Global Market Comments
February 19, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or ALARM BELLS ARE RINGING)
(SPY), (TLT), (GLD), (AMZN)
There is not a single hedge fund manager out there today who doesn’t believe that stock markets are on the verge of a very sharp selloff.
Earnings are falling. Europe is tipping into recession. The money supply is shrinking at a dramatic pace (see chart below). And government borrowing will double this year as compared to last. Yet the major indexes are 5% of an all-time high with valuations at an 18X multiple, the high end of the historic range.
You may be wondering why a correction, if not a new bear market, hasn’t already started yet. Every trader on Wall Street is nervously awaiting a China trade deal, possible weeks away, that they can all sell into, including me. The China negotiations have robbed traders of a decent short side entry point for a year now.
You may think I am being excessively cautious with these views. However, US equity mutual funds have suffered eleven straight weeks of outflows worth $80 billion, an all-time record. You really wonder what is supporting the market here. Are we in for a “Wiley Coyote” moment?
Who is left to buy the market? Short coverers, algorithms, and corporations buying back their own shares. There are in effect no real net investors.
One can’t help but notice the constantly worsening in the economic data that took place last week. Was this all happening in response to the December stock market crash? Or is it heralding a full-blown recession that has already started?
This is all backward-looking data, in some cases as much as two months. But what followed the December crash? The January government shut down which we already know pared 75 basis points off of Q1 GDP growth. That’s why companies announced middling earnings for Q4 but horrendous guidance for Q1.
December Retail Sales came in at a disastrous ten-year low. If you’re looking for an early recession indicator, this is a big one. Maybe it’s because the prices are falling so fast?
The NY Fed slashed Q1 GDP estimates to below 2% with more cuts to come. Trade war uncertainty cited as the number one reason.
Consumer Spending is slowing. That means the recession is near. Fund managers are universally moving into defensive and value stocks. So, should you.
Car Sales fell at the fastest rate in a decade, as US Manufacturing Output drives off a cliff. There is also a subprime crisis going on here, if you haven’t heard.
Amazon (AMZN) told New York City to drop dead as it canceled plans to build a second headquarters in New York, thanks to opposition from a local but vociferous minority. Some 25,000 jobs went down the toilet. More likely, they don’t want to expand their business right ahead of a recession. Jeff Bezos can see into the future infinitely better than you and I can.
You have to take Jeff’s thoughts seriously. Amazon added more square feet in the US than any other company last year, bringing the total to 288 million square feet. That is a staggering 28 World Trade Centers. Do they know something we don’t?
In the meantime, American Personal Debt is soaring, hitting a new apex at $13.5 trillion. Some 9.1% of this is already delinquent, and credit cards are being canceled at an alarming pace.
Business Confidence hit a two-year low, and Consumer Confidence hits an eight-year low. It seems a government shutdown and a stock market crash are not good for business. Now that stocks are up, will confidence return?
Inflation hit a one year low, with the Consumer Price Index coming in at only 1.9%. It means the next recession will bring deflation.
The Mad Hedge Market Timing Index is entering danger territory with a reading of 70 for the first time in five months. Better start taking profits on those aggressive leveraged longs you bought in early January. Your best performers are about to take a big hit. The market has since sold off 500 points proving its value.
There wasn’t much to do in the market this week, given that I am trying to wind my portfolio down to 100% cash as the market peaks.
February has so far come in at a hot +3.31%. My 2019 year to date return leveled out at +12.79%, boosting my trailing one-year return back up to +34.12%.
My nine-year return clawed its way up to +312.93%, another new high. The average annualized return ratcheted up to +34.12%.
I am now 90% in cash and 10% long gold (GLD), a perfect downside hedge in a “RISK OFF”. We have managed to catch every major market trend this year, loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD).
Government data is finally starting to trickle out now that the government shutdown is over.
On Monday, February 18 was Presidents Day and the markets were closed.
On Tuesday, February 19, 10:00 AM EST, the Homebuilders Index is released.
On Wednesday, February 20 at 2:00 AM EST, Minutes from the January FOMC meeting are released. How dovish are they really?
Thursday, February 21 at 8:30 AM EST, we get Weekly Jobless Claims. At 10:00 AM, Existing Home Sales are out.
