?There are just not enough human buyers in the market,? lamented Eddie Perkin, chief investment officer at Eaton Vance.
Global Market Comments
July 19, 2016
Fiat Lux
Featured Trade:
(JULY 20 GLOBAL STRATEGY WEBINAR),
(WHY WATER IS ONE OF 2016?S BEST SECTORS),
(CGW), (PHO), (FIW), (VEOEY), (TTEK), (PNR),
(WHY ACTIVISTS HAVE THE UPPER HAND),
(JCP), (NFLX), (HLF), (AAPL),
(TESTIMONIAL)
CGW Guggenheim S&P Global Water ETF
PHO PowerShares Water Resources ETF
FIW First Trust ISE Water ETF
VEOEY Veolia Environnement S.A.
TTEK Tetra Tech, Inc.
PNR Pentair plc
JCP J. C. Penney Company, Inc.
NFLX Netflix, Inc.
HLF Herbalife Ltd.
AAPL Apple Inc.
I bet you didn?t know that water infrastructure plays have been one of the top performing stock sectors in 2016.
In fact, shares of this little known industry are up more than 25% since the February market bottom.
If you think that energy is scarce, it will pale in comparison to the next water crisis. So investment in fresh water infrastructure is going to be a great recurring long-term investment theme.
One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.
Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. Global warming is freeing up some of this, but not fast enough.
In places like China, with a quarter of the world's population, up to 90% of the fresh water is already polluted, some irretrievably so, with heavy metals.
About 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.
Aquifers in the US, which took nature millennia to create, are approaching exhaustion.
It has become so extreme in California, that subsidence has destroyed hundreds of buildings. The Golden States Central Valley is now about 10 feet lower than it was during the 19th century.
While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don't have any, and will easily double the end cost of water to consumers.
While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in concentrated form.
The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent.
It says a lot, that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds and were not allowed to talk!
At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW). You can get it for a bargain now, as it has just fallen by more than 10% since the stock market melt down began.
You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR).
Who has the world's greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.
There is a potential happy ending to this story. If solar energy cost improvements continue their Moore?s law like descent, energy will effectively become free by the 2030?s.
If you think this is pie-in-the-sky stuff, know this. On peak days alternatives are now accounting for 56% of California power grid, largely through solar.
That will dramatically drop the cost of desalination. Indeed, major efforts along these lines are already underway by utilities in the Middle East.
San Diego?s Poseidon project only recently came on line, and is producing 50 million gallons of fresh water a day. The goal is for the Carlsbad facility to obtain 8% of the county?s water from the ocean by 2020.
And the last time I checked, we had plenty of seawater.
The US is Still the Saudi Arabia of Fresh Water
Having been in this market for yonks, ages, and even a coon?s age, I have seen trading strategies come and go.
First, there was the nifty fifty during the 1960?s. Junk bonds had their day in the sun. Then portfolio insurance was all the rage.
Oops!
While the dollar was weak, international diversification was the flavor of the day. After foreign stocks turned bitter, the IPO mania and the Dotcom bubble of the nineties followed.
Macro trading dominated the new Millennium until the high frequency traders took over.
What is the cutting edge management strategy today?
According to my friend, Anthony Scaramucci, of Skybridge Capital, activist shareholder trading now has the unfair advantage.
Anthony, known as the ?Mooch? to his friends, is so convinced of the merit of this bold, in-your-face approach that he has devoted nearly 40% of his assets to this aggressive posture.
That is no accident.
Have you ever heard the term ?unintended consequences?? Scaramucci argues that The Financial Stability Act of 2010, otherwise known as Dodd-Frank produced that effect with a turbocharger.
The Act brought in a raft of new shareholder rights intended to help Mom & Pop. But activist investors have, so far, been the prime beneficiaries of the reform, using the new regulations to shake down companies for quick profits.
Historic low interest rates are allowing them to leverage up at minimal cost, increasing their firepower.
These include known sharks (once spurned as ?green mailers?) like my former neighbor, Carl Icahn, and his younger, more agile competitor, Bill Ackman.
They can simply buy a small number of shares in a target company and demand a management change, share buy backs, the spinning off of assets, several seats on the board, and even making allegations of criminal activity, which are often unfounded.
A message from Icahn on the voicemail is not something management is eager to hear.
He even shook down Apple (AAPL) last year, with great success, harvesting a near double on the trade.
This is why names like Herbalife (HLF), Netflix (NFLX), and JC Penny?s (JCP) are constantly bombarding the airwaves.
The net result of this is that savvy activist shareholders have effectively replaced the traditional ?buy and hold? strategy as a way to add alpha, or outperformance.
This has enabled activist oriented hedge funds to beat the pants off of traditional macro hedge funds because many historical cross asset relationships they follow have broken down.
Tell me about it!
