December 8 Post

Hi Again,

 From my 12/1/16 newsletter.

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

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

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

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

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

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

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

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

 From my 11/1/16 newsletter:

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

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

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

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

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

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

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

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

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

Lalana Fernando