On Friday, February 22, there will be a half a dozen public Fed speakers suggesting that interest rates will go up, down, or sideways. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be digging out from the massive series of snowstorms that hit me at my Lake Tahoe Estate. Snowfall this season has so far hit 50 feet and is challenging the 70-foot record from three years ago.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 15, 2019
Fiat Lux
Featured Trade:
(THE CONTINUING DEATH OF RETAIL),
(AMZN), (WMT), (M), (JWN),
(TESTIMONIAL)
Global Market Comments
February 14, 2019
Fiat Lux
Featured Trade:
(WHY I’M AVOIDING PFIZER LIKE THE PLAGUE)
(PFE), (MRK), (MVS),
(THE LIQUIDITY CRISIS COMING TO A MARKET NEAR YOU),
(TLT), (TBT), (MUB), (LQD),
(TESTIMONIAL)
You would think that the company that makes Viagra would be booming with all these baby boomers around.
It’s not.
As we come into the tag ends of the Q1 earnings season, it is hard to ignore the pitiful performance put on by Pfizer (PFE). Its fourth-quarter earnings were totally overshadowed by its disappointing outlook and underperforming shares.
The 168-year-old drug maker can expect sustainable growth in some of its product franchises, such as prostate cancer drug Xtandi, blood clot medication Eliquis, metastatic breast cancer drug Ibrance, and arthritis medicine Xeljanz.
However, generic competitors against Pfizer mainstays like Pristiq, an anti-depressant drug, and Viagra are threatening to trigger a massive decline in the former’s sales. With generic companies hot on its heels, Pfizer faces incredible pressure in terms of pricing and lower gross margins.
Expiring patents known as the loss of exclusivities (LOE) are also projected to contribute to their red ink by approximately $2.6 billion. In particular, Pfizer is expected to lose exclusive rights to its blockbuster drugs Lyrica in June 2019 and Chantix in the next few years. To date, their LOEs already cost Pfizer $2.1 billion in sales in 2017 and an additional $1.8 billion in 2018.
Pfizer is doing better than its competitors. In the past 12 months, Pfizer EPS stood at $1.86, which showed a 47.16% decline year-over-year. By comparison, major competitor Merck & Co., Inc. (MRK) EPS was at $0.69, suffering from a 281.58% decline year-over-year while Novartis (NVS) faced a 38.8% decline with an EPS of $0.52.
Pfizer’s recorded annual revenues of $53.4 billion, which puts it ahead of its major competitors Novartis ($51 billion) and Merck & Co., Inc. ($41.7 billion).
Bleak 2019 but promising 2022. That’s a long time to hold your breath.
As far as 2019 is concerned, the pharma heavyweight does not present any growth potential in both their top and bottom lines, with their midpoints offering slightly lower revenue and earnings compared with that in 2018.
Pfizer is projected to deliver a flat year-over-year performance regardless of the major headwinds primarily due to the strong sales of its remaining products. The company continues to remain confident as it awaits roughly 25 to 30 drug approvals up to year 2022.
Among these pending potential blockbuster products, 15 are expected to be approved by 2020. In addition, Xtandi, Ibrance, and Xeljanz/XR are slated for line extensions. With regard to long-term growth, Pfizer is well positioned to make headway on innovative medical breakthroughs in the next five years or so.
Pfizer is anticipated to reap the rewards of its $93 million investment in NextCure, which is a biopharmaceutical company focused on discovering and developing next-generation immuno-oncology-based drugs.
Pfizer has also been implementing various cost-cutting and productivity measures since 2017 in an effort to offset the effects of rising expenses and push for bottom line growth (read firing people).
Their efforts include investing in new market creation strategies as well as seizing opportunities to streamline their operations and cutting down organizational layers to eliminate (or at least reduce) bureaucracy.
These initiatives are anticipated to reach completion by 2019 and are expected to bring in approximately $1.4 billion in savings by 2020.
Given the challenges ahead, Pfizer seems to offer a promising future as seen in their efforts to curb their losses. While it remains to be seen if the company can come up with any notable acquisition to jumpstart their promised progress as early as 2020, Pfizer’s current products along with its pipeline candidates appear to be capable of delivering solid growth in succeeding years. Meanwhile, Pfizer is intent on providing a growing dividend to its shareholders.