Suddenly, the world no longer makes sense to them and has apparently gone mad, at the investors? expense. Long/short equity managers, which comprise 43% of the funds out there, are also underperforming for the sixth consecutive year.
The activist managers themselves justify their often harsh actions by arguing that individual shareholders can ride to riches on their coattails. Shaking up management can result in better-run companies, even if it is at the point of a gun.
Activism accelerates evolution, breaks up clubby boards of insiders, and enhances the bottom line. Corporations can be forced to retool and restructure.
How does the individual investor get involved in the new wave of activist investors? The short answer is that they don?t. There are few, if any, such exchange traded funds (ETFs) in existence.
Doing the quantitative screens to generate short lists of potential activist targets, and then listening to the jungle telegraph regarding who is coming into play, are well beyond the resources of your average Joe.
You can try to give your money to the best activist managers. But they are either closed to new investors, or have very high minimum initial investments, often in the $1-$10 million range.
If you are lucky enough to get your dosh in, you will find the talent very expensive. Activist funds are one of the last redoubts of the old 2%/20% management fee and performance bonus structure. And ?hockey stick? bonus schedules are not unheard of.
When I ran my old hedge fund, we made 40% a year like clockwork. I took the first 10%, the limited partners the remaining 30% and they were thrilled to get it.
And you wonder why the small guys feel the market is rigged.
The activist trend won?t last forever. Interest rates will inevitably rise, making the strategy expensive to finance. If the stock market keeps rising, as I expect, then cheap targets will become as scarce as hen?s teeth.
Eventually, gobs of money will pour into the strategy, compressing returns as the Johnny-come-latelys pile in. In the end, trading around activist shareholders will get tossed into the dustbin of history, along with all the other investment fads.
Checking in With the ?Mooch?
I am an independent financial advisor in Atlanta, GA.? We have spoken via email and text a few times.? Historically, you have always been responsive, even to my complaints, and I have always appreciated that.
After canceling my Service a few months ago, I have decided to come back.? In markets like yesterday your insights are just too valuable not to have.? So I am officially again a paid subscriber.
I still think your macro timing is better than your stock picking, but I hope you prove me wrong.? Regardless, you?re still the man.? You should be in the Dos Equis commercials as "the second most interesting man in the world".
Thank you for sharing your insights with the world for the bargain price of $3000 per year.
Brody
Atlanta, Georgia
?If someone called me tomorrow and said that ten year US Treasury bonds were at 0.75%, I would not be surprised,? said Larry Fink, the founder of BlackRock, the world?s largest asset manager.
Global Market Comments
July 18, 2016
Fiat Lux
Featured Trade:
(WHAT?S ON YOUR PLATE FOR THIS WEEK?),
(SPY), (TLT), (FXY), (YCS), (JNK), (GLD),
(TEN STOCKS TO BUY ON THE NEXT DIP)
SPY SPDR S&P 500 ETF
TLT iShares 20+ Year Treasury Bond
FXY CurrencyShares Japanese Yen ETF
YCS ProShares UltraShort Yen
JNK SPDR Barclays High Yield Bond ETF
GLD SPDR Gold Shares
Finally, finally, the stock markets broke out to an all time high last week.
After trying, and failing, for two years, traders finally got the print they were begging for, with the S&P 500 closing above 2015.
The world has too many people and not enough bonds.
That is the undeniable conclusion of the recent market action.
A surplus of humans means that wages can never rise fast enough to bring on true inflation. Hyper accelerating technology is exacerbating the trend.
So tidal waves of cash are flowing into disinflationary plays, primarily in fixed income, of which there never seem to be enough.
The global ultra-low interest rates this has brought us suddenly made stocks look cheap. A 2.5% (SPY) dividend yield, versus 2.27% for a 30-year US Treasury Bond?
REALLY?
New all time highs thus became a done deal.
Giving the bulls further confidence was the abundance of cross asset class confirmations.
As I expected, the Japanese yen (FXY), (YCS) tickled ?100 briefly, and then plunged 4.1%. Ten year Treasury bonds (TLT) also took a six-point respite. Junk bonds (JNK) held on to heady gains.
That great inflationary play, gold (GLD), took a much-needed breather.
But is this really the breakout that the pundits have been baying about? Or is it just the umpteenth head fake?
After all, trading for 2016 has been characterized by an endless series of false breakdowns, followed by false breakouts, relentlessly punishing traders and investors alike.
Blame the high frequency traders that received a huge fresh infusion of new capital at the beginning of this year. That gave them the juice to trigger a big round of stop losses on either side of recent trading ranges, every time.
I?m a firm believer that markets will do whatever they have to do to screw the most people, so I vote for the head fake.
The coming week may give us some clues.
On Monday at 10:00 AM EST, the National Association of Home Builders New Housing Starts Index should bring us a continued reacceleration, thanks to the incredibly low interest rates brought to us by Brexit. Expect a report of 61 or higher.
