Global Market Comments
April 2, 2018
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOODBYE THE QUARTER FROM HELL),
(SPY), (INTC), (AMZN), (CSCO),
(MONDAY, JUNE 11, FORT WORTH, TEXAS, GLOBAL STRATEGY LUNCHEON),
(THE HARD/SOFT DATA CONUNDRUM)
Well, that was some quarter! Call it the quarter from hell.
For as long as most traders and investors can remember, they are losing money so far this year. And they promised us such a rose garden!
The S&P 500 made a valiant, and so far successful effort to hold at the 200-day moving average at $256. We saw an unprecedented four consecutive days of 2% moves.
Yet, with all that tearing of hair, banging of heads against walls, and ulcers multiplying like rabbits, the (SPY) dropped only 5 points since January, off 1.8%, a mere pittance. It's been a whole lot of work and stress for nothing.
So far, the (SPY) has been bracketed by the 50-day moving average on the upside at $272, and the 200-day moving average on the downside. It could continue like this for six more months, forming a very long triangle formation with a year-end upside breakout.
Is the market going to sleep pending the outcome of the November midterm congressional elections?
But here's the catch. We now live in the world of false breakouts and breakdowns, thanks to algorithms. It happened twice in February and March to the upside.
What follows false upside breakouts? How about false downside breakdowns, which may be on the menu for us in April.
My bet is that we'll see one of these soon, taking the (SPY) down as low as $246. Then we'll rocket back up to the middle of the range in another one of those up 100-point days.
What will cause such a catharsis? An escalation of the trade war would certainly do it. Or maybe just a random presidential tweet about anything.
That's why I have been holding fire so far on my volatility shorts and more aggressive longs in stocks.
What will I be buying? Amazon (AMZN), which has essentially an unlimited future. Thank the president for creating a rare 16% selloff and unique buying opportunity with his nonsensical talk about antitrust action.
On what exactly does Amazon have a monopoly? Brilliance?
I also will be taking a look at laggard legacy old tech companies such as Intel (INTC) and Cisco Systems (CSCO). And how can you not like Microsoft here (MSFT)?
Of course, the mystery of the week was the strength in bonds (TLT) taking yields for the 10-year Treasury down to 2.75%. This is in the face of a Treasury auction on Wednesday that went over like a lead balloon.
I think it's all about quarter end positioning more than anything. Some hedge funds have big losses in stocks and volatility trading to cover, and what better way to do it than take profits on bond shorts through buying.
I already have started selling into the rally.
The scary thing about the bond action is that it has accelerated the flattening of the yield curve, with the two-year/10-year spread now only 50 basis points.
It also brings forward the inversion of the yield curve. And we all know what follows that with total certainty: a bear market in stocks and a recession.
The data flow for the coming week is all about jobs, jobs, jobs.
On Monday, April 2, at 9:45 AM, we get the March PMI Manufacturing Index.
On Tuesday morning, we receive March Motor Vehicle Sales, which have recently been weak at 17.1 million units.
On Wednesday, April 4, at 8:15 AM EST, the first of the trifecta of jobs reports comes out with the ADP Employment Report, a read on private sector high.
Thursday, April 5, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000.
At 7:30 AM we get the March Challenger Job Cut Report.
On Friday, April 6, at 8:30 AM EST, we get the Big Kahuna with the March Nonfarm Payroll Report. Last month brought shockingly weak figures.
The week ends as usual with the Baker Hughes Rig Count at 1:00 PM EST. Last week brought a drop of 2.
As for me, I am headed up to Lake Tahoe, Nev., today for spring break to catch the last of the heavy snow. After a record 18 feet in March, Squaw Valley, Calif., has announced that it is keeping the ski lifts open until the end of May.
Good Luck and Good Trading.
Mad Hedge Technology Letter
April 2, 2018
Fiat Lux
Featured Trade:
(WHY THERE WILL NEVER BE AN ANTITRUST CASE AGAINST AMAZON)
(AMZN), (WMT), (MSFT), (FB), (DBX), (NFLX)
POTUS's Amazon tweet of March 29 has given investors the best entry point into Amazon (AMZN) since the January 2016 sell-off. Since then, the stock has essentially gone up every day.
