Hello Again,
Baron Rothschild, 18th century British nobleman and member of the Rothschild
banking family, is credited with saying that "the time to buy is when there's
blood in the streets."When Trump came to power and boasted the market is going up due to him,
(which is incorrect), I told all of you that one day we will see a “Trump Crash”.
Presidents get credit for market rallies and blamed for crashes but it is not due
to politicians; it is mostly due to central bankers and mass psychology.
Don’t catch a falling knife though by buying in to a crash! Just nibble.
This is healthy for the long run. Market going up in a straight line for a long
time is not healthy for the market. From day one I asked all to keep at least
25% in cash. Trying to maximize gains is a sure recipe to lose everything one
day. The Corona virus was just a catalyst. The market did not go down 4,000
points or lose over 4 trillion in market cap due to the virus, it did not lose that
much due to any other factor other than “irrational exuberance” as Alan
Greenspan put it in 1990. I have been warning of this for many months.
Two weeks ago when there were signs of danger flashing with respect to the virus,
market kept going up! I started writing this newsletter on 2/10/20-see below
what I wrote on 2/10 and 2/16/20. Chart and technical analysis with no regard
to fundamentals or other factors is the most prudent way to consider the future
of any market. On 2/16/20 I wrote (see below) that market chartist/technician
Bob Marino predicted that the market could go down by 16%. Guess what?
From the high on the Dow on 2/14 Friday to the low on 2//16 Friday, it was
down exactly 16% or fell from 29,463 to 24,681. I saw another good chartist
on 2/28/20 after the market close and he thinks we could have hit a short term
bottom here but from the chart he concluded that we “capped” at the previous
high or in other words we may not go beyond the previous high for a long time
to come. I have known the value of technicians for 35 years. In 1987, before
the crash taking advice of another technician called Prechter I bought puts
on the market before the crash and they went up by 70% for the crash. Last
week so many on CNBC were saying that since the outcome of the virus is
unknown we have no choice but only consider technical/chart analysis. On
Thursday afternoon and Friday I saw signs in the market that it could be close
to a short term bottom and that was proven correct when the Dow moved from
a minus 1,000 to a minus 300 during the last 15 minutes of the market. As a
hedge against my long term puts that have risen a lot, I started buying index
call options to prepare for a short term “dead cat bounce” as it called on
Wall Street. When that happens I will December puts because this is not
over yet. Recently I heard a young money manager saying that during times
when the market is so irrational we should place unrealistic orders but I
have been doing that for 35 years! Let me explain. Two weeks ago Disney was
at $150 and people thought it would go forever. I saw somewhere they get
25% of their revenue from theme parks and when people are avoiding such
places they are sure to get hurt badly. I looked at options and I bought some
put options with a strike price of $55 with a 1/2021 expiry. The probability of
making any money was close to 0 (in my assessment) as Disney could never
fall from $150 to $55 in one year but investors get irrational on the buy side
and they do the same on the sell side. However in my thought process if
Disney fell from $150 to $55 in ten months, my $100 option would grow to
$10,000 !!!! I never expected to make any money from this purchase 24 hours
after the purchase I had a 25% gain and in 36 hours I had a 100% gain! See
people are idiotic! Some expect Disney to fall from $150 to $55 in 10 months.
Another example, AMC theaters; they first dropped but on Thursday they
announced higher revenue/profits so the stock started to rise so I bought
puts on AMC. Already all over the world countries are closing cinemas!
People are irrational on the upside too. Several weeks ago I bought Uber at
$25 and I sold it a few weeks later at $40. When the market was down 3,000
points on Thursday I bought 1 share of Uber for tracking purposes at $31 and
after that for the next 2 days Dow fell 1500 but Uber kept rising and ended
2/28/20 at $34,15 or a 9% gain in a few hours. Why Uber? They have got
good management that is getting rid of their unprofitable business like “Uber
foods in India’. I also bought put options on Uber expecting it to fall below
$25 prior to 1/1/21 due to the virus and other factors. According to Janet
Yellen, former Fed Chair, we could easily be in a global recession in 2020.
Central bankers cannot cure a virus by increasing the money supply. Bet
stock Warren Buffets’s MO is to buy quality stocks and hold them forever but
even before the market went down due to the virus, he was selling; even his
Apple stocks! When the market was down 1,000 Buffet said he is still bullish
but we might see a 50% correction when all is done. On Friday 2/28, even
cruise stocks were going up! Investors are idiots. In previous newsletters I
have been mentioning the VIX index or the fear index. Before last week at was
at a very unreasonable 12; even with all the news of the virus in China. Experts
used to say if it goes 32 or so market will reverse it is trend and it will start to
rally. Prior to last week, the highest it reached over the past 5 years was 28.
On 2/28/20, Friday, it reached 40! That too implies we are close to short
term ‘dead cat bounce’(rally). When interest rates are low it is not a good idea
to buy bonds, especially bond funds but due to the environment that existed
for the past few years where Europe and Japan have negative interest rates
with all their money coming in to our treasuries decreasing our treasury yields,
our treasuries bonds have been a great investment –even better than stocks.
take the 20year treasury ETF with the symbol TLT, if you purchases a share
at $136 on 12/31/19, you would have got a 12% return when TLT ended at
$155 on 2/28/20. Now with everyone expecting 3 rate cuts over the next few
months, you would expect TLT to rise further in 2020 but technical analysts
are bearish on TLT which might be good for stocks. Be very careful of high
yield bonds and funds. 10% of the high yield bond fund HYG, 10% comes from oil and gas companies which are sure to go insolvent over the next few years as $82B in their bonds will mature and they cannot get refinancing for those bonds.
