January 8 Post

January 8, 2019

Hi Again,

Happy New Year!

The last three months were brutal to the market. Our portfolio alone dropped close to 25%.

All kinds of analysts blame this and that but there is only one driver and that is the Federal Reserve

Bank (the Central Bank of the US). I have been warning of this for a long time. As Martin Zweig

coined it in the 1980s, “Do not fight the Feds”. That is the most important advice one could get

when it comes to market activity. There is always a time lag between policy implementation and the

effect it has on the economy. That is the trickster. Most of the time the Feds keep tightening for too

long and create an unnecessary deep recession and then they have to go to the other end of the

spectrum and loosen monetary policy too much. When Trump heard that the market was going

down due to interest rate hikes by the Federal Reserve, he asked his staff if he has the power to

fire the chairman of the federal reserve who he just appointed. Many past presidential advisors stated

that no other president would have asked that question. The Federal Reserve is independent so that

our monetary policy will be safe from politicians. Trump mush have assumed that if he fired the

fed chairman, the market would sky rocket. What would have happened if Trump fired the

fed chairman? If that was an option, Jimmy Carter would have done that in 1979. If the President

fired the fed chairman, all people all over the world will lose confidence in the dollar as the main

protector of inflation, the federal reserve will now be run by political stooges. The bond market is

much more bigger than the stock market and the bond market drives the equity market as well as the

foreign currency market, which is the biggest financial market. Such a move would drop the bond

market so much it could raise mortgage rates to over 20%. Equity markets all over the world could

drop more than 66% (technically the most a market could drop).Already analysts are saying that

there is a 35% probability of a recession and some are calling it a Trump Recession. There is a more

of a probability in 2020. Is this for sure?

Is it all gloomy for the future? No, not at all. It all depends on the Federal Reserve. The circumstances are such that we could have “Goldilocks” economy andmarket in the US-not too hot, not too cold. The Federal Reserve has been increasing interest ratesto cool down the economy as they believe that since we are at full employment, inflation is ready to raise its ugly head. The logic is that if we are at full capacity, then we have to pay more for capacity

which will passed to the consumer in terms of inflation.

If we wait to see signs of inflation then the Feds have to raise rates so high, we

could end up with a very severe recession. Already there are signs of the economy slowing down and

it is much worse in other countries. Trump’s tariffs scared investors so much Chinese market lost 2.5

trillion in 2018. China hit back hard and our technology companies, which have been carrying the

US economy are having a major slow down as it was evident from the Apple announcing a 38%

drop. Technology company revenues are heavily (70%) dependent on international sales. Due to

Trump tariffs, those companies will have a bleak future and the ripple effect could be seen all

over the economy. For example, expect real estate prices to drop around silicon valley.So how is this

all good for the market? Now if the federal reserve believe that the slow down that is coming due to

past actions is enough to cool down the economy, they might stop raising rates or even lower rates

which would be hugely beneficial for the market. Remember Martin Zweig’s golden words, “Do

not fight the feds”, the other side of the coin is when the feds are loosening monetary policy, buy

stocks and do not sell stocks!

A note of caution. This time around we do not have a point of reference when it comes to predicting

what might happen with an economic downturn or a recession; the reason is that for the first time

in history we had zero percent interest rates in the US and negative interest rates in Europe and

elsewhere so Corporate debt level is sky high and they cannot sell bonds at these rates to cover for

the existing or maturing bonds so we could see a calamity that we never thought possible. Even the

Managing Director of the IMF warned that this level of corporate debt is a huge risk to the world

economy. On the bright side, analysts believe that Trump tax cut is being used by companies to

reduce their debt level.

GE- Last month when I wrote my newsletter I was going to ask you to increase your GE holdings by buying 500 to 1,000 shares of GE but I made a terrible mistake of not doing it. My idea was to

Start buying at that stage and buy more as the share price dropped. Over the past 30+ days, GE share

Price rose by 24% !! Strangely the share price bottomed out at $6.66! Some people might call it the

Devil’s number but it is also fibanocci number used to measure the technical movements in a stock.

Better late than ever. I suggest that you buy 500 shares of GE and be prepared to buy more if the

Price drops further. When we buy 500 shares on 1/1/19, we bring down the average cost to the share

price on 1/1/19 which is $7.57 (down from $20)

Apple- Apple stock cratered 10 percent Thursday, a day after slashing revenue guidance in a rare acknowledgement of waning sales.. The stock ended trading at $142.19, its lowest price level since July 2017. The plunge makes for Apple's worst day of trading since January 2013, and it extends a painful year-end trend for Apple into 2019. The stock, which once traded above $230 per share, shed 30 percent in the fourth quarter of 2018. Thursday's losses push Apple's market valuation below $700 billion and behind the market cap of Alphabet to become the fourth most valuable publicly traded U.S. company — down from the top spot just two months ago. The company has lost $450 billion in market valuesince its peak of about $1.1 trillion last year. Apple cited longer upgrade cycles and headwinds in China as causing lower-than-expected iPhone sales. Apple now expects revenue for its fiscal first quarter to be as much as $9 billion lower than previous projections. It's the admission shareholders had been waiting for, after months of reported supply-chain cuts and a major shake-up to the company's sales reporting structure. Apple said in November it would stop reporting individual unit sales and revenue figures for its main product lines. As of Thursday's close, Apple has lost 17 percent in the last 12 months, and almost 40 percent since 52-week highs.(Sara Salinas,”Apple Suffers”,1/4/19)

Have a great month

Fernando

December 11 Post

December 11, 2018

Hi again,

Most investors were under the impression that after October, it would be back to good old days but as I predicted that did not happen. Technically we are in a bear market. A few days ago, 70% of the companies on the S&P 500 were down 20%+. I do not think this is typical bear market which would last at least 12 months.

The Federal Reserve has been increasing interest rates and they are promising to do more in the future. As Martin Zweig used to say in 1980s, “do not fight the Feds”. Already there are signs of the economy weakening and that is not such a bad thing. This might prompt the Feds to go easy on tightening the money supply to avoid future inflation. The Federal Reserve is very afraid of inflation making a comeback.

I wish you a Merry Christmas and a Happy New Year!

Fernando

November 12 Post

November 12, 2018

Hi Again,

We just got done with the two worst calendar months (historically) for the market. Looking at the scorecard you can see that we had a gain of 6.63% in August and in September and October with the market calamity we only lost 5.75%. That is not bad at all! Is the worst over? May be not. The real cause of the correction of the market was high interest rates caused by a hostile Federal Reserve who is afraid of inflation and they want to be proactive and raise rates for that purpose. Historically they always overshoot so why should this time be any different? Just wait and see.

GE- General Electric (GE) just got its second credit-rating downgrade this month. Moody’s cut the industrial giant’s rating two notches, to Baa1 from A2. The analysts said that problems in GE’s power-generation business could cause “considerable” damage to its cash flow: “The weaker than expected performance… is not only attributable to a considerable drop in market demand and ensuing heightened competition, but also to GE’s misjudgment of financial prospects and operational missteps,” the firm wrote. This follows a similar downgrade from S&P, which cut GE’s rating to BBB+ from A on Oct. 2. Both ratings firms cut GE’s short-term credit rating from their top tier to their second-best rating. This is notable because GE used to be one of the biggest issuers of commercial paper, as we pointed out yesterday. It’s not clear that this will be the last downgrade for the troubled conglomerate, which is shedding businesses and restructuring its core power business. Fitch put the company’s rating on watch for a downgrade earlier this month. GE also announced Tuesday that it was cutting its dividend, and perhaps more importantly, that the SEC had expanded its probe of the company’s accounting practices to include a $6 billion charge from the first quarter and a $22 billion third-quarter charge.(Alex Scaggs, Bonds,10/31/18)

GM- General Motors (ticker: GM) stock slipped a little Thursday, but analysts expect more gains now that they have digested its upbeat third-quarter earnings report. Where we were: GM has struggled year to date, but its most recent results demonstrated that tariff headwinds aren’t the whole story. Where we’re headed: The quarter reinforced analysts’ bull thesis on the auto maker. In a year that’s been tough on auto makers, GM has held up better than Fiat Chrysler Automobiles (FCAU) and Ford Motor (F). Now that it has reported better-than-expected results, bulls are even more enthusiastic about the stock. As a reminder, GM’s results handily beat bottom-line estimates, while it expects higher fourth-quarter earnings per share than analysts had expected. The company acknowledged tariffs were a headwind, but remained optimistic about its prospects through the end of the year (Teresa Rivas, Real

Time Analysis, 11/1/18)

Exxon and Chevron- Chevron (CVX) and Exxon Mobil (XOM) are trading higher Friday following third-quarter earnings reports. Where we were: Despite higher oil prices, major energy players have lagged the market this year. Where we’re headed: Both stocks are moving higher after reporting results, capping a series of upbeat reports from oil majors. Markets turned negative midday Friday, taking the Energy Select Sector SPDR ETF’s (XLE) with it. Yet Chevron and Exxon were still notching gains thanks to upbeat results. Chevron earned $2.11 a share on revenue of $43.99 billion, while analysts were looking for EPS of $2.06 on revenue of $47.17 billion. World-wide net oil-equivalent production was 2.96 barrels a day in the quarter, up from 2.72 million barrel a year ago, a new record. Exxon earned $1.46 a share on revenue of $76.61 billion. Analysts were looking for EPS of $1.22 on revenue of $72.91 billion. Its oil-equivalent production was 3.8 million barrels per day, although that was a 2% year-over-year decline.(Teresa Rivas, Sector Focus, 11/2/18)

IBM- As the market digested International Business Machines ’ (ticker: IBM) $34 billion pact to buy Red Hat (RHT), a deal announced Oct. 28, investors decided they didn’t quite like it. IBM shares sank to a near-decade low on Halloween.

That was when two IBM directors pounced, buying the stock on the open market on a day it slipped to $114.09, an intraday low it hasn’t traded at since July 2009. Shares have lost nearly a quarter of their value so far this year. James Owens, retired chairman and CEO of Caterpillar, and an IBM director since 2006, bought 1,000 IBM shares for $114,673, an average of $114.67 each. Owens made the purchase through a trust. His most recent buy was on May 16, 2017, when he paid $263,180 for 1,718 shares, or $153.19 each on average. He now owns 6,000 IBM shares through the trust. Sidney Taurel, chairman emeritus of Eli Lilly, and that company’s former CEO, bought 4,311 IBM shares for $495,846, or $115.02 each, on average. Taurel has been an IBM director since 2001, but this buy was his first on the open market. IBM declined to comment. (Ed Lin, IBM Insiders,11/2/18)

Apple- “ Apple Reduces Disclosure; Typically Not a Good Sign,” wrote one analyst about the iPhone maker’s latest quarterly earnings report. And that about sums it up. Last Thursday, Apple beat estimates for revenue and earnings, reported just OK guidance for the Christmas quarter and said it will no longer break out iPhone sales going forward. This last item, in particular, seemed to rankle investors. Apple stock (AAPL) tumbled almost 7% on Friday, and kept falling on Monday. Apple stock is now down about 10% since the report. One reading of Apple’s shift on disclosure, after all, is that Apple has so successfully saturated the globe with high-priced smartphones that it will struggle to grow unit sales from here, and would rather not point that out for investors each quarter. Consider another interpretation, however: Apple wants investors to focus on its earnings, not its units, because steady, rising earnings are the path to a higher stock valuation.(Jack Hough, “Apple changed..,11/5/18)

Have a great Thanksgiving!

Fernando

October 9 Post

October 9, 2018

Hi Again.

On Friday,10/5/18, the market (Dow) was down 250 points at one time. Why did that happen?Interest rose sharply in the bond market which made analysts fear that the Federal Reserve would do the same. A sudden, sharp rise in interest rates is what caused the market crash on 10/9/87. All market crashed took place in October. Be careful!

A general malaise? Three stalwart NYSE stocks are trading at or near annual lows: GeneralElectric, General Mills, and General Motors. GE and GM set new lows just last week. The Car maker could bear the brunt of a trade war. General Mills is being crunched be a generational shift away from cold cereals and package foods. GE? There’s a menu of problems. Which will be first to rise from the mat? Perhaps General Mills, which Wells Fargo Securities analyst John Baumgartner rates outperform. Last week, General Mills reported solid fiscal first-quarter earnings but light revenues. Baumgartner trimmed his target price by $1 to $50, which still implies 16% upside. (Barron’s Market Week, 9/28/18)

Have a great month!

Fernando

September 10 Post

September 9, 2018

Hello again,

I will begin this newsletter with a pat on the back. During the month of August, the market,(Dow30), rose by 2.16% or increased from 25,415 on 7/31/18 to 25,964 on 8/31/18. On theother hand, our portfolio had a monthly gain of 6.63% and this is because I asked all of youto buy more of Apple when all analysts were negative on Apple and Carl Icahn sold of his Apple holdings.

“Sure, the robots might take over some day, but for now businesses are stuck with humans,and they are finally being forced to pay more to employ them. “Wages grew at a 2.9% annualrate in August, the government said on Friday (9/7). That is the best since 2009. Wage growthspooks investors, as it cuts in to company profits and could push inflation higher, thusconvincing the Federal Reserve to raise interest rates more quickly. But for workers, the anemicwage gains of the past9 years might be finally over. More small businesses are looking to hirethan in the last 30 years. (Barron;s Market Week, 9/7/18)Developing countries are facing a perfect storm, according to Larry Brainard, TS Lombard’sChief emerging market economist. In the research firm’s September message to clients, hewarned, would be bargained hunters that emerging markets have not neared a bottom.While problems in Turkey and Argentina have not been “systematic”, Brainard wrote that acombination with several other crises now brewing could lead to a broader problem. Among possible events Brainard sees: Further escalation of the US/China trade spat Likelihood of a market friendly candidate emerging as a winner in Brazil’s elections Real risk of a financial crisis in Turket when Europeans cut of financing as bad debt rise. Due to trade war fears, most stock markets of emerging markets like Brazil and China arehaving severe corrections; some are down as much as 35% within the past few months. Someanalysts are fearful that that is an indicator or what will happen to our market in the near future.Historically, September has been the worst month for the stock market and October is the monthwhen we had all our market crashes.