Entry points have been few and far between as every small pullback has been followed by aggressive buying by big institutional money.
The 200-point nosedive was a function of the White House's dissatisfaction of leaked stories that would find their way into the Washington Post owned by Amazon CEO Jeff Bezos, my former colleague and good friend.
Although there are concerns about Amazon's business model, notably its lack of actual profits, there is no impending regulatory action. And, if there is one company that's in hotter water now, it's Facebook (FB), which inadvertently sells every little detail about your personal life to third-party Eastern European hackers.
Amazon's e-commerce business does not violate the Federal Trade Commission Act of 1914 of "deceptive" or "unfair practices."
The American economy has rapidly evolved thanks to hyper-accelerating technology, and the jobs required to support the modern economy have changed beyond all recognition.
The Clayton Antitrust Act of 1914 addressing harmful mergers that destroy competition hasn't been breached either since Amazon has grown organically.
Analyzing the most comprehensive law, the Sherman Antitrust Act of 1890, which was originally passed to control unions, espouses economic freedom aimed at "preserving free and unfettered competition as the rule of trade."
And, in a way, Amazon could be susceptible, but it would be awfully difficult to persuade the U.S. Department of Justice (DOJ) Antitrust Division and would take a decade.
Amazon's business model will change many times over by the time any antitrust decision can be delivered, or even entertained.
Helping Amazon's case even more is the DOJ interpretation of the three antitrust rules. It is the company's duty to first and foremost protect the consumer and ensure business is operating efficiently, which keeps prices low and quality high. Antitrust laws are, in effect, consumer protection laws.
Amazon's e-commerce segment epitomizes the DOJ's perception of these 100-year-old laws.
The controversial part of Amazon's business model is funneling profits from its Amazon Web Services (AWS) division as a way to offer the lowest prices in America for its e-commerce products.
This strategy has the same effect as dumping since it is selling products for a loss, but it is not officially dumping.
POTUS has usually delivered more bark than bite. The steel and aluminum tariffs went from no exceptions to exceptions galore in less than a week. Policies and employees change in a blink of an eye in the White House.
The backlash is a case of the White House not being a huge admirer of Amazon, but individual government workers probably have Amazon boxes stacked to the heavens on their doorsteps.
It is true that Amazon has negatively affected retail business. It is doing even more damage to traditional shopping malls, which it turns out are owned by close friends of the president. The mom-and-pop stores have disappeared long ago. But Amazon could argue this trend is occurring with or without Amazon.
In addition, Walmart (WMT) was the original retail killer, and it currently is morphing into another Amazon by investing aggressively into its e-commerce division. Does the White House go after (WMT) next?
Unlikely.
Amazon didn't create e-commerce.
Amazon also didn't create the Internet.
Amazon also does pay state and local taxes, some $970 million worth last year.
Technology has been a growth play for years.
Investors and venture capitalists are willing to fork over their hard-earned cash for the chance to own the next Google (GOOGL) or Apple (AAPL).
Many investors do lose money searching for the next unicorn. A good portion of these unicorns lose boatloads of money, too.
Spotify, slated to go public soon, is a huge loss-maker and investors will pay up anyway.
Investors went gaga for Dropbox (DBX), already up 40% from its IPO, and it lost $112 million in 2017.
The risk-appetite is hearty for these burgeoning tech companies if they can scale appropriately.
Should investors be prosecuted for gambling on these cash-losing businesses?
Definitely not. Caveat emptor. Buyer beware.
It is true that Amazon pumps an extraordinary percentage of revenues back into product development and enhancement.
But that is exactly what makes Amazon great. It not only is focused on making money but also on making a terrific product.
The bulk of its enhancement is allocated in warehouse and data center expansion. Splurging on more original entertainment content is another segment warranting heavy investment, too, a la Netflix (NFLX). Did you spot Jeff Bezos at the last Oscar ceremony?
