Global Market Comments
March 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE RECESSION HAS BEGUN),
(SPY), (TLT), (GLD), (AAPL)
Global Market Comments
March 4, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE RECESSION HAS BEGUN),
(SPY), (TLT), (GLD), (AAPL)
Global Market Comments
March 1, 2019
Fiat Lux
Featured Trade:
(OH, HOW THE MIGHTY HAVE FALLEN),
(BRK/A), (AXP), (AAPL), (BAC), (KO), (WFC), (KHT),
(AMGEN’S BIG WIN), (AMGN), (SNY), (REGN)
Mad Hedge Technology Letter
January 17, 2019
Fiat Lux
Featured Trade:
(WHY FINTECH IS EATING THE BANKS’ LUNCH),
(WFC), (JPM), (BAC), (C), (GS), (XLF), (PYPL), (SQ), (SPOT), (FINX), (INTU)
Going into January 2018, the big banks were highlighted as the pocket of the equity market that would most likely benefit from a rising rate environment which in turn boosts net interest margins (NIM).
Fast forward a year and take a look at the charts of Bank of America (BAC), Citibank (C), JP Morgan (JPM), Goldman Sachs (GS), and Morgan Stanley (GS), and each one of these mainstay banking institutions are down between 10%-20% from January 2018.
Take a look at the Financial Select Sector SPDR ETF (XLF) that backs up my point.
And that was after a recent 10% move up at the turn of the calendar year.
As much as it pains me to say it, bloated American banks have been completely caught off-guard by the mesmerizing phenomenon that is FinTech.
Banking is the latest cohort of analog business to get torpedoes by the brash tech start-up culture.
This is another fitting example of what will happen when you fail to evolve and overstep your business capabilities allowing technology to move into the gaps of weakness.
Let me give you one example.
I was most recently in Tokyo, Japan and was out of cash in a country that cash is king.
Japan has gone a long way to promoting a cashless society, but some things like a classic sushi dinner outside the old Tsukiji Fish Market can’t always be paid by credit card.
I found an ATM to pull out a few hundred dollars’ worth of Japanese yen.
It was already bad enough that the December 2018 sell-off meant a huge rush into the safe haven currency of the Japanese Yen.
The Yen moved from 114 per $1 down to 107 in one month.
That was the beginning of the bad news.
I whipped out my Wells Fargo debit card to withdraw enough cash and the fees accrued were nonsensical.
Not only was I charged a $5 fixed fee for using a non-Wells Fargo ATM, but Wells Fargo also charged me 3% of the total amount of the transaction amount.
Then I was hit on the other side with the Japanese ATM slamming another $5 fixed fee on top of that for a non-Japanese ATM withdrawal.
For just a small withdrawal of a few hundred dollars, I was hit with a $20 fee just to receive my money in paper form.
Paper money is on their way to being artifacts.
This type of price gouging of banking fees is the next bastion of tech disruption and that is what the market is telling us with traditional banks getting hammered while a strong economy and record profits can’t entice investors to pour money into these stocks.
FinTech will do what most revolutionary technology does, create an enhanced user experience for cheaper prices to the consumers and wipe the greedy traditional competition that was laughing all the way to the bank.
The best example that most people can relate to on a daily basis is the transportation industry that was turned on its head by ride-sharing mavericks Uber and Lyft.
But don’t ask yellow cab drivers how they think about these tech companies.
Highlighting the strong aversion to traditional banking business is Slack, the workplace chat app, who will follow in the footsteps of online music streaming platform Spotify (SPOT) by going public this year without doing a traditional IPO.
What does this mean for the traditional banks?
Less revenue.
Slack will list directly and will set its own market for the sale of shares instead of leaning on an investment bank to stabilize the share price.
Recent tech IPOs such as Apptio, Nutanix and Twilio all paid 7% of the proceeds of their offering to the underwriting banks resulting in hundreds of millions of dollars in revenue.
Directly listings will cut that fee down to $10-20 million, a far cry from what was once status quo and a historical revenue generation machine for Wall Street.
This also layers nicely with my general theme of brokers of all types whether banking, transportation, or in the real estate market gradually be rooted out by technology.
In the world of pervasive technology and free information thanks to Google search, brokers have never before added less value than they do today.
Slowly but surely, this trend will systematically roam throughout the economic landscape culling new victims.
And then there are the actual FinTech companies who are vying to replace the traditional banks with leaner tech models saving money by avoiding costly brick and mortar branches that dot American suburbs.
PayPal (PYPL) has been around forever, but it is in the early stages of ramping up growth.
That doesn’t mean they have a weak balance sheet and their large embedded customer base approaching 250 million users has the network effect most smaller FinTech players lack.
PayPal is directly absorbing market share from the big banks as they have rolled out debit cards and other products that work well for millennials.
They are the owners of Venmo, the super-charged peer-to-peer payment app wildly popular amongst the youth.
Shares of PayPal’s have risen over 200% in the past 2 years and as you guessed, they don’t charge those ridiculous fees that banks do.
Wells Fargo and Bank of America charge a $12 monthly fee for balances that dip below $1,500 at the end of any business day.
Your account at PayPal can have a balance of 0 and there will never be any charge whatsoever.
Then there is the most innovative FinTech company Square who recently locked in a new lease at the Uptown Station in Downtown Oakland expanding their office space by 365,000 square feet for over 2,000 employees.
Square is led by one of the best tech CEOs in Silicon Valley Jack Dorsey.
Not only is the company madly innovative looking to pounce on any pocket of opportunity they observe, but they are extremely diversified in their offerings by selling point of sale (POS) systems and offering an online catering service called Caviar.
They also offer software for Square register for payroll services, large restaurants, analytics, location management, employee management, invoices, and Square capital that provides small loans to businesses and many more.