They say talk is cheap, but tariff talk has been expensive for oil and stock investors. The latest round of retaliatory tariffs took a bite out of crude prices as China slapped a 25% charge on $16 Billion worth of goods, including petroleum products. US crude was carved out of the list; it might have been spared for now, only to be used later if the trade war escalates. He adds that crude also could have been given a temporary pass to allow previously purchased barrels to land without additional cost to Chinese refiners. This also buys refiners time to find alternative sources. The news is neither light nor sweet (Michael Tran, RBC Capital Markets,8/10/18)

Looking at our historical record is a good way of learning lessons for the future. About 20 years ago I worked for a boss who used to be a financial analyst at Intel during its hayday. He told me that I should invest in AMD which was Intel’s #1 competitor. A few years ago, there was not a single person on Wall Street who could say a bad thing about Intel and who could do the opposite of AMD. In 2015, I purchased some AMD for about $2.50. A few months later the stock price went down to $1.80.Till January 2016, the price fluctuated around $2. I gave up and sold my holdings. Now everyone hates Intel and everyone loves AMD, a couple of days ago, it had an intra day high around $30.. Just imagine buying at $2 and selling at $30! This happens to most professionals.

GM- Autonomous and electric cars—the Auto 2.0 movement—are gaining momentum, and today's players will likely see increased competition, says Morgan Stanley. The best bet for General Motors (ticker: GM)? Breaking out its Cruise division. Where we were: Technology gives companies like GM and Tesla an advantage in the Auto 2.0 movement, for now. While Tesla's technology often steals the headlines, it's hardly the only company working on electric and autonomous cars. For example, General Motors' Cruise division is a bright spot for the company: The company is targeting a 2019 launch for Cruise's robo-taxi service and if it gets the technology right, the unit could bring in $17 billion in earnings before interest, taxes, depreciation, and amortization by 2030. That's a big if, however. As Morgan Stanley's Adam Jonas warns, if Cruise "doesn’t achieve independence soon....the market might have reason to forget about it." He reiterated an Overweight rating and $46 price target on GM on Thursday, but writes that "each month brings more evidence of an auto cycle past its peak and a growing backlog of competition focused on Auto 2.0." (Teresa Rivas, Sector Focus,9/6/18)

Apple- As Apple (AAPL) preps for its biggest day of the year next week, at least one Wall Street firm has raised its price target on the company's stock in anticipation of the launch of three new iPhones. Canaccord Genuity set its price target at $250, up from $220, saying it expects the launch will "drive a continued strong upgrade cycle," encouraging people to buy higher-margin, more expensive iPhones. "Given the strong consumer satisfaction with iPhones, we anticipate Apple will continue to grow its global share of the premium smartphone market," analyst T. Michael Walkley wrote in a note Monday. Apple's share of the worldwide smartphone market, including both premium and less costly phones, slipped to 11.9% from 12.1% in the second quarter of the calendar year, according to the market researcher Gartner. This left it at No. 3 in the world, after Samsung Electronics (South Korea: 005930) and Huawei Technologies, both of which posted year-over-year gains. Walkley expects Apple to offer two new OLED-screen iPhones and a more affordable LCD iPhone on Sept. 12. If the devices' launch leads to gains in market share, as he expects, that could lead to more gains for the stock, the analyst says. Apple shares are up 35% this year, through Tuesday's close.(Jon Swartz, Tech Trader Daily,9/4/18)

Have a nice month!

Fernando

August 6 Post

August 6, 2018

Hello Again,

The market has been stagnant for some time now. After dramatically moving up within a short period of time, this is not unusual. Increase in interest rates by the Federal Reserve to slow down the economy while the rate of growth in the economy is expected at 5% for this quarter, makes me believe that the Federal Reserve will create a mini recession to cool down the economy. To that effect, the trade war came at the best time as that alone might create the desired slow-down in the economy.

I would like to take this opportunity to take a victory lap. Many months ago, all analysts were negative on Apple. They declared that Apple is dead as a growth company and we could all expect a decline in the price. At that time, after making billions of dollars, Carl Icahn sold all of his Apple holdings and he stated that Apple has a negative future in China. When all this was taking place, I asked you to buy more of Apple and the shares of Apple owned by us increased. Our average cost of Apple is at $92. On 8/2/18, Apple became the first publicly owned company to have a market cap of one trillion dollars and the share price ended the day at $207 per share. Apple’s future looks very rosy according to their latest Wall Street call. Now Jim Cramer predicts that Apple will go up by another 50% to $300 per share! Along the way, Apple missed many golden opportunities. For the longest time, they had the biggest cash balance on their balance sheet-over $200 billion. As most analysts state, they should have bought Netflix when it was cheap or they could have done the same with companies like Square and Facebook. Apple is known not to have made a single huge acquisition but that does not mean that they will not do so in the future.

GE- General Electric's (GE) lead director, H. Lawrence Culp Jr., has bought $2.5 million in shares of the troubled conglomerate on the open market. He paid an average of $13.04 for 191,000 GE shares on July 24. Culp, who made the transaction through a holding company, now owns a total of 373,400 shares through that entity and through family trusts. The stock has dropped about 24% so far this year, excluding dividend payments. Despite its problems, GE does have its bulls. Culp, who joined GE's board earlier this year, is the former CEO and chairman of Danaher (DHR) and retired from that company in 2014.(Ed Lin,RealTime Analysis, 7/27/18)

GM-While earnings and tariffs play tug of war with stock performance, it's obvious that some companies would be hit harder than others in a trade war. Auto makers are a prime example of companies that have a target on their backs when trade tensions flare. But what if there we didn't have to worry about tariffs? Well, in that case, General Motors (GM) looks like a better buy than Ford Motor (F), says Piper Jaffray's Alexander Potter. Potter writes that "it's clear that GM is outperforming Ford in China." He points to GM's success in the luxury space as "particularly notable," as he estimates the Cadillac brand represented 16.7% of GM's second-quarter sales in China, up from 13.6% in the same period last year. He believes this will boost GM margins, and may even help the auto maker log better-than-expected income from its joint venture (versus guidance of $2 billion). Yet that's only if things carry on as is, a big if given worries about the escalating tit-for-tat trade war between the U.S. and China. Potter write that both GM and Ford would be hit hard by a trade war: "In addition to absorbing higher import duties, both companies would probably cede share if consumers began boycotting U.S. brands. So far no boycotts have materialized, but recent market-wide sales declines are probably due to trade-related price confusion, and GM/Ford are not immune."(Teresa Rivas,Sector Focus,7/25/18)

EXXON- Exxon Mobil (XOM) will report earnings a week from Friday, but JPMorgan's Phil Gresh warns that even though expectations aren't very high, the second quarter will probably still not provide the "panacea" for the energy giant's woes. Exxon has slipped 2.8% year to date, underperforming other oil majors such as Chevron (CVX) and ConocoPhillips (COP), along with the EnGresh reiterated a Neutral rating and an $88 price target on the shares today, writing that his earnings estimates are in line with consensus, but that "it feels like upside could be fairly limited."ergy Select Sector SPDR ETF (XLE), which is up 3.6% since the start of 2018. He writes that on the upstream (exploration) side, earthquake-recovery efforts likely hurt volumes, prices, and cash flows at the PNG LNG project that Exxon is spearheading, while maintenance and production issues in areas from Canada to Kazakhstan may also weigh on the quarterly results. In all, Gresh warns that Exxon could notch another year-over year and quarter-over-quarter production decline, the eighth quarterly production decline in the last 10 quarters.(Teresa Rivas, Sector Focus,7/20/18)

IBM(IBM) this afternoon reported Q2 revenue and profit that topped analysts' expectations, and re-affirmed its profit outlook for the year, led by sales of mainframes and operating-system software, sending its shares higher in late trading. Most other lines of business were flat to up slightly in the quarter. Chief Executive Ginni Rometty called the results "strong," and said they showed IBM's "progress and momentum in the emerging, high-value segments of the IT industry." Added Rometty, "More clients are engaging IBM on their journey to the cloud, and deploying IBM Cloud, Watson AI, analytics, blockchain and security solutions. "This demonstrates IBM's unique leadership in providing innovative technology coupled with deep industry expertise, trust and security." Revenue in the three months ended in June rose to $20 billion, yielding earnings per share of $3.08, excluding some costs. Analysts had, on average, been expecting $19.85 billion in revenue and $3.04 per share in net income. IBM's gross profit margin declined from a year earlier by half a point, to 46%, while its pre-tax The biggest increase among all IBM's businesses, percentage-wise, was its "systems" business, including its mainframe computers, up 25%, at $2.2 billion.operating profit margin rose to 13.9% from 12.7% a year earlier. IBM's "cognitive solutions" products, including its Watson business, was flat from the prior-year period, at $4.6 billion. Its "Global business services" business was upIBM said its revenue from cloud computing rose by 23% over the trailing twelve-month period, to $18.5 billion. 2% and "technology solutions and cloud platforms" revenue was also up 2%.(Tiernan Ray, Tech Trader Daily, 7/18/18)

Apple I would like to take this opportunity to pat myself on the back. Many months ago, all analysts were negative on Apple. They declared that Apple is dead as a growth company and we could all expect a decline in the price. At that time, after making billions of dollars, Carl Icahn sold all of his Apple holdings and he stated that Apple has a negative future in China. When all this was taking place, I asked you to buy more of Apple and the shares of Apple owned by us increased. Our average cost of Apple is at $92. On 8/2/18, Apple became the first publicly owned company to have a market cap of one trillion dollars and the share price ended the day at $207 per share. Now Jim Cramer predicts that Apple will go up by another 50% to $300 per share! Along the way, Apple missed many golden opportunities. For the longest time, they had the biggest cash balance on their balance sheet-over $200 billion. As most analysts state, they should have bought Netflix when it was cheap or they could have done the same with companies like Square and Facebook. Apple is known not to have made a single huge acquisition but that does not mean that they will not do so in the future.

Apple (AAPL) doesn’t report results until after the closing bell on Tuesday, July 31...but it’s never too soon to start pontificating about what to expect. The stock’s received a couple price target boosts today as analysts contemplate what Apple might say. Morgan Stanley’s Katy Huberty has dug into the work of quantitative analysts to find that probably the current quarter, not the one that Apple is reporting, is likely going to be lighter than expected. Huberty sees Apple probably delivering an "in-line June quarter but providing a slightly weaker-than-consensus September quarter outlook due to a possible October launch of the 6.1-inch LCD iPhone." Still, Huberty, who has an Overweight rating on the stock, raises her price target to $232 from $214 to reflect the fact that peer stocks are getting more richly valued of lateLTiernan Ray,Tech Trader Daily,7/25/18)

Have a great month!

Fernando

July 3 Post

July 3, 2018

Hello Again,

The Dow Jones Industrial Average has dropped 328.09 points, or 1.3%, to 24,252.8 after President Donald Trump ratcheted up the trade-war talk with warnings to U.S. trading partners, and on reports that the administration would put restrictions on Chinese investments in U.S tech companies. The S&P 500 fell 1.4% to 2717.07, and the Nasdaq Composite slumped 2.1% to 7532.01. But that might only be the beginning, claims Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet," he writes. "Instead, what we are experiencing is how the Trump administration is applying pressure to the Chinese so that they will eventually agree to some type of compromise (e.g. this is part of the negotiation)." I'm not sure I want to hear that word–"negotiation"–in this context again. We've been hearing it since Trump first started ratcheting up the trade talk, and through each iteration of the process. At some point, however, the negotiations, if that's what they are, will start to take their toll on the economy. And that point might be here. JPMorgan's David Hensley notes that June's flash manufacturing PMI points toward an "unusual sharp drop in expectations versus current conditions," and that the results, which were released last Friday, "hinted that manufacturers are getting worried, especially in the U.S."(Ben Levisohn, Real Time Analysis, 6/25/18).

The yield curve, the spread between the 10-year and two-year Treasury yields, is the flattest it has been since August 2007. It may even invert at some point. What are good ways to play the flat yield curve? Chief investment officer, Stone Investment Partners. “Inversion has an amazing record of forecasting recession…but stocks have typically continued to rise (sometimes sharply) after the inversion with a median gain of 13.1%.…Bottom line: the flattening yield curve is not a reason to flee stocks.”. Analyst, Canaccord Genuity, “Although many fear [financials] may underperform…the history of the past two cycles suggests otherwise. We would add to our overweight sectors of financials, info tech and industrials with an intermediate-term time horizon.” Chief economist & market strategist, MKM Partners, “Contrarian investors should take a look at interest-rate sensitive defensive sectors like utilities, stables and real-estate investment trusts, which may gain their footing as growth momentum peaks.…” Equity Strategist, Morgan Stanley, “We still think it is too early to go full-on defensive, but it probably is not too early to start shifting out of some of the extreme cyclicals and picking up a few more defensively oriented names.” (Barron’s Review, 6/22/18)

Oil prices look set to temporarily hit $90 a barrel during the first half of next year, if not sooner, and risk spiking to as much as $100 a barrel, depending on geopolitical events and other factors, say Bank of America Merrill Lynch analysts. But they do not see an immediate major jump in prices. For this year, they forecast an average price of $70 a barrel for Brent crude, the international benchmark. They forecast $75 for next year. Their previous forecast was $60. Prices could climb significantly next year, however. The analysts have a target of $90 a barrel during the second quarter of 2019, with a risk it could go to $100 a barrel. Futures on Brent were trading as high as $78 Thursday. "Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices," they wrote.(Patti Domm, Market Insider, 5/10/18).

The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896. Out of the original Dow 30, only GE remained, that is up to 6/19/18 when GE got replaced by Walgreens.