In a nutshell, Pfizer’s current status is not ideal for investors interested in immediate profits. However, those who are patient enough to wait for a few more years could be in line to receive a dividend that could yield 3.5%.
Leave this one to the index funds and ETFs. There are better fish to fry in the space.
I had the great pleasure of having breakfast the other morning with my longtime friend, Mohamed El-Erian, former the co-CEO of the bond giant, PIMCO.
Mohamed argues that there has been a major loss of liquidity in the financial markets in recent decades that will eventually come home to haunt us all, and sooner than we think.
The result will be a structural increase in market volatility and wild gyrations in the prices of financial assets that will become commonplace.
We have already seen a few of these. Look no further than superstar NVIDIA (NVDA), which announced earnings in line with expectations in November but nevertheless responded with a 50% decline. It was a classic “Buy the rumor, sell the news” type move.
The worst is yet to come.
It is a problem that has been evolving for years.
When I started on Wall Street during the early 1980s, the model was very simple. You had a few big brokers servicing millions of small individual customers at fixed, non-negotiable commissions.
The big houses made so much money they could spend some dough facilitating counter cycle customers trades. This means they would step up to bid in falling markets and make offers in rising ones.
In any case, volatility was so low then that this never cost all that much, except on those rare occasions, such as the 1987 crash (we at Morgan Stanley lost $75 million in a day! Ouch!).
Competitive, meaning falling, commissions rates wiped out this business model. There were no longer profits to subsidize losses on the trading side, so the large firms quit risking their capital to help out customers altogether.
Now you have a larger number of brokers selling to a greatly shrunken number of end buyers, as financial assets in the US have become concentrated at the top.
Assets have also become institutionalized as they are piled into big hedge funds and a handful of very large index mutual funds and ETFs. These assets are managed by people who are also much smarter too.
The small individual investor on which the industry was originally built has almost become an extinct species.
There is no more “dumb money” left in the market, at least until this month.
Now those placing large orders were at the complete mercy of the market, often with egregious results.
Enter volatility. Lot’s of it.
What is particularly disturbing is that the disappearance of liquidity is coming now, just as the 35-year bull market in bonds is ending.
An entire generation of bond fund managers, almost two generations worth, have only seen prices rise, save for the occasional hickey that never lasted for more than a few months. They have no idea how to manage risk on the downside whatsoever.
I am willing to bet money that you or your clients have at least some, if not a lot of your money tied up in precisely these kinds of funds. All I can say is, “Watch out below.”
When the flash fire hits the movie theater, you are unlikely to be the one guy who gets out alive.
You hear a lot about when the Federal Reserve finally gets around to raising interest rates in earnest this year. They say it will make no difference as rates are coming off such a low base.
You know what? It may make a difference, maybe a big one.
This is because it will signify a major trend change, the first one for fixed income in more than three decades. Almost all of these guys really understand are trends and the next one will have a big fat “SELL” pasted on it for the fixed income world.
El-Erian has one of the best 90,000-foot views out there. A US citizen with an Egyptian father, he started out life at the old Salomon Smith Barney in London and went on to spend 15 years at the International Monetary Fund.
He joined PIMCO in 1999 and then moved on to manage the Harvard endowment fund.
He regularly makes the list of the world’s top thinkers. A lightweight Mohamed is not.
His final piece of advice? Engage in “constructive paranoia” and structure your portfolio to take advantage of these changes, rather than fall victim to them.
See the Long Term “Head and Shoulders” Top in the (TLT)?
"We may be moving from cautiousness to optimism, but euphoria is down the road," said Bob Doll of Nuveen Asset Management.
Global Market Comments
February 13, 2019
Fiat Lux
Featured Trade:
(BIDDING MORE FOR THE STARS),
(SPY), (INDU), (NVDA)
(NOW THE FAT LADY IS REALLY SINGING FOR THE BOND MARKET),
(TLT), (TBT)
Global Market Comments
February 12, 2019
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, APRIL 20 OPTIONS EXPIRATION), (TLT),
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW),
(BRING BACK THE UPTICK RULE!),
Global Market Comments
February 11, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or DON’T STAND NEXT TO THE DUMMY),
(AAPL), (MSFT), (TSLA), (VIX), (TLT), (TBT), (FXI)
