April 5 Post

Hi Again,

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

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

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

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

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

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

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

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

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

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

Cash and investments worth $38 per share.

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

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

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

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

 Tony Molnar

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

Yes, great compliment Fernando.

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

 Richard Sarif | Co-Chief Executive Officer


Have a great month!