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