Contrary to popular belief, Amazon is in the black.
It has posted gains for 11 straight quarters and expects a 12th straight profitable quarter for Q1 2018.
The one highly negative aspect is profit margins. It is absolutely slaughtered under the current existing model.
However, investors continually ignore the damage-to-profit margins and have a laser-like focus on the AWS cloud revenue.
Amazon's AWS segment could be a company in itself. Cloud revenue last quarter was $5.11 billion, which handily beat estimates at $4.97 billion.
Amazon's cloud revenue is five times bigger than Dropbox's.
The biggest threat to Amazon is not the administration, but Microsoft (MSFT), which announced amazing cloud revenue numbers up 98% QOQ, and has grown into the second-largest cloud player.
(MSFT) is equipped with its array of mainstay software programs and other hybrid cloud solutions that lure in new enterprise business.
(MSFT) has the chance to break Amazon's stranglehold if it can outmuscle its cloud segment. However, any degradation to Amazon's business model will not kill off AWS, considering Amazon also is heavily investing in its cloud segment, too.
Lost in the tweet frenzy is this behemoth cloud war fighting for storage of data that is somewhat lost in all the political noise.
This is truly the year of the cloud, and dismantling Amazon is only possible by blowing up its AWS segment. The more likely scenario is that AWS and MSFT Azure continue their nonstop growth trajectory for the benefit of shareholders.
Antitrust won't affect Amazon, and after every dip investors should pile into the best two cloud plays - Amazon and Microsoft.
__________________________________________________________________________________________________
Quote of the Day
After ignoring the constant chaos in Washington for 17 months, it finally mattered to the stock market.
Guess what was at the top of the list of retaliatory Chinese import duties announced last week?
California wine!
The great irony here is that half of the Napa Valley wineries are now owned by Chinese investors looking for a bolt-hole from their own government. Billionaires in China have been known to disappear into thin air.
And after years of trying, we were just getting Chinese consumers interested in tasting our fine chardonnays, merlots, and cabernet sauvignons.
It will be a slap in the face for our impoverished farmworkers who actually pick the grapes, who have just been getting back on their feet after last fall's hellacious fires.
Do you suppose they will call the homeless housing camps "Trumpvilles?"
California is on the front line of the new trade war with China.
Not only is the Middle Kingdom the largest foreign buyer of the Golden State's grapes, almonds, raisins, and nuts, it also is the biggest foreign investor, plowing some $16 billion in investments back here in 2016.
Down 1,700 Dow points on the week and a breathtaking 1,400 points in two days. It was the worst week for the markets in two years. And the technology and financial stocks suffered the worst spanking - the two market leaders. The most widely owned stocks are seeing the worst declines.
We certainly are paying the piper for our easy money made last year. The Dow Average is now a loser in 2018, off 4.1% and back to November levels.
The Dow 600 point "flash crash" we saw in the final two hours of trading on Friday was almost an exact repeat of the February 9 swoon that took us to the exact same levels.
There was no institutional selling. It was simply a matter of algorithms gone wild. The news flow that day was actually quite good.
Our favorite stock, Micron Technology (MU) announced blockbuster earnings and high target (for more depth, please read the Mad Hedge Technology Letter).
Dropbox (DBX) went public, and immediately saw its shares soar by 50% in the aftermarket. The president signed an emergency funding bill to keep the government open, despite repeated threats not to do so.
Which means the market fell not because of a fundamental change in the US economy. It is a market event, pure and simple.
I therefore expect a similar outcome. Only this time, we don't have an $8 billion unwind of the short volatility trade ($VIX) to deal with, as we did in February. That's why I thought markets would bottom at higher levels this time around.
There is only one problem with this theory.
The chaos, turmoil, and uncertainty in Washington is finally starting to exact a steep price on shareholders. Uncertain markets commend lower price earnings multiples than safer ones.
As a result, multiples are now 15% lower than the January high at 19.5X, and much more for individual stocks. And multiples have been falling even though earnings have been rising, quite substantially so. Such is the price of chaos.
