?If you want to learn the art of medicine, it is best to follow an army,? said Hippocrates, the ancient Greek physician.
Global Market Comments
November 3, 2015
Fiat Lux
Featured Trade:
(NOVEMBER 4 GLOBAL STRATEGY WEBINAR),
(WHAT COULD DESTROY THIS MARKET?),
(SPY), (TLT), (FXE), (USO)
SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
CurrencyShares Euro ETF (FXE)
United States Oil (USO)
The Teflon market is back.
Good news is good news. Bad news is good news. What could be better than that?
However, there are a few issues out there lurking on the horizon that could pee on everyone?s parade. Let me call out the roster for you.
1) Economic Data Continues to Weaken - After a nice data run into September, the numbers have suddenly turned ugly, taking Q3, 2015 GDP forecasts from 3.9% down to 1.5%.
Sluggish corporate earnings in 2015 should rebound in 2016, as the European and Chinese drag dissipates. They should improve going into Q4 and Q1, 2016. But if they don?t, watch out below.
2) The Fed Raises Interest Rates in December - This has been the world?s greatest guessing game for the past two years. With China stabilizing, and the US stock market on the mend, the path is open for our central bank to raise interest rates for the first time in nine years. Janet Yellen lives in fear of the American economy going into the next recession with interest rates at zero! That would leave them powerless to do anything.
We could get a 4% mini correction in stocks off the back of a December surprise, especially if the stock indexes go into the announcement from a high level. But, I doubt we?ll see more than that.
3) Another Geopolitical Crisis - You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about ISIS, Al Qaida, Afghanistan, Iraq, Russia, the Ukraine, or the Chinese expansion in the South China Sea.
Everyone of these has been a buying opportunity, and they will continue to be so. At the end of the day, terrorists don?t impact American corporate earnings.
4) A Recovery in Oil - Texas Tea (USO) is clearly trying to bottom here, now that we are at the nadir of the supply/demand balance. If it recovers too fast, and rockets back to the $70 level, we lose some of our energy tax windfall.
5) The End of US QE - The Fed?s $3.5 billion quantitative easing policy ended a year ago, and since then the return on US stocks has been absolutely zero, save for the odd special situation (Amazon, Netflix, etc.). Anyone who said QE didn?t work obviously doesn?t own stocks. Still to be established is whether stocks can rise without QE.
6) A New War - If the US gets dragged into a new ground war, in Syria or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.
However, it is unlikely that a pacifist President Obama would let things run out of control in the Middle East, nor would a future President Hillary. Better to leave it to the Russians. After all, their move into Afghanistan in 1979 worked out so well for them. It caused the demise of the old Soviet Union.
7) The European Refugee Crisis Worsens - If the numbers get too big, there are supposed to be 4 million refugees en route, it would demolish Europe?s (FXE) economic recovery.
Unfortunately, the enormous influx of Islamic migrants into Europe has already led to the resurgence of Nazi parties in Sweden, Denmark, and the Netherlands. Some are showing up with their 13 year old brides.
Good for Germany for doing the heavy lifting here. After all, they did happen to have a spare empty country at hand, the old East Germany. With a collapsing birthrate, it was the smartest thing they could have done to boost their long-term economic growth.
8) Another Emerging Market Crash - If the greenback resumes its long-term rise, as I expect, then another emerging market debt crisis is in the cards. With US rates rising and European rates falling, how could it go any other way? This is because too many emerging corporations have borrowed in dollars, some $2 trillion worth.
When their local currencies collapse, it has the effect of doubling the principal balance of their loans, and doubling the monthly payments, immediately. This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.
9) China Goes Into Recession - So far, the Middle Kingdom has resorted to cutting interest rates, easing bank reserve requirements, and selling big chunks of its US Treasury and Eurobond holdings to reinvigorate its economy. What if it doesn?t work? Look for a new China scare to hit US stocks, and don your hard hat.
10) Interest Rates Start to Rise - I have already chronicled the sudden shortages in truck drivers, airline pilots, and minimum wage workers at Amazon fulfillment centers. What if wages really start to take off, and the trend towards 40 years of falling real wages reverses? That would bring substantial interest rate hikes, a rocketing dollar, true inflation, and eventually, a recession. 2017 anyone?
11) Donald Trump is Elected President - I doubt the Donald has seriously thought out his economic policies, and most of what he has proposed is unenforceable under current US law. But he has established that he has the money and the media strategy to win the Republican nomination.
What if Hillary then develops a major health problem and has to drop out of the race? The implications of a Trump presidency are hard to fathom, but it certainly would NOT be good for the stock market. This is an outlier, but is not impossible.
I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.
Down the Ambien, and full speed ahead!
A Threat to Your Portfolio?
