggest asset manager with $5.7 Trillion under management with clients in 100 countries) wants more regulations on ETFs. derivatives and leveraged products.
· “A major, major, major correction is coming and this is not it”.
· In 2017, Mr. Icahn predicted a crash but the market went up 9%.
· Huge market crash will take place within the next 3 years.
· Market going up in a straight line as it did from November 2016 to January 2018 is hugely dangerous.
· Bitcoins and Cryptocurrencies ate ridiculous and extremely dangerous.
· Too much money flowing in to index ETF funds.
· “This is a bit like 2008”.
· Passive investing (index funds) is in a bubble.
· Nobody can predict when the market will hit a bottom.
· This is not the beginning of the end but do not have all your money in stocks and bonds. When the bond yield go up, the value of your bond will go down. Remember!
Sentiment toward hedge funds has turned around, according to new data from Preqin that tracks the proportion of institutional investors planning to increase or decrease their hedge fund exposure. Now, 27% of these investors plan to boost their allocation in 2018- the biggest chunk since December 2013, and 46% plan to maintain what they’ve got. According to data from Hedge Fund Research, after a rocky 2016, hedge funds returned 11.45% in 2017, helping to lure investors back. Preqin data show clients added a net $44.4billion in 2017. Just before the market fell 1,000+ points, many people were posting pictures of their 401K statements on Facebook! Euphoria could last for days or years but we all know how this story will end! On 2/26/18, Goldman Sachs stated that they started keeping track of margin borrowing in 1980 and at this time it is at an all-time record high. Warren Buffet announced that this margin borrowing is worrying him. This is euphoria! This is not about being optimistic about the future, this is about valuations and investor “mass” psychology. Also on 2/26/18, Goldman Sachs stated that if the 10 year old bond rate goes up to 4.5%, the stock market would drop by 25% but they did not expect that to happen in 2018.
According to the IMF, total debt in the world is around $195 Trillion a couple of years ago and now it is over $230 Trillion. According to the World Bank in 2015, the US had the biggest economy with $18 Trillion (23%) and China was at $11 Trillion (14.8%) and fast catching up to the US. For decades, size of the second biggest economy was less than 50% of the US economy. Good old days! On 2/27/18, when the new US Federal Reserve Chairman testified at the US Congress, it was stated that total debt in the US is at about $100 Trillion and 15% of that is public debt. In other words, 42% of total global debt is in the US; and this include federal, state, local government, corporate and consumer. The recent tax cut added another $1.5Trillion to the debt. The Fed Chair stated that the US has enough assets to back up the debt level but that is not true for China. In other words, we could see a huge economic disaster in China in the future. Bond markets, foreign exchange markets trade on expectations of the future. As Bill Gates recently stated, we could easily have a worse disaster than 2008 in the future. When President Trump proposed a 25% increase in duties on imports on 3/1/18, many (mostly Republican) analysts reminded us that this is what led to the great depression in 1930.
It is an article of faith among economists that rising global protectionism intensified the Great Depression of the 1930s. History looks back at the infamous Smoot-Hawley Act, which jacked up tariffs in the U.S., as a disastrous step that stymied the international economic cooperation needed to alleviate the worst economic catastrophe in modern history. Even the U.S. State Department says the act "quickly became a symbol of the 'beggar thy neighbor' policies of the 1930s." Between 1929 and 1934, world trade declined by about two-thirds. Here we are, almost 80 years later, and possibly about to make the same mistake.(Michael Schulman,Time,1/19/2009).
“No one outlawed the business cycle”, an analyst once stated. This business cycle has to come to an end one day. As it has done in previous decades, the Federal Reserve will try to create a ‘soft landing” (very mild recession) but they are known to make mistakes. Many economists predict a recession during the 2019/2020 period. Inflation is the enemy of the economy so to be proactive, the Federal Reserve raise rates before we see real inflation. As the commodity prices rise, as it has been doing lately, it is a sign of inflation coming back. As the Feds are increasing interest rates and also not buy back any treasuries, the government will need to find more buyers for treasuries to pay for the $1.5 Trillion added to the deficit due to the new tax cut. China and other countries are also slowing their treasury purchases. All these factors will drive interest rates in the future. One reason why we had a 1987 market crash was Japan as a protest stopped buying treasuries and drove the interest rate (yield) up so investors sold stocks to buy bonds. Proceed with care!
