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!

Fernando

March 8 Post

Hi Again,

 For the last 2 years, every Sunday, I have been trying to make predictions for the “Dow” for the following week-(1) Dow high for the week (2) Dow low for the week and (3) Dow close for the week. Then the following Sunday I compare my predictions to the actuals. I have a good ‘batting’ record but nowhere near perfect; yet quite impressive (if I may say so).

I keep all this on an excel sheet. On Sunday, 2/19/17, my predictions were off 0.53% for the Dow High, off 0.09% for the Dow Low and off 0.10% for the Dow Close. On 2/26/17 Sunday, my predictions were 21,500 for the Dow High (going over 21,000 for the first time in history). 20,774 for the Dow Low and 21,005 for the Dow Close. My Dow Close was off by 0.45%, prediction for the Dow Low was off by 0.13% and even though I predicted correctly the Dow would go over 21,000, my prediction of 21,500 was off by 1.54%. If I can get more consistency with my accurate predictions then I would be able to earn some good money on index option trading.

 From 1/31/17 to 3/1/17, our portfolio had a gain of 5.64%; that was after a gain of 4.5% from 12/31/16 to 2/1/17 for our portfolio.  According to Barron’s of 3/3/17, the average gain for the average investor during February 2017 was 1.44% (1.35% for the under 25 investor and 1.98% for investors over 64).  What were our best performers for the first 2 months of 2017?  Number 1 : Alcoa with a 25.82% gain. Number 2 :Apple with an 18.67% gain. Bank of America with 11.67% takes the Number 3 slot. Number 4 and 5 : IBM and Glaxo Smith Kline with 8.8% and 8.3% respectively. The worst performer was Exxon with a 9.16% loss. GE and Chevron both had losses over 4% during the first 2 months of 2017.  Most probably, within the bull market, a sector by sector correction or a rotation is taking place.

According to technicians and chartists, the market has got greedy or getting in to a bubble. Warren Buffet, the famous value investor says that the market is not too pricey and he keeps buying-especially Apple! When I recommended Apple, all investors hated Apple!  Sooner or later we will have a correction and that is a good thing and not a bad thing. In my opinion, it would not last long. Why? Many fund managers and investors missed this bull rally since the election (Trump Rally?) and they are patiently waiting for an entry point to get in!

 Have a great month!

Fernando

February 10 Post

Hi Again,

Now that Dow hit 20,000 psychological mark, people are talking about Dow 30,000. As a contrarian, this is alarming. I would not be surprised to see Dow at 10,000 before it gets to 30,000. According to technical analysts bond market and the foreign currency markets are sending danger signals to the stock market. Monetary, Fiscal and political situation is undergoing huge changes and to expect the stock market to go smooth sailing for a long time is nothing but a pipe dream. However this is good for us as it will us opportunities to add more to our portfolio.

Removing Dodd Frank and other regulations open up the market for massive fraud schemes and this time around the Federal Reserve as well as the Federal Government would not be able to bail out the system. Most to suffer would be the average Joe and not the Wall Street billionaires.  Removal of the Glass Steagall Act of 1933 was a huge mistake and more deregulation could do us real harm. The pain the country felt in the 1930s led to the Glass Steagall; I guess we did not feel much pain from the recent mortgage crisis. 

Glaxo Smith Kline-GlaxoSmithKline Plc (GSK) reports fourth-quarter earnings Wednesday, with investors looking for guidance on the fate of its key Advair drug in the U.S. and the recent pace of organic growth for new products sales. The group is expected to announce earnings per share of £0.24 on sales of £7.48 billion ($9.25 billion) for the three months ending in December, according to Factset estimates. Net profit for the quarter is forecast at £1.1 billion, up from a £354 million loss in the year-ago period. For the full year, analysts see sales of £27.7 billion and earnings per share of £1.01. Currency tailwinds are expected to play a significant role in the company's top and bottom line, however, with the company's reporting currency, the pound, falling 4.77% against the U.S. dollar over the October to December period. Glaxo takes one third of its sales from the United States. "We expect GSK to deliver 16% Core EPS growth in 2017 but 14% of this will be FX tailwind... We therefore forecast 2.6% [constant exchange rate] growth as strong high single-digit underlying growth is impacted by generic Advair in the US," said Roger Franklin at Liberum Capital. Perhaps more importantly, investors will be keen to hear further guidance on expectations surrounding Advair sales, because the drug maker has seen a growing line of competitors threatening to encroach on its blockbuster asthma treatment over the last year. (James Skinner, The Street, 2/7/17)

GM, Ford- Auto industry sales volume slipped 1.9% year over year in January, from 1.16 million light vehicles sold during January 2016 to 1.14 million last month. On the bright side, January's seasonally adjusted annualized sales rate (SAAR) of 17.57 million outpaced Wall Street's consensus forecast of 17.3 million, even if it was slightly below last year's 17.62 million result. "It's tricky to use January as a bellwether for how auto sales will trend for the year," said Jessica Caldwell, Edmunds executive director of industry analysis, in an email. "It's the lowest volume month and only accounts for 6 percent of annual sales on average. But 2017 is already proving to be a year unlike any other -- expectations were that sales were going to level off or decline, but the president has proven a bit of an X-factor..." Among full-line automakers, Nissan Motor Co. and Honda Motor Co. were the only ones to post year-over-year gains; Detroit automakers Ford Motor Co. (NYSE:F), General Motors(NYSE:GM), and Fiat Chrysler Automobiles (NYSE:FCAU), among others, were left behind. (Daniel Miller The Motley Fool, 2/5/17)

Disney- Walt Disney Co. (NYSE:DIS) reports its first-quarter results for fiscal 2017 after the market close on Tuesday, Feb. 7. The entertainment giant is going into the report on a solid note from both a business and stock momentum standpoint. Rogue One: A Star Wars Story, released in mid-December, has been dominating box offices around the world. After struggling for more than a year, Disney's stock has moved steadily upwards since November, gaining more than 16% since Nov. 1 -- about double the S&P 500's 8% gain, as of Jan. 26. That said, investors should be prepared for Disney to post headline numbers that don't look so magical because it's facing extremely tough year-over-year comparables. Revenue rose 14% and adjusted earnings per share (EPS) soared 28% in the year-ago period, driven largely by the phenomenal success of Star Wars: The Force Awakens, which opened before the holidays in 2015. Disney doesn't provide earnings guidance. Analysts are expecting The House of Mouse will earn $1.50 per share on revenue of $15.29 billion, representing a year-over-year earnings decline of 8% on approximately flat revenue growth. Long-term investors shouldn't pay too much attention to analysts' estimates since Wall Street is focused on the short term. However, these expectations can be helpful to know as they often help explain market reactions. Within media networks, Disney's largest and most profitable segment, investors should continue to focus on the cable networks business. This lucrative business has been under pressure due to declining subscriber counts as a result of cable cord-cutting and cord-slimming. ESPN's loss of subscribers has been the most concerning because the leading sports cable network is a cash cow.(Bet McKenna, 2/4/17)

Apple- Driven by strong demand for the IPhone7 and 7 Plus, Apple reported first quarter fiscal 2017 results with revenue and EPS above our and consensus estimates. We believe double digit percentage growth in the installed base of IPhone users positions Apple for strong sales and earnings growth with the IPhone 8 upgrade, dye later in calendar 2017. Apple ended first quarter fiscal 2017 at the low end of its target inventory range of five to seven weeks, with demand for the IPhone Plus remaining above supply. But supply reached demand during January, yielding a larger presence of 7 Plus in the total IPhone mix, and with an average sale price of $695 versus the consensus of $685. Adding to that the Samsung Galaxy issues, we see Apple extending its market share in the premium tier smart phone installed base, exceeding 570 million as we exit calendar 2016. We see a stronger upgrade cycle in fiscal 2018 with the 10 year anniversary IPhone 8 likely in September 2017 (Barron’s, 2/5/17).

Have a great month!

Fernando

New Years Day 2017 Post

Hi Everyone,

 Happy New Year!!

 During 2016 (1/1/16-12/31/16), “Dow Index” rose by 13.5%, while our portfolio rose by 31.38% during the same period. In 2014, only 16% of fund managers beat the “market”.  If we did not have Twitter, we would have done better but most prudent analysts are optimistic that eventually Twitter will rise above previous highs.

 Now we are so close to that big number 20,000 on the Dow! As one analyst stated, the market has to keep knocking to get through ‘big numbers’ that have a big psychological impact on the investor psyche so now the market keeps knocking on Dow 20,000.  In January 1987, for the first time the “Dow’ hit 2,000; in less than 20 years, it has gone up by 10 times. When Trump won, a co-worker asked me whether I could recommend a stock based on the Trump victory and I stated that US Steel would be a good bet. US Steel is running a very tight efficient operation but due to Chinese cheating on international agreements and dumping (selling below cost), US Steel has been having a difficult time for the past few years-the very thing Trump ran against. During the last couple of months, US Steel share price tripled!

 As a contrarian, this market scares me. Everyone is overly bullish. That is a big red flag for investors to be cautious. According to the National Association of Active Investment Managers (NAAIM), the bullishness among investors has reached it’s 2nd highest point EVER! Also this has been above the historical average bullishness for 4 consecutive weeks-longest such streak in 2 years (Barron’s December 2016). I advise investors to put a small portion of their portfolio in to put options on the Dow Index (DIA) and if the market go sailing higher, buy more puts. This kind of a bull market is not healthy. Since Trump’s victory, not only interest rates went up but the Feds promised more will follow soon and the dollar has been rising sharply; which is very bad for most companies but investors ignored all that. This is too is a bad sign. Why is it bad for everyone to be bullish? Less money on the sidelines to come in to the market and also one unexpected blow, could send all investors rushing to the exit. As Barron’s put it, “When everyone zigs, the market tend to zag”.

 In 1930. Smoot Hawley brought up legislation to impose high tariffs on imports which led to a trade war among nations which decreased US foreign trade by 40%.  We are living in a different world now where we are more dependent on foreign trade. Technology companies get 70% of their revenue from other countries. In 1930, total US foreign trade as a percentage of US GDP was 0.6%. Now we are much more dependent on foreign trade and a trade war will take us to a place where we have never been.

 One thing we are sure of over the next 4 years, with a Republican President and a Republican Congress is that we will have lower tax rates. This will make tax free muni rates go up as local governments try to compete for funds. Since we are close to full employment and with fiscal policies adding fuel to the fire, the Federal Reserve will have no choice but increase interest rates at a faster rate than previously anticipated. This too will make the tax free muni rates go higher. As muni or other bond rates go up, the principal will keep going down; and unlike equities, the probability of making a full recovery is close to zero.

Now is not a time to buy equities or bonds. It is a good time to start hedging against a bear market in the future. Whenever the next correction or crash comes, we can add to our holdings.

 Have a great January!

Fernando

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 Shell, BP, Exxon 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

September 18 Post

Hi Folks.

 This is from my 9/1/16 stock newsletter (as of 9/1/16)

During the month of August 2016, stock market (the Dow Jones Industrial Average) went down by 32 points or 0.17% but at the same time our portfolio went up by 1.91% in 31 days. Annual return on the 10 year US Treasury is 1.6% and the yield on the 2 year treasury is at 0.75%. In 2014, only 14% of fund managers beat the market index.  However we just started the month of September; historically, September is the worst month for the market and all market crashes took place in October. Also in September the Bank of Japan could decide to change course with respect to interest rates that could spook markets all over the world.

 The US Federal Reserve could raise rates in September too which would be a blow. OPEC once again meets in September and that too could send jitters around the world. However some believe that OPEC has become impotent.  Technical analyst Spiro of ORIPS Research Studies who studies oil charts say that a barrel of oil (WTI) could easily go up to $72- a 50% rise! Recently we went back down to $39 and rose sharply to $50 due to short coverings.  However he see oil going down during the first 2 weeks of September. Technical analysts believe that gold will go much higher but that is not a good sign for other markets; historically speaking. At the same time, historically, October to December or October to May is the best for the market. We do not have to fear a correction or a crash; if that happens we would be able to increase our holdings in good stocks and decrease the average cost per stock. Eventually we will have a huge return on the total portfolio. After all, our GE holding grew 61.9% in 373 days or approximately 1 year! At the current rate, it would take about 40 years to get that on the 10 year US Treasury!

 Hedge funds usually cater to people who have hundreds of millions or billions of dollars. Last month, while equity fund inflows grew, hedge funds saw their largest outflow since 2009. On 8/22/16, per CNBC, cash inflows in to stock funds was at an all-time high with most going to index funds. During the first part of 2016, $160B went in to index funds while $200B came out of managed funds. On 8/18/16, Chief Investment Officer for Wells Fargo, James Paulson stated that he believes that the global economic recovery is in its early stages. On 8/10/16. Jeremy Siegel, professor at Wharton School of Business who correctly predicted his market rally predicts it has another 15% on the upside. CNBC experts who study market trends say that finally money on the sidelines is coming in to the market and it will be stronger after the Labor Day when everyone returns to work after summer vacations.  Technical analysts are the best when it comes to making predictions about the market. After we have been in a narrow range for the past 2 years, tech analyst Chris Verrone now states that the market is ready to go up much higher. The fact the semiconductor index PHLX has risen more than 20% in 2016 is seen as proof of future market upside by Chris. On the other hand, technician Steve Grasso stated that if the Feds have an interest rate hike, the market (S&P 500) could go down to 2043. To me that is only 2% and it is not important at all-just another buying opportunity.

 Digesting all this information, my conclusion is that during the next couple of months we could see a correction in the market but the probability is high that we could see new highs in the market prior to January 2017. However this bull market is getting close to its end. The next bear market could be very brutal. When the interest rate on the US Treasuries go up, most investors will sell equities and buy bonds. This is what happened during the 1987 crash.

 June 2016 to July 2016, new home sales grew by 12.4%-highest since 2007. At the same time existing home sales fell by 3% as there were less homes available for sale. Most of the new home sales took place in the south.

 Apple- Apple will introduce its newest products (IPhone 7) next week. It is difficult to say how the market would respond. On 8/16/16, Apple announced that it would invest more money in China. On 8/21/16, Samsung surprised the market with their Q2 earnings; reporting a 56% increase in their mobile phone revenues-compared with Apple’s meager 2.3% for the same period.

 Disney- On 8/5/16, Jim Cramer stated that over the long run ESPN is not going to have a negative impact on Disney’s share price. He went on to say, ”Those who think more short term may end up trading this thing right in to the poor house”.

 Twitter- Twitter which plans to stream 10 Thursday night games has set its sights on a bigger screen to capture more viewers, the company is creating an app for Apple before the NFL season kicks off in September, a person familiar with this matter told San Jose Mercury News on 8/16/16.

 GM and Ford- Three of the biggest car makers saw their sales revenue decline 3% to 8% from June 2016 to July 2016. Car sales dropped by 25% as most of the sales were for SUVs and trucks. Most experts believe that the 6 year bull run on auto stocks is over. Ford alone saw an 8% decline in sales from June to July 2016 while GM saw a 5.2% drop for the same period. When interest rates start rising, autos being the classic type of cyclical stocks will see a bear market.  Also as it has happened so many times in the past, people have got addicted to low gas prices and buying gas guzzlers. Within the next 12 months if the price of a gallon of gas goes up to $6 to $10, these people are sure to have a difficult time paying for their monthly expenses.

 Wish you a nice September!