GE- The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896. Out of the original Dow 30, only GE remained, that is up to 6/19/18 when GE got replaced by Walgreens. General Electric’s sweeping restructuring plan announced this morning drew cheers on Wall Street despite the likelihood that the company’s dividend will be lower after the company spins off its large health-care business in the next 12 to 18 months. GE shares (ticker: GE) are up 97 cents, or 7.6%, to $13.72 after the stock recently hit a new 52-week low of $12.61. Investors are pleased about the combination of actions that GE announced today, notably the health-care spinoff, a plan to reduce net debt at the core industrial company, and continued asset and debt reduction at GE Capital. The dividend, now an annualized 48 cents, is expected to decline by an unspecified amount after the health-care split to reflect what the company called “health-care industry practices” and “industrial peers.” This means the combined dividend of the new GE and the health-care division will be lower than the current payout. The stock now trades for about 14.5 times projected 2018 earnings of 94 cents a share and yields 3.5%.The remaining part of GE will be dominated by three divisions—the now-troubled power-generation unit, a maker of utility-scale natural-gas turbines; aviation, GE’s crown jewel; and GE Capital, a financial-services unit. GE Aviation is the leading maker of commercial jet engines in the world, operating in an effective duopoly in both the narrow-body and wide-body aircraft markets. GE put forth some ambitious goals, notably to make up all the lost earnings from the health-care division, a leading producer of imaging equipment like CT and MRI scans. The unit generated over $3 billion in operating income last year and is expected to produce more than $4 billion in earnings before interest, taxes, depreciation, and amortization, or Ebidta, in 2018. GE aims to offset the lost profits with cost reductions and earnings gains at the remaining businesses—notably power generation and aviation—by 2020. That lofty goal seemed to catch some analysts by surprise on the company’s earnings conference call this morning.(Andrew Bary, Feature,6/25/18)

IBM-The US patent and trademark office just issued its 10th million patent since 1836. You might think patents are important enough to drive stock prices; you would be wrong. The US patent leader isn’t Apple, Alphabet (Google) or Amazon. It has long been IBM, which scored a record 9,043 patents in 2017.and has held the patent crown for 25 years straight. Number 2 on the list is Intel, with a third of IBM’s patents but a market cap of almost double. Given the Big Blue’s stock price has hardly changed over the past decade, patents don’t appear to predict stock prices. (Nicholas Colas of Data Trek, Market Week, 6/22/18)

Have a great month!

Fernando

June 6 Post

June 6, 2018

Hi Again,

During May 2018 we had a gain of 5.61% on our portfolio and the gain for the past 2 months was 6.55% while we lost 5.44% in March 2018. This truly explains what is going in the stock market right now. The stock market sky rocketed for about 15 months ending around January 2018. This happens during the last few stages of a bull market. No one knows for sure when this bull market will end and how long the next bear market soul last. We can hope for a good correction followed by a short bear market. However our strategy should be prepared for the worst so then we would be able to face any possible outcome. As I have said from day one, if you keep 25% to 50% of your funds in cash, you will be ready for any outcome.

For many years I have been ringing alarm bells about Deutsche bank, the biggest bank of Germany. They have over 70 trillion dollars in derivatives which are not on their balance sheet. Their argument is that it is hedged properly. I have studied hedges for the past 30 years and any expert will be able to tell you that there is nothing as a perfect hedge. Remember how banks felt secured prior to 2007 as they were properly hedged to take care of their mortgage activities? People did not see themselves as ‘greedy’, they replaced the word “greed” with “optimism”. Just prior to the 1929 stock market crash, JFK’s father, Joe Kennedy, first head of the SEC, saw the greed of the masses and in order to protect his assets sold off his stock holdings prior to the crash. If and when Deutsche bank implodes, there is no entity in the world capable of saving a 70 trillion mess created by this bank. The JP Morgan too has over 5 trillion in such derivatives. Last week it was in the news that US authorities placed the Deutsche bank on a watch list about a year ago.

Deutsche Bank AG just ended a roller-coaster week. June doesn’t look any less harrowing. Shares of Europe’s largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm’s health. It’s part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good. First came the reports Thursday that the German lender is on a U.S. regulatory watchlist for problem banks. Then on Friday, S&P Global Ratings cut its credit rating. In a sign of dimi Deutsche Bank AG just ended a roller-coaster week. June doesn’t look any less harrowing. Shares of Europe’s largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm’s health. It’s part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good. First came the reports Thursday that the German lender is on a U.S. regulatory watchlist for problem banks. Then on Friday, S&P Global Ratings cut its credit rating. In a sign of diminished standards, investors expressed relief that the grade dropped only one level. “They dodged a bullet,” said David Hendler, founder of Viola Risk Advisors and an analyst who’s followed the industry for more than three decades.(Sridhar Natarajan, Business/Bloomberg,6/1/18).

We are currently at full employment; last time it was this low was in 1969. According to economic theory, if it goes any lower, we could reignite inflation so you can expect the Federal Reserve to increase interest rates to slow down the economy. If that, the outlook for the market will be very bad.

Have a great month!

Fernando

April 2 Post

April 2, 2018

Hi Again,

Over the past few months, some people thought that the stock market goes up without going down. Unrealistic expectations! Markets go up and markets go down. Every time the market goes down, all kinds of pundits come up with reasons or excuses. Many months ago I asked you if you are ready for the Trump crash; but Trump is not to blame for the crash that is coming and he cannot take credit for the current bull market. This bull market is very old. Markets are like dogs. This market is over 9 years old and that is very old for a market. This is the 2nd longest bull market since 1990; and this is the 4th longest bull market since 1960. All bull markets, like all humans got to die one day. In the 1980s Martin Zweig became famous on Wall Street for his theory that got his Ph. D-“Do not fight the Feds”. By Feds, he meant the Federal Reserve Bank (US Central Bank). They are watching what economists call the “Phillips Curve”-the relationship between inflation and the unemployment rate. After reaching a certain level of unemployment, in order to keep inflation at bay, the Feds increase interest rates to slow down the economy. They always try to have a ‘soft landing’ but most of the time, they miss their targets. In the 1970s, it was believed that full employment with no inflation was considered to be around 6%, now as the unemployment rate dips below 4%, we are seeing signs of inflation but the Feds cannot afford to wait to see significant rates of inflation as at that time, they have to raise interests in a big way causing a recession. Fiscal stimulus created by the Administration is only causing the Federal Reserve to increase rates faster than earlier projected.

On 3/22/18, Jim Cramer shouted, “This was nothing but a tsunami of selling stocks”. For months we have been told by pundits that we are experiencing synchronized global economic growth but latest reports show weak growth in Europe and in some other countries. European banks stocks got hit badly. The market is still waiting to see how China (PRC) will respond to Trump’s tariffs. Tech companies that get as much as 70% from overseas, are very nervous. Heavily subsidized agriculture sector in the US could become another target of China. When Trump talked about tariffs for US steel to protect it from China, I wondered why Trump does not take a different route to achieve the same goal. If we have tariffs on steel, all things made by steel would be more expensive than what other countries produce with Chinese steel so the US will become less competitive in many industries (i.e. cars). I was wondering why Trump did not want to do the same thing China was doing; in other words, we too could subsidize the US steel industry as Chinese do and make our steel even cheaper. Recently, a professor of economics at a prominent university in the US also proposed the same route for Trump. Trump can work with US companies to use a mixture of subsidies and technology to have our sell at a lower price point than the Chinese.

What we have been going through for the past 2 months (volatility and the correction) is good and it has contributed to the overall health of this bull market. Market going up in a straight line is never a good thing. The market could go even lower and that too is good.

EXXON-In an analyst meeting today, oil giant Exxon Mobil (XOM) laid out an aggressive earnings target and capital expenditure plan for the next five years. The company also said it would “broaden and deepen” its engagement with shareholders and stakeholders. Exxon Mobil Chairman and CEO Darren Woods said that 2018 capital expenditures for 2018 would be $24 billion, including chemical, upstream, and downstream businesses, a bit higher than 2017’s $23 billion. Next year it will jump to $28 billion and rise to about $30 billion in the 2020-25 period. Woods said that the company’s average return on capital employed would rise to double-digit percentage levels, or about 15%, by 2025, assuming a $60-per-barrel oil price, from the current 7% level. Much of the company’s guidance was predicated on $60 oil. f oil averages about $40 per barrel, Exxon sees a 35% potential increase in earnings by 2025, Woods said, compared to a gain of about 135% if oil remains around the current $60 price. With $60 oil, the upstream business would triple divisional profit by 2005, thanks to the discovery or addition in 2017 of resources with 10 billion barrels of oil equivalent (BOE) potential; a fivefold increase in tight oil production in the Permian basin of Texas; and the addition of 25 start-up projects adding a net 1 million BOE per-day production. The downstream part of the business, which includes refining and chemicals, should double earnings at $60 oil. That will derive from improved proprietary technology; a 20% margin improvement from a shift to higher-value products like jet fuel and away from fuel oil; and integrating Permian Basin production into downstream production. Like other oil companies, Exxon has sharply cuts costs since 2014, when oil prices were about twice where they are now. In the upstream business, there was a 22% reduction in operating cash costs through 2017, said upstream head Neil Chapman. He said that production would grow to around 5 million BOE per day by 2025 from last year’s 4 million, which was down 2% from 2016. When pressed for a dividend growth number, Woods declined to give one. He said that “we are confident we can reliably grow the dividend at $40-per-barrel oil.” Excess cash beyond dividend needs and company investment plans will go to shareholders in the form of buybacks, he said.( V Racanelli Real Time Analysis, 3/8/18)

IBM-The Street today was digesting what it heard yesterday from International Business Machines’s (IBM) CFO James Kavanaugh and CEO Ginni Rometty in their analyst briefing. Today the stock closed up $3.10, almost 2%, at $159.31, after dipping slightly yesterday, suggesting investors are warming to what they heard. Kavanaugh, in a phone conversation, intimated that avoiding explicit targets was somewhat by design. The discussion, which was not in person but rather webcast — you can view a replay on IBM’s investor relations site — included a reiteration of long-term intentions by Kavanaugh, including “low single-digit revenue growth.” He also provided some new metrics, such as the company’s "as-a-service” business at some point achieving "an exit run rate of growth of 15-20% annually." The event is part a “wave” of events IBM will have, he said, as a new approach to talking with the Street. The next even is on March 20th, IBM’s annual “THINK” conference, in Las Vegas. There will be various “deep dives” on topics such as Watson A.I. and blockchain throughout the year, he said. Reaction has been mixed. Among the most bullish, Katy Huberty of Morgan Stanley this morning reiterated her Overweight rating, and $198 price target, writing that IBM is positioned to lead in a “new computing cycle” dominated by tIf things seem a bit vague, that is perhaps because, Kavanaugh tells me, he has learned the hard way that setting traditional financial targets can be a vexed matter.hings such as A.I. She believes that the bottom line is “IBM is returning to growth." “You’re talking to the guy who put in place the original long-term financial roadmap for this company years ago,” Kavanaugh reflected.(Tiernan Ray, Tech Trader Daily,3/9/18)

Disney- Investors were clearly excited by the Netflix’s potential venture with Barack Obama. Netflix is planning to spend nearly $8 billion on content in 2018, so it won’t have any trouble paying the former president. The skeptics who long questioned Netflix’s big-spending ways have been steamrolled by the impressive numbers. In the U.S., the company finished 2017 with 53 million paid streaming customers. Netflix has another 58 million customers abroad, a figure that has more than doubled in two years. Just 5% of the company’s publicly available stock is now held short -- the lowest level in at least 10 years. Netflix’s stock surge gives it a market value of $144 billion, not much below Walt Disney at $157 billion. That creates an interesting opportunity for investors. Disney shares have languished over the last year, but the company is about to take a major step into Netflix’s terrain. Later this year, the company will launch a direct-to-consumer ESPN streaming service, for $4.99. By 2019, the company plans an entertainment package, as well. That product gets all the more impressive once Disney closes its deal for 21st Century Fox . Imagine a platform with exclusive rights to Pixar movies, Disney princesses, and Marvel superheroes. It’s a compelling offer, if my young daughters are any guide. Having tired of Netflix’s choices, most mornings they now turn on our Apple TV and pull up the Disney app that comes with our cable subscription (Disney’s forthcoming streams won’t require cable authentication). In a note to clients today, BTIG analyst Rich Greenfield said that Disney could “win the streaming war” if it stopped trying to protect its legacy movie business. He points out that Black Panther should reach $1 billion in global box office revenue this weekend.(Alex Eulie, Review & Preview, 3/9/18)

Apple- While many investors are focused on device sales at Apple and other tech companies, services could be the way forward as the company tries to work its way toward a $1 trillion market cap. “Over the last five years, the vast majority (86%) of Apple’s 8% annual revenue growth was driven by iPhone sales,” Morgan Stanley analysts wrote in a Thursday note. “But as replacement cycles extend further and device installed base growth slows to single digits (from 14% over the last two years), it is through monetization of Apple’s (AAPL) Services business that we see the company still generating mid single digit revenue growth.” Morgan Stanley, which has a $203 price target—about 21% above current levels—on the Barron’s Next 50 stock’s shares, suggested several “levers” the company could use to accomplish this. (David Marino-Nachison,3/22/18)

Have a great month!

Fernando

March 2 Post

March 2, 2018

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 past 30 year trend for interest rates broke recently and for the next 30 years, you can expect interest rates to go up.

· 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)

· 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!

· People are using the market as a casino.

· Our market is a casino on steroids.

· No one knows when this market will blow up.

· “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!

Have a great month!

Fernando

February 6 Post

February 6, 2018

Hi Again,

What goes up must come down! Prior to this week, all professional managers were getting concerned about the market’s parabolic move up (“meltup”) while the retail investors were overly bullish. That is a real danger sign as this happens at market tops. “Meltups” could end in “Meltdowns”. On 2/2/18, the Dow dropped by 666 points! Is God/Universe trying to tell us something? Just kidding! All the Dow 30 stocks went down on 2/2/18. For this market to have a normal correction, the Dow must go down by about 2500 points. That would be healthy for the long run. Why did this happen today? For the same reason the market crashed on 10/19/87; the 10 year bonds went over 2.7% and the Federal Reserve talked about inflation making a comeback and having 4 possible interest rate hikes in 2018. In 1987, Dow went down 25% in one day, for us to get a similar crash, the market has to go down 6,000+ points. It will not happen in one day due to circuit breakers where markets get halted for a while for people to cool down. That could have the opposite effect as it happened in Shanghai in 2015 as every halt and restart brings the market down even more sharply. We are dealing with “mass psychology”. People who have made a lot of money over the past 9 years can put their funds in risk free government 10 year old bonds and get 2.7%+ for the next 10 years. It is just common sense. If the 10 year bond rate go to 3% or 5%, the value of your bond will get devalued but if you wait for 10 years, you will get 100% of your initial investment. Now as margin calls come in, we could have one wave after another to the low side. As I have been saying for months, stocks bought on margin in the US alone was more than a half a trillion dollars! Most people were assuming that the market can only go up! That never happens!