Twitter- On 2/8/18, 9am, when the Dow was down 500 (or 1.98%), Twitter was up over 4.50. As noted earlier, Twitter (TWTR) was an island of calm in the storm of the broader market today, rising $1.33, or 4.4%, to close at $31.51. Helping that rise was an upgrade by RBC Capital’s Mark Mahaney, who raised his rating to Sector Perform from Underperform, and raised his price target to $31 from $18, writing that the company’s Q4 report on Wednesday evening was “not just less worse,” but actually better. The “fundies,” as he refers to the fundamentals of the business, “are clearly improving,” observes Mahaney, so “our Underperform call was wrong." Among those improvements is the 12% rise in daily average user count, which shows the product improvements of late have been successful. And the forecast for ad revenue to rise by double digits this quarter was the ‘biggest surprise” for him, and “speaks to growth sustainability for the near/medium term." Moreover, there is “clearly a cash flow story here,” after a total of $550 million of free cash flow last year. (Tiernan Ray, Tech Trader Daily,2/9/18). On 2/9/18, Joshua Brown (CEO, Ritholtz Wealth Management), a very astute investor, stated that if not for the correction we were having with the overall market, Twitter would have gone up to $35 or $40 after announcing that for the first time Twitter made a profit. He went on to say that people were focusing on the number of the users rather than the quality of the users; as well as thIn 1999, Money magazine named him "arguably the greatest global stock picker of the century."[2]e usefulness of the platform. For years he used to be negative on Twitter but a few months ago, he bought the stock. My regret is not asking you to buy more when the Twitter fell to $14.62 several times over the past 3 years. Market technicians would say that there is a floor at $14.62. The reason I did not recommend more buying was that this is a company with terrible financials; which I usually avoid.
GE- Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. GE shares are down 16% so far in 2018, following 2017’s 50% plunge. Despite the loss in altitude, they may not yet warrant a Buy rating. Don’t tell Pimco that, however. It picked up 2.19 million more GE shares in the fourth quarter, pushing its investment to 9.19 million shares. (Ed Lin, Inside Scoop, 2/14/18)
Schlumberger- Oilfield-services firm Schlumberger slumbered through 2017 as shares lost 17%, excluding dividends. MassMutual sold 25,700 Schlumberger shares in the last quarter, ending the year with 26,100 shares. It was another prescient stock sale for the firm. Schlumberger has lost another 4% this year. We noted that in January, Schlumberger’s strong fourth-quarter report failed to rally the stock.(Ed Lin,Inside Scoop, 2/22/18)
Apple- - Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. Apple shares surged 48%, excluding dividends, in 2017, trouncing the 20% gain logged by the Standard & Poor’s 500 index. We’ve suggested that Apple shares looked cheap after the early February punishment meted out by the market. We contemplate seeing “$125 billion of fresh spending on stock buybacks, dividends, or both.” Pimco bought 331,800 additional Apple shares in the fourth quarter, ending the year with 366,250 shares. Through Tuesday’s close, Apple is down 2.5% so far this year. (Ed Lin, Inside Scoop, 2/14/18)
Have a great month!
Fernando
Hi Again,
The correction we had was extremely healthy for the longevity of this bull market. A market that shoots up with no pullback is very dangerous. The late Sir John Templeton often reminded us that "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." Prior to the recent correction, euphoria among retail investors was so high, people were sharing pictures of their 401K statements. As with any correction/crash, many analysts will find many causes and reasons for the correction and this correction was no exception. One main reason was not only the 10 year treasury went over 2.85% but 4 more interest hikes were expected in 2018. After making a lot of money in the stock market for the past 9 years, some bought bonds (NOT bond funds) to keep their capital safe. In 1977, writing about the power of interest rates, Warren Buffet, one of the best in the stock market and one of the richest in the US stated, “1% increase in interest rates lower the S&P 500 market cap by 16%”. Over the past 60 years, US Presidents have taken credit and also got blamed for market activity but it is monetary policy that drives stocks and other markets as well as the economy. Using mathematical economics, it can be shown that monetary policy is much more powerful than fiscal policy in energizing the economy. When Bill Clinton was President, he said, “Whatever I do, it is the bond market that is determining my fate; this is unbelievable”. At that time James Carville, who was a top aide to Clinton said, “If reincarnation was true, I always wanted to come back as the US President but now I want to be reborn as a bond trader’.