Will markets bottom out here on a valuation basis as they did last time? Or will the continued destruction of our democracy command a higher price? We will find out soon.
Clearly the S&P 500 200-day moving average at $255.95 is crying out for a revisit, which we probably will see first thing Monday morning. Allow more shorts to get sucked in, and then you probably have a decent entry point to buy stocks for the rest of 2018.
Indeed, it was a week when the black swans alighted every day. First, the twin hits from Facebook (FB), followed by the worst trade war in eight decades. Then came the Chinese retaliation.
While the damage suffered so far has been limited, investors are worried about what is coming next.
One of the last supervising adults left the White House, my friend and comrade in arms, National Security Advisor H.R. McMaster. His replacement is Fox News talk show host John Bolton, who is openly advocating that the US launch a pre-emptive nuclear strike against North Korea.
Bolton has quite a track record. He is the guy who talked President Bush into invading Iraq. Now, that would trigger a new bear market in the extreme!
As I did not predict five black swans in five days, the Mad Hedge Trade Alert Service took a hit this week, backing off of fresh all-time highs.
The trailing 12-month return fell to 46.49%, the 8-year return to 284.01%, bringing the annualized average return down to only 34.08%.
Given all of the above, economic data points for the coming holiday shorted trading week seem almost quaintly irrelevant. But I'll give them to you anyway.
On Monday, March 26, at 10:30 AM, we get the February Dallas Fed Manufacturing Survey.
On Tuesday, March 27, at 9:00 AM, we receive an update on the all-important CoreLogic Case-Shiller National Home Price NSA Index for January. A 3-month lagging housing indicator.
On Wednesday, March 28, at 8:30 AM EST, the second read of Q1 GDP comes out.
Thursday, March 29, leads with the Weekly Jobless Claims at 8:30 AM EST, which hit a new 49-year low last week at an amazing 210,000. At 9:45 AM, we get the February Chicago Purchasing Managers Index. At 1:00 PM, we receive the Baker-Hughes Rig Count, which saw a small rise of three last week.
On Friday, March 30, the markets are closed for Good Friday.
As for me, I'll be doing my Christmas shopping early this year before the new Chinese import tariffs jack up the price for everything by 15% to 25%.
I'll be doing all of this courtesy of Amazon (AMZN), of course. Since I arrived here at Lake Tahoe, it has snowed 6 feet in two days in a storm of truly biblical proportions. We got a total of 18 feet of snow in March. By the time I dig out, it will be time to go home.
Good luck and good trading.
John Thomas
There is no doubt that old tech is back with a vengeance.
Look at the trifecta of blockbuster earnings reports from Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) recently, and you can reach no other conclusion.
The Microsoft turnaround in particular has been amazing.
PCs, and the software to run them were so 1990s.
After the Dotcom bust in 2000, Microsoft was dead money for years.
Founder Bill Gates retired in 2008. CEO Steve Ballmer finally got the message in 2013, and retired to pay through the nose, some $2 billion, for the basketball team, the LA Clippers.
Succeeding operating systems offered little that was new, and they fell woefully behind the technology curve.
Even I gave away my own machines years ago to switch to Apple devices. These virus immune machines are perfect for a small business like mine, as they seamlessly integrate and all talk to each other.
When the company brought out the Windows Phone in 2010, three years after Apple, people in Silicon Valley laughed.
Long given up for dead as a trading and investment vehicle, the shares have been on a tear in 2015.
The stock is hitting a new all time high FOR THE FIRST TIME IN 15 YEARS!
Satya Nadella, who took over management of the company in 2014, clearly had other ideas. The challenge for Nadella from day one was to move boldly into new technologies, while preserving its legacy Windows business lines.
So far, so good.
The key to the company?s new found success was it?s dumping of its old ?Wintel? strategy of yore that focused entirely on the growth of the PC market.
The problem was that the PC market stopped growing, as the world moved onto the Cloud and mobile.
The company is now rivaling Apple with $100 billion in cash, almost all held tax-free overseas.
EPS growth will reach 10% next year, beating other big competitors.