In the 1980s, a very good market analyst/manager, Martin Zweig came with a good saying, “Do not fight the Feds”. What he meant was when the Federal Reserve start to increase interest rates, get out of the market and when the Federal Start to lower interest rates, start buy stocks. There is always a time lag and people who wait for the last minute could lose all the gains they accumulated during the bull market. Decades or centuries prior to economics getting in to ‘behavioral economics’, technical analysts and other astute market analysts knew that ‘mass psychology’ drove markets. In 2017, economist Richard Thaler was awarded the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics and his pioneering work in establishing that people are predictably irrational in ways that defy economic theory.

There are three prevalent themes in behavioral finances. About 100 years ago, John Pierpont Morgan Sr. (J P Morgan) was an American financier and banker who dominated corporate finance and industrial consolidation in the United States of America in the late 19th and early 20th centuries. When J P Morgan was asked how he made so much money in the stock market, he replied, “ I never bought stocks at the bottom and I never sold at the top”. This does not mean that people should not buy low and sell high. It is okay to allow others to make on the final stages of a bull market. This is why I recommend having 50% in cash at all times and buying a little at a time as the stock or the market moves lower.

On each of the stocks listed on this newsletter, I have given a price level where you can purchase more to decrease the average cost; however beware of what market experts call a “catching a falling knife” (buying when prices are dropping sharply and decreasing your portfolio sharply). This is why I have always asked everyone to have at least 50% in cash and when buying stocks, only, “nibble”(buy a little and wait for it to drop much more and then buy more). After that we have to be patient for the recovery. The past 40 years is not a good example. At times, you might have to wait for many years to see a profit.

In my last edition I talked about the bubble in Bitcoins and how many analysts stated that they heard from their Uber drivers how they were going to retire early with their Bitcoin “investments”; and how that was similar to Joe Kennedy being told by his shoe shine boy that he was going to make money on stocks prior to the 1929 crash. Since my last edition, in a month, Bitcoin fell from $17,000 to $7,000 on 2/5/18!

For the first time, we purchased Twitter on 8/3/15, we have a gain on Twitter! These days, most analysts are optimistic about Twitter’s future. Patience paid off!

The US market has been on fire, returning 22% last year. And the action so far in 2018 suggests there’s no looking back. The huge run-up has brought the total market value of the Russell 3000 index (which covers 98.5% of the US market) to $30 Trillion, a staggering amount of money. (Bespoke Investment Group, 1/19/18) The Dow has been accelerating, it only took 8 days to go from 25,000 to 26,000; 23 days for the Dow to move from 24,000 to 25,000, 30 days for the Dow to move from 23,000 to 24,000.

For the past few years, on a weekly basis, I have been checking on the weekly net performance of the 25 biggest international equity markets in the world. Every single week I have seen at least 1 or 2 markets with net losses but for the very first time, during the first week of January 2018, all top 25 international equity markets had gains! This is a nightmare for a contrarian!

For the past few decades I have been a big fan of the halftime report on CNBC. They do a good job of covering equity markets. Kevin O’Leary on Shark Tank got in to a partnership with an immigrant contestant who invented “Benjilocks” that use finger print sensor to open padlocks. Just after this invention was shown on the CNBC Halftime Report, within a few minutes, Kevin O’Leary got calls from Saudi Arabia (a royal prince), Asia and Europe if they too can get in to a licensing deal on these Benjilocks. According to Kevin this was proof that this show is popular in Saudi Arabia and the rest of the world. It also show the global interest in US equities.

Deutsche Bank has released a series of charts that paint a stark picture of the widening gulf between the haves and have-nots in the US and around the world-with broad implications for investors. A record of 30% of all US households had either zero or negative net worth. Another shows that income inequalities is higher in the US than in other industrialized countries. “This development, combined with associated populism, could over the coming years become the most important theme for investors in US equities, rates, and FX”, writes the bank. (Market Week/Barron’s, 1/5/18)

Anyone remember Dow 30 stock Eastman Kodak which was on the Dow till 2004 or so? On 1/9/18, the share price of Eastman Kodak (KODK) jumped from $3.10 to $9.35 –tripling of price, in one day (in about 9 hours)! The very next day, it rose another 57% !! What made this happen? Kodak announced that they were going to get in to cryptocurrencies! Jokingly one good wealth manager said that he is waiting for Polaroid Cryptocurrencies,

Twitter- Aegis Capital upgraded Twitter to a buy (from a Sell) with a target price of $30. Revenue growth is expected and cleanup of Nazis and so on were indicated. Twitter has a reputation of having one good quarter followed by a terrible one; and if they can stop that trend, it would be good for Twitter. Technically speaking, the chart looks very bullish. (CNBC Halftime Report, 1/16/18). Shares of Twitter (ticker: TWTR) soared 9.5% to $24.27 today after a research firm in a tweet called 2018 "the year for"Twitter and said it could be a takeover target. The endorsement and speculation from Citron Research sent Twitter stock to its biggest one-day gain in more than a month. Citron, which put a target price of $35 on Twitter, thinks Chinese social-media giant Tencent Holdings Ltd. (Hong Kong: 0700) could acquire Twitter. Earlier in the week, rumors resurfaced that Salesforce (CRM) may emerge as a buyer of the micro-blogging company. Twitter and Salesforce declined comment. In each case, Twitter shares rose in the same week it lost its Chief Operating Officer, Anthony Noto, to online lender SoFi as its next Chief Executive Officer. Twitter shares have been on the rise since it reported better-than-expected results in October, leading to upgrades and higher target prices from at least six Wall Street analysts. Its shares declined 5% after Noto's resignation. (Jon Swartz, Tech Trader Daily, 1/26/18) For the first time, we purchased Twitter on 8/3/15, we have a gain on Twitter! These days, most analysts are optimistic about Twitter’s future. Patience paid off!

GM-Wall Street’s stance on car stocks recalls an unsubtle bumper sticker seen on some pickups: “I’d rather push a Chevy than drive a Ford.” A slight majority of analysts who cover Chevrolet owner General Motors (ticker: GM) say to buy shares. Fewer than one-quarter like Ford Motor (F). Even though fourth-quarter results for the two will likely show a deeper revenue decline at GM than Ford. Ford reports Wednesday after the close. GM is slated for the morning of Feb. 6. Falling revenues are not a put-off for investors now, for three reasons. First, pricing has been strong, and inventories look manageable. Second, a long U.S. boom for the industry has left investors expecting demand to soften. Last year, U.S. car sales likely slowed for the first time since the Great Recession, and 2018 is expected to be another down year. But declines so far have been modest. Third, GM has shown that shrinking can be good for business. Last May, it announced its exit from European operations. Last quarter, it said all of its operating segments were profitable for the first time since the fourth quarter of 2014. That has gained it credibility now, when it says it is cutting back on slow-selling cars and retooling its key North American truck lineup. By contrast, when Ford warned earlier this month at a Detroit auto show that profits would decline in 2018, it was seen as skimping on details. Morgan Stanley’s Adam Jonas, who is bearish on Ford and neutral on GM (Jack Hough, Feature/Barron’s, 1/24/18)

Ford- Does Chickasaw see single-letter tickers going down the tubes? At the end of the third quarter, it owned 18,300 Ford shares and 6,250 AT&T shares but both names were out in the cold by the end of the year. Perhaps the investment manager believes a move by Ford to boost domestic production of autonomous vehicles could cause the stock to lose even more drive; shares of the automaker turned in a lackluster 8.7% gain for 2017. (Ed Lin, Inside Scoop,1/6/18). Ford Motor (F) tumbled to the bottom of the S&P 500 on Wednesday, hurt by its guidance. Ford slipped 92 cents, or 7%, to $12.18, while the S&P 500 climbed 26.14 points, or 0.94%, to 2802.56. Ford said that it will invest more in electric and autonomous vehicles, but investors were disappointed by its forecast for this year and next, which comes a day after a much more upbeat outlook from rival General Motors (GM). Ford is down 2.5% this year, and has fallen 2% in the past 12 months. (Teresa Rivas, Stocks to Watch, 1/17/18) Wall Street’s stance on car stocks recalls an unsubtle bumper sticker seen on some pickups: “I’d rather push a Chevy than drive a Ford.” A slight majority of analysts who cover Chevrolet owner General Motors (ticker: GM) say to buy shares. Fewer than one-quarter like Ford Motor (F). Even though fourth-quarter results for the two will likely show a deeper revenue decline at GM than Ford. Ford reports Wednesday after the close. GM is slated for the morning of Feb. 6. Falling revenues are not a put-off for investors now, for three reasons. First, pricing has been strong, and inventories look manageable. Second, a long U.S. boom for the industry has left investors expecting demand to soften. Last year, U.S. car sales likely slowed for the first time since the Great Recession, and 2018 is expected to be another down year. But declines so far have been modest. Third, GM has shown that shrinking can be good for business. Last May, it announced its exit from European operations. Last quarter, it said all of its operating segments were profitable for the first time since the fourth quarter of 2014. That has gained it credibility now, when it says it is cutting back on slow-selling cars and retooling its key North American truck lineup. By contrast, when Ford warned earlier this month at a Detroit auto show that profits would decline in 2018, it was seen as skimping on details. Morgan Stanley’s Adam Jonas, who is bearish on Ford and neutral on GM (Jack Hough, Feature/Barron’s, 1/24/18)

GE- In 2017 GE became the symbol of the sick man of the Dow if not the entire stock market as it lost nearly half its value. As the shares continued to slide in the fourth quarter, Chickasaw bought nearly 105,000 of them, pushing its holdings to 185,390 GE shares at Dec. 31, up from 80,800 shares at Sept. 30. JPMorgan still thinks the stock will underperform.(Ed Lin, Inside Scoop, 1/6/18). CenturyLink Investment more than doubled its holdings of General Electric (GE), a stock that lost nearly half its value in 2017. It also bought more shares of Bank of America (BAC) and initiated a position in United Technologies (UTX) while exiting CSX (CSX) and Bristol-Myers Squibb (BMY). Even people who don’t own GE shares or have any interest in buying the stock are eying the company. Can the Spruce Goose of the investing world take flight once more or will it fall apart? CenturyLink Investment is betting on a takeoff. It bought an additional 91,442 GE shares in the fourth quarter, more than doubling its investment to 173,150 shares at Dec. 31. CenturyLink Investment isn’t the only entity bulking up on GE.(Ed Lin, Inside Scoop, 1/9/18) Last November, new GE CEO John Flannery slashed the dividend by half and talked about asset sales to streamline the company. The stock (ticker: GE) fell 12.6% in two days in what looked to be a technical washout event. After a long decline, a sudden big drop in price action accompanied by a surge in trading volume often can mean the final capitulation of the bulls. Whoever held out hope for a recovery threw in the towel and sold their shares at any price just to get out. That can clear the decks for an ensuing recovery. Sometimes it can be quick, with a surge to the upside creating a classic “V” pattern on the charts. Or it can be a long period of directionless trading where interest fades, fast money moves on, and the media focuses on something else.(Michael Kahn, Getting Technical, 1/16/18)

EXXON- In the fourth quarter, ExxonMobil Investment Management reduced its U.S.-traded equities portfolio by 12.3% to $3.5 billion from $4 billion as of Sept. 30. The Exxon Mobil (ticker: XOM) investment arm, whose portfolio mimics the allocations of the Standard & Poor’s 500 index, reduced holdings nearly completely across the board by 12% to 13%.ExxonMobil Investment Management (EIM) didn’t hesitate to sweep out its own kitchen, reducing holdings in parent Exxon Mobil to 673,700 shares on Dec. 31 from 773,800 shares on Sept. 30. Notable exceptions were made, however. EIM bought more shares of Intuitive Surgical (ISRG) and EQT (EQT), and initiated a position in Norwegian Cruise Line Holdings(NCLH). The advisor also bulked up on iShares Core S&P 500 exchange-traded fund (IVV). (Ed Lin, Inside Scoop,1/10/18) US oil (WTI) rising over $60 ($63 on 1/11/18 and Brent or foreign oil at $68), oil stocks have not risen at the rate of oil in the recent past.

Chevron- On 1/11/18, CNBC Halftime Report announced that BMO Capital upgraded Chevron with a target price of $140. After paying their high dividend ($4.32 per share or 3.38% as of 1/11/18), in 2018, Chevron will have $7 Billion in cash. US oil (WTI) rising over $60 ($63 on 1/11/18 and Brent or foreign oil at $68), oil stocks have not risen at the rate of oil in the recent past. It was only a few months (less than 2 years) that the financial markets worried about Chevron paying this high dividend when the dividend per share was higher than earnings per share. It was then that oil companies like Conoco Phillips lowered or eliminated their dividend. How things have changed!

IBM- On 1/18/18, Martin Schroeder, Senior VP Global Markets appeared on CNBC show “Mad Money”. Some of the highlights:

· This quarter IBM experienced revenue growth for the first time in 6 years- especially due to “cloud’ etc.

· IBM beat market expectations on earnings per share by 6 cents.

· IBM expects revenue growth for the next 12 months.

· The mainframe business is alive and doing well. 90% of the world’s biggest banks and 90% of the world’s biggest airlines still rely on mainframes but IBM mainframes are secure.

· H&R Block uses IBM Watson . Watson is a question answering computer system capable of answering questions posed in natural language, developed in IBM's DeepQA project by a research team led by principal investigator David Ferrucci. Mr. Schroeder stated, “Our blockchains (crypto currency) are immutable”.