What we had since 2008 was an abnormal bond market and interest rates. US Reserve Bank and World’s central banks had to do go in to this untested territory to save the world from a depression after the mortgage crisis. However, the US Federal Reserve should have moved to higher interest rates to ‘normalize’ rates long time ago. What is going on is the normalization of rates. Fixed-income heavyweights are also wading into the discussion with investors such as Bill Gross suggesting the bond bear market is indeed here. The panic we saw was nothing as the 10 year old Treasury could double or more to 5% or 6% in the near future. To make matters worse, to their own detriment, Chinese have stopped buying treasuries as they used to do. The US Federal Reserve is in the process of unloading what they bought in quantitative easing so all these factors and the Feds raising interest rates to avoid inflation, we should expect the 10 year Treasury to rise in the future.
There are two main methods to analyze stocks or financial markets-(1) Fundamental Analysis (2) Technical Analysis. Most investors mainly use fundamental analysis. Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. When it comes to a stock, it involves considering financials, sales, sales growth, future expectations, price to earnings, management and so on. A similar method is used for economies, the macro markets and so on. Technical analysis of stocks and trends is the academic study of historical chart patterns and trends of publicly traded stocks. Technical analysis of stocks and trends employs the use of tools such as bar or candlestick charts and trading volumes to determine the future behavior of a stock. I do not believe that this definition does justice to technical analysis. Anyone who wants to study this subject should read the 530 page book by John Murphy titled, “Technical Analysis of the Financial Markets”. It is said that investors and traders who employ fundamental analysis at the total exclusion of technical analysis put the cart before the horse. I have been a big believer in technical analysis since the mid-1980s. Most market pundits would agree that the world’s best market technician is Ralph Acampora. On 2/13/18, talking about the recent unexpected volatility, this is what Ralph Acampora stated (comparing historic S&P500 chart with the historic interest rates chart):
· The past 30 year trend for interest rates broke recently and for the next 30 years, you can expect interest rates to go up.
· He disagreed with most fundamental analysts that this means the end of bull markets for the stock market. As evidence, he showed how interest rates rose from 1941 to 1982 but the stock markets also moved up from 1941 to 1982 (with corrections and bear markets)
· This secular bull market is not over.
· If the stock market go sideways or down from time to time, it is a very good thing (as it only contributes to the longevity of the overall bull market)
All people, even the greatest market pundits make mistakes and we all learn from our mistakes. One of those pundits is Leon Cooperman (75 years old), CEO of a hedge fund of $3.5billion.A couple of days after the two 1.000 point drop days on the Dow, someone asked Cooperman, “what did you learn from this correction?: He thought for a minute and stated, “I found that I am stupid”: and he continued, “I teach others that arrogance is a luxury we cannot afford”. Why did he see himself as stupid? That was another reason for the recent correction. As I was stating in my newsletter for many months, now there is an ETF for Volatility called VIX and most people were getting a false sense of security by hedging on VIX. It is like credit insurance without considering the counterparty risk. On the other side of the equation, there were others who were making a lot of money for the past 3 to 5 years betting that low volatility will continue and not reverse with no notice. Cooperman was one of those people. Every time the market went down 1.000+, not only these people lost more than 80% in a day; that also contributed to the ‘mini crash”. Some experts are asking the SEC and the government to ban these instruments. I do not agree as their errors give us opportunities to get in to good stocks at low prices.
Rick Santelli has been an expert on the commodity markets that includes the treasury market, foreign exchange market and so on. He reports from the Chicago Board of Trade where commodities are traded. Politically I do not agree with him as he is on the extreme right wing of the Republican Party. Rick was in opposition to the Federal Reserve that went down to 0% plus quantitative easing that was employed to save the economy after the 2008 mortgage crisis. However I feel that the Federal Reserve waited too long to normalize rates. When the market went down 1,000+ pints as the 10 year treasury rate went up to 2.85%,Rick Santelli was shouting (he really does!), “This is nothing. This is going towards normalization and normal rates are around 5% to 6%. For the past 10 years what we had were artificial rates created by central banks around the world”. I totally agree. If the stock market fell more than 10% for the 10 year Treasury yield going over 2.85%, imagine what the market would do when the 10 year yield is over 6%-most investors will sell stocks to buy bonds. At the same time, people in bonds will lose most of their capital. All experts agree that the bond market is much more dangerous than stocks right now. If you are in bonds, be in the actual bond and not in bond funds; that way if you wait till the bond matures, you will get 100% of your initial investment.