Written on 2/16/20:
Technical analyst Bob Marino predicts that there is a high probability of a 16% drop to the downside.
That is a technical analysis, but on fundamental analysis, the market is way overvalued. The value
of a stock or a market is measured by the PE (price to earnings) ratio and now it is at 19. After the
2017 tax cut the multiples increased but revenue and earnings decreased as most of the tax cut went
to stock buybacks and not for increase in operating income or in to the hands of the employees.
Written prior to 2/10/20
As I stated in my last newsletter, the way investors are ignoring an unquantifiable or an
unpredictable risk facing the global economy and the impact that would have on most stocks shows
that we are in a dangerous bubble. In normal times, after making so much gains over the past
10 years, most investors would have taken more measures not to put their past gains at risk. Our
technology have been leading the market for the past 10 years and 70% of their revenue come
from other countries. Some people compare corona virus scare to the SARS virus that hit China or
PRC decades but at that time China was responsible for about 4% of the global GDP and now it is
about 14%. Most stocks are trading at very high multiples and that is because the investors expect
these companies to report continuous growth in revenue and earnings but that is not possible when
global GDP is falling or at risk with an infection like the corona virus spreading fast all over the
world. Most people assume that a cure would be found soon and that is with no basis. Chinese
government is always trying to be in control and a few weeks ago they flooded the global
economy with a quarter of trilling dollars! Even in China the stock markets have risen sharply!
ETF with the symbol ASHR that is traded here reflects the top Chinese markets; and from
2/3/20 to 2/5/20, ASHR rose from $26 to $28! The CEO, Eminence Capital, Sandler who is trying to
acquire Credit Cuisse was on CNBC a few days ago and he was asked if out market is overvalued;
and he stated that most stocks are way overvalued but there are some stocks that are trading at
fair value. That made me think of 1999. In 1999 we were in the middle of the internet or the dot com
bubble. I prefer to buy companies with a PE of less than 20 and less than 10 is even better. Even
though Google was started in 1995, at that time most people were using Yahoo for everything.
I remember that at that time Yahoo had a PE of 1,000! It took about 20 years for Intel to get back
to their previous glory and yahoo never recovered. However in 1999 I was looking at the market
and I was trying to find hidden gems that was being overlooked by most investors. At that time
there was a big scare about all the litigation faced by tobacco companies and all investors stayed
away from tobacco stocks. I did a deep dive in to the finances of Phillip Morris. At that Krafts food company and Miller Brewery were under Phillip Morris and the book value of Krafts was higher
than the stock price of Phillips Morris and it was the same with Miller Brewery. Phillip Morris
dividend yield was at 9%! In the market, people have the herd mentality. After the internet stocks
crashed for years Phillip Morris gained year after year paying a dividend yield of 5% to 9%. In
1999, only 40% of Phillips Morris revenue came from US tobacco sales. There is a comparison
between 1999 and 2020; at this time, big money managers and well known stock pundits like
Jim Cramer hate all oil companies saying that there is no future with them as the world shifts to
other forms of energy use but like with tobacco, I think that judgement is premature. Exxon (XOM)
has a dividend yield of 5.7% and the stock price on 2/4/20 was $60. About 15 months ago, XOM
was trading at $85-which shows its future potential. Exxon has never decreased their dividend per
share. Another one I bought was BP which recently increased their dividend and now has a
dividend yield of 6.98%! When they had the big oil spill, they tried to lower their dividend and
so many shareholders in UK objected, they decided not to do it as many pensioners depend on
that dividend. Now due to technology, oil companies can get more oil with less people and capital
so there are a lot of layoffs but companies like Exxon and Chevron have no problem keeping
their shareholders happy. At this time Chevron is doing better than Exxon as Chevron has a better
balance sheet and the operating income a Exxon has suffered greatly. At the same time Exxon
expect their previous investments to benefit the company in the future. On 2/8/20, Barron’s had
a deep dive in to Exxon and concluded that the dividend is safe. For executives at Exxon, paying
the dividend and increasing the dividend is a #1 priority.
As I have stated in the past, when we want to take a glimpse at the future of the market (or a stock),
we have to look at technical analysis and not fundamental analysis. One of the best in the field is
Carolyn Boroden who is known as the Fibonacci Queen. According to what Carolyn stated on
2/4/20, we could easily have a 14% correction on S&P 500 index (SPY-top 500 companies) but the
NASDAQ where technology dominates is less risky; and the reason is on the SPY chart, current
prices are below the line for the past 13 day average and it is the reverse for the NASDAQ.
However she stated that if she is wrong, the S&P500 could rise by another 6%.
Some experts foolishly were saying “If Chinese market did not go down over the past 2 months,
there is no need for our markets to go down”. Can you see their mistake? No one can believe
anything that comes from communist China. They arrested the doctor who warned them of the crisis.
They are all about the communist party staying in power forever. They forbid people to sell and the
state keeps buying trillions of instruments and lie. You cannot trust anything that comes out of PRC.
Cronavirus started because they eat bats in communist China!
Next few weeks will be very interesting. Stay tuned!
Good luck!
Fernando