Fernando

August 2 Post

Hi Again,

 From 6/30/16 to 7/31/16, the market (Dow Jones Industrial Average) rose by 2.87% but our portfolio went up by 4.04%!! Remember 86% of the active money managers failed to beat the market in 2014.

 After 18 months, the market hit an all-time high on 7/12/16! According to the historical data that I have studied, the probability of market rising another 10% to 20% from this point is very high. However on 7/14/16, Blackrock announced that they have concerns about the US market as international markets are down and there is so much money on the sidelines. They also expect the 10 year US Treasury to go down to 0.75%.  For many years it was around 2%. Markets always climb a wall of worries so this is good (bullish) for the market. Also if there is a lot of money on sidelines, it is extremely good (bullish) for the market. Low US Treasury rate has all to do with negative interest rates in most countries (Europe, Japan and so on). However when this range reverses, we could have a big bear market in the US. On 7/12/16, Julian Emanuel, Executive Director of UBS stated that he expects the S&P500 to go up another 20% to 2500. Technician Sebastian, who correctly predicted the BREXIT market bottom stated on 7/19/16 that he expects the S&P 500 to go up to 2200 within the next 30 days (that is another 1.99%).  Now the market is rather expensive with a PE of 20. For the longest time, it was hanging around 15. Just prior to the market crash in 1987, the PE was at 29. Unless there is a rapid increase in corporate profits, we could have a market correction.

 Glaxo Smith Kline- On 8/1/16, Google (Alphabet) announced that they will work with Glaxo Smith Kline to create a new company to develop Bioelectronics Medicines. The joint venture will be named Galvani Bioelectronics and it will be headquartered in the UK- 55% of the equity owned by Glaxo and 45% of the equity owned by Google (Alphabet).

 Twitter-  Q2 earnings were reported on 7/27/16. Their profits beat Wall Street estimates but once again their revenue figures were lower than Wall Street estimates. This is the 4th consecutive revenue miss. This news brought down the share price by 13%. New users increased slightly- by 100,000. Snapchat is killing Twitter. On 7/19/16, CNBC announced that more people got information on the political campaign from Twitter more than Facebook but still Twitter could not use this to raise revenue. Takeover talks are back again so this could shoot up overnight. Technically, chart shows a double bottom around $14 which is very good (bullish) for Twitter.

 GE- Per Barron’s, on 7/16/16, biggest increase in short interest for the week 6/15/16 to 6/30/16 took place in GE. It went up 65% in 2 weeks to 188 million shares. No wonder GE rose so much in July. Also in July, GE and Microsoft announced a partnership with respect to the ‘cloud’ businesses.

 Exxon & Chevron- Per Doug Terreson on 7/29/16, the Q2 earnings just reported was the worst in a decade but the bad news was well known; and we should expect the same for the next few quarters as well. He is optimistic about the long term future and he believes that the dividends are safe. He expects Oil (WTI) to rise to $60 by year end. He recommends Shell with a 6.6% dividend rate. Barron’s recently featured Shell on their front cover as a great buy.

 Apple-Reported Q2 earnings on 7/27/16. Smart phone revenue was down 23%, China sales were down by 33% and PCs were down 13%. The good news was that their services sector was up by 20%, and if this sector keeps growing, it is going to change a lot of bears in to bulls. Earnings call was not bad as expected so the share price rose $6+ to $103. Last week, for the first time they went over 1 billion phone sales.

 Have a great month!

 Fernando

July 11 Post

Hi again folks,

We do not have to care if the market goes up or down-even how far it goes down. We just have to wait for opportunities when ‘our stocks’ (listed on the scorecard) go below our average cost; then we can increase our holdings and be patient till we make a profit in the long run. Since December 2014, the market has been in a range without making new highs. Looking at historical data, once the market has not made a new high for more than 18 months, when it makes a new high again, you can expect the market to move up significantly. Our investments will eventually pay off.

 Over the past 30 years I have noticed that when experts expect the market to go down due to a certain future event (i.e. the BREXIT that took place a couple of weeks ago), you also get many money managers who wait for the opportunity to invest new money in the market. The BREXIT mini crash took down the Dow Jones Industrial average by about 870 points in 2 days ending on Monday, 6/27/16. On 6/27/16, market volume went up to 5 billion shares and the volatility index (VIX) went down which was a clear indication that all the sellers got out and the market is ready to go up-which it recovered most of the 870 points within the next few days. Also as it always happens, most of the rebound was due to short covering. One must never sell in to a crash when others are in to panic selling. That is a time to go shopping and buy.

 This mini crash gave us an opportunity to increase our holdings in Apple, Bank of America, Disney and Glaxo Smith Kline on 6/27/16. Where will the market go from here? There are many who expect the market to go down in a big way. On 6/10/16, the bond king, Bill Goss stated that all financial markets are in a supernova close to explode and be vulnerable. He also stated that oil, stocks, bonds and gold all have gone up so the market is very confused. He is invested in top oil company bonds. On the same day it was announced that Carl Icahn is saying that stocks and gold is up due to negative interest rates in many countries but he is net long on stocks. On 6/9/16, CNBC reported that George Soros is selling stocks and buying gold. As he did in the 1990s, he correctly predicted the downfall of the British pound if and when Britain exits the European Union. In one day the pound dropped by 8% to $132 to the US Dollar after the BREXIT vote but we have to wait and see if Soros’s prediction of $115 will come true. Paranoia among billionaires could be due to the fact that they lost $570 billion in 2015 and 200 billionaires lost their billionaire status in 2015. 85% of all trading in the market is done by computers and algorithms and as with the unexpected 8% drop in the Chinese market months ago, the computers did not know how to react to the BREXIT mini crash. Robo money managers of the Betterment Fund froze all trading on 6/27/16 and thereby they missed a huge buying opportunity.

 Humans can always beat computers! On 6/8/16, oil (WTI) hit a multi-year high of $51. On 6/17/16 it was announced that oil rigs were up by 9 and gas rigs were up by 1. Natural gas which was not expected to go up for decades has gone up more than 25% in one month. We may never see the February 2016 lows and we may never be able to buy our oil stocks at a cheaper price. Some expect oil (WTI) to hit $80 within the next 6 months. I have relied on technical analysis to assess the future of the market but what happens in the next moment can reverse all previous predictions when it comes to technical analysis. For example, world’s best technical analyst, Ralph Acampora, when the market was crashing on 6/27/16, stated on CNBC that we could see the February lows once again the ten year yield on the US treasury could even go down to !% (it has been around 1.5% to 2%).  He wanted to see more fear in the market prior to making a return to new highs.

 Apple- On 6/17/16, Beijing (China) Intellectual Property Court ruled that Apple infringed on Chinese patents. For now Apple can sell in China. Unlike in the US, Chinese courts are not independent and it seems like the Chinese government is out to get Apple and bully them. This is why Carl Icahn sold his holdings in Apple. It is no surprise Apple promised to invest billions in China. On 6/10/16, Brian White of Drexel stated that he expects the stock to rise by 90%. He also stated that innovation at Apple is still alive and growth will continue but not as it has done in the past. On 6/16/16 JP Morgan cut the Apple price target to $105.

 Disney-We made our first purchase of Disney on 1/10/16 when most analysts were negative on Disney due to ESPN and ‘cord cutting’ by consumers. Now many analysts are recommending Disney as a buying opportunity. On 6/20/16, Anthony DiClemente of Nomura Securities issued a buy recommendation on Disney with a price target of $115(our average cost is $94.28). He also stated that ESPN problems are well documented and no further cord cutting is expected. On 6/16/16, per CNBC, Disney opened its theme park in Shanghai, China with 33 million people living within 3 miles of the theme park. Disney CEO Igor stated that this was Disney’s best investment since they bought land in Florida. Their world’s biggest castle is in China.

 GE- Per Josh Brown, CEO, Ritholtz Wealth Management announced on 6/15/16, that the price of GE just moved above its 50 day moving average and if it goes over $32, it could go much higher.

 Twitter- On 6/15/16, Twitter went up by 6% in 4 hours due to their acquisition of Sound Cloud (online music); and also due to the acquisition of LinkedIn by Microsoft, there were rumors once again of Twitter being taken over by another company. It is difficult to find anyone who wants to buy the stock but analysts say not to short it due to M&A rumors. On 6/10/16, CNBC reported that Instagram is attracting more ad dollars than Twitter and they cannot understand why Twitter cannot make use of the presidential campaign (with Trump so Twitter happy) to monetize more.

Have a great month!

Fernando

June 12 Post

Hi again,

 As you can see from our scorecard, our portfolio rose by 17.49% between 4/30/16 and 5/31/16 !! During the same period, the stock market or the S&P500 index (top 500 companies) rose only by 1.5%. Even our worst pick Twitter rose by 5.95% between 5/1/16 and 5/31/16.  In order to have a general idea where we are headed for the market, we have to consider what the technical analysts (chartists who are in to Fibonacci ratios etc.) say and when most of them agree, then it is very credible. For the past 18 months, the market has been range bound. If the market has been range bound for more than a year, and it breaks it to the upside we could have a big gain (i.e. even 20%). Also if the market does not have a break through to the upside, once again we could have another severe correction.

Chartists say that small cap stocks (Russell 2000) is indicating that it is ready to move much higher. However, many money managers are selling their stocks and waiting for the market to make new highs to get back in to the market. I personally think that is a stupid idea. We can buy more as the market moves lower and reduce the average cost. So what is the magic level all these technicians are watching for? It is around 2134 on the S&P500; the S&P500 has to go over 2134 and stay there for a while or else it would be risky to assume that the market is going to go much higher. May 2016 is different from May 2015 as the market is technically stronger. As of now, 75% of the stocks are above their 200 day moving average.

When a stock goes below its 200 day moving average, it is in dangerous territory and most prudent investors would stay away from those stocks. International markets and economies are in better shape now than in May 2015. Oil reaching $50 per barrel in May 2016, is too a very good sign. On the negative side, per Barron’s, Carl Icahn, one of the best activist investors, had a net short position of 149% at the end of first quarter 2016; at the end of 2015, his short position was net 25% and a year ago it was only 4%. So Icahn is betting the farm on a big correction or a crash!

 Schlumberger- According to Bloomberg News, on 5/24/16, Goldman Sachs after being bearish on oil for years, added Schlumberger to its conviction buy list. Analyst Waqar Syed reiterated a $94 price target- nearly 30% above the stock price of 5/24/16.

 Twitter- On 5/18/16, Ronnie Moas, issued a buy recommendation on Twitter as their cash position is at $3.6B and their market cap was at $10B with a PE of 23.  Then on 5/10/16, Bob Peck of Suntrust, stated that the lowest we could see for Twitter should be $12 per share. He also stated that it is a candidate for getting acquired by another and Google is a possible suitor. He expects the price of Twitter to go up during the second half of 2016.

 GM and Ford- As analysts have been expecting it was announced that auto sales have peaked. Car sales for some automakers were down as much as 30%. Due to low oil prices, most of the demand is for SUVs and trucks-globally. Hedge funds are getting out of GM. On 5/11/16, GM announced that it has finally turned a corner in Europe.  Even though we cannot expect growth from these automakers, the auto market is expected to remain stable and profitable for a long time to come. GM is a PE of 5 and a yield around 5%, the stock is a safe place to park your money.

 Apple- Right now this has the biggest risk and the biggest reward. “No risk, no reward”. Day by day, the nay sayers are growing. More and more, pundits are saying that Apple will take the same road as Nokia, Xerox and Eastman Kodak (or even IBM). Latest is that Apple will take 3 years and not 2 to come up with a major change in the IPhone. Shark Tank’s billionaire Kevin O’Leary who used to be a big fan of Apple for years and who also started his own ETFs known as O’Shares states that his new Samsung can do everything but wash his laundry and it will take ages for Apple to come to that stage. The most bearish people on Apple expect the share price to hit $85 by the latter part of 2016. To me, that is not bad at all. It hit $89 in May 2016. If it goes to $85, I suggest you buy 5 more shares and another 5 shares at $75.

Carl Icahn got in to Apple years ago when it was a dud and he got Apple to be more shareholder friendly. During the past few weeks, he sold all his Apple holdings with a net profit of $4 Billion! Carl was worried that Apple might have more problems in China. In fact, one year ago, Carl said that he will never sell Apple.

Then should everyone get out of Apple too? No, not by a long shot. I still have faith in Apple and more than that the greatest investor this world has ever known and the 2nd most richest man on Earth, Warren Buffet just bought $1 billion in Apple shares! For many decades, he avoided technology stocks till he got in to IBM which has been a dud for the longest time. IBM too is showing signs of turning around. On 5/12/16, Apple dropped below $90 for the first time in 2 years  giving us another chance to increase our stake in Apple; also after a long time they dropped below Google aka Alphabet in market cap to $496B. On 5/13/16, Apple announced that they were going to invest $1B in China. Their profit margin is at 23% while the profit margin for their competitors is around 7% which could lead to a bigger problem for Apple. Apple makes a big deal about going in to India for the first time and how India is going to take over China as the most populated country; however keep in mind that per capita income of India (GDP/# of people) is US $1,500 per year and the monthly average wage in India is US $295. I cannot see a mad rush to buy a $700 IPhones. People will kill each other to steal an IPhone! On 5/2/16, Tim Cook, CEO of Apple, on CNBC show Mad Money stated the following:

·        In China, other smart phone users turning to Apple is huge.

·        In 2 years, Apple grew 70% in China.

·        The middle class in China is growing from 50 million to 500 million in 5 years.

·        India will be the most populous country in 2020 and most young people in India wants to own a smart phone.

Good luck!

Fernando

May 2 Post

Hi Again,

For the month of March 2016, our portfolio had a gain of  9.59% but for April 2016 had a loss of 1.79%; however if we remove Twitter and Apple, we have a gain of 12.89% for April 2016! For more on these 2 stocks see at the end of blog.

For the past 30 years I have noticed that technical analysis is the best method to predict the immediate future of the stock market. When most of the technical analysts agree on the future path, we can have a lot of confidence that is the correct path of the market. When the technical analysts do not agree, we could go with one(s) with a good track record. Now we have a very unique situation-most of the good technical analysts are very confused! Remember, technical analysts do not look at fundamental like earnings, economic growth and so on. Most technical analysts study charts. 

Different experts have different theories. One theory that has been effective for years is “Sell in May and go away (to buy back in the Fall)”. In order for us to be bullish, the market (S&P500) index has to go over 2130 and stay at that level for some time. However, the fundamentals and technical analysis show that the long term future for the market is very rosy. Therefore, if we have another correction, it would be another buying opportunity. 

Over the past year or so, banking stocks have been moving within a given range so if you are trader and not an investor, consider banking stocks. In technical analysis, in a chart, when a stock or an index is below the 200 day moving average, it is in a very risky territory and most prudent investors avoid such stocks and industries. The ETF, “XLE” that monitor the oil industry (biggest oil companies), for the first time since 2014, moved above the 200 day moving average in April 2016 which is an indicator that the worst is over for the oil industry. Since January 2016, when most expected Chesapeake to declare bankruptcy, it has risen over 245% in 4 months!

On 4/26/16, on CNBC, Jeff Curries, Goldman’s head of commodities, upgraded oil to neutral (reduction of risk) with a long term price goal of $45 per barrel. Everyone expected the demand for steel in China to decline but it increased slightly! SO much for the experts! However Goldman does not expect commodity (except oil) prices to rise for many years to come. Goldman wants traders to short gold-especially if the Feds raise interest rates. On 4/28/16, Doug Terreson of Evercore recommended Exxon and Chevron as buys. As they are cash neutral at $50 per barrel; and these companies are expected to cut costs in the short term and raise prices over the next few months. They are not expected to cut dividends. BP currently has a dividend rate of 7%! Apart from Exxon and Chevron, he also owns Conoco Phillips and Schlumberger. 