Global Market Comments
November 2, 2015
Fiat Lux
Featured Trade:
(WHY TECHNICAL ANALYSIS DOESN?T WORK)
(SPY), (QQQ), (IWM), (VIX),
(IBB), (HCA), (PANW), (SCTY), (TSLA),
(BIDDING FOR THE STARS), (SPX), (INDU),
(TESTIMONIAL)
SPDR S&P 500 ETF (SPY)
PowerShares QQQ Trust, Series 1 (QQQ)
iShares Russell 2000 (IWM)
VOLATILITY S&P 500 (^VIX)
iShares Nasdaq Biotechnology (IBB)
HCA Holdings, Inc. (HCA)
Palo Alto Networks, Inc. (PANW)
SolarCity Corporation (SCTY)
Dow Jones Industrial Average (^DJI)
S&P 500 Index (SPX)
Dow Jones Industrial Average (^DJI)
A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.
Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, whom shall remain nameless. Suffice to say, she is now married to a tech titan and has a sports stadium named after her.
Obviously, I didn?t work hard enough.
The bids soared to $15,000, $16,000, $17,000.
After all, it was for a good cause. But when it hit $17,750, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $17,000.? I said ?no thanks.? $16,500, $16,000, $16,250?
I passed.
The altitude of the stock market right now reminds me of that evening.
If you rode the S&P 500 (SPX) from 700 to 2,100 and the Dow Average (INDU) from 7,000 to 17,750, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it did then?
I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.
But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.? If you followed my Trade Alerts this year and are up now 38%, you don?t have to chase every trade.
At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.
Time to Mend the Nets
?Short term volatility creates long term opportunity, said Rupal Bhansali, of the Ariel International Fund.
Global Market Comments
October 30, 2015
Fiat Lux
Featured Trade:
(NOVEMBER 4 GLOBAL STRATEGY WEBINAR),
(BATTERY BREAKTROUGH PROMISES BIG DIVIDENDS),
(TSLA),
(BECOME MY FACEBOOK FRIEND)
Tesla Motors, Inc. (TSLA)
Global Market Comments
October 29, 2015
Fiat Lux
Featured Trade:
(CELGENE WILL MAKE A COMEBACK),
(CELG), (XLV), (IBB),
(REVISITING CHENIERE ENERGY),
(LNG), (USO), (UNG)
(TESTIMONIAL)
Celgene Corporation (CELG)
Health Care Select Sector SPDR ETF (XLV)
Health Care Select Sector SPDR ETF (XLV)
Cheniere Energy, Inc. (LNG)
United States Oil Fund LP (USO)
United States Natural Gas Fund, LP (UNG)
It was known as the ?Tweet that sank Wall Street.?
When presidential candidate Hillary Clinton attacked the drug industry last summer, the entire pharmaceutical and health care industries were taken out to the woodshed and beaten like the proverbial red headed stepchild (my apologies in advance to red heads).
One of the principal victims was cancer drug maker Celgene (CELG), which dropped some 24.6% from top to bottom.
Never mind that Clinton is unlikely to get what she wants, even if she wins the election.
For that, you need a congress in your pocket, a probability that is at least 5-9 years away.
That is, unless Donald Trump continues his campaign for the Republican nomination.
However, in this nervous, twitchy, gun shy trading environment, it is shoot first and ask questions latter. So Celgene shares sank, whether it was warranted or not.
Celgene is really all about one drug, Revlimid, a blood cancer treatment that accounts for 75% of its sales. Last year, the company sold $7.6 billion worth of this complex molecule.
To wean itself off of its overdependence on a single drug it has embarked on a number of aggressive initiatives.
Since the spring of 2012, it has increased the use of its Abrazane drug to treat late stage pancreatic cancer, the disease that killed Steve Jobs. It has won regulatory approval for the psoriasis drug Otezla.
It has also pursued the mergers and acquisitions road to growth, picking up some two-dozen small drug makers in recent years. The $7.2 billion purchase of Receptos was a big one, which manufactures Ozanimod, a drug used to treat ulcerative colitis and multiple sclerosis.
Celgene also picked up Juno Therapeutics for $1 billion a few months ago, a maker of innovative cellular immunotherapies.
If this ambitious strategy works, Celgene?s net earnings should continue to grow at a 25% annual rate for the next five years. That means the shares should triple by 2020.
This is why the company?s shares command a lofty multiple of 18 times 2016 earnings, the higher end of the range for this industry.
So the next time Hillary opens her mouth, use the dip in (CELG) shares to load the boat. It would also be helpful if stock investors shift their focus from value back to growth.
Looks Like a ?BUY? To Me
Loose Lips Sink Ships
I am constantly asked if there are any ways investors can take advantage of the current collapse in natural gas prices.
You don?t want to touch the gas producing companies, like Chesapeake (CHK) and Devon (DVN), because prices for natural gas are probably going to stay down for years.