Windows and servers, the (MSFT)?s core products, still account for 80% of the firm?s business.
But its cloud presence is being ramped up at a frenetic pace, where the future for the company lies, nearly doubling YOY. Mobile technologies, where it has lagged until now, are also on fire.
Rave reviews from its latest operating system upgrade, Windows 10, also helped.
On top of all of this, Microsoft is paying a generous 3% dividend. It?s earnings multiple at 15X makes it a bargain compared to other big tech companies and the rest of the market.
As I explained in my recent research piece ?Switching From Growth to Value? (click here?), Microsoft makes a perfect investment for a mature bull market.
It is not only at a multiple discount to the rest of the market, now at 18X, it is cheap when compared to the rest of its own sector as well.
This is when investors and traders bail from their high priced stocks to safer, lower multiple companies.
Obviously, I don?t want to pile into Microsoft, or any other of the big tech stocks on top of a furious 10% spike. But it is now safely in the ?buy on the dip? camp, along with the rest of big tech.
The party has only just stated.
To read my interview with Bill Gates? father, click here for ?An Evening With Bill Gates, Sr.?.
I stopped at a Wal-Mart (WMT) the other day on my way to Napa Valley.
I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long stem roses would prove useful. I happened to know you could get these for $10 at Wal-Mart.
After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.
The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there.
So I was not surprised when the company announced that it was closing 267 stores worldwide. The closures amount to only 1% of Wal-Mart?s total floor space. Some 10,000 American jobs will be lost.
The Wal-Mart downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.
However, it now appears we have reached a tipping point, and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.
I remember the first purchases I made at Amazon 20 years ago. The idea was so dubious that I made my initial purchases with a credit card with a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.
This is despite the fact that I knew Jeff Bezos personally as a former Morgan Stanley colleague. And how stupid was that name, Amazon? At least he didn?t call it ?Yahoo?.
Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don?t have to fight traffic, engage in the parking space wars, or wait in line to pay.
It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!
A used 42-inch Sub Zero refrigerator with a front door icemaker and water dispenser? Have it there in two days, with free shipping.
In 2000, after the great ?Y2K? disaster that failed to show, I met with Bill Gates Sr. to discuss the foundation?s investments. It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds. It turned out to be a brilliant move, coming mere months before the Dotcom bust.
Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn?t invested a dollar in commercial real estate.
It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low rent climbing walls and paint ball game centers.
Mr. Gates? prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.
It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.
The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company, with no office. Everyone works at home across the country and around the world.
You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch).
The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we?re hiring, especially in marketing.
You can see this in the business prospects of traditional brick and mortar retailers last year, which were dire.
As a result, Macy?s (M) stock plunged by a shocking -53%, Nordstrom (JWN) by -43%, and Best Buy (BBY) by -39%. Value players have mistaken the present low prices and subterranean price earnings multiples for a ?Black Friday? sale.
It has been like leading lambs to the slaughter.
Yes, some of this was caused by record warm temperatures on the US East coast, which led many to cancel their purchases of a new winter coat. But it is also happening because the entire ?bricks and mortar? industry is getting left behind by the march of history.
Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of amazon, with higher prices. It is all ?Hour late and dollar short? stuff.
In the meantime, Amazon soared by 150%, and was one of the top performing stocks of 2015. It is thought that Amazon accounted for a staggering 25% of all the new growth in US retail sales last year.
And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!
There?s a good reason why you haven?t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.
I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.
The business for them was an endless roll of the dice. That is a proposition which I was unwilling to invest in. There were always better trades.
I confess that I had to look up the ticker symbols for this story, as I never use them.
However, I also missed the miracle at Amazon. I could never grasp their long tail strategy and their 100 X multiples. I have had to admire it from the sidelines. At least I wasn?t short.
You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers.
It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when ?cheap? was on its way to zero.
So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.
Or better yet, go shopping at Amazon. The deals are to die for.
To read ?An Evening with Bill Gates Sr.?, please click here.
The Death of Retail?