On 4/6/16 I attended a very good seminar titled “Legends of Technical Analysis”. The panelists were Ralph Acampora, John Murphy, Charles Kirkpatrick and Paul Desmond. I do not care for Kirkpatrick and Desmond but Acampora and Murphy are true legends. Ralph Acampora is the demi-God of technical analysis. He has over 50 years of experience. I was surprised that my hero John Murphy was initially taught by Acampora. Acampora did not do his degree in business, economics, mathematics and so on; he did his degree in theology! Here are some of the highlights:

•    Transports hit a low in January 2016 and Industrials hit a low in February 2016- This could be the end of the bear market
•    Moving from a bull to a bear market is a slow process and does not happen overnight.
    1st rollover: Small Caps
    2nd rollover: Mid Caps
    3rd rollover: Big Caps
•    What stocks to sell first: Highest beta stocks (highest volatility stocks; higher the beta,   higher the volatility)
•    GE will double in the long term (per Ralph Acampora)
•    Per Ralph Acampora, we will not see the big caps going down
•    Per Tech Analysis, we have a sell sign on gold but this is not a good time to short sell gold
•    Per John Murphy, we are still in a bull market. We did not get in to a bear market.
•    Per Ralph Acampora, we could have a correction now but it will be shallow. After that we   will see higher highs, we will go to all time new highs in 2016. We will not go to February 2016 lows but if we have a 50% decline to the February 2016 lows, it would be very healthy.

•    Optimum word in investing: Always be willing to change.
•    If we go below February 2016 lows then we will go in to a bear market.
•    John Murphy does Relative Strength Indicators-comparison to other markets or stocks
•    All of Tech Analysis work some of the time
•    If most tech analysts agree, then it is reliable.
•    Don’t fall in love with one system of tech analysis
•    Nothing works all the time
•    Per Ralph Acampora, study of stocks and markets
    1st: Economics
    2nd: Industries
    3rd: P/E etc.
    4th: Tech Analysis

•    50% of all traded on NYSE are not stocks; they are close end funds, bond funds, preferred stocks etc. It is important to subtract these items when looking at advance/decline line etc. Watch your data!
•    Per Ralph Acampora, the weekly MACD is important and not the daily MACD. Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.
•    Per Ralph Acampora, Emerging markets bottomed and commodities bottomed too. 
•    Per John Murphy, All commodity currencies (Russian, Brazilian,Australia and so on) have bottomed too.

Have a great month!

Fernando

TWITTER- This is dragging our whole portfolio down but I am still optimistic about Twitter. Even the former CEO of Microsoft sold his holdings. On 4/15/16 they announced an exclusive deal with NFL. On 4/6/16, GFI Group announced that they are optimistic on Twitter as they have 360 million users and they said that Facebook had the same problem many years ago. That is when I sold my Facebook at about $25 after buying it at $18! Now FB is at about $100! On 4/27/16, it was announced that losses were not as most expected and there was a pickup in users. If the price drops under $10, buy 100 shares and bring down the average cost by 50%.

EXXON- On 4/26/16, after 6 decades, Exxon lost their AAA rating downgraded to AA+ - due to its debt level and refusal to cut the dividends. On 4/30/16, despite losses, Exxon raised its dividends by 2.7%-slimmest hike in 30 years. 

APPLE- Last month we had a 14%+ gain (from day one) on Apple. At 4/30/16, we have a loss of 1.65%-in just 31 days! Now it is trading below our average cost and some believe that it could even go down to $80 prior to August/September 2016. I suggest buy 5 more shares at the lowest available price on 5/2/16. In the future, if the price drops to around $85, buy 5 more and if the price drops to around $75, buy 10 more shares. This is the next best thing to a sure thing! In the future, Apple is going to be like an ATM!

On 4/30/16, Apple announced that it would cut $2B in IPhone inventories. Last week Apple raised its dividends by 10% to 57 cents per share-total dividends paid by Apple is at $12.6B which is 3.21% of all dividends paid by the S&P500 companies. This makes Apple the biggest payer of dividends overtaking Exxon Mobil. Apple earnings went down by 22% and they missed revenue guidelines(for the first time).  First sales drop in 13 years! Sold 12 million watches. Their IPhones fetch a margin of around 40% when others have a margin of around 0. On 4/26/16, Per Toni Saccibaughi of Sanford Bernstein analyst Apple product cycle will come in September 2016 so the stock will start going up July 2016. Only 60% of handsets in the world are smartphones. Apple just entered the market in India and in a few years India will overtake China as the most populated country on Earth. Per Barron’s article on Apple on 4/9/16:
•    Stock could rise to $150 in 12 months
•    Current pessimism due to slowing growth of IPhone sales that account for 2/3 of revenue
•    Total revenue projected to decline by 2.4% to $228.1B pulling profits down by 6.3% to $50B.
•    Apple service already brings in 15% of Gross Profit., and could reach 29% by 2020. 
•    Apple has a long term potential to reach 1.5b active devices with stable free cash flow if $67B a year up from 1B devices now and $56B in free cash projected for this year.

 

 

 

April 2 Post

Hi Again,

During March 2016 our portfolio gained 9.59%-in other words if you bought all the items listed in the scoreboard (stock listed @ # of shares), you would have gained 9.59% in 31 days! However our overall gain from day one is 10.2%. If not for Twitter, the overall goes up to 17%.  And the gain for March 2016 goes up to 14%. We are still in the bear that started on 8/25/15 (see below). When we get in to the next bull market, I would not be surprised to see an overall gain of 30% to 50% within the next 3 years.

 The market has been gradually moving up over the past few weeks.  In order to prove that we are not in a bear market, the S&P 500 has to go above 2125-that is another 3% from this point. In other words, we should expect a lot of resistance between this point and 2125 on the S&P500 so the probability is to the downside and not to the upside. If the Dow Jones (DJIA) hit a new high (18,312) with another new high on the Dow Transport, then we know for sure that the bear market is over (Dow Theory). For the past 3 months, the market has been acting in a very predictable manner-according to technical analysis. On 3/1/16, Ralph Acampora, one of the best technicians that I have been following for decades stated that the market hit a short term bottom on 3/1/16 (SP500 at 1978) and he expects the market(S&P500) to rise to 2050 to 2100 within a few weeks. On 3/30/16, the market(S&P500) hit 2070 on 3/30/16-4.7% increase in 30 days! Yes, technical analysis could be that accurate. However since 85% of trading is done by computer generated programs, it is safe to assume that they too follow technical analysis.

Oil (WTI) hit a bottom around $33 in January 2016. Since then it has risen to $38 and most analysts believe that this is just a short covering rally and it is not possible for WTI to go over $40.  That too might send the stock market lower. On 3/11/16, the industry reported the lowest level of rigs for the past 150 years. In North Dakota Bakken, rigs dropped from an all-time high of 235 to 33 as of now.

GE-On 3/23/16- It was announced that the digital business is just getting started so the stock has a long way to go. This week GE hit an all-time high since 2008.

Twitter- For the past 3 months I have been wondering if we should sell Twitter as it is bringing down the whole portfolio down but for now, I intend to stick with Twitter. On of its greatest fans, Steve Bahlmer, former CEO of Microsoft tweeted on 3/10/16 that he sold his holdings of Twitter saying, “Twitter taught him not to be an investor”. As Ihave said before, if the share price drops below $10, we should consider buying another 100 shares so as to bring down the average cost to $12.52 (50% reduction)

Chevron and Exxon- On 3/8/16, the CEO of Chevron addressed analysts and stated the following: (1) They are going to cut capital expenditures (2) They will increase dividends (3) They will increase production. On 3/10/16, Paul Sankey of Wolfe Research stated that Chevron is a better buy than Exxon. Exxon has losses in Russia. Chevron will cut capital expenses by 50% from peak so the dividend is safe and sustainable. Chevron need not make any acquisitions to make money in the future but hat is not true for Exxon. Most good assets of other companies are overpriced as they are expecting Exxon to go on a buying spree. No risk to the dividend at Exxon either. Exxon also have problems in the Middle East. Companies close to insolvency have assets (oil fields) that are not that attractive to buyers like Exxon.

Good luck till next week! Fernando

March 9 Post

 Hello again,

 We are still in the bear market that was started on 8/24/15 and in another 2 to 3 years our portfolio should have an average gain of 25% to 50%.

 The stock market has been going in the same direction as the oil market for a long time now. Everyone has been waiting for the ‘decoupling effect’ but it is not in sight.  The fate of the high yield bond market depends on the US oil companies that depend on the price of oil.  As stated in a previous newsletter on 1/20/16, oil (WTI) hit a bottom of $26. According to conventional wisdom, we will not test that low again but it is always a possibility as this was a technical low and not according to oil fundamentals. For that to happen we must see about 1/3 of all US oil companies declaring bankruptcy.  On 2/16/16 Saudi Arabia announced that it has agreed with Russia and other major oil producers to freeze production and the market was buzzing with the rumor that by this summer they would start cutting production but a few days ago the Saudi Arabia announced that it would not cut oil production.

 85% of all stock trading is done by computer programs and now there is talk that these computers might even use artificial intelligence to move markets. On 2/18/16, Roy Niederhofer of the Quant Fund, stated that using computers with no human intervention and just following trends, his fund had a gain of 16% from 1/1/16 to 2/18/16. His computer tracks trends that go from one minute to another.  He also confirmed that this is a bear market and he recommended buying gold. I have my doubts about gold. I think the gold rally is going to be short lived.

 Even though most believe that the market has been unreliable since 1/1/16, I believe that it has been quite predictable. It has been moving to technical analysis without missing a beat.  For the past 3 months, most technicians agreed with one another but that is not so now. Unlike astrological predictions, predictions made by technical analysts could change from day to day depending on what happens in the market. For example, they could say that if the S&P500 goes below 1820, the market could lose another 25% but if it manages to stay above 1820, it could rally to 1900 (or so)-just an example.  For the past 30 years or so I have had a knack for following good technicians. The technician I like these days (no one is 100% correct) is known as the ‘Fibonacci Queen’ or Carolyn Boroden. Fibonacci is the ancient mathematician who discovered the golden ratio (2/3 or 3/2) to study the universe but now it is used to study market moves as well. These days most technicians say that the market is close to a top (even a big decline like 2008 when the S&P hit 2000 and Dow at 17,000 which it did today, 3/4/16!!) but Carolyn disagrees and her record is quite impressive. On 2/29/16, on CNBC, Carolyn stated the following (after doing her chart analysis):

·        On 2/11/16, the market hit a low of 1810 which could be a pivotal low.

·        Now, the very next day, the market could start to rally in a substantial way.

·        Short term rallies have lasted 8 to 10 days.

·        From 3/1/16, if it goes up and continue to go up might hit new highs. We have not had a new high since 5/21/15. However if the market goes down the next day (3/1/16), expect the market to repeat old trends by going down significantly.

·        NASDAQ rally will be stronger than the Dow/S&P500 rally.

Then the very next day 3/1/16, within the first 3 hours, the Dow was up 270 points (or 1.65%) and NASDAQ was up by 2.18%!!!

 Many technicians say that short term gold might go down a bit but long term it would go by 25%. I find it difficult to believe that I have got burnt by gold so many times and I know. Also if you look at the chart going back to 1900, gold seems to be in a long term bear market.

Schlumberger- We had a gain of 18.35% in just 38 days! That is amazing as we are in the middle of a big bear market in stocks and oil! On 2/22/16, a chart analyst showed a ‘reverse head and shoulder’ formation in the Schlumberger chart. This is an extremely bullish sign that you can take to the bank! We were so lucky to get in on 1/25/16. To make matters better, on the chart, the current line moved over the moving average-another very bullish sign in the chart. According to that technician, Schlumberger has a better chance of rallying than Exxon or Chevron!

 Exxon Mobil- We had a gain of 23.65% in 193 days. On 2/16/16, an analyst announced that he expects the credit agencies to cut ratings for Exxon in 2016. Due to their large refinery business they are not very sensitive to changes in crude oil prices. After lifting of the oil and gas export ban, for the first time, there was a shipment of liquid natural gas from the US to Brazil on 2/24/16 and this was done by the only company that has the capacity to do it- Cheniere Energy (LNG). Carl Icahn is one of the major shareholders of Cheniere. Since Exxon is a major player in this area some think that they might even buy Cheniere in the future. On 3/2/16, the CEO of Exxon Mobil made these announcements:

  No more layoffs in 2016.

 He intends to increase the dividend as he wants the investors to hold the stock for a long time.

He did NOT borrow $10 Billion to pay dividends or buyback stocks; even though they temporarily stopped the stock buyback program.

Exxon Mobil has collected a ‘war chest” of $30 Billion to go on a future buying binge. Per analyst, Doug Terreson of Evercore, their balance sheet is only second to J&J and crude oil (WTI) has to go down $15 and stay there for long for Exxon and Chevron to cut their dividends

Chevron-  We had a gain of10% in 53 days! Chevron (and Exxon) are the least sensitive to crude oil prices as refiners account for a good part of their operations.

 Apple- For many years everyone on Wall Street loved Apple. It was impossible to find anyone who would say anything negative about Apple. However about 6 months ago, bulls became bears and it kept on increasing till recently when almost everyone was negative on Apple. Carl Icahn got in Apple years ago as an activist and due to the changes he got management to make, the share price increased by 400%+. About 6 months ago when most people were negative about the market and Apple, Carl Icahn said that as the price of Apple drops, he will buy more. It is said that in 2014 alone Icahn made over $1Billion on Apple. On 2/16/16, Icahn announced that he was going to trim his stake at Apple by 7 million shares.  He has been losing a lot of money (billions?) on Chesapeake Oil, Cheniere Oil and Freeport McMoran. Over the past 3 weeks, some analysts have come forward to recommend Apple as a buy and also with their new phones coming out the price could easily go up to $120 by year end-another 25%.  In my opinion, in another 3 years, we could easily see Apple around $150. After all the PE is only 10.96.

I wish you all, good luck!

Fernando

January 27 Post

Hi Folks,

As of 1/24/16:

As I predicted, we had a ‘dead cat bounce’ in the stock market last week. In a time like this with technical analysis we can find some direction.  On 1/19/16, Carolyn Boroden the technician known as the Fibonacci Queen made some remarkable predictions on CNBC. She said that we might have a short term bottom this week at S&P 500 at 1832 but if the market goes below that we might see a world of pain and the market could go down another 20% to 30%. The very next day, the S&P 500 hit 1812 (Dow was down 550 points) for a short time with volume rising 20% and market started rising. Reaching a low with higher volume is very good as it means that the market is running out of sellers.

 Ralph Acampora is one of the most respected market technicians that I have followed for decades and he is extremely pessimistic about the market right now and on 1/22/16 he made the following statements on CNBC (1) Russell 2000 or small cap stocks have been going sideways for the past 2 years and this is a very bad signal for the future (2) The stock market is tradeable but not investable (3) If the Dow Jones goes below 15,666 or the S&P500 goes below 1820, it could go down 75% - that will bring the Dow to $3900 (from over 18,000 in 2015) !! There have been many times he has been wrong too.  According to some technicians, the S&P cannot go higher than 2000 for some time to come and if it falls below 1880, then the decline would start again. From 1/1/16 to 1/20/16, stock markets around the world lost $7 Trillion! This is why it is always good to have some put options on indexes as a hedge against Armageddon. Prior to August 1987 I was following technician Robert Prechter and he predicted a market top during August 1987 and severe correction during the Fall of 1987. The puts I got my dad to buy were worth $1 before the 1987 crash and after the crash they went up to $70 (7,000% gain in 4 days or so).