Good firms that benefit from the increased volume of gas pumped are few and far between. Unless you are a large consumer of this despised molecule, such as an electric power company or a petrochemical plant, it is tough to find a profitable niche.
However, there is one company that delivers a narrow rifle shot that will do extremely well in coming years, and that is Cheniere Energy (LNG).
I first started following (LNG) two decades ago when I was still wildcatting for CH4 in the Texas Barnet Shale.
Back when natural gas was trading at a lofty $5/MBTU, Qatar invested $50 billion in developing its own massive gas resources.
The plan was to liquefy the gas at -256 degrees Fahrenheit in the Middle East, ship it to the US in a fleet of specialized LNG carriers, and have Cheniere convert it back into gas at its Sabine River plant for distribution to an energy hungry US market through the Creole Trail pipeline.
It all looked like a great plan, and (LNG) shares traded up to $45.
Then ?fracking? technology came along and blew up the entire model. The discovery of a new 100-year supply of gas under our feet caused gas prices to crash from a post Amaranth peak of $17/MMBTU down to $2/MMBTU.
Any plans to import LNG from the other side of the world were rendered utterly worthless. Qatar ended up selling its gas to Europe insteadto help offset that continent's over reliance on imports from Russia.
Chenier?s billion-dollar investment in a gasification plant was now worth only so much scrap metal. (LNG) shares plumbed to low single digits as the firm flirted with bankruptcy.
Enter China.
The Middle Kingdom?s voracious demand for energy in this recovery has caused the price of oil (USO) to soar from a 2008 low of $30 to $112.
Despite accounting for an overwhelming share of the world?s new energy purchases, Chinese cities are suffering from brown outs due to power shortages.
This is why China is resisting immense American pressure to quit buying Texas tea from Iran.
Enter the arbitrage. While oil has been plummeting, gas has been falling even more. Gas is now selling at 25% of the cost of oil on an adjusted BTU basis.
Another way of saying this is that you can buy oil for $12 a barrel instead of $48. It only takes a second with an abacus to understand the appeal of such a disparity.
Gas also has the additional benefits in that it is much cleaner burning than crude, lacks the sulfur and nitrogen dioxides, and produces half the carbon dioxide. That?s a big deal in Beijing where the air is so thick you can cut it with a knife on a bad day.
It is also important to know that many states, like California have decided to use natural gas as a bridge fuel until more economic and scalable alternatives are developed.
Enter the long-term contracts. During the 1960?s and 1970?s Japan entered into huge long term contracts to buy LNG from Australia and Indonesia to feed their own economic miracle of the day.
Because it is very expensive and hard to get, offshore supplies were tapped, the price was set at $16/MBTU. Those contracts are now expiring.
Do you think they?ll renew at the old price, or go to Cheniere for the $4 stuff? Gee, let me think about that one for a bit.
Enter Fukushima. The nuclear meltdown on March, 2011 prompted Japan to shut down 49 of 54 nuclear power plants that accounted for 25% of the country?s electric power generation. The brownouts that followed forced a sweltering summer on millions as the government urged consumers to shut off air conditioners to save juice.
Power companies there have been scrambling to obtain conventional energy supplies, and cheap gas supplies from the US would meet this demand nicely.
The trigger.
Cheniere obtained US government permission to export 2.2 billion cubic feet a day for 20 years. That would require it to convert the existing gasification plant to a liquefaction plant, something that can be done with some expensive re-engineering. A second plant is in the approval process.
It has already found several large international buyers to take delivery of the new end product. All that was missing was the money to finish the plant.
My hedge fund buddies have been accumulating this stock when it bottomed at $3, expecting an angel investor to appear. But it was one of those ?someday, it might happen? kind of stories better left to long-term players.
Then Blackstone jumped in with a beefy $2 billion investment in Cheniere. That will enable them to obtain an additional $3 billion in debt financing needed to finish the first of two export facilities. They are now expected to come online in 2016.
How does Cheniere stack up as an investment? Frankly, it is kind of scary. The market cap is only $11.3 billion, it has no earnings yet, and it pays no dividend. When the current spate of deals are done, it will have $5 billion in debt.
I first got followers into (LNG) at $5. We then had a great run all the way up to $85, and we took profits. In the current melt down, it has backed off all the way down to $45, a 47% hickey.
And these facilities are dangerous to operate. One blew up in Texas in 1937 and killed 300 schoolchildren.
As a result, local permits for these are very hard to come by. Anyone who thinks Texas is an unregulated paradise should try drilling for natural gas.
But as you can see a whole host of geopolitical, technology and economic strands reach a nexus in this one company, all of which are extremely positive for the share price.
If the story comes true, as Blackstone hopes, then there could be a double or triple in the shares for the patient. To learn more about Cheniere Energy, please go to their website: http://www.cheniere.com.