Schlumberger- New York-based John W. Bristol is an investment advisor that manages about $3.5 billion in U.S.-traded equities. Now in its 54th year, Bristol was established as a successor firm to a company that advised college endowment funds. In the fourth quarter, the advisor graduated some stocks out of its portfolio. Bristol exited positions in CSX (ticker: CSX) and PayPal Holdings (PYPL)--both of which had stellar performances in 2017--while buying more shares of Comcast (CMCSA) and Schlumberger (SLB). It also initiated an investment in Shopify (SHOP). Schlumberger shares have already surged more than 14% so far this year through midday Thursday, but that comes after 2017’s 17% drop, excluding dividends. That’s good news for investors who bought in the fourth quarter, including Bristol. The advisor picked up 152,000 more shares of the oilfield-services giant and ended 2017 with 999,300 shares. We noted a December sector breakout that Schlumberger hadn’t yet participated in. It’s happening now. (Ed Lin, Inside Scoop, 1/11/18)

Valley National Bank- WAYNE, N.J., Jan. 30, 2018 /PRNewswire/ -- Valley National Bancorp (NYSE: VLY), is pleased to announce that Valley President and CEO, Ira Robbins will appear on CNBC's Mad Money with Jim Cramer, this evening at 6 pm (ET). Valley National Bancorp is a regional bank holding company headquartered in Wayne, New Jersey with approximately $28 billion in assets, reflecting the recent acquisition of USAB. Its principal subsidiary, Valley National Bank, currently operates over 230 branch locations in northern and central New Jersey, the New York City boroughs of Manhattan, Brooklyn, Queens and Long Island, Florida and Alabama. Valley National Bank is one of the largest commercial banks headquartered in New Jersey and is committed to providing the most convenient service, the latest in product innovations and an experienced and knowledgeable staff with a high priority on friendly customer service. For more information about Valley National Bank and its products and services, please visit www.valleynationalbank.com or call our Customer Service Center at 800-522-4100.(PR Newswire, 1/30/18)

Apple- If it’s a Thursday, which it is, it must be time for another cut to the forecast for Apple’s (AAPL) iPhone production. Earlier today, Chris Caso, semiconductor analyst with Raymond James, reported that suppliers to Apple with whom he spoke just two weeks ago, at the Consumer Electronics Show in Las Vegas, “now have lower expectations” for iPhone. The “proximate cause,” he writes, is an “unusual product transition,” whereby Apple is discontinuing the existing iPhone X later this year, to replace it with two new models, which he’s referring to as “iPhone Xs," something that had been rumored earlier this week in a report from KGI Securities. As a result, he sees sales of iPhone in the March quarter of perhaps 55 million, which is consistent with what Bernstein's Toni Sacconaghi wrote yesterday when he opined Apple's March-quarter outlook may disappoint. Apple is set to report next Thursday, February 1st. (Tiernan Ray, Tech Trader Daily, 1/25/18). “The unpredictability of the ASP could be the Achilles heel (or maybe slingshot) for the stock,” he muses. Piecyk, who has a $198 price target, suggests that investors “avoid trading the quarter,” given the unpredictability of prices. And, he points out, with his new numbers, March iPhone sales of perhaps $38 billion would still be 15% growth, which doesn’t seem very disappointing, he writes. (Tiernan Ray, Tech Trader Daily, 1/26/18).

Have a great month!

Fernando

January 2018 Post

January 2, 2018

Hello Everybody,

Happy New Year!

Technical analysts predict the market would go up another 15% in 2018. Take a look at our scorecard; since Fall 2015, our average portfolio (well diversified) is up 43.78%!! 2017 was the best year since 2013 with the S&P500 rose 19% in 2017. If we consider the share price increase or losses for our stocks, 4 did better than the S&P500; and they are Alcoa (91.84%), Twitter (47.3%), Apple (46.11%) and Bank of America (33.57%). The worst performer (1/1/17-1/31/17), was GE with a loss of 44% on the share price; followed by Schlumberger with a share price loss of 19%. Both of those stocks will perform well in the future-if not 2018, in 2019. Have you heard of the “Dogs of the Dow” theory? Investors who buy in to the worst performers of the Dow tend to do make money in the long run. Also we should have sold GE when it reached $31 around February 2017, when our gain on GE was close to 60%!

Dow Jones (DJIA) ended December 2017 with a gain of 1.8%- that is the longest monthly winning streak for the Dow since a 12-month steak than ended February 1959! S&P 500 also up for the 9th consecutive month, matched a streak that ended April 1983. NASDAQ did not set any monthly records but the tech heavy index finished higher for the 6rh consecutive year, tying the longest annual streak on record, from 1975 to 1980. (Barron’s Market Week, 12/29/17)

The experts on the bond market are also experts on the economy, equity markets and so on. The global bond market is much bigger than the global equity market. Therefore it is good for us to consider what the current “bond king”, Jeffrey Gundlach said on the CNBC halftime show on 12/13/17. Some of the excerpts:
•   Total balance sheet items of all world central banks as percentage of the total world equity markets market cap has remained same since 2011. When the US Feds stopped quantitative easing, European and Japanese central banks increased their balance sheets to cover for the US Feds.
•   The new tax bill just passed by the US is deadly for highly leveraged small companies and also for oil and gas companies in the US.
•   Interest rates will continue to rise in 2018.
•   Rapid escalation of inflation and interest rates in the US due to tax cuts and fiscal stimulus on top of existing monetary stimulus will take place in the US soon.
•   After many years/decades, inflation is showing up in the US, UK and in Europe. Inflation is the greatest enemy of the bond market.
•   Always when the bond yield narrows, we come up with invalid excuses. Last time we said that it was due to China buying our bonds but that was wrong as they were buying at the short end. Current flattening of the yield curve is due to investors being happy that the Feds are increasing interest rates (normalcy).
•   Junk bond yields have to widen much more to predict a recession.
•   Historically when commodity totals equal the S&P 500, it is time for commodities to rise again. When commodity prices exceed 7.9 times the S&P 500, it indicates that commodities are at a top. Now we can see commodity prices rising with global growth.
•   Illinois and Chicago muni bonds are heading towards a disaster due to their pension fund liability.
•   If the dollar rises, one should not be in emerging markets. Prior to 2011, emerging markets market cap as a percentage of their respective GDP totals remained constant but 2011 to 2017, commodity prices started to fall so equity markets of emerging markets did not rise as their respective GDP and the gap became larger and larger. Therefore emerging markets are currently cheap.
•   He will not buy ANY crypto currencies or BITCOIN but Bitcoin is better than other crypto currencies. Crypto currencies are not ‘legit’ and even though it is not hackable today it is sure to fall prey to hackers in the future. NSA developed cryptocurrencies so the US government should know how to get in to it. Traitors like Snowden gave US secrets to the Russians and others. Gundlach’s mother sent him an email with a link to Bitcoins so he replied to his mother and said when such things happen, it is a sign of a true bubble.
•   Reagan tax cuts led to a huge explosion of debt as a percentage of GDP; and it happened to a lesser degree with George W Bush. Both those tax cuts were unfriendly to the bond market as they were fiscally irresponsible and prone to create inflation which is the enemy of the bond market. President Bill Clinton is the only President in the past 50 years to have a budget surplus.
Talking about bonds, I saw an interesting report on CNBC Halftime Report on 12/26/17. They usually report on companies with a market cap over $15B but they had this report on Sears with a market cap of about $400M. Their corporate bonds that will come due in October 2017 has a current yield of 20%! Sears have no choice but liquidate their inventory to meet their needs. This will impact all other retailers as they will have to compete with Sears. On 1/28/17, their inventory was at $3.9B and their Long Term Debt is at about $9B.

Did you ever want to see what a bubble market does before it blows up? Did you miss the pre-1929 Wall Street craze? Did you miss the Shanghai market euphoria prior to August 2015? Look at the Bitcoin market. However this could go on for months or years prior to blowing up. For many months and years, most rational investors and traders talked about the absurdity of the Bitcoin craze. Now even the most respected investors and traders are getting in to Bitcoin. We know that hackers can get in to anything connected to a computer but according to these wise guys, Bitcoin is immune to anything or anyone. It is not backed by gold or anything solid and it is not backed by a reserve bank or a governmental agency. People’s Republic of China banned it but I bet people there will find a way to get in to Bitcoin. Bitcoin is a heaven for criminals, tax evaders, foreign exchange rouges among other seedy characters. Does this mean that you cannot make huge amounts of money in Bitcoin? Absolutely not. Also one day you might lose your shirt due to Bitcoin too. It could have a negative impact on other financial markets too. It is a good thing for any company to have some credit losses so that they will build a reliable firewall against such risks and in the same way, it would be good for the world if Bitcoin goes up and explodes in the faces of those who put so much blind trust in to Bitcoin. Greed begets greed. When the Shanghai market crashed in August 2018, Chinese government intervened in unusual ways to stop the crash. Over the past 40 years, US and other central bankers came to the rescue of our market crashes. That is not feasible with Bitcojn. US central bankers are watching it closely but I do not think they can or will do anything-just like the mortgage crisis around 2008. If I am not mistaken, Bitcoin started around 2014, and in February 2014, it was around $800. Up to December 2015, the price hung around 0. Then in 2016, the price rose to about $893. Within the past 12 months (up to 12/10/17), Bitcoin rose from about $900 to $15,000!!! A gamblers golden dream! All straight up! If you had money that you did not mind losing and you bought some Bitcoin prior to 2017, you made a lot of money. Could $15,000 today go up to a million by 12/31/18? Why not? Have you heard of the biggest crash humans faced? A few centuries ago, in Holland, people traded tulips for huge mansions by the ocean!! Prior to 2017, experts said that the total amount of Bitcoins was so little it did not matter. On 12/9/17, Barron’s tried to make the same case but I take the opposite view. As of 12/10/17, total Bitcoins come to a Quarter of a Trillion US Dollars! However all crypto currencies are at half of a trillion dollars! World Gold Reserves= USD $7.7T. US Cash Outstanding = USD $1.5T. World Cash and Checking Deposits = USD $3.7T. Apple’s Market Capitalization = USD $873 B. In my opinion, in a few months Bitcoin total could be well over USD $5 Trillion! Most probably, very soon, people all over the world will start getting 2nd mortgages on their houses to put in to Bitcoin-as it happened in China in 2015. Why go to the casino when there is Bitcoin? If Bitcoin crashes when it is over a few Trillions in USD, it will have a negative ripple effect over all financial markets. Now people even in the US are buying many things even houses with Bitcoin. Square is making it possible for people to pay for anything with Bitcoin. Recently in the commodity markets, they started trading Bitcoin Options but the SEC refused to give permission to set up ETF. I would love to short sell Bitcoins through an ETF if that was feasible. Very soon, there will be an ETF for Bitcoins. On 12/11/17, among some well-respected Wall Street analysts there was a 15 minute non-stop heated debate about Bitcoin. People in repressive countries with exchange controls like Venezuela, Turkey, Russia, China have an incentive to buy Bitcoin but the fact that only the exchanges were hacked in the past does not mean that one day hackers will get in to this as this is a currency solely based on software, One of the biggest short sellers said that his Uber driver told him on 12/11/17 that not only he wants to make money with Bitcoin but he plans to retire with Bitcoin! What does this remind me of? Just prior to the 1929 stock market crash, JFK’s father Joe was getting his shoes shined on the street and the shoe shine boy talked to Joe Kennedy about his stock purchases. Joe Kennedy intuitively knew that the end was coming and he quickly sold off all his stocks! Now Uber drivers are planning on retiring on Bitcoins! On 12/11/17, in 3 hours, Bitcoin was up by 15%. In 1999, any stock with a “dot com” at the end would skyrocket and now the same is happening with Blcokchain/Bitcoin. On 12/12/17, the company Riot blockchain (RIOT), rose 22% in one day up to the market close. Two hours after the market close, on CNBC, an analyst warned that this used to be a biotech company that changed its name to Riot blockchain and got involved with this industry to take advantage of the Bitcoin craze and per that analyst, it was not even a prudent business move. Yet people saw “blockchain” in the name and sending the stock sky high. In one hour after that was announced, the share price dropped by 13% in just 60 minutes!!This is a bubble! On 12/19/17, SEC stopped trading of a company called, The Crypto Company as their share price went up from $22 to $575 in just a WEEK due to questionable trading and information!! Another unnamed company selling fruit juice in China stated that they were getting in to crypto currency and put crypto currency in their name. Another company with a CEO from India called Logfin, went from a share price of $5 on 12/14/17 to $70 on 12/18/18! If this trend continues, total crypto currencies, including Bitcoin, will reach 90% of the global money supply in 2018! Just because it is not hackable today does not mean that it is going to remain that way in the future. If Bitcoin and crypto currencies go to that level and crash, that will bring all global markets down as people who lost money in cryptos will turn to markets where they have actual money. With futures and ETFs in Bitcoins and cryptos, many will be buying these currencies with margin requirements. Why should a gambler go to a casino when they can buy Bitcoins? 1636-1637, due to the tulip mania, most expensive mansions were traded for tulip bulbs till everything crashed! Legal counterfeit money!

Per CNBC on 12/26/17:
•   There are more than 1400 cryptocurrencies
•   Bitcoin and BitcoinCash are different. BitcoinCash is fully controlled by 2 computer guys while the guy who created Bitcoin is “lost” and do not seem to have control over Bitcoin.
•   150 hedge funds are now in cryptocurrencies.
•   South Korea shut down some of the cryptos.
•   This way of “printing’ money is like how each state printed money centuries ago.
Glaxo Smith Kline- Glaxo Smith Kline (GSK) will finally face generic competition in 2018 for its blockbuster asthma treatment, Advair. That makes it the perfect time to buy the stock. GSK, whose earnings estimates have been sliding, and whose shares have tumbled since the summer of 2017. Now, look like a good time to buy the stock. To see why, look back at Pfizer 7 years ago when, on the eve of Lipitor’s patent expiration. Pfizer’s earnings per share did not grow for 5 years; yet Pfizer shareholders made a 120% profit over the stretch. The setup is similar to GSK. Its shares have slip from$44 to a recent $35. If shares gradually to 15 times earnings –where they traded as recently as June of 2017-investors stand to make 40% over the next 2 years, including dividends. (Jack Hough, Barron’s/Glaxo: Expect a speedy recovery. 12/29/17)

Twitter- We have been under water (below average cost) on Twitter since December 2015! I was tempted to get out of Twitter but as said before I knew that one day, especially as Trump is President, Twitter will come back to life. On 12/11/17, Twitter rose over $24 and our average cost is $25.14. On CNBC Halftime Report, some of the most respected wealth managers were full of praise for Twitter. Some said that they have been recently purchasing more shares. For the first time Twitter is supposed to make a profit in GAAP terms in 2018. Now it is rallying due to its value and not according to take over rumors. Twitter also announced that it will not allow racist and other undesirables to use their product. Also it was mentioned that most companies are not comfortable that Google and Facebook control 85% of internet ad revenue. CEO, Jack Dorsey (and founder) of Twitter and Square was the same a few years ago and my regret is not including Square in our portfolio. Square rose from $14 to $48 from February 2017 to November 2017!!