 When the market hit a bottom I bought a few call options on the market index and within 4 hours they doubled in price. Investor sentiment is at a 30 year low so taking the contrarian view, this is bullish and good for the market. One reason why the market went up over the past few years is due to huge buyback programs of many big companies but what most people miss is that due to SEC regulations they have to put a hold on those buybacks 5 weeks prior to an earnings call so during the past few weeks when the market went down by 2,000 points these companies could not intervene with buybacks. Very soon, we will see these buybacks coming back in to the market and lifting some of these stocks.

Here are some of the companies that will have earning reports soon- (1) Haliburton on 1/26/16 will give us a good picture of the oil industry (2) Apple will report on 1/27/16 (3) Chevron will report on 1/29/16. Next week is the Super Bowl of Earning Reports! Also on 1/27/16 Janet Yellen will have their FOMC meeting. Will they soothe markets or add fuel to the fire? My concern is that this will also open the door to insiders to sell their stocks so if that happens in a big way, the market will go down more than going up. It is a wait and see situation. We are in a bear market where the main trend of the market is down and not up. In my opinion, bear markets are good as it gives opportunities for the fearless long term investors to get in to good companies and make money in the long run. Between 2010 and 2015, there were no corrections and only a handful of stocks kept creeping higher-which is very unhealthy for everyone. Most countries are in deep trouble due to recessions, currency problems, and credit problems and so on. These countries have huge sovereign funds with US stocks. Over the past few weeks they (i.e. Saudi Arabia) have been selling to meet the daily needs of their government. Over the past 7 years due to 0 Fed interest rate, emerging markets borrowed $7 Trillion in US dollars. At the time the Dow was down 550 points on 1/20/16, oil also hit a bottom of $25 and started rising sharply. On 1/21/16, oil (WTI) was up 6% and on 1/22/16, it was up 9% to $32.25 (28% from the bottom). Some say that oil has to go down to $10 or so for companies like Exxon/Chevron to cut their dividends. Recently the Saudi government came up with their 2015/2016 budget and they prepared that assuming the price of oil (Brent/WTI) at $29 per barrel.

 Start nibbling at these stocks but know that initially for a long time, you might see the price decline sharply giving you opportunities to increase your holdings:

IBM- The most hated stock on the Dow Jones 30. It has been going down (Jan 2013 at $213 to $122 on 1/22/16) sharply. It has a PE of 9 while the industry average is 18 so the value is twice as much. Buy 2 share at this price, when it goes under $110 buy 3 shares and another 3 when it goes under $100 and so forth.

Schlumberger Limited (SLB)- It was a huge pleasant surprise when they had their earnings call last week. They said that they will not increase the dividend amount at this time but the dividend is safe for 2016. They also expect the price of oil to rise sharply in 2016 and the biggest surprise was that they announced a stock buyback! Most analysts were saying that even companies like Exxon and Chevron should suspend their dividend to get ready to buy when other oil companies go insolvent in 2016. Now it is trading at $65 so buy 2 shares, 2 more shares when it drops below $50,  and let us keep buying as the price declines so when it goes down to $14, we can buy about 1,000 shares.

On 1/19/16, it was reported that US freight tonnage was up by 1.1%. The Chief Economist of the International Monetary Fund or IMF or the World’s Central Bank on 1/19/16 stated that the stock markets all over the world are overreacting to energy prices; and he expects global growth rate to be around 3% and that is a reduction of a mere 0.2%. China reported a growth rate of 6.9% but most believe that the real rate is around 4.5%. However as expected retail sales went up by 11% as the market is moving from manufacturing to the service sector. Banks in the US are safe due to the Volcker Rule and Frank Dodd but that cannot be said about the banks in other countries. European banks are very exposed to commodity markets and sovereign debt. There are rumors that UBS and Credit Suisse might go insolvent-if the worst happens. Even Deutsche Bank (they just reported a loss of $7.2B) could lose over $700 Billion; too big to fail but too big to be saved.

 Given the information that came out, here is an update on our holdings:                                                                        

Apple- As I have stated before, for many years all of Wall Street loved Apple and then a couple of months ago, all on Wall Street started hating Apple. Earnings estimates kept going down. At that time I asked you to start nibbling (buying) Apple. Last week 2 major firms issued buy recommendations on Apple. Where were they when I asked you to buy Apple? On 1/19/16, Goldman Sachs gave a buy recommendation on Apple with a future price target of $150. On 1/22/16, Gene Munster of Piper Jeffries came out with a buy recommendation on Apple with a price target of $150 in 9 months and on that day alone Apple went up by 5%. On 1/20/16, Apple hit an intraday low of $93.42 and rose to $101.42 on 1/22/16. If Apple goes to $150 in 9 months, from the low of 1/20/16, it is a 61% gain in 9 months in one of the most valuable and the biggest company in the world. Scott Kessler of S&P Capital IQ issued a very strong buy recommendation on Apple. For the past year or so everyone in the market knew that Apple was stealing employees from Tesla and as with everything else they were secretly working on a car. Elan Musk used to joke that Apple hires their fired employees. Around 1/20/16, Elan Musk stated that Apple is developing their own car. Some say that Apple should buy Tesla but Elan Musk may not be willing to sell Tesla. I personally do not think that Elan Musk would be able to stand in the way of Apple if they decide to have a hostile takeover. All insiders and 5%+ owners own only 22% of Tesla. Tesla is extremely over-valued but their market cap is at $26.5Billion and Apple’s Cash and Short Term Investments come to about $50Billion and you add NetAR and you get about $80 Billion. Can Apple buy Tesla? You do the math! In my opinion, Apple should wait for a stock market crash or the bear to make a dent in stock prices where Tesla market cap drops to about $12 Billion and then make a hostile takeover. The guy in charge of the car division at Apple resigned around 1/22/16.

 Twitter-On 1/18/16, Scott Kessler of S&P Capital IQ stated that Twitter is now a value stock and expects revenue to go up by 40% this year.

 Get ready for an eye opening week on Wall Street. Will the market go up more before it falls down again? Some say that this bear rally could even go on for a couple of months but remember the bear market is not over and the general trend is towards the downside. It is good to have some money in S&P 500 puts as a hedge against a huge market decline over the next 6 months. Good luck!

Fernando

January 18 Post

Hi Folks, Welcome to a normal stock market!!

 Seven years, starting 2009 we had a market where a few stocks went up but not even a 10% correction-like the Chinese market prior to the summer of 2015. A value investors did not get opportunities to buy till 8/24/15. Now we are close to those lows. For the past 4 years I have been asking everyone to keep 50% of your portfolio in cash but now that we are close to getting in to a bear market, keep 50% to 75% in cash. Stay away from the bond market till the bond market implosion is over.  Many expect two-thirds of the junk bonds to go insolvent in 2016. Due to liquidity problems in the bond market, professionals are shorting the equity market as a hedge.  The manufacturing sector in the US is only 13% and that sector is in a recession but the other 87% (service sector) is doing well. Bear markets that do not lead to a recession lasts only for a short time- about 6 months; a very good example would be 1987.  I do not believe that we are headed for a recession. There are some technicians who believe that we got in to a bear market in the summer of 2015. When I issued the January 2016 initial newsletter I stated that even though we lost over 1,000 points on the Dow (DJIA or Dow30), I saw no fear among professionals in the market. Why? Put (for shorts) option prices did not rise as it used to and the put/call ratio (percentage of bears compared to bulls) did not rise either. That was extremely unusual. However there was fear among retail investors as well as 401K account holders. This week which just ended on 1/15/16, there was a significant rise in put call option prices.

 As I see it, now there is fear among the professionals but no panic. Over the past 7 days, the put call ratio doubled and over the same period, % of investors who are bearish (pessimistic) went up from 23% to 45% and the investors who are bullish (optimistic) went from 25% to 18%. The market has to go to a panic mode for it to make a meaningful bottom. As investors get more and bearish and the market keeps going down, selling pressureswill get exhausted and then we will have mostly buyers in the market for a ‘dead cat bounce’ rally. It will NOT reach previous highs. It will be a mere bear trap. On 1/15/16, Larry Fink, CEO of Blackrock stated, “There is not enough blood on the street so we are not near a bottom yet”. As many say, no one will ring a bell when the market bottoms out. For the past 35 years I have paid a lot of attention to technicians (people who study stock and market charts, sentiment etc. and not the fundamentals like revenue and earnings). Even though they are not 100% correct, they are pretty good in making predictions. Three weeks ago, there was not a single technician who was bullish and they all were saying that the market is ready to go down in a big way and stay that way for a long time to come.  However a significant event can change the opinion of technicians as they can only go by the ‘present moment’. Most of the trading is done by algorithms and computers and they follow technical projections. For the past 5 years or so, the mantra in the market was to ‘buy the dips’, starting 1/1/16, the mantra changed to ‘sell in to the rallies’. Last week trading showed that each time the market went up, selling pressure took it down to a new low. Now wait till millions of 401k and other mutual fund holders start making massive redemptions! Most technicians say that from this point, the market would fall another 20% to 50%. However the market is very oversold right now so before this market makes a real bear market bottom, we might see a rally in the market that might go on for a few weeks or months. Then as soon as people think that the bull market is back, it will go down again.

 This is called a bear trap. In a bear market, good stable companies that pay a high dividend (as long as the future is safe), will do better than other stocks.  Right now, the dividend yield of AT&T is at 5.65% and the prospects for AT&T looks very good. If AT&T goes down 50% in a crazy bear market, the yield will rise to 11%! People all over the world will sell stocks and bonds and buy AT&T! One can easily expect a return of 100% within a year or so while getting such a yield for waiting when the 10 year treasury is getting 2.03% (as of 1/15/16). One analyst believes that when this stock market bottoms, the yield on the 10 year will go down to 1.5% as investors will sell stocks and other bonds and rush to the safety of the treasuries. Last time we were at 1.5% was in 2012. If that happens, hopefully the Federal Reserve will unload some of the $4 Trillion treasuries they purchased over the past few years on the QE (quantitative easing) program. This all came to a climax after the Federal Reserve raised rates in December 2015 to normalize rates and there are all kind of debates on why they did that. In my opinion, they did it for 2 reasons: (1) To drain the excess liquidity it created all over the world by keeping interest rates at 0 for so long in the US (2) To have some ammunition when there are signs of a recession-They want to start the process of increasing rates so that when there is a fear of a recession hitting the US, they could lower rates again-even go in to another QE program or have negative interest rates as done by the European Central Bank. Every day, markets start tumbling down in China and Asia and then infects Europe and finally hits the US market as it opens at 6.30am Pacific Time. I have noticed that as soon as the European markets close, we stabilize our markets in the US. The Chinese government is not interested in having a huge growth rate as it used to as one of their leaders put it,” we prefer to have blue skies”.

 All is not bad in China. According to Jim Cramer, one of the best run companies in the US is Starbucks. CEO is determined to give great benefits to their employees; including free college education-even going against analysts and investors. Starbucks is doing so well in China that they are opening 500 stores all over China in 2016. Being the second largest economy it is not rational to have a 8% rate of economic growth forever. Now there is a significant slowdown in the Chinese economy. China will report their GDP stats on this coming Tuesday. Another fairy tale from the communist party? Whatever they state, you can assume the real rate is lower. Most expect China to grow at 5% or so. Compared to last year, their loans have gone down by 50%. With the immense amount of capital outflow, the Chinese government is having a difficult time stopping the depreciation of the Yuan. Most traders are shorting the Yuan in offshore accounts have spiked up the dollar for a few days and then the dollar will decline over the next 2 years which is very good for US multinationals, commodity markets, and all emerging ‘countries’. A win-win for all!  Extremely respected Art Cashin of UBS Financial Services who was always against the Fed rate hike of December 2015 now states that we will see the Fed rate go down to 0 prior to going up to 1%. In December 2015, the Feds raised the Fed Rate after having it at 0 for 7 years but on 1/14/16, the 30 year mortgage rate declined from 3.97% to 3.92% and it was the 2nd straight weekly decline. The market does not believe that the Feds would be able to raise rates 4 times in 2016 as they have indicated in their ‘dot projections’ (how they announce future increases). The commodity markets rose sharply over the past few decades (ending in 2014) over the huge hunger China had for those commodities. Many countries like Brazil and Australia benefited immensely from that growth period. Some of that will never come back. On 1/15/16 Goldman Sachs Jeff Currie broke commodities in two categories (1) Commodities consumed by humans- i.e. oil, coffee, sugar etc. (2) Commodities used mainly for industrial use. #1 will have a good future while the fate of #2 is in great doubt.  This is why I asked you to sell Freeport McMoran (FCX) on 12/31/15 and last week the market dealt a deathly blow to FCX with the share price dropping to $4.35. On 12/23/15 it was at $7.53 and 2 years ago it was around $37! Now the Market cap is at $5Billion and the bond debt is at $20 Billion! Chapter 11 is getting closer! Last week GM had a fantastic earnings call with (1) 80% increase in their buyback plan (2) Raised its revenue and earnings outlook for 2016 (3) Raised the quarterly dividend. What happened? The share price shot up by $1.50 for a couple of hours and then it was negative again. Welcome to a bear market! Last week, JP Morgan too came out with a fantastic earnings call and the market treated it with a big yawn. Talk about throwing the baby with the bath water. Citibank which has the biggest exposure to the international scene stated that their energy funded exposure was $20.5B which is 3% of their total loans; and they expect their credit costs to be around $600MM for the first part of 2016 assuming the price of oil will remain over $30 but if the price of oil drops to $25 their credit costs could double. 75% of their loans are to investment graded companies and they also reported that India is doing great.  On 1/15/16, Wells Fargo CFO stated that oil is only 2% of their loan portfolio and 1% is on oil drillers. Their energy losses were at $118MM and energy loans at $17B- all loans over a Trillion dollars. They have repayment plans with all and he stated that even with oil at $30 per barrel but most need oil to be at $50 per barrel to survive. According to Goldman Sachs Kostin, for the first time in 48 years, oil companies will report losses for 2015. Well known Dennis Gartman of the Gartman Letter stated on 1/11/16 that China has filled up its oil reserves and Iran is entering the oil market in a few days so he expects the price of oil to drop to $16 or $18-that is almost a 50% further decline! Why is oil dropping now as it is bottomless pit as we all expected this for 18 months? Reason 1- Till recently oil futures were selling higher than the current price and there were storage places for hedge funds to buy on the current market, store it and sell futures. It was a no brainer! Now there is no more places for storage. Reason 2- Iran entering the market this week or so. Reason 3- Banks have been very lenient with oil companies. If not, we would have seen bankruptcies and big oil gobbling up the smaller ones. Now it is in the interest of the oil companies with good balance sheets to wait for bankruptcies so they can descend on these companies like vultures and buy assets for a few cents on the dollar. Reason 4- Oil companies have become more resilient and efficient than no one ever expected. Per T Boone Pickens, they are pumping oil only to pay banks. Once we see a lot of US fracking companies go bankrupt we would be able to call a solid bottom to the oil prices. On 1/11/16, Fidel Gate of Oppenheimer stated that he expects 50% of US oil companies to go bankrupt but he is expecting the price to go up to $70 in 2 years. In my personal opinion, by watching the boom and bust cycle for more than 40 years, I feel that everyone is underestimating what could happen to oil prices in the future. Globally we are increasing demand due to low oil prices (buying gas guzzlers like SUVs and trucks) while destroying our capacity to provide supplies so in a couple of years prices are headed higher. Add geopolitical unrest in the world and I would not be surprised to see a barrel of oil over $150 and the price of gas at the pump going over $10 in 2 to 3 years. Oil companies all over the world are not spending on maintenance or investing in drilling and this will come back to haunt all of us! Expect the unexpected! Over the past 30 days I have been wondering if to issue a sell recommendation on Alcoa but I am hesitant to do so for now but I might change my mind very soon. Alcoa started the earnings reporting season for January 2016 and it was good. They are going to split the company in to 2 parts-(1) commodity (2) Engineering. They beat market estimates and they say that 2016 demand is strong. They even made money on the commodity side and they expect a 9% rise their commodity business in 2016. My concern is that their CEO like most CEOs is a very good salesman and he might be overstating what they could really deliver but intuitively for now I feel good about their future. During the last hour of trading in the stock market, even if the buy order exceed sell orders by 200 MM, the market moves up but on Friday 1/15/16 during the last hour of trading in the NYSE, buy orders exceeded sell orders by 2 Billion and yet the market did not go up and closed at a minus 390 (while having an intraday low of around minus 547)! The market is struggling to find buyers. I noticed that Exxon Mobil and Chevron did not go down as much as one would have expected and every time Apple went down to $96, it would rise to $97 or more within a few minutes. This shows a lot of potential for Apple in the future. Even if Apple falls to $50, if you buy a little along the way, you will make money in 1 to 2 years. All FANG stocks went down. Jim Cramer is the one who coined that term and now he says that he wishes he got a copyright on that! Prior to the crash of 8/24/15, mostly the FANG stocks were going up. What does FANG stand for? Facebook, Amazon, Netflix and Google (now known as Alphabet). I want to end this with a Wall Street joke (per Leon Cooperman of Omega Advisors):

