January 2018 Post

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!