GE- IBM is the second-worst performer in the Dow, after General Electric (GE)’s incredible 45% collapse. IBM, at a recent $153.53, is down 7.5% this year.(Tiernan Ray, Tech Trader Daily/Barrons, 12/28/17)

IBM- Berkshire Hathaway’s Warren Buffett rethought his long-held defense of International Business Machines (IBM) in 2017, and many followed him out the door. With only two trading days left in the year, and little in the way of market-moving news to write about, we thought we'd take a look at all 30 stocks in the Dow Jones Industrial Average starting with the worst performer and working our way up to the highest-flying stock in the benchmark. The rankings will shift over the next two days, but the stories behind the stocks shouldn't. IBM is the second-worst performer in the Dow, after General Electric (GE)’s incredible 45% collapse. IBM, at a recent $153.53, is down 7.5% this year. The stock had been positive through about mid-April, but then on May 4th, Buffett, whose Berkshire had the single largest holding in IBM, owning just under 7% of IBM’s common stock, told CNBC’s Becky Quick that he had sold 24 million worth of an original 81-million share stake in the first quarter. The loss of confidence by Buffett was rebuffed by the bulls several times. Morgan Stanley’s Katy Huberty tried to rectify things later that month, telling investors not to worry, IBM just is moving away from the kinds of predictable businesses Buffett likes, to be a more aggressive cloud company. Our own Jack Hough wrote in Barron’s in August something similar, opining the stock can rise 35%. Neither appeal did much good, and the stock continued to meander, hitting a decline of over 15% in late August. As Barclays’s Mark Moskowitz wrote in July, IBM’s transformation under CEO Ginni Rometty had become “tedious." At this point, it’s entirely possible Buffett will continue to sell in 2018, bulls will continue to step up to Big Blue’s defense, and the cycle will repeat itself. .(Tiernan Ray, Tech Trader Daily/Barrons, 12/28/17)

Disney- More recently, after somewhat struggling with its TV channels model, the company initiated a transformation to strengthened its position in the age of Amazon.com (AMZN) and Netflix (NFLX). And the company is well positioned for success in the future: a range of license with no equals and strong experience in family entertainment of all shapes and forms. Disney is often criticized for its inertia in adapting to the new consumption behavior stemming from new technologies. It used to over-emphasize traditional point of sales and distribution channels such as television. Because the group’s traditional media activities generate upwards of 40% of its revenue, people often reduce Disney to a media company. But the company is first and foremost a powerful brand and a fantastic publisher of exclusive content. The company is also coming to terms with the more direct relationship that now exists between content creators and those who consume the content. BAMTech will give Disney the tools to approach this market shift and create a coherent distribution environment for its exclusive contents. The not-so-hidden objective is to impede on Netflix’s hegemony. Disney is pulling future movies from Netflix, and as the companies engage in fierce price battles, one of the fronts is psychological. Disney streaming will launch in a similar price range of $10.99 to $12.99. Disney’s leisure spaces are still popular. The theme parks and recreation centers have generated record revenue for the group. This segment has always constituted a major strength and saw its quarterly operating profit grow by 17% on average in the third quarter. Disney resorts in Asia have encouraging growth perspectives with a fairly new soaring middle-class tourism in China (the company is not the sole shareholder in these two parks). Each park operated by third-parties that pay royalties to Disney, ensuring a non-negligible source of revenue with very limited risk. On the other hand, the company recently orchestrated a return to full-ownership for Disneyland Paris, in effect taking back control of the most visited tour destination in Europe. The company is also undergoing large expansion in its domestic parks (Florida and California) which will fully leverage the newly acquired, super-charged franchises: Marvel and Star Wars. This could significantly stimulate visitor growth and average visitor spending. We consider that an attractive price. We see an upside potential of 30% towards 2019-2020, justified by encouraging perspectives for the company (strong release schedule, consistent growth of the parks and resorts, and streaming services). We believe that future growth is possible and stock price upside will not be limited to $130 ( Panterra Global Fund, View from the buyside/Barrons, 12.7.17)

Will post another blog in a month. Have a great month!

Fernando

December 4 Post

December 4, 2017

Hi Again,

On 11/13/17, the best options and one of the best stock market analyst stated, “The best analyst on Wall Street is not the one we know as analysts; it is Oprah Winfrey”. For the past few years I have been noticing that everything or everyone Oprah touch, turns to gold. In 2015, Weight Watchers (WTW) was at $4 and everyone stated that it was headed towards insolvency as now people are using internet based tools to lose weight and so on. On 10/19/15 morning Oprah purchased a 10% stake in for $6 per share for a total cost of $43MM. Within 8 hours of her purchase, she had a gain over $50MM on that investment! Assuming it rose too fast within a short period of time I purchased a put option to short sell but it was like standing in front of a freight train! I learned not to bet against Oprah. On 8/6/17, the share price was at $47 so I am not surprised for all the accolades Oprah Is receiving. That is close to a $300MM gain on Oprah’s 10/19/15 gain in just 2 years with a $43MM investment!!

Now let us consider some technical analysis. Major stock market indexes touched all-time highs again this week. But even as the bull continues to run, a few new warning signs have popped up recently. Nothing says the rally is over, but once again we have to consider easing back on the gas pedal. This week, we have another bump. While not big enough to say the bull market it over, or even that a correction is at hand, a second round of warnings cannot be ignored. Let’s start with the S&P 500. This benchmark index is quite overbought in weekly and monthly time frames and sports a bearish setup in the daily time frame. Price made new highs as indicators made lower highs. An overbought or overextended condition is not reason enough to sell. Yet when the market makes new highs, as it has been doing, and momentum readings start to fade, it does tell us the bulls are getting tired. Put another way, they are fully invested—leaving little cash left to buy more stocks.(Michael Kahn, Getting Technical, 11/9/17)

GE-The call buying, some of which is clearly a hedge against bearish positions, suggests that pressure is now even more intense for GE’s management team. The Street is telegraphing what it wants GE’s team to say. Already, GE’s options are priced as if the annual dividend will be cut from 96 cents to about 50 cents. Rather than treating GE (ticker: GE) as dead money until Monday’s investor-day gathering, investors are buying loads of bullish call options as they debate how much GE is worth if management breaks up the company. Stephen Tusa, J.P. Morgan’s GE analyst, said GE’s management sparked the sum-of-the-parts valuation debate by saying “everything is on the table.” Over the past 52 weeks, GE has ranged from $19.63 to $32.38. This has prompted many investors to come up valuations that price GE’s stock in the high $20s. Shares were trading at $19.94 in mid-morning trading, almost a percentage point down from Wednesday’s close.

The events of next week will determine if the stock plummets into a new lower trading range. So far this year, GE’s stock is down about 36%.(Steven M Sears, Striking Price, 11/9/17). Since Monday’s investor day meeting, GE’s stock (ticker: GE) has wiped out whatever support it had around $20, and the stock chart suggests the decline is not yet over. Rather than giving credit to GE for releasing so much bad news at once—something investors regularly interpret as an opportunity to buy stock in anticipation of a rebound—investors are braced for more bad news. JPMorgan’s Stephen Tusa told investors that the investor day meeting had the feeling of an “all hope is lost” event. His price target remains $17. Shares were trading at $18.14 Wednesday morning.

In the options market, where it’s often possible to anticipate the future price of stocks based on trading patterns, investors are aggressively positioned for the stock to keep falling. They are buying bearish puts, which increase in value when stock prices decline.(Steven M Sears, Striking Price, 11/15/17) I disagree with this assessment as when pessimism rises, it is really bullish for the stock. Even a small surprise to the upside can make short sellers run to buy the stocks to cover their shorts. CNBC had a long discussion if GE should be kicked out of the Dow 30. GE is the only company from the original Dow that is still there. I too purchased a little bit of call options on GE (expiry date: 12/15/17, strike price $21 when GE was at $20) on 11/8/17. The market was $0.41 asking and selling at $0.45 but I placed a limit order at $0.35 and got it. If this expires worthless by 12/16/17, then it becomes a tax deduction. As Sears stated above, if GE moves up to high $20s on dividend cut news by 11/18/17, my call option would go up from 35 cents to the range of $5 to $9. The gain could be astronomical while the potential loss is very limited. What happened on 11/13/17? CEO announced a 50% cut on the dividend and projected a 50% reduction in earnings for 2018 so the share price dropped by 7%. If the price go below $17, we should buy more and get ready for a gain in 2019. Surprisingly 40% of all shareholders of GE are retail. Per Barron’s on 11/22/17, “James S. Tisch, chief executive of Loews and a General Electric director, bought 3 million shares of GE on the open market on Tuesday for $53.7 million. Tisch has stepped in while other investors have exercised caution around GE. He purchased stock ranging in average value from $17.82 to $17.99—close to the multiyear-low of $17.46 set last week. Tisch now owns the 3 million GE shares through Loews and 540,000 shares through a trust.”(Ed Lin, Inside Scoop 11/22/17). Flannery was willing to get back to basics on the conference call, and early in his remarks even questioned GE’s raison d’etre by asking, “Why do we exist?” Should the head of a 125-year-old company be asking such things? If you were a GE director, that wasn’t the most unnerving thing Flannery said. The CEO also noted that half the current board would be leaving; currently there are 18 directors and the roundtable will be reduced to 12 seats, and three directors will be new. In the days after the call, directors have stepped up to buy stock on the open market. Qualcomm (QCOM) CEO Steven M. Mollenkopf, an independent GE director, chipped in $100,000 to buy 5,500 GE shares on Nov. 16. Mollenkopf has only been on the board for a year, so his relatively smaller buy is understandable. Flannery himself paid $1.1 million for 60,000 more GE shares on Nov. 15 for his personal account, following his August purchase of $2.7 million in shares for his 401(k) plan.(Ed Lin, Inside Scoop, 11/29/17)

Have a great month

Fernando

November 1 Post

November 1, 2017

Hi Again,

Our stocks had a great month in October 2017- the month of all the market crashes! During the past 31 days, our overall portfolio went up 4.62% in 31 days! Over the same period, Twitter went up by 22.23%, Bank of America went up by 8.09%, GM went up by 6.44% (not the highest for the month), and IBM went up by 6.19%. 2017 has been very good for most global equity markets which some call “global synchronized global growth”. In 2017, so far, the US market (S&P500) has been up 15% but most markets like China, India, Europe, Japan, Brazil have been up for 20% to 33% over the first 10 months of 2017. Remember one thing-corrections and crashes also could happen globally! The stocks with the highest growth are some of the most at risk.

Apple hit an all-time high of $169.04 on 10/31/17. Since our average cost is $92.62, our gain (for 29 shares) on Apple for the past 27 months was at 82.51% on 10/31/17. Once again, let me remind you when I asked you to buy and also to hold this stock, some of the best minds on Wall Street like Carl Icahn and billionaire “Mr. Wonderful” of Shark Tank were dumping their holdings of Apple.

Since 1/1/16, Twitter has been bringing down our whole portfolio and there were many times when I wondered if I made a mistake about Twitter. However even though most prudent investors were buying the stock, no prudent investor was selling it. As long as Trump is President, I do not think Twitter would go insolvent. On 10/26/17, finally, surprising everyone, Twitter reported an increase in users, even though revenue did not increase (which will come later). Twitter began the day on 10/26/17 with a gain of 18% for the day! The following day, in just 3 hours, Twitter was up another 5%! Please keep in mind that this huge 23% gain in a matter of hours is partly due to short covering (people who had previously shorted the stock and now had to rush to buy the stock to cover their losses). I love to put money in to stocks with a good future as well as a huge percentage in shorts.

Twenty months ago, when all analysts hated IBM (at $121) , I asked you to buy it. A few months ago, most analysts, including the world’s best stock picker Warren Buffet lost confidence in IBM but we did not lose our confidence. On 10/17/17 evening, IBM reported good earnings and 10/18/17 began with a 9% increase in IBM-raising the price over $161

My strategy is not to maximize your gains in the stock market. People who attempt do that lose in the long run. Always remember to have 50% in cash. Having a prudent discipline is the key to success for the long run. Globally we see what we saw in the late 1920s. Over the past 40 years, market crashes in the US (not Japan) recovered within a short period of time; that happened as central bankers who learned from the 1929 crash (i.e. Greenspan, Bernanke) flooded the economy after each crash. Now the central bankers are out of ammunition. A few months ago, as I reported in my newsletter, according to the IMF, all global debt was at USD $192 Trillion but a few days ago, CNBC reported that now total global debt is at USD $220 Trillion. One day this dam is going to burst! According to the CIA, total global GDP (all goods and services produced) for 2016 was at USD $106 Trillion. President Trump is seriously considering appointing Sanford’s John Taylor as Fed Chair to replace Janet Yellen. Taylor has been an opponent of easy money policies of the Feds; and this could lead to an economic disaster when the Feds do not come to rescue the economy as it did around 2009. I seriously believe that the Dow could go up to 30,000 to 50,000 within the next couple of years and then crash down to 10,000 or so. I also believe that we will have a 1929 style crash where it would take more than 30 years to recover. If you had $10,000 in the market around 3/1/29, you would have got your money back around 7/1/58. The market reached a peak around 3/1/29. Then the drop brought it close to zero in October 1929.After a crash, according to the Elliot Wave Theory, there is a bullish period when everyone thinks that the ‘good old days are back again’; and then they get caught to the next wave down. The 2nd leg down is 3/2 times the first wave. 3/2 is the golden ratio that mathematicians find everywhere in the universe. In fact, by 2/1/37, the market recovered 55% of its original loss. I do not think anyone was prudent enough to get out of the market. Then again, people like Joseph Kennedy was amazed that even his shoe shine boy was investing money in the market, so he sold all his holdings prior to the 1929 crash.