 “ A technician and a fundamental analyst were sitting at the dinner table when a knife fell from the table. The fundamental analyst asked the technician, “why didn’t you catch the knife?. The technician replied, “ Technicians do not catch falling knives and why didn’t you pick up the knife from the floor?” The fundamental analyst replied, “We cannot see the floor”

 Get it? Technicians believe that they can estimate the depth of a fall in the market so they are not going to rush in early and buy which is known as catching a falling knife. In the same way fundamental analyst has no way of even guessing (which only technicians can do) when the market might have reached a short term bottom-not 100% accurate though.

On my personal account, last summer, I made good money shorting the Chinese market using ETFs in the US (ASHR, FXI) but then the Chinese government turned it in to their personal casino. Then I had some put options to short it again but those expired in December 2015. If they expired in January I would have made a lot of money. I had some calls (to take advantage of rallies) and puts (to short) on the US market but with 1/15/16 expiry date. Around 12/15/15 I could have sold my calls with a 400% profit but instead of doing it I bought more puts to preserve my gains. Unfortunately from 12/15/15 to 12/31/15, market fluctuated in a narrow range (under 0.5%) and due to the time value all option prices went down in a big way. During the first week of January 2016, I made a profit of about $1,000 in my put options by shorting the market but if I waited a few days my gain could have been about $5,000. However I did the right thing as it is not a good thing to wait till the expiry date. Live and learn! Lessons we learn today will enable us to make money till we die!

 Tighten your seat belts and get ready for an interesting short week in the market. Some US professionals will have an unnerving Monday as all international markets are open on Monday. In my personal opinion, oil and US equity market could go down in a big way and hit a short term bottom within the next 2 weeks. Also we could see a decoupling of the US equity market to oil as well as China-in other words, oil and China might go down while the bargain hunters send the US equity market higher. In a couple of week’s Janet Yellen will come up for congressional hearings and if she says that they are going to go slower than expected on raising rates, market could go up by 1,000 to 2,000 points-just my take on the story.

 Start nibbling (buying) in to these stocks/ETFs:

 iShares MSCI Canada (symbol: EWC)

The Fund Summary-The investment seeks to track the investment results of the MSCI Canada Index. The fund will at all times invest at least 90% of its assets in the securities of its underlying index and in depositary receipts representing securities in its underlying index. The underlying index may include large-, mid- or small-capitalization companies. Components of the underlying index primarily include energy, financials and materials companies.

Canadian economy and markets are deeply connected to the oil industry. Oil and gas companies make up 20 to 30% of the value of the Toronto Stock Exchange (TSX), One way to invest in the future rises in the oil sector is to buy in to the stock market of Canada.

This ETF, “EWC” has gone down from $32 on 7/31/14 to $18.97 on 1/15/16 which is a 40.72% decline in 17.5 months. There is a possibility that it could even go down to the technical support level of $8.60 (in 2002).

At this time buy 3 shares at $19 or the lowest on 1/19/16. The strategy is to keep on buying as the price drops to have a very low average cost when the ETF starts to move up. For example if you buy 3 shares at $19, 7 shares at $15, 10 shares at $10 and 100 shares at $5, you will own 120 shares at an average cost of $6.35. In 3 years, if this ETF goes back to $32, you would have made a 403.94% profit!!

Risk: The ETF could close as they cannot keep up with the needed liquidity. Canada could go in to a 10+ year bear market like the Japanese market. No risk, no reward!

Valley National Bancorp (VLY)

This is very different from my other sections. This is a small cap bank with $2.1Billion. On 1/15/16, the stock closed at $8.68 with a dividend yield of 4.98%.

Valley National Bancorp operates as the holding company for the Valley National Bank that provides commercial, retail, insurance, and wealth management financial services products. As of December 31, 2014, it operated 224 branches in northern and central New Jersey; the New York City boroughs of Manhattan, Brooklyn, Queens, and Long Island; and southeast and central Florida. The company was founded in 1927 and is headquartered in Wayne, New Jersey

Initially buy 5 shares of VLY at $8.68 or the lowest possible price on 1/19/16. If the price drops below $6, buy 25 shares.

Good Luck! Do not give in to fear!

Fernando

January 11 Post

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:

·        Chevron

·       Bank of America

·        Disney

Add more to the following holdings:

·        Apple

Be prepared to purchase more of the following:

·        Glaxo Smith Kline

·        Twitter

·        GM

·        Ford

·        GE

·        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.

Lalana Fernando

December 13 Post

Hi Folks,

We are at a very crucial point in the market. People are focused on the Federal Reserve Board meeting on 12/6/15 and most believe that a rate hike or back to normalization would take next week. Up to last week, the reaction from the market was very minimal. I am a contrarian but even I failed to be true to myself last week. As I mentioned in my first December issue, I predicted that we would have a Santa Claus rally by the latter part of the December. Usually in December, during the first part, the market goes down due to tax selling and then bargain hunters come in for the rally. It could still happen. I ignored a few things (1) When most expect something, the reverse happens (2) The market was making lower highs and lower lows. In other words, every time the market rallied, it hit a high that was lower than the previous high and when the market went down, the bottom it reached was lower than the previous low (3) A technical analyst who came on CNBC around 12/9/15 stated that the probability of a severe downturn in the market is quite probable. For the past 4 years I have been asking everyone to keep 50% of the portfolio in cash and I suggest that you keep doing that; most probably till 2018.  The best thing to do, is like I do, to have some out of the money put options on a market index as a hedge. Very soon, my book on Basic Options Trading would be available on Amazon. When the DJIA (Dow30) fell 1,180 point on 8/20/15 and 8/21(Friday), in my newsletter on 8/23/15, I mentioned that we could have a severe correction very soon and on Monday 8/24/15, during the first 5 minutes the DJIA (Dow30) fell 1100 more points. There is a very good possibility that we could face another severe correction next week for the reasons listed below:

·        For the first time since late September 2015, the VIX index rose over 25. The VIX index measures market expected volatility for the next 30 days. VIX index rose from 13 to 40 on 8/24/15 (highest since it was invented around 1991).  Most of the VIX Call options expiring 12/16/15 rose 200% to 600% in one day. However this also means that we could be close to a short term bottom. If that happens, sell some of the stocks you do not want to wait a long time to profit from and better yet buy some put options on the major indexes (i.e. S&P 500 in SPY,DJIA in DIA or the NASDAQ in QQQ).

·        For the past 6 months I have been saying that the high yield bond market is highly illiquid and ready for a crash. There are over $3 Trillion high yield bonds that will mature in 2016 to 2018 and they cannot bring more such bonds in to the market as they cannot find buyers for such bonds. When people cannot sell what they want to sell, they sell what they can. This is why the contagion from the high yield bond market is going to impact all markets. As I mentioned a few weeks ago, the Managing Director of the IMF stated that the next financial crisis will start with the corporate bond market. On Friday 12/11/15 we saw the first visible signs of it when the Third Avenue Junk Bond Fund (bonds were not even rated!) stopped redemptions and they did that prior to informing the SEC.  CNBC reported that Stone Hedge Fund did the same. Carl Icahn who came on CNBC stated that this is just the beginning. Also Jim Cramer reported that all day 12/11/15 mutual funds were asking clients to withdraw funds from high yield bond funds. THIS IS GOING TO BR HUGE! Even the 1987 stock market crash took place due to the contagion effect from the bond market. If this does not happen within the next month, it will happen within the next 2 years so always keep 50% in cash. If the ETFs start going insolvent as some predict, then we will see a 50% to 90% decline in equities. This is a totally new experience as we have never had ETF controlling a good portion of the financial market.

·        Historically after the first rate hike, you see a lot of market volatility. Usually prior to Fed meeting, the market moves up but we did not see this yet and that too is a bad sign.

·        One of the main reasons for the market downturn was the price of oil (WTI) which dropped below $36. Of all high yield bond issuers, 40% are in the oil patch. In a panic, when the whole market goes down, even the solid companies go down. We are 100% sure to see many oil companies go insolvent in 2016. For now, oil majors like Exxon Mobil, Chevron and so on are okay but if we have oil (WTI) below $40 for one year, we will have to take a second look at that.

·        Options Triple Witching hour falls on 12/18/15. An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. This usually causes a lot of volatility in the stock market.


When all the traders are on one side of the trade, there is a good possibility that the market would move the other way. On Friday, Simon Hobbs (CNBC financial host) was talking about the rise of the Euro against the dollar during the past few days and said, “When everyone says something is going to happen, close your ears. The opposite might happen”. That is the contrarian viewpoint. So this means that we could experience a short term bounce in the market in the near future and that would be a blessing as we would be able to sell some profitable trades and buy some more hedges. If the Feds move the rates higher next week, volatility would be here for a long time but volatility is not a bad thing as we get opportunities to make investments for the long term.

Even though almost all analysts expect the Feds to raise rates next week (12/16-12/18), I believe that depends on what happens in global markets between now and then. I won’t be surprised if the IMF Managing Director is trying best to persuade the Feds not to raise rates now as to avoid a global economic meltdown. Sooner or later the Feds have to normalize rates and go over 0% as we are close to full employment and that will not come without any pain. Longer they wait to raise rates, more pain there would be. Initially around 2008, they had to take rates down to 0 and have the quantitative easing to avoid the economy going in to a great depression. Bernanke saved the US and the world! Due to their intervention, the unemployment rate went from 10% to 5% in 6 years. According to Barron’s, in 2009, for every job opening, there were 6.8 unemployed (15 year old high); and in 2014, it was 1.9 and now it is at 1.9.

 Most of the bond market woes come from the commodity market; especially the oil market. In the oil market, the major integrated companies are safe for now. If WTI (oil price) remains under $40 for 12 months, even those companies could cut dividends and face the wrath of investors. On 12/8/15, Chevron CEO was interviewed by a CNBC anchor and these are the highlights (these are valid for Exxon Mobil too):

·        His # 1 priority is pay and increase the dividend. They have been increasing the dividend for the past 28 years..

·        Whatever the price of oil, they know how to run a profitable operation.

·        Now even cutting the labor force, he is reluctant because he sees an upswing in the industry.

·        Long term projects are currently on hold.

·        Smaller companies are too expensive now; and those companies have managed to cut costs and yet increase production.

·        For decades Saudi Arabia had excess capacity as they were fearful that the price of oil might go too high and lead to a decline in demand. Now that concern is no longer valid so they do not see a reason to cut production.

·        Smaller companies are busy keeping creditors happy so they are not in a position to focus on running the business.

Former BP Chairman was on Bloomberg and he stated that all big integrated oil companies only produce in low cost environments and they are always prepared for all eventualities. He also stated that except for the past decade, the average price of oil (WTI) has been quite low. In fact I did a fact check and I found that between 1/1/1986 and 12/7/2015, the average price of WTI was at $42.87. However on 12/11/15, WTI price went below $36 and Godman Sachs believe that price could drop to $25. If that happens, companies like Exxon Mobil and Chevron would be a good place for you to invest your money for the long term. It is just a ‘no brainer’!

 To sum it up; be prepared for wild fireworks (up and down) on Wall Street for next week; 12/14/15 through 12/18/15 as well as for the next month or two. As of Saturday, December 12, 2015, the futures market shows that the DJIA (Dow30) will open with a 300+ point decline. There is a lot of time between now and Monday morning so it could go either way by then. On a given day, as it happened on 8/24/15, if the market goes down heavily and end the day on a very positive note, that could spell a short term bottom for the market. For example, the market could go down 1,000 points (-1,000) during the day but end the day with +200 (1,200move from the bottom to the top).  If you are concerned that the market would fall more than 25% within the next 6 months, with 3% of your portfolio, you might want to buy put options on DIA (ETF for the DJIA or Dow30) that expire 3/18/16 with the strike price 160 (equal to the Dow at 16,000). Current option price is $355 per contract or 100 shares.

 Put on your seat belt, hold on to your seat and have a nice roller coaster ride next week!

Fernando

December 6 Post

Hello again,

Our (from my newsletter) Scorecard:

Gain for November 2015: +20.94% 
Gain for October 2015: +11.21%
Loss for September 2015:  -0.11%
Gain by 9/1/15: +18.09%

What’s new since the last edition:

Now we are in December 2015 and most December months are very good for the market-historical trend. Many people are expecting the Santa Claus rally to hit during the last part of December. It is a well-known ‘secret’ on Wall Street is that analysts rarely come out with bad news in December as that could spoil the ‘nice holiday mood’ and bring down Wall Street bonuses; so they wait till January to come out with bad news. On 12/18/15, Janet Yellen of the Federal Reserve is expected to announce the first interest rate hike since the recession of 2008. Unlike in September of 2015, the market is expecting this Fed increase. We can see this from the increase in bond yields as well as the rise in the dollar. Even though the employment report was strong, there are other indicators showing that some segments of the economy are slowing down-manufacturing for example. In my opinion, the Feds as a face saving gesture, might increase rates but limit it to 0.125%; instead of the 0.25% expected by most.  Banking stocks should do well in a rising interest rate environment. Most of all this will lead to a lot of volatility in the stock market. David Kostner of Goldman Sachs is predicting that S&P 500 would end at 2100 on 12/31/2016; since it is at 2091 on 12/1/15, they are expecting the market to move within a narrow range in 2016-as it did in 2015. He was correct about 2015 though. My feeling is that the market might move up in December 2015 and then see a severe decline in early 2016. On 11/13/15, CNBC, Art Cashin, UBS Floor Manager for the NYSE stated that most major banks are short on corporate bonds. That could be a self-fulfilling prophecy and lead to the bond crisis we all feared. On 11/12/15, on CNBC, Wells Fargo reported that they see a severe drop in transportation equipment and usually that is a sign of a pending recession.  Let us take a look at some of the sectors:

·        Financials- This sector cannot move up till the Feds raise rates

·        Energy- In a deep recession due to lower demand and excess supply

·        Other commodities-In a deep recession due to China and other economies.

