Happy and Peaceful New Year to Everyone!
I want you to begin 2016 with the following purchases by nibbling at these stocks hoping to buy more as the price declines further:
· Bank of America
Add more to the following holdings:
Be prepared to purchase more of the following:
· Glaxo Smith Kline
· Exxon Mobil
On 12/31/15 I issued a sell recommendation on Freeport McMoran when it was down 15% or $12. The reason is that due to the debt crisis and the commodity market which keeps going down endlessly, this company might go insolvent. I had faith in this company because Carl Icahn purchased a major stake in the company but most of his purchases are in doubt now (i.e. Chesapeake Energy).
What I expected the market to do or finish doing during the Fall of 2015, it started doing as it opened for the new year in 2016. The first day of trading was the worst first day of trading since 1932 and this has been the worst first week of trading EVER! The Dow Jones Ind. Avg. went down by 6% or 1072 points in one week and now it is in correction territory as it is down 11% from its all time high. None of the top 26 international stock markets had a gain during the first week of January. DJ Europe was down 6.8% and DJ Asia Pacific was down 5.7%. S&P 500 companies lost $1 Trillion in market cap during the same period. Initially when the market was going down I noticed that the fear index was not going up as it did in August and the put option prices did not go that up as it used to do in the past. Later some analysts noted that the fear factor was less and it was not really panic selling but there were no buyers. Today’s Barron’s paper shows that the put call ratio went down and not up. This is the first time in 35 years I saw that! This means that professionals were not in a panic mode to buy insurance against their holdings. Some professionals are in 100% cash so I suppose they do not see a need to buy hedges. I also saw more call option activity so many professionals are bullish. On the other hand all the technical analysts expect another 10% to 20% decline –at least!
George Soros told a newspaper in Sri Lanka that he sees a repeat of 2008. Carl Icahn and others have been predicting this for some time. Very interestingly the utility index or the ETF for Utilities (XLU) had a slight gain over the first week of January-flight to safety? Jim Cramer and some others were talking about the fear factor but I suspect that they are talking about the retail investor and not the professional. I take technical analysis seriously so it is reasonable to expect another 20% decline. The problem with technical analysis is that a huge directional change in one day can change the whole story. For example, around 8/24/15, when the market dropped more than 1,000 points I asked all of you to start ‘nibbling’ at some stocks mentioned in my newsletter but Jim Cramer, technical analysts and most professionals were asking people to stay away from the market. Last week, George Soros told a newspaper in Sri Lanka that this market reminds him of 2008. This is really more like 1997 Asian currency crisis. Let me explain; when the US Feds went to 0 on interest rates around 2008, most Asian currencies pegged to the dollar had high interest rates to attract capital. With interest rates and US dollar going up, there is a huge outflow of capital from those countries. It is said that China alone lost half a trillion dollar in the recent past due to capital outflows. Some fear that the Chinese have run out of ammunitions when it comes to reviving their economy-which I do not believe. China had unrealistic circuit breakers on their stock market so last Monday when the market fell 7%, it closed the market for the day. Two days later, in the first 30 minutes the market went down 7% and so it closed for the day again! People were selling to beat the 7% decline. In the US, the market has to go down 20% (about 3200 points) for the circuit breakers to stop trading for the day. This has not happened for the past 20 years or so.
The real danger to the market is the ever declining oil prices which is putting the bond market at risk. A few weeks ago Chesapeake (CHK) bought back some of their bonds at 50% of their face value. That could be the way out of this crisis for some of these companies-especially the ones not exposed to commodities. Banks are supposed to be very lenient with them. If Glencore goes insolvent, international banks (mostly non US like Deutsche Bank) are expected to lose over $100 Billion. In 2016 alone, $300B in oil junk bonds could go insolvent. On 12/18/15, CNBC reported heavy redemptions from investment graded bond funds which could mean trouble for all markets. Due to Dodd Frank Act, banks and brokerages cannot make markets by holding on to assets as it was done prior to 2008 so this will add to illiquidity and we could see explosive down days in the future. Then we will see ‘throwing the baby with the bath water’ which would create buying opportunities for the long term. In such a scenario, a company like
Verizon with a very high yield would look attractive. On the bright side, 87% of the US economy is domestic-lowest in the world. Even though there is so much focus on China, India is expected to grow faster than China for a long time to come. The jobs report that came out on 1/8/16 shows that 292,000 jobs were created and 230,000 was in the service sector. Despite what is happening in the markets, this kind of data will persuade the Feds to increase interest rates 4 times in 2016. Also a Fed Governor said that he thinks that oil might rise up suddenly which is an inflation fear.
Now it is 9pm Pacific Time on 1/10/16 and the Dow future are down about 200 points if that does not change we could start 1/11/16 with the Dow going down about 200 points. We are getting in to the oversold area now and one of these days we could see a ‘dead cat bounce’ in the market. That could happen next week but that could be short lived.
Glaxo Smith Kline- As of 1/9/16, the dividend rate is at 5.91% and this is a solid company with a PE of 6.77-compare that with the industry average of 26! If the price drops to $37, then the dividend rate or yield will go up to 6.3%. If the price drops to $30, the yield will go up to 7.77%. This alone will attract investors in the future. The only concern is that the government might come up with price controls for this industry and that is a valid risk.
Twitter- Most prudent analysts believe that ‘ultimately’ Twitter would make a comeback but the question is ‘when’ and by ‘how much’. Management has not come up with a plan yet to gain the confidence of the market and due to weak financials I am not purchasing any more at this to reduce the average cost; but I might come to regret that decision in the future. This is not a Gopro!