When the 1987,10/19/87 crash happened and lost 25% in one day, treasury rates rose from 7% to 10%!! For the past few years, treasury rates have been around 2%.On this 30th anniversary of the 1987 stock market crash, on the 10/16/17 issue of Barron’s, the Editor in Chief asked, “Where were you on that Monday in 1987 when you learned the market crashed catastrophically?”. I was watching the stock market on FNN (now CNBC) market coverage. Ben Levisohn asks whether if we are in a similarly precarious position today. The answer is “yes”. Barron’s go on to say, “No one in living memory had seen anything like it, at least not in the US, and in the postmortems conducted to understand just how the Dow managed to drop 508 points (25%-it is like a 6,000 point daily drop today) in once day. Experts found a culprit; so-called portfolio insurance, a quantitative tool designed to use future contracts to protect against market losses. Instead it created a poisonous feedback loop, as automated selling begat more of the same. In fact, 1987 was the first market created by computers. Now, in 2017, that risk is much higher. Hedge fund assets managed via quantitative strategies have risen from $392 Billion in 2008 to $918 Billion in 2016. Just during the first 2 quarters of 2017, it was up to $933 Billion. Over the past few weeks, all the experts who came on TV and in the media to do postmortems on the 1987 crash said that 1987 type crash will not happen again. I think worse crashes could happen. After 1987, under the revised rules approved by the SEC in 2012, market-wide circuit breakers kick in when the S&P 500 Index drops 7 percent (Level 1), 13 percent (Level 2), and 20 percent (Level 3) from the prior day's close. At Level 3, market closes for the day. Unlike a circuit breaker that stops stock trading, the Securities and Exchange Commission's Rule 48 makes it easier and faster to open the stock markets — when there are fears that the market could open with a lot of volatility that would disrupt trading. The idea behind circuit breakers is that investors will return the next day with a ‘cooler head’ and the crash will not continue. I always disagreed with that concept. August 2015 Shanghai crash (8.48% drop in one day) proved me right as the market would close for the day and the very next day, it would fall another 20% in about 5 minutes after the opening and close again. Funds that had to sell to meet obligations or go insolvent, became insolvent. This trend repeated till the Chinese government came up with very strange laws to control ‘market activity’. As most westerners said at that time that China can get away with it as it is a total dictatorship but it is not feasible for the US, Canada, Europe or Australia. We are in a bubble so we could easily go up to 30,000 to 50,000 on the Dow in a matter of months or years. Warren Buffet recently predicted that we could see 1,000,000 on the Dow. Contrarians know very well that when you hear that, it means that we are heading for a crash. I do not think we will see 1,000,000 on the Dow for another 100 years or more. All global markets have been going up so this is not limited to the US. Over the past few months, what has been the best stock market in Europe? Greece! That says it all! With time, people are seeing the market as a casino and not as a place for investments. This is very true for the Peoples Republic of China where their Central Bank printed over USD 35 Trillion over the past decade or so and now responsible for 50% of the global money supply.

Last week was a big week for earning calls for some of the biggest companies in the US. Tech companies like Amazon, Alphabet (Google), Intel, reported very good earnings. At 9.30am Pacific Time on 10/27/17, the Dow was up 0.14% for the day and S&P Tech Index was up 2.99% for the day! This sure reminds me of the 1999 tech bubble but this could go on for years! It took only 52 days, for the Dow to go from 22,000 to 23,000! The bubble is alive and well! The meltup before the storm? Maybe it’s the calm before the storm so said President Trump at a white house photo up on Thursday (10/5/17) evening. What the white house press corps did not realize was that Trump could have been offering sage assessment of the world’s stock and bond markets (all over the world). Calm has descended upon them to an extent unprecedented in modern financial history. Hours before he offered his cryptic statement, the CBOE volatility index (VIX) also known as the fear index closed at its lowest level since 1993! (Randall W Forsyth, Up and Down Wall Street, 10/9/17).

Trading in CBOE Volatility Index options has become a mirror into the collective soul of investors. Even as stocks grind higher, and the Standard & Poor’s 500 index is the least volatile it has been since 1965, an increase in VIX options trading shows investors are having a hard time believing what they are seeing. As a result, many investors have bought upside VIX calls to hedge stocks, and even high-yield bonds, that the volatility market’s trading pattern is at an extreme. Of the almost 12 million outstanding VIX options, 9.15 million are for calls that would increase in value if VIX rises. The VIX tends to jump during periods when stocks swoon. Even though low volatility defines the stock and options market, outstanding puts total 2.5 million. The data suggest that many investors expect historically low levels of volatility could end by year’s end. These VIX observations are not shared to spread fear. As stated before, stock prices seem capable of heading higher as long as economic data and earnings remain in reasonable shape. The intent is to remind investors that risk, and return, coexist in the market. Investors who are too focused on risk, are likely missing out on returns, and vice versa. Many investors now run perpetual hedges to keep the risk of their portfolios in check. This is why VIX has emerged in recent years as a primary hedge for stock and high-yield bond portfolios.(Steven Sears, The Striking Price/Barron’s,10/5/17) This is one big reason why we have not seen much volatility! There is fear and pessimism but it comes in the form these very technical hedges. In my opinion, investors who believe that they are safe as they have these VIX hedges, are operating from a false sense of security. This could fall apart for many reasons. Consider the counterparty risk; what if the VIX ETF becomes unable to make ends meet in a terrible crash? Also, historically, I have seen times when the VIX Index does not really reflect the volatility that is seen in the market. Therefore I suspect, when the ‘big one” (market crash) hits, there will be more ‘blood shed’ than ever before!

Cramer turned to technician Carley Garner, the co-founder of DeCarley Trading, author of Higher Probability Commodity Trading and Cramer's colleague at RealMoney.com, to gauge the likelihood of a corrective drop. Garner pointed to some worrying signs in the monthly charts of the two indexes. For one, the S&P 500's Relative Strength Index, which measures how overbought or oversold a stock or index is at a given time, just reached 80 for the first time since 2007. "A reading over 70 is rare and signals that we're pretty overbought, meaning we've come up too far too fast," Cramer explained. "Over the last 20 years, the RSI on the S&P 500's monthly chart has broken out above 70 just three times ... One, the peak of the dot-com bubble in 1999 and 2000, then right before the financial crisis in 2007, and then the oil implosion in late 2014." Plus, the S&P 500 is running close to its ceiling of resistance at 2600 and its floor of support is in the mid-2100s. Similarly the Nasdaq 100 is showing signs of being overbought and is close to its ceiling of resistance. "Here's the bottom line: the charts, as interpreted by Carley Garner, who's been spot-on for us, suggest that this rally might have a shorter shelf-life than we'd like," Cramer said. "I'm a little more optimistic than that because the earnings from some of these great American companies have been so breathtaking. But you need to hear Garner's message because complacency, for all of us, is dangerous. When everyone else is euphoric after a huge run, it does not hurt for all of us to be a little more skeptical."(Elizabeth Gurdus, CNBC,10/24/17)

Glaxo Smith Kline- Buy 10 more shares to take advantage of the share price falling below 10% of our cost. Last month I assumed that this stock might start to go up again soon but now the loss has increased to about 10% and the dividend yield now is at 5.48%. As long as they do not cut the ‘dividends per share’, the yield as a percentage will continue to go up and that alone would attract buyers in the future. All this time, the general assumption on Wall Street was that Trump and the Democrats continue to complain about prices gouging in healthcare but the Republican congress will not do anything about it. Price gouging in this industry has continued well in to 2017. On 10/31/17, CNBC reported that 40 state attorney generals have filed law suits with respect to price gouging. My thoughts are that after Trump gets immigration and tax cuts, he will work with Dems to control price gouging in healthcare. If not, he might lost his base.

Twitter- Since 1/1/16, Twitter has been bringing down our whole portfolio and there were many times when I wondered if I made a mistake about Twitter. However even though most prudent investors were buying the stock, no prudent investor was selling it. As long as Trump is President, I do not think Twitter would go insolvent. On 10/26/17, finally, surprising everyone, Twitter reported an increase in users, even though revenue did not increase (which will come later). Twitter began the day on 10/26/17 with a gain of 18% for the day! The following day, in just 3 hours, Twitter was up another 5%! Please keep in mind that this huge 23% gain in a matter of hours is partly due to short covering (people who had previously shorted the stock and now had to rush to buy the stock to cover their losses). I love to put money in to stocks with a good future as well as a huge percentage in shorts.

GM- "Like wide ties, General Motors was out of style for years — until very recently, the skinny tie reigned supreme — but in 2017 the wide tie has made a comeback and so has the stock of GM," the "Mad Money" host said. With shares up over 25 percent since the end of August, General Motors, once a low-growth, bond-like stock, has become "beloved" by the Wall Street analyst community, Cramer said. In the last three weeks, analysts from Deutsche Bank, Bank of America-Merrill Lynch and Barclays peppered General Motors with upgrades and the stock caught a wave of price target raises. One Citigroup analyst was so bullish on the $45 stock that he came out with a possible $134 price target. "That's the kind of coverage you might expect for a fast-growing, cloud-based software stock, not a major American automaker," Cramer said. Cramer found several possible reasons for General Motors' rally. Its shares caught fire right when Hurricane Harvey hit Texas and potentially destroyed half a million cars. Given that many thought the auto industry had peaked before Harvey hit, Cramer saw the rise in General Motors and other auto stocks as a sign that the "peak auto" thesis would be put on hold. Plus, General Motors' monthly U.S. sales have been improving, according to the company's latest earnings report. But a one-off hurricane and an otherwise tepid earnings report hardly explained analysts' infatuation with the stock, Cramer said. The analysts who recently upgraded General Motors cited the company's autonomous driving platform, which Deutsche Bank said would come to fruition much sooner than expected; Maven, its millennial-targeted car-sharing business; and the stock's low valuation. "Really, though, none of this explains why GM's stock has gone from zero to hero in a matter of just months," Cramer said. "Everything I've just mentioned certainly helps, it's a nice background, but none of it gets at the real issue here. The real reason, I think, for the sudden love [is] you're witnessing a re-rating of GM's shares by the analysts and then a total change in the investor base."(Elizabeth Gurdus, CNBC,10/16/17). Cramer is surprised that investors just discovered GM but we got in to GM about 2 years ago! Check our past issues!

Ford- Ford (F) anticipates electric vehicles and various hybrid derivatives to comprise two-thirds of the global vehicle mix by 2030. In our opinion, as the industry progresses to electrification and connectivity, more robust electrical architecture will be needed. It was clear to us that Ford intends to partner with suppliers with technology (although they did not rule out some vertical integration). We believe Delphi (Aptiv) should benefit from advanced electrical architecture design. In addition, the company’s powertrain unit (Delphi Technologies ) should also be a benefactor from the increase in hybrids and electric vehicle propulsion. BorgWarner (BWA) should benefit as well. We note that Ford plans to whittle its engine architectures to 12 platforms by 2022 (versus 17 today) and decrease powertrain capital spending by 32% to $1.2 billion by 2022. In our opinion, Ford is taking a page out of Honda Motors ’ (HMC) playbook about reducing the number of orderable combinations (reducing complexity and saving cost). We think this could lead to more-consistent lad times for suppliers and possible uptake on certain content. (Kwas & Lim, Investor Soapbox, 10/5/17). Yet naming a new CEO (Jim Hackett) and stability in the stock (it’s now up 5.3% year-to-date through Thursday’s close) haven’t curbed selling by executives. In fact, excluding big 2016 sales by Fields and Henry Ford’s great-grandson William “Bill” Clay Ford Jr. (who holds the elaborate doubled title of executive chairman and chairman), selling of common shares has ramped up significantly year-to-date in 2017, to $7.1 million from $4.1 million in all of 2016. Fields and William Ford sold $9.7 million and $14.8 million in stock, respectively, in 2016. We’ve recently written about General Motors ’ (GM) executives who sold into stock strength. Interestingly, many Ford executives sold their shares at prices for modest gains from the end of 2016--and even at small losses. The last time a Ford executive bought common shares was in November 2011 when Bill Ford paid $9.89 each for 25,000 shares. The only person who’s bought common shares since then is Ford director John C. Lechleiter, who retired as Eli Lilly’s (LLY) CEO at the end of 2016; he bought $128,000 in Ford stock that year but none yet in 2017.(Ed Lin, Inside Scoop,10/6/17)

GE-Even though the share price is not below the average cost, buy 10 more shares at this time to make use of this low price. Buy when everyone hates the stock! Watching General Electric struggle is painful, said Bob Nardelli, the company's former transportation CEO and power systems CEO. GE's famously predictable stock price has fallen 26 percent this year. John Flannery replaced Jeff Immelt as CEO in June. Earlier this month, the company made several management changes and and added Trian Partner's founding partner and chief investment officer Ed Garden to its board of directors. "(Those were) some of my best days, both with the colleagues I the had chance to work with. I was blessed and fortunate to get mentored by Jack Welch, who was clearly the best leader, the ultimate leader and the ultimate CEO," Nardelli told CNBC's "Fast Money" on Monday. "We always had that yin and yang kind of thing going on so we were able to have steady, predictable earnings quarter after quarter, year after year. And that's probably what's missing a little bit," he said. "If you look at the goes ins and the goes out, there's been a lot of goes outs, but not a lot of goes ins." He said he doesn't know if he would point his finger at any one person for GE's struggles. However, he did say GE needs to maintain its dividend or else risk losing confidence — and shareholders.(Angelica La Vito, CNBC, 10/16/17) The options market is treating General Electric’s dividend cut as a fait accompli. GE’s (ticker: GE) options are priced as if the 96-cents annual dividend will be reduced to 71 cents. Stock investors, however, are speculating that the dividend will be lowered even more sharply to 60 cents a share. The discrepancy between GE’s options pricing, and some analyst commentary, illuminates the controversy surrounding GE’s third-quarter earnings that will be released early Friday. The company is considered to be in such bad shape that investors are braced for the new chief executive to pretty much say or do anything to show investors that he understands the enormity of GE’s problems. In anticipation, many investors have bought bearish puts, which increase in value when stock prices decline, to hedge or short GE stock. JPMorgan Chase (JPM) has been an early, persistent GE bear, and now Goldman Sachs Group (GS) is advising clients to prepare for the stock to trade lower on earnings, and even after a Nov. 13 analyst-day meeting. The company is expected to reduce financial guidance for 2017, and perhaps beyond.(Steven M Sears, The Striking Price, 10/19/17)