·        Industrials-In a deep recession; mainly due to China shifting to consumer based economy.

·        Exports, Tourism and foreign investments- Declining sharply due to the strong dollar

·        Healthcare-Which has been strong for a long time is showing weakness due to price gauging by some pharmaceutical companies

·        Utilities- Expected interest rate hikes is killing this industry

As the US economy heads towards ‘full employment’ (5% unemployment rate considered to be full employment with inflation under control), the consumer is doing well and the US consumer is about 70% of the US economy. Wages are rising so the Federal Reserve is concerned about ‘wage push inflation’. We see this in rising home and apartment prices. If oil and commodity markets stop being deflationary, we could see the inflation rate spike up and then the Feds will have no choice but raise interest rates significantly. Auto revenue would set a record for 2015. Most analysts believe that this trend cannot last and 2016 would not be so friendly for the autos.  However what was pleasantly surprising was that as it happened with the US economy since 2009, in the Eurozone, the auto industry is doing very well. This is a sign that the European economy is on the rebound. Interest rates going up in the US and the rising US dollar is not good for the US car industry but rising employment and wages in the US would drive up demand.  As of 12/1/15, GM P/E at 13 and Ford P/E at 12, these are cheap stocks.

On 11/30/15, Bloomberg reported that an army of index funds and ETFs at Vanguard have been taking $20 Billion from the rest of the financial industry and for the past 11 months alone they have seen a net inflow of $365 Billion. In the future, when these funds and ETFs see redemptions, you will see good stocks falling rapidly because they belong to these funds. Be ready for buying opportunities!

For the past few months I have been writing about hedge funds and drug companies who are in to price gauging and Valeant (VRX) was one of the worst culprits. Their share price dropped from $250 to $70 within 5 months. On 11/6/15, CMBC announced that the CEO of Valeant took a personal loan from Godman Sachs on his holdings and when he could not make his margin call, Goldman Sachs sold one million of his stocks! Divine justice!

On 11/22/15, there was an interesting article in Barron’s and it was an interview they had with Larry Jeddeloh, editor of the ‘Institutional Strategist’ and here are the highlights:

·        Saudi Arabia is negotiating defense deals with Russia

·        China is negotiating oil deals with Saudi Arabia to pay in Yuan and not in US dollars.

·        Saudi Arabia is running a 20% deficit on their current budget

·        Russian defense contracts for Saudis and the others in the Middle East

·        Oil (WTI) to go down till 1/1/16 and then rise to $70 or $80 in 2016.

·        China is building a highway from China to Europe

·        IMF including the Chinese Yuan in SDRs will make central banks buy Yuans and the value of the Yuan will go up.

·        If the S&P 500 go over 2125 in 2015, it will squeeze the shorts and the market would sky rocket during the last few weeks of 2015

·        A bear market for stocks in 2016

·        Optimistic on gold as China will have the world’s biggest exchange for gold in Shanghai. Gold will go up to $2,700.

Technical analysis or chart analysis is the best way to get the direction of the market. According to some technicians (Barron’s, 11/30/15) the chart of the S&P500 reminds the chartists of 2007 but they do not think that it is in our immediate future. In my opinion, we might see a bull rally during the next few weeks and a volatile, bear market in 2016.

I wish you all a Merry Christmas and a Happy New Year.

Lalana Fernando

To order my newsletter, on Amazon.com, query under my name (Lalana Fernando)-on a monthly basis. Starting 12/11/15.

Submitted November 4

•    Hello Again,
•    
•    First of all I would like you to start nibbling at a new stock. Please be forewarned that I expect
•    this stock to go down for the next year or so but that will give you an opportunity to accumulate
•    more and reduce your average cost. Once again, remember the golden rule-never buy more
•    when the price is rising and increase your average cost. Lower the average cost, higher the
•    probability of making a profit.  My recommendation:
•    • Glaxo Smith Kline (GSK)
•    Recently Barron’s had a very favorable article on Glaxo Smith Kline (GSK) and my own
•    research shows that Barron’s is on the right path. I do not always agree with Barron’s. As of
•    11/1/15, the dividend rate is 6.98%!! That is 350% of the 10 year US Treasury rate! This is a
•    company with a market cap of $104 Billion. With their recent acquisition of Novartis and with
•    vaccines business and possible AIDS drugs, Barron’s expect a 25% increase in price over the
•    next 12 months. Don’t count on that! Currently it is trading at $43 and if the price drops by 50%
•    with no significant news, that is a 14% dividend yield from a solid pharma company based in
•    UK. The dividend yield will act as a hedge against a major drop in the price of the stock. 
•    However this works only with companies that will not cut their dividends. This is a historic fact.
•    October 2015 was the best month in 4 years for the stock markets in the US, Germany, Japan, 
•    Hong Kong and China. When you take valuations and economic conditions, should the market
•    go up? No; but these are not the factors that move markets-people just assume that they are the
•    factors that move the market. Now it is 9pm on 11/1/15 and due to poor economic data, Asian
•    markets are down so this could spell trouble for Europe and the US on 11/2/15. It is mass
•    psychology and trends that move markets. 80% of the trading is done by computers and robots
•    and it is obvious that technical analysis as applied to the markets play a major role. What are
•    some of these technical indicators? Contrarian perspective (more bearish the advisors, more
•    bullish the market), historical trends (most markets bottom in October), money waiting to get in
•    to the market, chart analysis and so on.  In previous newsletters I mentioned that when the
•    Dow30 was around 16,600 on 9/22/15, that looking at call options on the Dow30, most
•    professional expected the Dow30 to hit 17,500 by 2/1/16 but almost no one expected the
•    Dow30 to hit 18,000 by 2/1/16. How did I figure this out? Only 24% of money managers were
•    bullish and that meant that there was a lot of money waiting to come in to the market and also
•    the trend from past years show that markets bottom in October. The call option for 18,000 was
•    36 cents and while the 17,500 call was at $1.50. As I stated then I bought those 18,000 calls for
•    $0.36 on 9/22/15 and on 10/28/15, my options were worth $2.58-616% increase in 36 days! I
•    did the same with the NASDAQ index and what I bought for $0.94 on 9/28/15 was worth $4.57

•    on 10/28/15-386% increase in 30 days! I am still convinced that even if we have a short term
•    correction, by year end we would see the expected ‘Santa Claus Rally”. I am also hedged if the
•    market goes down in a big way. Why? The Dow30 is only 400 points below its all-time high
•    and still some of the best brains on the market think that we are still in a bear market. This
•    happens after every crash. When the Dow30 goes over 18,200 or so, all will believe that the bull
•    market is back and rush in to the market. No professional wants to be accused of missing a bull
•    market; and if that happens, that is the end of that person’s professional career. They want to
•    give the illusion (to their clients) that they were in the market prior to the ‘bull run’. For
•    example, in Q4, if Apple goes from $110 to $150, even at $150, most fund managers will buy
•    that and their clients will assume that they made a terrific gain. This is called ‘window
•    dressing’. While keeping the call options purchased in September (see above), I just purchased
•    calls with a strike price equal to 18,500 on the Dow30 for January 2016 for 54 cents (this has
•    the potential of rising to $3 or more prior to 1/15/16).
•    Over the past 6 months I have been bashing momentum stocks, and very especially Netflix
•    which has a ridiculous PE of 288 and with a PE like that you are expected to like double your
•    revenue every year. It is like buying apple for 20 times its current price. When those high PE
•    companies disappoint Wall Street, the stocks get slaughtered.  On 10/15/15, this really
•    happened! Netflix came out with disappointing revenue and the price dropped 8% within 2
•    hours! Competition was hitting them hard. They expected to have 1.15 million more subscribers
•    but they only got 880K. One analyst states that Netflix has to go down by 80% to reach fair
•    value. Just say no to momentum stocks!
•    Oprah Winfrey made a very clever investment in Weight Watchers (WTW) by buying a 10% 
•    stake in the company with a seat on the board for $30million. She made a 110% profit within     7 hours! I do not know if Oprah knew that this was a major target for short sellers so she had
•    them running for cover. Smart move! However I do not think that this would stick so I bought
•    some put options to short sell.
•    In a previous edition, I mentioned that a hedge company sold call options and with that bought
•    put options at no cost (except for brokerage commission). They did this on Valeant (VRX).  In
•    my October edition I mentioned that 32 year old CEO of American Armenian Hedge Fund
•    bought a drug company that has the only cure for a deadly disease and raised the price by
•    5000% and let patients die.  This brought a backlash from Hillary Clinton which was followed
•    by some Democratic politicians. This sent the whole healthcare stocks in to a bear crash. 
•    Valeant (VRX) is the worst of the price gougers they did not invest in research and it is a hedge
•    fund run company that bought drug companies with unique life-saving drugs and jacked up the
•    price by about 1000%. In the past few days, Valeant (VRX) has fallen from $250 to $93-62.80%
•    decline! In my estimation, the company who sold calls and bought puts (20MM) would have
•    easily gained more than $100MM in profits! What did the parasite CEO of Valeant do? He
•    appealed to the SEC for not letting him make millions by price gouging the American people. 
•    Please note that in all other countries, they have price controls when it comes to drugs. What happened to Valeant (VRX)? It is called divine justice! Now the parasite CEO announces
•    he will not increase prices by more than 10%.  They admit that even though it was legal (many
•    disagree), it was unethical and bad PR. At the Republican debate the neurosurgeon, Ben Carson,
•    who has no knowledge of anything other than surgery was asked about price gouging and he
•    said he will eliminate all regulations! Then Governor Chris Christie jumped in and said that he
•    would prosecute these companies for price gouging. Yet the party is trying to elect jokers like
•    Trump and Carsen over people who can run the country like Bush and Christie. Trump said, 
•    “our leaders are stupid, they allowed countries like China, Japan, Russia, Brazil and so on to
•    devalue their currencies which is hurting America”. Most rates are set by the foreign exchange
•    market which trades about 5 trillion dollars in a day. China is not supposed to set their rates but
•    they only decreased it by 3%; and per well-known economists, it is a fair devaluation as China
•    is on the decline and the US economy is strong. Republicans say they are for free markets but
•    Trump does not understand how exchange rates come in to being! For the longest time, the
•    Republicans and Fox news used to say that due to Obama, the dollar is going to be worthless, 
•    inflation will skyrocket so the price of gold is going to sky rocket and we will not make our
•    employment situation any better. Now our current situation: (1) too high dollar (2)ever
•    declining price of gold (3) employment rate is close to the official full employment rate of 5.1%
•    (4) rate of inflation well below the 2% target of the US Reserve Bank that even social security
•    recipients did not get their annual cost of living increase this year! 
•    I like to think differently and come up with a different perspective. For the last decade or so, the
•    corporate America and the Republican Party have been advocating welfare for the biggest
•    multi-national companies by decreasing the corporate tax rate so they will bring back to this
•    country the $2 trillion they have overseas. The argument is that then they will invest that in our
•    jobs and people.  Trump’s friend, Carl Icahn just established a multi-billion dollar super pac to
•    get the laws changed. Carl Icahn himself has been saying that all companies do is financial
•    engineering by buying back stocks and increasing dividend payments-without making actual
•    investments. This is what they will do with this $2Trillion! In investments, as Jim Cramer says
•    it is not good to avoid selling due to minimize tax payments because you might lose what you
•    have already earned. This should apply to this $2 Trillion problem too. No one has pointed this
•    out but during the past few months, the US dollar (USD) rose sharply against all currencies and
•    that trend is expected to continue. Russia and Brazil did not and does not like a 40% reduction
•    in their currency value against the USD. Even though it is not realistic, let us assume they had
•    this $2 Trillion in Brazil or Russia where the USD rose 40% so now in dollar terms these
•    companies have already lost $800 Billion due to currency devaluations! I am assuming that
•    most of this $2 Trillion is in Europe, over the past 5 years, the Euro fell 29.45% against the
•    USD- that is a loss of $600 Billion in currency devaluations. According to the World Bank and
•    IMF, the US economy is the only strong economy in the world-it is the sole engine that is
•    dragging all other major economies. If our growth rate gets stronger, the US Federal reserve
•    will increase rates to avoid inflation so why give welfare to these companies to bring this 2
•    trillion dollars to our biggest companies.  Most people are ignorant of the fundamentals of
•    economics. When a country grow over the technical full employment rate (i.e. 5% for us) we
•    run in to the economy’s worst enemy- inflation! Feds will do anything to avoid inflation. Over
•    the past few years, our companies have spent over $1,7 Trillion on buying back stocks, 
•    increasing dividends and mergers & acquisitions. Companies like Apple, without bringing their
•    money from overseas, borrowed against it to buy back stocks and pay dividends. Now they
•    might have to pay more when US rates go up and their foreign asset have gone down in value
•    due to currency valuations. Serves them right! Also I think our government should take action
•    such as not allowing these companies get Federal contracts for keeping their money overseas. I
•    have not seen this analysis done by anyone; this is my own analysis. May be I should send this
•    to Clinton or Sanders!
•    I initially recommended Twitter when everyone hated it. Then last month I stated that there was
•    a rumor on Wall Street that the board was going to make Jack Dorsey the permanent CEO of
•    Twitter; the very next day that happened and the stock went up by 6% in one day. There is a
•    rumor that Google, Apple or Facebook might buy Twitter. Then what happened on 10/7/15, 
•    Saudi Prince Alaweed doubled his stake at Twitter to 5% and now he is the #2 owner of Twitter
•    and he owns more shares than the founder and CEO, Jack Dorsey! This Saudi Prince is well
•    respected on Wall Street and he is known to pick ‘stock bottoms’. He still owns a major share of
•    Citibank, 21 st
•     Century Fox, etc. Then on 10/12/15, Twitter announced that they were cutting
•    their global labor force by 8% and they have the lowest pay rates compared to their competitors.
•    On the same day, Jim Cramer predicted that the price of Twitter would go up.  The good news
•    on Twitter kept on flowing like a tidal wave in October 2015! On 10/16/15, former CEO of
•    Microsoft, Steve Ballmer, sent a tweet, “Good job, Twitter! I am glad that I just bought 4% of
•    your company”. Now Ballmer and Alaweed owns more of Twitter than CEO Dorsey! Then a
•    few days ago, CEO Dorsey announced that he was going to donate a big share of his stocks to an employee pool to reward his employees.  Dorsey is developing new products every week. 
•    When all technology stocks were going down, Twitter rose sharply. By the last week of
•    October, the open interest (all available) options on twitter was higher than any other stock in
•    the market-even more than Apple! Earnings call show that they are on the right path by
•    increasing users and revenue and cutting costs. After moving up sharply to $31.36 on 10/27/15, 
•    the price dropped to $28.46 on 10/30/15; apart from my stock holdings I  took a wild bet on
•    Twitter by buying call options (strike price: $50, expiry date : 3/18/16) for 14 cents each. If
•    Twitter rise to $50, my options would have a value around $4; that is a 2,757% gain in less than
•    6 months!! On the other hand if Twitter goes up to it’s 10/27/15 high of $31.36, I would be able
•    to sell my options at 33 cents (more than a 100% gain). I am not implying that Twitter would go
•    up to $50 by 3/18/16 but intuitively I know that it might double within the next 3 years. 
•    Out of all the shorts that increased from 9/30/15 to 10/15/15, GE was the 3
•    rd
•     highest, so no
•    wonder GE went to a 7 year high. If I heard anyone saying that GE could go up by 49% in 90 days.