GM/Ford- Currently the stock market is going through a correction (or a bear market). Now everyone is in fear so it is a time to nibble a little bit-if we see our price targets in the market. As Warren Buffet says, “Buy when others are fearful and sell when others are greedy”. Please be forewarned that we could lose 25% to 66% in a bear phase and this could take many months or years; and that is the worst case scenario but very unlikely. Even during a bear market, we see market rallies. As of 1/9/16, the dividend yield on GM is at 4.88% and if the share price drops to $25, this yield will go up to 5.76%. and if the price drops to $20, the yield goes up to 7.2%! When the 10 year Treasury has yield of 2.5% or so, buying GM is a no brainer for the long term. Can the world go back to the 2008 stage and destroy GM? Yes but very unlikely. There is no reward without taking a risk.
GE- Since the market started crashing after 1/1/16, GE started moving lower but on 12/31/15, GE was at $31.49 and on 12/31/15, we had a gain of 62.57% in 129 days! S&P500 had a flat year for 2015 and the 10 year Treasury yield is at 2.5% or so. With all this volatility in the global financial markets, GE could go down to $20 or so but I expect GE to be around $40 or more by 1/1/18.
Exxon Mobil/Chevron- What Goldman Sachs predicted many months ago is finally happening. A barrel of oil is below $35 and most say that it could go below $20 as there is no room for storage anymore and supply exceed the demand. Saudis are operating at full capacity and they have no incentive to cut production to benefit others. However tensions are rising in the Middle East so that could upset the apple cart. Surprisingly when tensions rose between Iran and Saudis as they got close to a face to face war, the price of oil did not go up at all. One year ago, that would have sent the price of oil sky high. Experts are divided on the future prices of oil. Some say ‘low for long’ while others say that we are close to a bottom and then prices would shoot up soon. Prices always over shoot so I think that when most small fracking companies go insolvent, when the over supply problem gets resolved, as demand grows we might see a rapid increase in the price. In December 2015, Republican Party agreed to extend the credit for solar energy so as to get President Obama to agree to lift the 40 year ban on crude oil. I think that this is a mistake for the long term. Due to this lifting of the ban, now there is no difference between WTI and Brent (US and International prices). If this is true for natural gas, as there is a huge variance between the prices we pay for it and what it costs in other countries, in the years to come, most people in cold states will have a problem paying for heating bills.
On 1/6/15, T.Boone Pickens was on CNBC Mad Money and he said that this price decline is solely due to an over-supply problem but the supply exceed the demand only by 1 million barrels per day when in the 1980s when we had the problem, we had an over-supply of 20 million barrels per day. Also the demand is growing as European economy keeps growing and US consumers are going back to gas inefficient vehicles. Pickens is predicting the price of a barrel of oil rising to $70 by year end. John Dowd, who manages Fidelity Select Energy Portfolio wants to invest in oil companies with strong balance sheets who can manage themselves well whatever happens to the price of oil. Exon Mobil is his top holding (or 12.4% of his portfolio. Other companies on his portfolio includes Schluberger (7.9%), EOG (6.6%) Valero (5%) and Chevron (4.8%). Between 8/24/15 (market crash) and 11/3/15, Exxon rose by 18% and Chevron rose by 40%; even the oil prices going below $35 did not bring these share prices to the 8/24/15 level. Therefore it is extremely likely that we could see Exxon and Chevron going down sharply soon but in about 2 years we would be able to reap the rewards. This is why I want to add Chevron and start nibbling at it now so we could lower the average cost in the future by buying more when the price drops further.
Bank of America- For the past 2 years, all analysts were waiting for the Feds to increase interest rates to see the financial sector out performing other sectors but after the initial rate hike in December 2015, banking stocks declined. Why? Despite what the Feds have indicated (4 rate hikes in 2016), economists believe that due to the international economic and currency crisis, rates will not go up as previously expected. For banks to make money, the Fed rate has to be over 1%. Also there is a concern about the loans that the banks have made to the energy sector. Already Wells Fargo announced that their energy loan portfolio is stressed. This is a good time to start nibbling at Bank of America!
Disney- Even with Star Wars movie, Disney has been on the decline. Interestingly the day the movie came out, an analyst came with a downgrade and the share price started declining again. Why? All the pessimism is about declining earnings at ESPN. I do not think that this is serious at all. I have confidence in Disney management with one of the greatest CEOs. On 11/20/15, the share price was at $120 so this is a good indicator of what kind of growth we could expect from Disney in the future. We might see the price declining for 6 to 12 months giving us a chance to decrease the average cost of our purchases.
Apple- Even though everyone invested or traded in Apple as if this was a growth company it is really a value company. 13 months ago, Apple was trading at $133 so now it is trading 27% below its all time high of 2015. It has a dividend yield of 2.15%-which is close to the 10 year US Treasury. The PE is at a very low 9.22 (industry average: 19.82). Apple has the biggest cash balance with $21.12Billion and $20.48Billion in short term investments. It is a well-known fact that Apple is getting in to the auto industry and has been stealing employees from Tesla. Some even suggest that they might even buy Tesla or another strategic company. A newer version of the watch is expected. Most are afraid that China might disappoint Apple with IPhone sales but I have my doubts. The reason is that China is moving from a manufacturing economy to consumer based economy. Nike had good sales revenue from Apple and the last report from Apple from China was quite good so I think Apple might surprise everyone to the upside.
Until we meet again, I wish you all the best.