One couldn?t help but notice the outbreak of recollection, reminiscing and schadenfreude that took place yesterday when the NASDAQ briefly tipped over 5,000.
I remember it like it was yesterday. I am still amazed by the frenzy that took place, witnessing the kind of bubble one only sees twice a century. And I was right in the thick of it, living in nearby Silicon Valley.
Business school students were raising $50 million with a one-page business plan. An analyst predicted that Amazon (AMZN) shares would double to $400 in a year. It happened in only four weeks.
All of my attorneys quit, taking up prestige jobs as chief legal counsels at new start ups, taking stock in lieu of pay, dollar bills dancing in front of their eyes. They were replaced by the ?B? team. Other law firms started accepting stock as payment of legal fees.
I knew more than one office secretary who took pay cuts to $15,000 a year in exchange for stock, which they later sold for $2 million.
When I tried to expand my company, I couldn?t find a larger office to rent. San Francisco had run out of office space. So I bought a house for $7 million instead and worked from there. That was no problem, as everyone had $7 million then.
But what I remember most fondly were the parties. The beneficiaries of every IPO sought to celebrate with the biggest party in Bay Area history, each one eclipsing the last. An entire industry of creative party organizers sprung up, seeking to outdo every competitor.
I remember most fondly the Vodka luge carved out of a giant block of ice, where a pretty hostage poured 100 proof super cooled rocket fuel straight down your throat. By midnight, the passed out bodies started piling up on the periphery.
Those were the days!
Which brings us to today, when handwringing is breaking out all over. Investors are afraid that we are just now putting in the double top of the century in NASDAQ, with a very neat 15 years taking place between peaks.
Is it time to sell?
I think not.
Today, we see a completely different world from the one we knew in 2000. Global GDP then was a mere $32 trillion. Today it is 2.5 times higher at $78 trillion. Using this simplistic measure, the GDP adjusted value of NASDAQ should be 12,187.
The high tech index peaked at a price earnings multiple of 100 times earnings. Today it is 30 times. That means the multiple adjusted high for NASDAQ today would be 16,650.
Technology stocks then didn?t pay dividends. Today, look at Apple (AAPL), which pays a 1.50% dividend worth $11.25 billion in annual payouts. This revenue stream provides enormous support under the market, and almost makes Apple shares perform more like bonds than stocks.
Which brings me to a new investment thesis.
What if the stocks that peaked in 2000 are only now just breaking out and starting long bull runs? I am thinking of quality technology names that have completed long, sideways, basing moves. Ebay (EBAY), Broadcom (BRCM), and Cisco (CSCO) leap to the fore.
The possibilities boggle the mind.
I think that in order to get NASDAQ to really get the bit between its teeth, one thing has to happen. Apple has to stop going up.
You really only had to make one stock call in 2014. You had to be overweight Apple. If you did, you were a star. If you didn?t, then you are still probably looking for a new job on Craig?s List.
Managers are behaving as if the past were a prologue, loading the boat with Apple with their eyes firmly fixed on the rear view mirror. That explains the blowout 13% jump in Steve Jobs? creation so far in 2015, some $90 billion in market capitalization.
All you need is for investors to stop buying Apple for 15 minutes and rotate into other big tech names. That was my logic behind my Trade Alert to buy Cisco two weeks ago. If that occurs, it will be off to the races for NASDAQ once again.
Remember that old saw in technical analysis land, ?the longer the base, the bigger the air above it.?
A vodka martini, anyone?
We have just endured three weary months of tedious range trading, typical of a normal summer?s action. The problem is that the actual summer is about to begin. Are we going to suffer another three months of tedious range trading? Is summer trading this year going to last a full six months?
Is this the endless summer of 2014?
That is the alarming conclusion of the many hardened and seasoned traders I know. I have been saying all year that 2014 might be a fourth quarter year. It?s looking like my worst nightmare is coming true. Can you blame my friends for throwing in the towel?
The fact that almost all traditional trading tools have recently been utterly worthless hasn?t helped.