Addendum for October 2015), I sold my $27 calls at a 300% profit but my intuition told me not to sell at that time. If I waited just 2 more days I would have got a 2,000% profit but the decision I made was a rational as GE hit a 3 year high and my options were going to expire in 2 months. What I had to say about GE on 10/5/15 (in my addendum:
General Electric (GE) was the biggest story today! For the past few years everyone thought
I was crazy to recommend GE. As I have been saying they are going through a death and
rebirth process. The new GE is going to be totally different than the GE of the past.  Alan
Peltz who owns the Hedge Fund TRIAN invested $2.5B in GE.  The Chief Investment Officer
of Trian stated that they consider GE to be totally ‘risk free’ with dividend yield close to 4% 
while the US 10 year treasury rate is at 1.99%. They are pressuring GE to increase their
buybacks from $90B to $120B. Jim Cramer said that the price of GE could double with
Trian getting in to GE. Trian expect margins to grow rapidly at GE. Now Trian is the #10
owner of GE and they see GE going up by 70%. I had GE stocks and call options. Maybe it
was too premature but I sold my call options (GE, strike price $27, expiry: Jan 2016) at a
300% profit and kept the stocks. If GE goes to $54 as Jim Cramer predicts and if that
happens prior to 1/15/16, I could have made a 10,000% profit but with options, one cannot
take that risk. Next time GE goes down, I will get in to options again. Over the past year or
so, it has been trading between $24 and $26. It has been a trader’s dream.
This is what I stated on 10/11/15 (addendum 2):
Freeport McMoran- Analysts used to call this the worst stock in the market about 2 months ago
and at that time I asked you to start ‘nibbling’ (buying) it. Then Carl Icahn bought a big share
of the company. Last week, on CNBC, Carl Icahn was saying that he wanted the price to drop
for a year or so he could buy more and then make a lot of money in 3years. I had the same wish
for all of you. Luckily or unluckily, like Twitter, it kept going up! On 10/8/15 alone this stock
went up by 9.97%! This week alone, 10/5/15 to 10/9/15, Freeport went up by a WHOPPING
34.72!  So $1,000,000 invested in Freeport on 10/2/15, you would have gained $340,720 in 5
days! This too will not last. All this is due to short covering as well as algorithms and computer
robots gone crazy. From the bottom of my heart I want to thank all the 23 year old idiots who
created those robots! Also Morgan Stanley upgraded Rio Tinto and BHP-which I think was
quite premature. Even though I did not put Rio Tinto (UK based commodity company), I bought
Rio for the long term as it pays a dividend of 6% about 1 month ago but I think it is too risky for
you. I will not be surprised to see the price drops 50% to 80% soon. Wait for the profit takers! 
Then, like Carl Icahn, buy more. If it comes out that Chinese economy is weaker than expected, 
this will hurt Freeport. China consumes 40% of all supplies. They are heavily in to high yield
bonds so if that bond market blows up, that would be a terrible blow to Freeport. Like Mr. 
Icahn, I too have hedges against the high yield market. Buy puts on HYG! If you took my advice in 2015, no one would have believed it. It has been stick in the mud for more than 8 years. 
•    After the financial crisis, some thought that GE (only original Dow30) would even get dropped
•    off the Dw30. It is so big, it rarely moves.  As I stated on 10/5/15 (1
•    st
•     addendum for October
•    2015), I sold my $27 calls at a 300% profit but my intuition told me not to sell at that time. If I
•    waited just 2 more days I would have got a 2,000% profit but the decision I made was a rational
•    as GE hit a 3 year high and my options were going to expire in 2 months. What I had to say
•    about GE on 10/5/15 (in my addendum:
•    General Electric (GE) was the biggest story today! For the past few years everyone thought
•    I was crazy to recommend GE. As I have been saying they are going through a death and
•    rebirth process. The new GE is going to be totally different than the GE of the past.  Alan
•    Peltz who owns the Hedge Fund TRIAN invested $2.5B in GE.  The Chief Investment Officer
•    of Trian stated that they consider GE to be totally ‘risk free’ with dividend yield close to 4% 
•    while the US 10 year treasury rate is at 1.99%. They are pressuring GE to increase their
•    buybacks from $90B to $120B. Jim Cramer said that the price of GE could double with
•    Trian getting in to GE. Trian expect margins to grow rapidly at GE. Now Trian is the #10
•    owner of GE and they see GE going up by 70%. I had GE stocks and call options. Maybe it
•    was too premature but I sold my call options (GE, strike price $27, expiry: Jan 2016) at a
•    300% profit and kept the stocks. If GE goes to $54 as Jim Cramer predicts and if that
•    happens prior to 1/15/16, I could have made a 10,000% profit but with options, one cannot
•    take that risk. Next time GE goes down, I will get in to options again. Over the past year or
•    so, it has been trading between $24 and $26. It has been a trader’s dream.
•    This is what I stated on 10/11/15 (addendum 2):
•    Freeport McMoran- Analysts used to call this the worst stock in the market about 2 months ago
•    and at that time I asked you to start ‘nibbling’ (buying) it. Then Carl Icahn bought a big share
•    of the company. Last week, on CNBC, Carl Icahn was saying that he wanted the price to drop
•    for a year or so he could buy more and then make a lot of money in 3years. I had the same wish
•    for all of you. Luckily or unluckily, like Twitter, it kept going up! On 10/8/15 alone this stock
•    went up by 9.97%! This week alone, 10/5/15 to 10/9/15, Freeport went up by a WHOPPING
•    34.72!  So $1,000,000 invested in Freeport on 10/2/15, you would have gained $340,720 in 5
•    days! This too will not last. All this is due to short covering as well as algorithms and computer
•    robots gone crazy. From the bottom of my heart I want to thank all the 23 year old idiots who
•    created those robots! Also Morgan Stanley upgraded Rio Tinto and BHP-which I think was
•    quite premature. Even though I did not put Rio Tinto (UK based commodity company), I bought
•    Rio for the long term as it pays a dividend of 6% about 1 month ago but I think it is too risky for
•    you. I will not be surprised to see the price drops 50% to 80% soon. Wait for the profit takers! 
•    Then, like Carl Icahn, buy more. If it comes out that Chinese economy is weaker than expected, 
•    this will hurt Freeport. China consumes 40% of all supplies. They are heavily in to high yield
•    bonds so if that bond market blows up, that would be a terrible blow to Freeport. Like Mr. 
•    Icahn, I too have hedges against the high yield market. Buy puts on HYG! If you took my advice and bought Freeport on 8/25/15, today your holding would be up by an AMAZING 65.32% in just 46 daysAs I mentioned a few weeks ago, in my addendums, Apple had the highest short sell increase and I predicted that this will cause the price of Apple to go up as these people will have to do some panic buying to cover their shorts; and as I predicted within the past 3 weeks, Apple rose from $110 to $120 (9% in 3 weeks).  On 10/22/15, Brad Lamensdorf who predicts a bear market in 2016 and who was shorting Apple said that they got out of the Apple short position. However Brad was bullish for the US market for 2015 Q4.  On 10/11/15, in my 2nd addendum, this is what I had to say about Apple:As I have been saying in the past, on Wall Street, love can turn in to hate in an instant. A month or two ago (or prior), it was impossible to find someone who did not love Apple on Wall Street. Now almost everyone hates Apple. Kevin O’ Leary, Shark Tanks Billionaire who thinks he is an expert on stocks was saying that Twitter was dead prior to its astronomical rise of the stock also mentioned that Apple has no future now. Why? His 18 year old son toldhim that he hates Apple music. How stupid! For the past year or so he would come on TV and say that Apple was the best stock ever. On 8/25/15, when the market crashed 1100 points, Apple CEO emailed Jim Cramer of CNBC to let him know that IPhone sales are growing rapidly in China and that is what stopped the carnage-not limited to Apple. Recently Nike earnings report also show that China sales are doing great. Why? These American products are status symbols for the Chinese.  As I said a few days ago, Apple had the highest short interest hike of all stocks with a rise of 14 million in one week. When I was talking about all the stocks that went up sharply last week due to short coverings, did you wish you were able to buy them prior to that rise? Now here you have that with Apple.  Next time Apple would report earnings would be on 10/27/15. There is a very high probability that Apple would skyrocket around 10/27/15. I looked at call option prices but they are too rich for my blood but this means you can make a lot of money by writing options on Apple. 
•    
•    Good Bye for now! Have a great November and a Happy Thanksgiving!
•    
•    Fernando
•    
•    
•    

October 13 Post

Hi Again,

 Two weeks ago, I stated that according to the fundamentals we are facing some dark clouds but do not expect the market to act rationally. The market did not act rationally but we can laugh all the way to the bank! One rational thing happened last week and what was that? For the first time, people stopped chasing ‘fang stocks’ (Facebook, Tesla, Amazon etc.). Last week was a fantastic week for our portfolio (see the Scoreboard bellow)! On Friday, after the market close, top level pros of CNBC were asking one another if we were in the twilight zone. Why? For no apparent reason, commodity stocks started to skyrocket! I asked everyone to get in to commodity stocks more than a month ago but I said that prices will fall and as prices will fall buy more and in 3 to 5 years, you will make a lot of money but they are going up already. Do NOT expect this to continue-more buying opportunities will come our way.

Two weeks ago, I taught you how to buy a hedge without putting in a single dollar by selling calls and using that money to buy puts. Well, last week, a hedge fund did that with 20 million shares and they did not pay a cent (except for commission). They lost (just a paper loss which they will recover later) about 10% on their stocks but gained 100% on their put options! Brilliant! The stock was a big biotech company. Ever since that 32 year old CEO of the Armenian American Hedge Fund raised drug prices by 5,000%, all biotech and healthcare stocks have been in a bear market. Divine Justice! Even though we did well last week, do not fool yourself, to borrow a phrase from Greenspan, this is “irrational exuberance”. Now with respect to our interests, here are some amazing highlights from last week:

·        TWITTER- Last Sunday I mentioned that as I predicted Jack Dorsey was appointed CEO of Twitter and on that news, in one day the stock went up by 6.99%. For the past few months, this has been one of the most hated stocks in the market. As I have said before, as in mundane relationships, on Wall Street, hate can change to love overnight; and vice versa. I have seen this for 30 years on the market! This is why I am a contrarian. Even after the 6.99% rise, on 10/6/15, experts were saying that most analysts are worried about ‘corporate governance’ at Twitter. In my mind, it is easily fixable. There is a rumor that Google, Apple or Facebook might buy Twitter. Then what happened on 10/7/15, Saudi Prince Alaweed doubled his stake at Twitter to 5% and now he is the #2 owner of Twitter and he owns more shares than the founder and CEO, Jack Dorsey! This Saudi Prince is well respected on Wall Street and he is known to pick ‘stock bottoms’. He still owns a major share of Citibank, 21st Century Fox etc.. His business acumen and shrewd entrepreneurial prowess have earned him comparisons to American investor and business magnate Warren Buffett. Due to his prominence as a businessman, he was acknowledged by Time, who labeled the Prince as the "Arabian Warren Buffett". In June 2015 Forbes listed Al-Waleed as the 34th-richest man in the world, with an estimated net worth of US$28 billion. (Wikipedia). When the Saudi Prince made this announcement, on that day alone, in 6 hours, Twitter went up another 8%!!After the CEO announcement, I was waiting for Twitter to go down so I can buy some call options on Twitter (apart from the stocks I own) but that did not happen; why? Twitter went up every single day! Last week alone (10/5/15-10/9/15), Twitter went up by 16.38%! If you put $1,000,000 in to a 10 year treasury, you will earn $20,000 in 365 days.  If you were lucky enough to put $1,000,000 in Twitter on 10/1/15, in just 9 days, you would have gained $272,690.44 (27.27%)!! I expect the price to decline sharply when people come to their senses. This was mostly due to short covering.

·        Freeport McMoran- Analysts used to call this the worst stock in the market about 2 months ago and at that time I asked you to start ‘nibbling’ (buying) it. Then Carl Icahn bought a big share of the company. Last week, on CNBC, Carl Icahn was saying that he wanted the price to drop for a year or so he could buy more and then make a lot of money in 3years. I had the same wish for all of you. Luckily or unluckily, like Twitter, it kept going up! On 10/8/15 alone this stock went up by 9.97%! This week alone, 10/5/15 to 10/9/15, Freeport went up by a WHOPPING 34.72!  So $1,000,000 invested in Freeport on 10/2/15, you would have gained $340,720 in 5 days! This too will not last. All this is due to short covering as well as algorithms and computer robots gone crazy. From the bottom of my heart I want to thank all the 23 year old idiots who created those robots! Also Morgan Stanley upgraded Rio Tinto and BHP-which I think was quite premature. Even though I did not put Rio Tinto (UK based commodity company), I bought Rio for the long term as it pays a dividend of 6% about 1 month ago but I think it is too risky for you. I will not be surprised to see the price drops 50% to 80% soon. Wait for the profit takers! Then, like Carl Icahn, buy more. If it comes out that Chinese economy is weaker than expected, this will hurt Freeport. China consumes 40% of all supplies. They are heavily in to high yield bonds so if that bond market blows up, that would be a terrible blow to Freeport. Like Mr. Icahn, I too have hedges against the high yield market. Buy puts on HYG! If you took my advice and bought Freeport on 8/25/15, today your holding would be up by an AMAZING 65.32% in just 46 days!

·        This is how some of our stocks did last week (10/5/15-10/9/15):

§  Twitter- up by 27.27% in 5 days.

§  Freeport McMoran-up by 34.72% in 5 days.

§  GM- up by 5% in 5 days.

§  Ford-up by 6.94% in 5 days.

§  GE- up by 6.83% in 5 days (after the tremendous run between 9/28-10/2)

§  Exxon Mobil- up by4.59% in 5 days.

§  Alcoa-up by 13.63% in 5 days.

§  Apple-up by 0.11%. (see story below)…Opportunity!

·        APPLE- As I have been saying in the past, on Wall Street, love can turn in to hate in an instant. A month or two ago (or prior), it was impossible to find someone who did not love Apple on Wall Street. Now almost everyone hates Apple. Kevin O’ Leary, Shark Tanks Billionaire who thinks he is an expert on stocks was saying that Twitter was dead prior to its astronomical rise of the stock also mentioned that Apple has no future now. Why? His 18 year old son told him that he hates Apple music. How stupid!

For the past year or so he would come on TV and say that Apple was the best stock ever. On 8/25/15, when the market crashed 1100 points, Apple CEO emailed Jim Cramer of CNBC to let him know that IPhone sales are growing rapidly in China and that is what stopped the carnage-not limited to Apple. Recently Nike earnings report also show that China sales are doing great. Why? These American products are status symbols for the Chinese.  As I said a few days ago, Apple had the highest short interest hike of all stocks with a rise of 14 million in one week. When I was talking about all the stocks that went up sharply last week due to short coverings, did you wish you were able to buy them prior to that rise? Now here you have that with Apple.  Next time Apple would report earnings would be on 10/27/15. There is a very high probability that Apple would skyrocket around 10/27/15. I looked at call option prices but they are too rich for my blood but this means you can make a lot of money by writing options on Apple.