We get a follow up on Tuesday at 8:30 AM EST with New Housing Starts, which should best the 1,170,000 consensus.
The trifecta of positive housing reports will get wrapped up by an explosive increase in Mortgage Banker Association Mortgage Applications, with new refinancings as a major driver.
Needless to say, all of this upbeat housing data has a big multiplier effect on the rest of the economy.
The never to be missed Weekly Jobless Claims will be reported at 8:30 AM EST. We have been hovering at a near four-decade low of 254,000. However, you might expect a seasonal summer economic slowdown to bump those numbers back up a bit.
Friday brings us nothing exciting, except for the Baker-Hughes Rig Count at 1:00 PM EST, which has been trending up of late, putting pressure on oil prices.
If you were lulled into a false sense of complacency, expecting tedious summer doldrums to continue, and missed the move, you are not alone.
That would include me.
Virtually every hedge fund I know was caught either in cash, or net short. It is another nail in the hedge fund industry.
Personally, I wasn?t expecting the new highs in stocks until August at the earliest, and the end of the year at the latest.
Which means that we may get another chance to buy this market. The breakout certainly isn?t based on any earnings revival that usually accompanies such a move.
So if we do get the 5% correction in stocks I am expecting in August, it will be time again to close your eyes, hold your breath, and ?BUY?.
I?ve Never Been One to Blow My Own Horn
If we get another 5% correction in stocks in the coming weeks, it is best to have your ?BUY? list on the table and ready to go. That way you don?t have to waste time looking up ticker symbols.
I?ll give you mine.
Let me get this right. Stocks screamed upward last week because:
1) The Federal Reserve isn?t going to raise interest rates anymore.
2) The price of oil is holding steady in the high $40s, less than half the levels two- year ago.
3) Commodities are still holding close to multi-year lows.
4) The US dollar finally took a rest.
5) Corporations are continuing to buy back their own stock like there is no tomorrow.
6) Investors are yanking money from abroad and pouring it into the US, because it is the only place they can obtain a positive return, especially in stocks.
7) The FBI gave presidential aspirant Hillary Clinton a boost when it closed its email investigation.
May I point out the blatantly obvious right here?
These are all reasons for the 90% of US companies that consume energy to increase earnings and boost their share prices.
Only the 10% that derive revenues from ripping oil and commodities out of the ground should get hurt here.
Of course, the market doesn?t know that. It was anything but rational last week. There was only one direction, and that was UP.
The Dow and the S&P 500 are now, once again, posting positive numbers for 2016.
What is even more stunning is that these increases in prices are occurring in the face of US macro economic numbers that are mediocre, at best.
Only housing, which accounts for about one third of the US economy, has been on fire. Prices are still rising everywhere.
Even more incredible is that the stock market reached new highs in the face of a geopolitical backdrop that was nothing less than horrendous, with a major terrorist attack in Nice, France, followed by a coup d?etat in NATO ally Turkey.
If nothing else, corporate buybacks, sticking close to record levels, should reaccelerate here, which could reach $1 trillion in 2016. Some 4.7% of the outstanding share float of corporations is disappearing every year!
I am, therefore, going to give you a list of MY TEN FAVORITE STOCKS to buy during the next dip, highlighting the sectors that will lead us into a pre/post election yearend rally.
The themes here are homebuilders, consumer discretionary, solar, biotech, big technology, and international. And I?ll give you some mouth watering yield plays among the REIT?s and master limited partnerships.
?Even the entire interest sensitive sector is on the table as a value play.
Watch out, because when I sense that the market has opened a window, the Trade Alerts are going to be coming hot and heavy.
You have been forewarned!
Read ?em and weep with joy!
10 Stocks to Buy at the Bottom
Lennar Homes (LEN) $48.65
Home Depot (HD) $134.78
Facebook (FB) $116..86
IShares NASDAQ Biotech Index (IBB) $272.53
Apple (AAPL) $98.78
First Solar (FSLR) $47.73
Gilead Sciences (GILD) $86.67
Alerian MLP ETF (AMLP) $12.88 with a 6.84% yield
Simon Properties Group REIT (SPG) $222.94 with a 2.87% yield
Wisdom Tree Japan Hedged Equity (DXJ) $41.37
Global Market Comments
July 15, 2016
Fiat Lux
Featured Trade:
(JULY 20 GLOBAL STRATEGY WEBINAR),
(WHY STOCKS COULD RISE 50% HIGHER),
(SPY), (QQQ), (IWM),
(THOUGHTS ABOARD THE QUEEN MARY, PART III)
SPY SPDR S&P 500 ETF Trust
QQQ PowerShares QQQ Trust, Series 1
IWM - iShares Russell 2000 ETF
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