Since the 1980s I have had a lot of respect for Carl Icahn as a demi-God (over 60years of experience in financial markets) when it comes to market activity. He has made his share of mistakes too but we all learn from our mistakes. Once an inventor stated, “I love making mistakes as whenever we make mistakes, we learn valuable lessons”. On 2/6/18, soon after the two 1,000+ point drops in the stock market, Carl Icahn made the following points (words of wisdom!):
· What we experienced was a rumbling that comes before the big earthquake. At times, the earthquake comes soon after the rumbling and at times, the earthquake comes after 10 years after the rumbling. No one knows when!
· Derivatives, ETFs, double or triple the index ETFs are very bad for the long term health of all financial markets.
· There is too much leverage in the market; there are too many people involved in the market. Market will implode!
· There is no difference between the current time and 1929. Mr. Icahn kept repeating “1929”. “Eventually what will happen to us will be worse than what happened to us in 1929. (The index took 30 years to get back to the previous level held in 1929 and that was around 1959.).
· People are using the market as a casino.
· Our market is a casino on steroids.
· No one knows when this market will blow up.
· Banks and markets should be regulated. Deregulation always lead to disasters. Even Blackrock (World’s biggest asset manager with $5.7 Trillion under management with clients in 100 countries) wants more regulations on ETFs. derivatives and leveraged products.
· “A major, major, major correction is coming and this is not it”.
· In 2017, Mr. Icahn predicted a crash but the market went up 9%.
· Huge market crash will take place within the next 3 years.
· Market going up in a straight line as it did from November 2016 to January 2018 is hugely dangerous.
· Bitcoins and Cryptocurrencies ate ridiculous and extremely dangerous.
· Too much money flowing in to index ETF funds.
· “This is a bit like 2008”.
· Passive investing (index funds) is in a bubble.
· Nobody can predict when the market will hit a bottom.
· This is not the beginning of the end but do not have all your money in stocks and bonds. When the bond yield go up, the value of your bond will go down. Remember!
Sentiment toward hedge funds has turned around, according to new data from Preqin that tracks the proportion of institutional investors planning to increase or decrease their hedge fund exposure. Now, 27% of these investors plan to boost their allocation in 2018- the biggest chunk since December 2013, and 46% plan to maintain what they’ve got. According to data from Hedge Fund Research, after a rocky 2016, hedge funds returned 11.45% in 2017, helping to lure investors back. Preqin data show clients added a net $44.4billion in 2017. Just before the market fell 1,000+ points, many people were posting pictures of their 401K statements on Facebook! Euphoria could last for days or years but we all know how this story will end! On 2/26/18, Goldman Sachs stated that they started keeping track of margin borrowing in 1980 and at this time it is at an all-time record high. Warren Buffet announced that this margin borrowing is worrying him. This is euphoria! This is not about being optimistic about the future, this is about valuations and investor “mass” psychology. Also on 2/26/18, Goldman Sachs stated that if the 10 year old bond rate goes up to 4.5%, the stock market would drop by 25% but they did not expect that to happen in 2018.
According to the IMF, total debt in the world is around $195 Trillion a couple of years ago and now it is over $230 Trillion. According to the World Bank in 2015, the US had the biggest economy with $18 Trillion (23%) and China was at $11 Trillion (14.8%) and fast catching up to the US. For decades, size of the second biggest economy was less than 50% of the US economy. Good old days! On 2/27/18, when the new US Federal Reserve Chairman testified at the US Congress, it was stated that total debt in the US is at about $100 Trillion and 15% of that is public debt. In other words, 42% of total global debt is in the US; and this include federal, state, local government, corporate and consumer. The recent tax cut added another $1.5Trillion to the debt. The Fed Chair stated that the US has enough assets to back up the debt level but that is not true for China. In other words, we could see a huge economic disaster in China in the future. Bond markets, foreign exchange markets trade on expectations of the future. As Bill Gates recently stated, we could easily have a worse disaster than 2008 in the future. When President Trump proposed a 25% increase in duties on imports on 3/1/18, many (mostly Republican) analysts reminded us that this is what led to the great depression in 1930.