·        OIL & COMMODITIES- Oil (WTI) rose to $50 per barrel last week. Even though the fundamentals show that demand for oil is weakening and the supply exceeds demand in a huge manner. Last week, once again, Goldman Sachs repeated that WTI would go down to $25. Then why did oil rise so much lifting all energy stocks? MIDDLE EAST! To paraphrase T Boone Pickens, “there is a new sheriff in town in the middle east now”. He was talking of the Russian intervention in Syria. Every Middle East tragedy drives up the price of oil but this is very artificial and psychological. We have been talking about how Saudi Arabia’s refusal to lower their oil production was meant to drive oil fracking companies in the US to bankruptcy but they also drove Russia in to a deep recession. Some countries have wars to get out of recessions. This is hurting Saudi Arabia too. People who watch financial markets say that even to survive on a day to day basis, they cannot reply on the current account anymore and they are selling their US Treasuries. They even liquidated their assets at Blackrock. Do not expect the price to remain high. Markets fluctuate! 90%+ oil companies are struggling to survive with oil prices under $50 so I hope these companies have the horse sense to make use of this current price of $50 on WTI to sell oil futures. For example, they can hedge in the futures market to keep selling oil at $50 for a long time but some of these companies may have the knowhow or the resources to hedge. Let us say that a company would be able to sell a million barrels in December 2015, in the futures market they can sell a million barrels for $50 (or more) for December 2015 and deliver the oil in December 2015.

·        Last time I mentioned that I bought some call options on Dow30 and if the Dow30 goes to 18,000 by 1/31/16, my options would rise from $0.48 to $9. At the time I purchased those options, the Dow30 was around 16,000 and on 10/9/15, the Dow30 closed at 17,080. On 10/9/15, the options closed at $1 (100% ‘paper’ profit +) but this shows that still most people do not expect the Dow30 to go up another 920 points in 3.5 months when the Dow30  rose 608 points last week in 5 days! Never expect the market to act rationally! Algorithms and computer robots are going on historical data so this is good for us.

 Looking forward to another very interesting week; why? Many companies will start reporting their earnings this week. If Apple drops below our initial cost, buy more because of all those shorts and negativity I believe that Apple will surprise Wall Street with higher than expected earnings and revenue and when people run to cover their shorts, the price could skyrocket.

 The newspaper, Barron’s, is the most important paper one could read when it comes to the stock market. I read it religiously on Saturday because it moves the market on Monday and this has been the case for 40 years. When CBS 60 minutes had a show on Donald Trump he showed that his office- full of magazines with him on the front cover. This week’s Barron’s had Trump on the front cover too and I wonder if Trump will add this to his collection. They had a big picture of Trump and the caption “TRUMP- the Art of Baloney-Don’t gamble with this guy”. Barron’s tried to contact the Trump organization many times, and they stated they will get back but didn’t. Surprised? I remember the 1990s very well when an analyst (working for a Wall Street firm) stated that Trump is driving his business in to bankruptcy and Trump got that guy fired and he made sure that guy will never work as an analyst again. Prior to that he raised a lot of money (promising 14% interest) saying that he is building the 8th wonder. The analyst was RIGHT! He defaulter on the FIRST interest payment in October 1990, Taj declared chapter 11 bankruptcy in the Spring of 1991! This was the first of the FOUR bankruptcies that Trump casino related entities filled over the next two decades. What happened to the analyst this idiot ‘destroyed’? First he lost everything; and then he became extremely rich in a different business and now owns a 15 room mansion! No one has the guts to say that they like Donald for having Hitler like policies but they say that he speaks his mind. Remember Germany in the 1920s? Thank you Mr. Trump for destroying the Republican Party for the next decade! Follow in the footsteps of Billionaire Ross Perot who destroyed Herbert Walker Bush.

Have a great week!

Fernando

October 7 Post

Hello again,

 Due to the unusual activity that took place today, I thought of writing a short addendum to the October newsletter that I issued last night. As I said last night, do not expect the market to act rationally. 80% of the trades are done by algorithms and computer robots; which follow trends.  Our portfolio, went up 22.6% from 8/25/15 to 10/5/15 (see below).

·        First of all, last night I mentioned that there was a rumor on Wall Street that Jack Dorsey was going to be made permanent CEO of Twitter. That was announced today and just today alone Twitter jumped up by 6.99%!! It could go up another 100% within the next 12 months.

·        Even though everyone was pessimistic about commodities, in August 2015, I asked you to start ‘nibbling’ at Alcoa. Today alone the stock went up by 9.35%. If you bought Alcoa on 8/25/15 as I suggested at $7.97, today your gain would be 31%.

·        General Electric (GE) was the biggest story today! For the past few years everyone thought I was crazy to recommend GE. As I have been saying they are going through a death and rebirth process. The new GE is going to be totally different than the GE of the past.  Alan Peltz who owns the Hedge Fund TRIAN invested $2.5B in GE.  The Chief Investment Officer of Trian stated that they consider GE to be totally ‘risk free’ with dividend yield close to 4% while the US 10 year treasury rate is at 1.99%. They are pressuring GE to increase their buybacks from $90B to $120B. Jim Cramer said that the price of GE could double with Trian getting in to GE. Trian expect margins to grow rapidly at GE. Now Trian is the #10 owner of GE and they see GE going up by 70%. I had GE stocks and call options. Maybe it was too premature but I sold my call options (GE, strike price $27, expiry: Jan 2016) at a 300% profit and kept the stocks. If GE goes to $54 as Jim Cramer predicts and if that happens prior to 1/15/16, I could have made a 10,000% profit but with options, one cannot take that risk. Next time GE goes down, I will get in to options again. Over the past year or so, it has been trading between $24 and $26. It has been a trader’s dream.

·        As I stated yesterday, even though the corporate credit crisis is taking place all over the world and would definitely hit us at some time in the future, the stock market is ignoring it and going up. Why? The market is driven by algorithms and computer robots. They follow trends. They cannot compute the bond crisis. When the Shanghai market fell 8.5% in one day on 8/25/15, algorithms went crazy and that is why the Dow30 fell 1100 on 8/25/15. All the analysts were having a good laugh on CNBC at all the 23 year olds who programmed these computers. When the 1987 crash happened these guys were busy getting breast fed! Just before the Fed Reserve announced their decision the market went up as that is the historical trend. October markets bottom so the computers are buying. As I said last night, on Friday (10/2/15) morning at 6.30am, the Dow30 was down 280 points. I had the horse sense to know the market would go up and I bought some call options and from that point the Dow30 went up 480 points and ended the day at up 200 points. Technically this could be interpreted as a bear market bottom. On paper my options were up 52% in one day. I have a knack for noticing odd pricing in the option market. A week ago, I knew that the market might act irrationally and go up and I looked at call option prices. Most people expected the Dow30 to go to 17,500 by 12/31/15 but only a few expected the Dow30 to go to 18,000 by 12/31/15; I made this conclusion as the call option price for 17,500 Dow30 was $1.50 and the call option for Dow30 at 18,000 was $0.45. Since our recent high was over 18,000 and also a few days of 200 to 500 days could easily get us back to 18,000 before year end so I started nibbling at those options. The call options I bought at 6.30am on 10/2/15, ended today with a gain of 159% in 2 trading days or 11 trading hours! If the Dow30 hit 18,000 prior to 1/1/16, my call options would be worth $9 each. My last purchase was at 27 cents on 10/2/15.  That is a 3,233% gain within 3 months! I am still hedging against a crash and I will continue to do that as long as there is a credit and currency crisis going on in the world. Also our market never got corrected. In an irrational manner it is going up so ALWAYS keep 50% of your portfolio in cash. Big corrections and crashes do not come announced. When everyone thinks that the market is done going down, then only the crashes take place. In the stock market lingo, it is called a ‘Bear Trap”. Beware- bears are waiting to trap you!

Good luck till next time!

 Fernando

GLOSSARY

 ·        ADR (American Depository Receipt)- Certificate issued by a bank in the US representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange.

·        Arbitrage- practice of taking advantage of a price difference between two or more markets.

·        Balance Sheet- Financial statement that covers assets, liabilities and equity of an entity.

·        Bear Market- A market condition in which the prices of securities are falling. Some would define a bear market when the securities are down 20% from it’s recent high.

·        Blue Chip Stock- A stock of a well-established, financially sound company.

·        Book Value-Value listed on the balance sheet

·        Bull Market-A market condition in which the prices of securities are rising.

·        Contrarian-Opposing the popular view

·        Credit Default Swap-A credit default swap is a type of contract that offers a guarantee against the non-payment of a loan; usually issued by banks.

·        Credit Spread- The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.

·        Dividend-see stock dividend

·        Dow Jones Industrial Average- price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

·        Earnings per share-Earnings divided by the number of shares outstanding.

·        Emerging Markets- An emerging market is a country that has some characteristics of a developed market, but does not meet standards to be a developed market.

·        Exchange Rate- The price of a nation's currency in terms of another currency.

·        ETF (exchange traded fund)- is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.

·        Exercise of options- the buyer (or holder) of a call contract may exercise his or her right to buy the underlying shares at the specified price (the strike price); the buyer of a put contract may exercise his or her right to sell the underlying shares at the agreed-upon price.

·        Expiration (of options)- All options have a limited useful lifespan and every option contract is defined by an expiration month. The option expiration date is the date on which an options contract becomes invalid and the right to exercise it no longer exists. For many decades, the option expiration date was 3rd Friday of the month.

·        Ex Stock Dividend- usually set for stocks two business days before the record date. If you purchase a stock on its ex-dividend date or after, you will not receive the next dividend payment

·        Federal Fund Rate- The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution overnight.

·        Federal Open Market Committee (FOMC)- The monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members--the seven members of the Board of Governors and five of the 12 Reserve Bank presidents.

·        Federal Reserve Bank- the central banking system of the United States

·        401K plan- A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis.

·        Futures Market- An auction market in which participants buy and sell commodity/future contracts for delivery on a specified future date.

·        GDP- The total value of all goods and services produced within a country.

·        Going Public- The process of selling shares that were formerly privately held to new investors for the first time.

·        Government Securities-A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that is backed by said government.

·        Growth Funds-The Growth Fund seeks to provide capital appreciation and some current income.

·        Hedging-A risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, bonds, stocks and so on.

·        Hedge Funds- privately-owned companies that pool investors' dollars and reinvest them into all kinds of complicated financial instruments.

·        High Yield Bonds-A high paying bond with a lower credit rating than investment-grade corporate bonds

·        Illegal Dividend-A dividend declared by a corporation that is in violation of its charter and/or of state laws

·        Index Funds-When an investor purchases a share of an index fund, he or she is purchasing a share of a portfolio that contains the securities in an underlying index.

·        Index Options-Index options usually have a contract multiplier of $100, meaning that the price of an index option equals the quoted premium times $100. Unlike options in shares of stock or even commodities, it's not possible to physically deliver the underlying index to the purchaser of an index option

·        IRA Accounts-Account at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis

·        In the money (options)- Situation in which an option's strike price is below the current market price of the underlier (for a call option) or above

·        Junk Bonds-A security issued by a corporation that is considered to offer a high risk to bondholders

·        LEAPS (options)- Long Term Equity AnticiPation Security Options are options of longer term until expiry than other, more common, options.

·        LBO (Leverage Buyouts)-  stands for Leveraged Buyout and refers to the takeover of a company that utilizes mainly debt to finance the buyout

·        Load Funds-A mutual fund that comes with a sales charge or commission

·        Margin Accounts-A brokerage account in which the broker lends the customer cash to purchase securities

·        Market to Market-Refers to accounting for the value of an asset or liability based on the current market price instead of book value.

·        MLP (Master Limited Partnership)- limited partnership that is publicly traded on an exchange

·        M1, M2, M3, M4 – see money supply

·        Money Supply- Include cash, coins and balances held in checking & savings accounts. M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. M4 includes M3 plus other deposits. The term broad money is used to describe M2, M3 or M4, depending on the local practice.

·        Money Market Funds-One of the sections of a financial market where securities and financial instruments with short-term maturities are traded is called the money market.

·        Moving Averages-A technical analysis term meaning the average price of a security over a specified time period.

·        Municipal Bonds-A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state in which the bond is issued.

·        Mutual Funds-An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets

·        Naked Options-A trading position where the seller of an option contract does not own any, or enough, of the underlying security

·        NASDAQ-created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971.

·        NYSE-A stock exchange based in New York City, which is considered the largest equities-based exchange in the world based on total market capitalization of its listed securities.

·        Net Asset Value-A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding

·        No Load Funds-A mutual fund in which shares are sold without a commission or sales charge.

·        Off Balance Sheet Financing-A form of financing in which large capital expenditures are kept off of a company's balance sheet through various classification methods. For anyone who was invested in Enron, off-balance sheet (OBS) financing is a scary term.

·        Offshore-Located or based outside of one's national boundaries.

·        Open Market Operations-Market interventions by a central bank to manipulate liquidity levels by buying or selling short term securities.

·        Options-see Stock Options-

·        Out of the money (options)- the strike price of the option exceeds the share price of the underlying equity.

·        OTC (Over the counter)- A decentralized market, without a central physical location,

·        Penny Stocks-common stock, usually highly speculative, selling for less than a dollar a share.

·        Preferred Stocks- Dividends that are paid out prior common stock dividends are paid out.

·        Prime Rate- The prime rate is the interest rate commercial banks charge their most creditworthy customers, which are usually corporations.

·        Put-Call Ratio- technical indicator demonstrating investors' sentiment. The ratio represents a proportion between all the put options and all the call options purchased on any given day.

·        Put Options- An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option,

·        Retail Investor- Individual investors who buy and sell securities for their personal account, and not for another company or organization

·        Reverse Split-the opposite of a conventional (forward) stock split, which increases the number of shares outstanding

·        Shareholder-Shareholders are a company's owners

·        Short Covering-refers to the purchase of the exact same security that was initially sold short, since the short-sale process involved borrowing the security and selling it in the market.

·        Short Interest-Short interest can be expressed as a percentage by dividing the number of shares sold short by the total number of outstanding shares

·        Shorting-Initially you borrow certain stocks, sell them and later, if possible, when the price drops, you buy it in the open market to replace the borrowed stocks.

·        Short Interest Ratio-the number of shares shorted divided by the number of shares available for trading

·        Short Squeeze-A situation in which a heavily shorted stock or commodity moves sharply higher, forcing more short sellers to close out their short positions and adding to the upward pressure on the stock.

·        Stock Dividend-A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.

·        Stock Exchange Market-Organized and regulated financial market where securities (bonds, notes, shares) are bought and sold

·        Stock Option-A right to buy or sell specific securities or commodities at a stated price within a specified time.

·        Stock (or Ticker) Symbol-string of letters used to identify a stock, bond, mutual fund, ETF or other security traded on an exchange

·        Stop Limit Order-A stop order that designates a price limit.

·        Subprime-borrowers with a tarnished or limited credit history.

·        Venture Capital-Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets.

·        VIX Index- trademarked ticker symbol for the CBOE Volatility Index, a popular measure of the implied volatility of S&P 500 index options; the VIX is calculated by the Chicago Board Options Exchange (CBOE).