IBM- Twenty months ago, when all analysts hated IBM (at $121) , I asked you to buy it. A few months ago, most analysts, including the world’s best stock picker Warren Buffet lost confidence lost in IBM but we did not lose our confidence. On 10/17/17 evening, IBM reported good earnings and 10/18/17 began with a 9% increase in IBM-raising the price over $161

Schlumberger- Even though the share price is not below the average cost, buy 8 more shares to take advantage of the low price. Since we added this stock, our gain has fluctuated between 1% and 30%. Schlumberger's third-quarter earnings results shed more light on the state of the oil and gas industry than Wall Street realized, CNBC's Jim Cramer said on Monday (10/23/17). "The long-term commentary here was a lot more bullish than some people seem to realize. After spending years in purgatory, Schlumberger now says that the oil industry's about to get back on track," the "Mad Money" host said. On Schlumberger's conference call, CEO Paal Kibsgaard said that, as supply and demand for oil fall into balance, producers will start spending again, giving oilfield services giants like Schlumberger an eventual boost to their numbers. "The best thing that could happen to Schlumberger long term is a healthy oil market where crude can go higher. The company believes we're getting there, but the oil service industry might need to experience some near-term pain first," Cramer said. "At these levels, with oil possibly making a major comeback next year ... I think you're getting an excellent buying opportunity in the best stock of the best company in the entire industry, Schlumberger."(Elizabeth Gurdus,CNBC,10/23/17)

Bank of America-With Bank of America’s third-quarter upside, we’re raising our full-year 2017 earnings-per-share estimate to $1.81 from $1.77; our 2018 and 2019 EPS estimates are unchanged at $2.10 and $2.30 per share, respectively. Our target price is unchanged at $31. We continue to recommend purchase of Bank of America (ticker: BAC) shares and are that much more encouraged in prospects for outperformance given year-to-date results. Better revenue growth, visible operating leverage and manageable credit-cost incApplying our weighted average valuation methodology (using a 35% weight on our blue-sky scenario, a 50% weight on our base-case scenario, and a 15% weight on our gray-sky scenario), our target price stands, at $31, translating to a price-to-forecasted-year-end 2018 book value of 1.2 times (1.7 times price/tangible book value (TBV)).reases will drive realization of franchise value. [We rate Bank of America at Outperform.] (Credit Suisse, 10/17/17) At a time when the financial sector has been left behind by a strong stock market rally, BofA has stood above the crowd even as it has had to withstand some of the same headwinds as other banks. The second-largest U.S. bank by assets reported third-quarter earnings of 48 cents a share, ahead of Wall Street estimates. BofA did say it had seen a 22 percent slide in bond trading, mirroring a broader industry trend. Moynihan (BofA CEO also praised the pro-business environment created by Washington, which he said is helping his company succeed, in particular the lowering of regulatory barriers.(Jeff Cox,CNBC,10/26/17)

Alcoa-We increase our 2018 earnings before interest, taxes, depreciation and amortization (Ebitda) estimate on Alcoa to $2.4 billion from $2.08 billion and 2019 to $2.28 billion from $2.05 billion to reflect improving aluminum and alumina prices. We are downgrading to Hold from Buy. We are cautious on the alumina breakout, even as Alumina Limited has traded up a strong 40% year-to-date as spot alumina prices have climbed from $300 per ton to $390 mainly due to Chinese environmental restrictions, while bauxite prices have been tempered by Guinea exporting to China. We believe that the increase in the alumina price may be short-lived given as alumina is less energy-intensive and less polluting than aluminum production, creating less environmental-curtailment upside. In the short term, two-thirds of Chinese alumina production is in the four key provinces looking to curtail pollution during the winter months of November to March. We expect an alumina price on the order of $360 per ton in 2018 drifting down sub-$350 by end of decade, although would note uncertainty caused by shortage of coke and pitch (which limits margins as well). We now recommend Hold on Alcoa as the cycle may be long in the tooth (we do not fully buy into the broader macro reflation trade), valuation is less compelling, and we believe a Rio Tinto merger is less likely until prices normalize. We still see a merger catalyst in the medium term but believe we should be on the sidelines until alumina prices reset. We note a 7%-plus free-cash-flow yield in 2018 and capital deployment optionality but minimal potential benefit from tax reform.(Justin Bergner, Hot Research PM, 10/5/17)

Apple- Apple hit an all-time high of $169.04 on 10/31/17. Since our average cost is $92.62, our gain (for 29 shares) on Apple for the past 27 months was at 82.51% on 10/31/17. Once again, let me remind you when I asked you to buy and also to hold this stock, some of the best minds on Wall Street like Carl Icahn and billionaire “Mr. Wonderful” of Shark Tank were dumping their holdings of Apple.

Have a great month!

Fernando

October 3 Post

October 3, 2017

Hi Again,

Take a look at our scorecard! During the past 21 months, our Bank of America holding has gone up by 91.39% and during the past 25 months, Alcoa holding has gone up by 94.98%! Those two were very unpopular with most analysts 2 years ago. On Schlumberger, last week, our gain was at 0.87% and at end of September 2017, the gain was at 10.37%; and that means that if you purchased some of this stock on 8/31/17(for the same number of stocks given here), you could have gained about 9% in 30 days on one of the best companies of America! Even though this is one of the longest running bull markets with the least amount of volatility (see below for more details), from time to time, there has been a ‘sector rotation’. In other words, corrections do not take place for the whole market but corrections take place by industry or by sectors. Information is power! Using that bit of information, when stocks in our portfolio, except for Twitter, go down, it is safe to assume that it is a buying opportunity. Using that theory, as of 10/1/17, Glaxo Smith Kline (GSK) holding is down 0.66%. The dividend yield as of 10/1/17 is at 4.89%-which is fantastic! Let us assume GSK share price go down by 50% to $20.30 and there is no change in the dividend payout ($1.99 per share), then the dividend yield as a percentage will be at 9.80%!! Just a cautionary note-if a dividend yield of a stock is over 5%, be extra careful as that is usually a red flag as it could indicate that many bad things could happen to that company in the future. Extra research is needed in such cases.

In my last newsletter, I mentioned that our market (as well as the South Korean market) was ignoring all danger signs and kept moving up which is a bad sign. That is unhealthy. For decades, I have heard that a healthy market ‘climbs a wall of worry”. I also stated that I placed an order to buy a put option on the South Korean ETF, “EWY” (which mirrors the South Korean market). I wrote my last newsletter on 9/1/17 evening, and on the next business day (after Labor Day), on 9/4/17, the day began with the South Korean ETF (EWY) which mirrors the South Korean market down 2% and the put option I was trying to buy was up 50% (one business day to another)! Therefore my order did not get filled. This clearly shows the power of put options as a hedge against a market crash.

Data released last week showed that August 2017 US margin debt (a measure of much borrowed money investors used to buy equities) reached a record high of $551 Billion (over half a trillion dollars!). Since 1959, nearly 25% monthly margin debt readings were record highs, and over the span, the difference between average S&P500 index performance 6 months after record months and 6 months after non-record months is minimal. (Bespoke Investment Group/Barron’s, Market Week, 10/1/17). What does this mean for us? First, this is another indication that we are in a bubble. Second, bubbles always end in crashes. Thirdly, it is never possible to predict an end to a bubble to proceed with caution!

According to CNBC, in 2017, the most market corrected was 3%; and that is the least amount corrected since 1914. This does not mean that a correction is around the corner but that would be healthy for the market. We had the same kind of situation around 1994 and then we had less volatility and more bullishness for the next 5 years or so which ended in a crash. In 2002 we had about 200 ETFs and now we have about 1800 ETFS. In 2002, S&P500 Index Vanguard fund had assets worth about $12B and now their cash inflows come to about $6B per day. These days most of the money is invested per quantitative analysis (mostly computer driven). As it always happen, when global trends change with little or no notice, we could see a multi-million trillion dollar loss in the global equity market. On 9/21/17, CNBC Halftime Report announces that this is the lowest volatility period in the market since 1896; even with all bad news coming from all quarters! This is bad! When all people are bullish, it is a huge bubble! On 9/20/17, Nightly Business Report commented that bullishness in the country is at a 17 year low and Warren Buffet predicted that in 100 years, the Dow will be at 1,000,000; as a contrarian, this is another sign of a bubble. The old bull market reached a new milestone by 9/15/17, the silver medal for endurance. 9/15/17 close of 2500, the S&P 500 index made a new all-time high and also capped its second strongest rise in history, up nearly 270% eclipsing the 1949-1956 bull market’s 267% rise, says the Bespoke Investment Group. The current rally which began on 3/9/2009 had already pulled in to second place for longevity in April 2016, and has now lasted 3,112 days without a bear market, defined as a 20% group. But first place is a long way off; the famous 1987-2001 rally logged 4,494 days and a 582% rise. Still, just because a bull is old doesn’t mean it can’t charge ahead. For the past year, the stock market has been the least volatile since 1965, and investors seem complacent. (Barron’s 9/18/17). “The biggest thing we have to fear is the lack of fear itself; Something investors aren’t even contemplating will ultimately make volatility great again” (Steven Sosnick, Timber Hill, 9/17/17).

On the other hand, to make an argument for the longevity (9+ years) of this bull market, I have noticed that under the surface (which you cannot see by market index S&P500), there have been many major industry rotations over the past 9 years. Just take our portfolio for example; a few months ago, our oil stocks were doing very well and then a couple of months ago, they fell sharply and now they are rising again. Biotechs, Chips, Airlines, Banks are some other sectors that have been fluctuating between bull and bear markets.

Many global markets are in bubble territory. Bitcoin market is definitely in a bubble. Per Stephen Weiss (Managing Partner, Short Hills Capital Partners, on CNBC, 9/5/17) , our bond market has been in bubble for the past 5 years.

Over long periods, Wall Street analysts give contrarian signal when they herd in to a single view of a stock, when that view is bullish or bearish. When every analyst is positive, it often pays to be wary on the stock, and vice versa. As of 8/28/17, the 50 (10%) of the S&P 500 Index Stocks with the highest aggregate analyst ratings have done the best, up to 15% in 2017, while 50 (10%) with the lowest ratings have performed the worst, down 7%. (Bespkoe Investment Group/Barrons Market Week, 9/11/17).

Diversification is extremely important. A few months ago I applied for a job at Dexcom that boasted to be the number one supplier of diabetic supplies. One year ago, their share price was trading around $90. On 9/27/17, Abbot Labs announced that FDA approved their new device that does not need pricking of fingers to test blood sugar levels; and in one day the share price dropped by 50%!

I have been a big fan of stock options for the past 35+ years. I want to share something interesting that happened on 9/8/17. On 9/8/17, the credit bureau, Equifax, announced that they were hacked and 143 million accounts (half the US population) is at risk for identity theft. The hacking happened in July 2017, and they took so long to let the public know. The two Najarian brothers of the CNBC half time report that are the ultimate experts on options and who keep tabs on unusual trading in options noticed that a certain party purchased a massive amount of put options (as a short) on Equifax soon after the actual hacking in July. They were purchased at 40 cents per contract and on 9/8/17, they were sold at $16 per contract! That is a whopping 3,900% profit in about 2 months! They were hinting that the authorities (SEC for insider trading, Justice Dept. etc. ) should look in to this trade. Later in the day, the New York attorney general announced that he was looking in to the whole Equifax hacking incident. This shows the power of options.

GE- On 9/7/17, JP Morgan rated GE as ‘underweight’ and stated, “Future of GE is going to be below what we expected”. Their current price target is $22. Many analysts do not believe that GE will maintain its current dividend yield. As of 9/7/17, 2 analysts have sell ratings and 8 have buy ratings on GE. Analysts who monitor stock option volumes states that there is heavy put buying on GE-which means many are pessimistic but this could turn out to be bullish for GE as this could lead to a ‘short squeeze’ in the future. If there are a lot of puts, it is safe to assume that a lot of people might be shorting GE too. If we get some positive news on GE and if it moves up, people who shorted, have to ‘cover their shorts’ which will move GE higher, sharply.

Disney- On 9/7/17, Disney CEO Igor gave a profit warning for end of September 2017 stating that their profits will be at the same level as last year. For 9/7, Disney was the worst performer on the Dow. He blamed NBA costs and recent hurricanes. Immediate impact was a 3% decline. Analyst Rich Greenfield, who is the only analyst with a sell rating on Disney, stated that Disney should buy Twitter (due to their role in sports). He also stated that all media stocks are in trouble. Other analysts are stating that Disney should purchase Netflix. This is good for us as Disney is close to our average cost. We buy for the long term and not for short term trading opportunities.

Alcoa- Alcoa (ticker: AA) could beat our third-quarter estimates on lower energy costs or higher energy sales. At our Laguna conference, we heard that the Warrick smelter restart could add about $60 million to Ebitda and the Rockdale land swap another $60 million, approximately. We hosted Chief Financial Officer Bill Oplinger at our Fifth Annual Laguna Industrials Conference last week. Our key takeaway was that the restart of the Warrick smelter gives the company about $60 million in synergies with downstream and if Alcoa can execute the land-swap plan at Rockdale, that could lower transformation costs by about $60 million. At a conservative five times multiple, we think both these initiatives can add about $3, or 7%, to the stock. Capital return could take some time. On the last earnings call, management said that they’ll look to renegotiate their revolver once they get a better credit rating. The revolver limits the company’s ability to pay out dividend and buy back stock. Moody’s recently upgraded the company’s debt. Our impression from the Laguna conference is that management will look to raise their debt rating above current levels before they renegotiate their revolver, but at the same time, Alcoa does not plan to be an investment-grade-rated company.(Sood and Alley, Hot Research/Barrons,9/20/17)

Apple- On 9/5/17, Nomura Securities raised the price target for Apple from $175 to $185. They referred to “confidence in the super cycle”. Shares have been up over 50% over the past 2 years. According to Piper, IPhone upgrade interest is low.

Till next month, have a great month!

Fernando

September 5 Post

September 5, 2017

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

August 2, 2017

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

July 3, 2017

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

June 1, 2017

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

May 2, 2017

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