It is an article of faith among economists that rising global protectionism intensified the Great Depression of the 1930s. History looks back at the infamous Smoot-Hawley Act, which jacked up tariffs in the U.S., as a disastrous step that stymied the international economic cooperation needed to alleviate the worst economic catastrophe in modern history. Even the U.S. State Department says the act "quickly became a symbol of the 'beggar thy neighbor' policies of the 1930s." Between 1929 and 1934, world trade declined by about two-thirds. Here we are, almost 80 years later, and possibly about to make the same mistake.(Michael Schulman,Time,1/19/2009).
“No one outlawed the business cycle”, an analyst once stated. This business cycle has to come to an end one day. As it has done in previous decades, the Federal Reserve will try to create a ‘soft landing” (very mild recession) but they are known to make mistakes. Many economists predict a recession during the 2019/2020 period. Inflation is the enemy of the economy so to be proactive, the Federal Reserve raise rates before we see real inflation. As the commodity prices rise, as it has been doing lately, it is a sign of inflation coming back. As the Feds are increasing interest rates and also not buy back any treasuries, the government will need to find more buyers for treasuries to pay for the $1.5 Trillion added to the deficit due to the new tax cut. China and other countries are also slowing their treasury purchases. All these factors will drive interest rates in the future. One reason why we had a 1987 market crash was Japan as a protest stopped buying treasuries and drove the interest rate (yield) up so investors sold stocks to buy bonds. Proceed with care!
Twitter- On 2/8/18, 9am, when the Dow was down 500 (or 1.98%), Twitter was up over 4.50. As noted earlier, Twitter (TWTR) was an island of calm in the storm of the broader market today, rising $1.33, or 4.4%, to close at $31.51. Helping that rise was an upgrade by RBC Capital’s Mark Mahaney, who raised his rating to Sector Perform from Underperform, and raised his price target to $31 from $18, writing that the company’s Q4 report on Wednesday evening was “not just less worse,” but actually better. The “fundies,” as he refers to the fundamentals of the business, “are clearly improving,” observes Mahaney, so “our Underperform call was wrong." Among those improvements is the 12% rise in daily average user count, which shows the product improvements of late have been successful. And the forecast for ad revenue to rise by double digits this quarter was the ‘biggest surprise” for him, and “speaks to growth sustainability for the near/medium term." Moreover, there is “clearly a cash flow story here,” after a total of $550 million of free cash flow last year. (Tiernan Ray, Tech Trader Daily,2/9/18). On 2/9/18, Joshua Brown (CEO, Ritholtz Wealth Management), a very astute investor, stated that if not for the correction we were having with the overall market, Twitter would have gone up to $35 or $40 after announcing that for the first time Twitter made a profit. He went on to say that people were focusing on the number of the users rather than the quality of the users; as well as thIn 1999, Money magazine named him "arguably the greatest global stock picker of the century."[2]e usefulness of the platform. For years he used to be negative on Twitter but a few months ago, he bought the stock. My regret is not asking you to buy more when the Twitter fell to $14.62 several times over the past 3 years. Market technicians would say that there is a floor at $14.62. The reason I did not recommend more buying was that this is a company with terrible financials; which I usually avoid.
GE- Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. GE shares are down 16% so far in 2018, following 2017’s 50% plunge. Despite the loss in altitude, they may not yet warrant a Buy rating. Don’t tell Pimco that, however. It picked up 2.19 million more GE shares in the fourth quarter, pushing its investment to 9.19 million shares. (Ed Lin, Inside Scoop, 2/14/18)
Schlumberger- Oilfield-services firm Schlumberger slumbered through 2017 as shares lost 17%, excluding dividends. MassMutual sold 25,700 Schlumberger shares in the last quarter, ending the year with 26,100 shares. It was another prescient stock sale for the firm. Schlumberger has lost another 4% this year. We noted that in January, Schlumberger’s strong fourth-quarter report failed to rally the stock.(Ed Lin,Inside Scoop, 2/22/18)
Apple- - Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. Apple shares surged 48%, excluding dividends, in 2017, trouncing the 20% gain logged by the Standard & Poor’s 500 index. We’ve suggested that Apple shares looked cheap after the early February punishment meted out by the market. We contemplate seeing “$125 billion of fresh spending on stock buybacks, dividends, or both.” Pimco bought 331,800 additional Apple shares in the fourth quarter, ending the year with 366,250 shares. Through Tuesday’s close, Apple is down 2.5% so far this year. (Ed Lin, Inside Scoop, 2/14/18)
Have a great month!
Fernando