Take technical analysis. In a flat market, commentators urge you to buy every false upside breakout, and then sell every false breakdown, only to see it snap back in the opposite direction the next day. You don?t have to suffer too many round trips following this strategy before you run out of money.
Economic data isn?t useful either. It has been unrelentingly positive, as have corporate earnings, with a few notable exceptions (Amazon (AMZN), Fire Eye (FEYE)). Yet, the market can?t carry out a sustained rally, frustrating bulls to no end. It seems that one day, the market is discounting an heroic? 3% GDP growth rate this year, the next day only a disappointing 2%.
Talk about a bipolar market.
The (SPX) better get a move on. The dismal Q1 report showed that the economy actually shrunk by -0.2%-0.8%. That only allows for three more quarters to stage a comeback, requiring absolutely torrid growth rates. Maybe this is why stocks can?t go down either.
Everyone knows the market will be up on the year, and they don?t want to sell positions for fear they won?t be able to get back in when the long awaited breakout finally happens. That would bring a second year of relative underperformance in a row for most portfolio managers, not exactly a career boosting move.
So while the market is tearing the petals off my own 2014 performance with a ?love me, love me not? torture routine, I think I?ll stay on the sidelines. That?s why I bailed on my last remaining position, a small long in the iPath S&P 500 VIX Short Term Futures ETN (VXX), taking yet another shaving cut on my numbers.
The only way to survive in this industry for the long term is to stay out when you don?t understand what is happening. There are times when there is just no money to be made in the market. This is one of those times.
Screaming at it, throwing your handset through your monitor, or tossing your PC out the window, all things I have seen frustrated traders do, isn?t going to improve the situation.
Go watch a season of Game of Thrones instead.
Better Than Watching the Market
AT&T (T), or Telephone as we used to call it on the floor on the New York Stock Exchange when we hand traded its shares, enjoyed a nice little 50-cent pop yesterday, to $34, only the second day it managed to rise this year.
The move comes after a federal appeals court in Washington DC ruled that the FCC exceeded its authority when it told Verizon Communication (VZ) that it could not charge different prices to different content providers based on their bandwidth and numbers of users.
This is a reversal of the FCC's "net neutrality" rule and should allow both Verizon and AT&T to increase revenues and help protect their profits from customers who are costing them more money to service. ?Big users of broadband, like Netflix (NFLX) and Amazon (AMZN), saw their shares suffer accordingly.
You would think it would be off to the races for (T). But it won?t, as not all is well with Ma Bell. One of my first jobs at Morgan Stanley some 32 years ago was to break this company up into the seven ?baby bells? at the direction of the Antitrust Division of the Justice Department (I carried the shareholder ballots from one floor of our building to another). The company traded off its local telephone exchanges for the right to go into the computer business. I have been following it ever since.
For a start, (T) is suffering from some major internal cash flow problems. Revenues have been stagnant for years. Its hard-wired infrastructure has been corroding away for years. The capital spending needed to fix this will be a drag on any future earnings, and is unlikely to generate any real payoff. Do you know anyone under the age of 30 who owns a landline? It?s a wireless world, baby. Did I mention that their service sucks beyond belief?
Every pension fund manager in the country already owns this stock for its generous 5.30% dividend yield. One has to ask how long the company can maintain this in the face of a stagnant business in a highly competitive industry. Now that we are in a world of rising long-term interest rates, this yield will provide much less support than it has in the past.
The hedge fund community has been aware of these difficulties for a while, and has been pounding every rally. This is why (T) completely missed out on last year?s ferocious, record setting bull market, posting a zero return for 2013, versus a 26% increase in the main indexes.
AT&T is the oldest stock to inhabit the Dow 30, being a successor to a company founded by Alexander Graham Bell, the inventor of the telephone. It has long been a pillar of the investment establishment (it took a brief vacation from the index after the breakup). Its history mirrors that of American capitalism.
With 100 million customers and a market capitalization of $179 billion, it certainly occupies a big footprint. Time to put this beast out of its misery and retire it to the dustbin of history.
Looks like AT&T is Dialing a Wrong Number