On average, each customer pays for 3.4 Square software services that are an incredible boon for their software-as-a-service (SaaS) portfolio.
An accelerating recurring revenue stream is the holy grail of software business models and companies who execute this model like Microsoft (MSFT) and Salesforce (CRM) are at the apex of their industry.
The problem with trading this stock is that it is mind-numbingly volatile. Shares sold off 40% in the December 2018 meltdown, but before that, the shares doubled twice in the past two years.
Therefore, I do not promote trading Square short-term unless you have a highly resistant stomach for elevated volatility.
This is a buy and hold stock for the long-term.
And that was only just two companies that are busy redrawing the demarcation lines.
There are others that are following in the same direction as PayPal and Square based in Europe.
French startup Shine is a company building an alternative to traditional bank accounts for freelancers working in France.
First, download the app.
The company will guide you through the simple process — you need to take a photo of your ID and fill out a form.
It almost feels like signing up to a social network and not an app that will store your money.
You can send and receive money from your Shine account just like in any banking app.
After registering, you receive a debit card.
You can temporarily lock the card or disable some features in the app, such as ATM withdrawals and online payments.
Since all these companies are software thoroughbreds, improvement to the platform is swift making the products more efficient and attractive.
There are other European mobile banks that are at the head of the innovation curve namely Revolut and N26.
Revolut, in just 6 months, raised its valuation from $350 million to $1.7 billion in a dazzling display of growth.
Revolut’s core product is a payment card that celebrates low fees when spending abroad—but even more, the company has swiftly added more and more additional financial services, from insurance to cryptocurrency trading and current accounts.
Remember my little anecdote of being price-gouged in Tokyo by Wells Fargo, here would be the solution.
Order a Revolut debit card, the card will come in the mail for a small fee.
Customers then can link a simple checking account to the Revolut debit card ala PayPal.
Why do this?
Because a customer armed with a Revolut debit card linked to a bank account can use the card globally and not be charged any fees.
It would be the same as going down to your local Albertson’s and buying a six-pack, there are no international or hidden fees.
There are no foreign transaction fees and the exchange rate is always the mid-market rate and not some manipulated rate that rips you off.
Ironically enough, the premise behind founding this online bank was exactly that, the originators were tired of meandering around Europe and getting hammered in every which way by inflexible banks who could care less about the user experience.
Revolut’s founder, Nikolay Storonsky, has doubled down on the firm’s growth prospects by claiming to reach the goal of 100 million customers by 2023 and a succession of new features.
To say this business has been wildly popular in Europe is an understatement and the American version just came out and is ready to go.
Since December 2018, Revolut won a specialized banking license from the European Central Bank, facilitated by the Bank of Lithuania which allows them to accept deposits and offer consumer credit products.
N26, a German like-minded online bank, echo the same principles as Revolut and eclipsed them as the most valuable FinTech startup with a $2.7 Billion Valuation.
N26 will come to America sometime in the spring and already boast 2.3 million users.
They execute in five languages across 24 countries with 700 staff, most recently launching in the U.K. last October with a high-profile marketing blitz across the capital.
Most of their revenue is subscription-based paying homage to the time-tested recurring revenue theme that I have harped on since the inception of the Mad Hedge Technology Letter.
And possibly the best part of their growth is that the average age of their customer is 31 which could be the beginning of a beautiful financial relationship that lasts a lifetime.
N26’s basic current account is free, while “Black” and “Metal” cards include higher ATM withdrawal limits overseas and benefits such as travel insurance and WeWork membership for a monthly fee.
Sad to say but Bank of America, Wells Fargo, and the others just can’t compete with the velocity of the new offerings let alone the software-backed talent.
We are at an inflection point in the banking system and there will be carnage to the hills, may I even say another Lehman moment for one of these stale business models.
Online banking is here to stay, and the momentum is only picking up steam.
If you want to take the easy way out, then buy the Global X FinTech ETF (FINX) with an assortment of companies exposed to FinTech such as PayPal, Square, and Intuit (INTU).
The death of cash is sooner than you think.
This year is the year of FinTech and I’m not afraid to say it.
Mad Hedge Technology Letter
August 23, 2018
Fiat Lux
Featured Trade:
(THE RACE TO ZERO FOR BROKERAGE COMMISSIONS)
(JPM), (WFC), (ETFC), (SCHW), (AMTD)
The other shoe has dropped.
No more waiting for it as it was only a matter of time, but it was going to happen soon enough.
The acceleration of the race down to zero for brokerage commissions has moved into full throttle.
In a bid to engage new customers, especially millennials, J.P. Morgan (JPM) will offer its customers 100 free stock or ETF trades for one year.
The new service will be available on Chase’s mobile banking app called “You Invest” and also does not require a minimum balance as do so many of the competitors.
Last year, J.P. Morgan was still charging customers a horrific $24.95 per trade, a ridiculous sum in an age of brokerages slashing fees left and right.
Recently, I chronicled the start-up fin-tech brokerage Robinhood, which rolled out the zero-commission model to the chagrin of the traditional brokerages on the verge of major disruption.
Well, Wall Street has stood up and taken notice. There is no way back from this new normal.
The catalyst for J.P. Morgan to change direction was its lack of competitiveness in the digital brokerage space and a free model of luring in business is seen as a quick recipe to correct its ills.
J.P. Morgan has pumped in $300 million in the past two years into digital initiatives but still lacks the volume it was hoping for. This could help capture fresh accounts that could eventually turn into a meaningful business.
Freemium models made popular in Silicon Valley are catching fire in other parts of the economy as potential customers can dabble with the service first before committing their hard-earned money.
This is dreadful news for the fin-tech brokerage industry as it indicates a whole new level of acute pressure on margins and revenue.
The brokerage business has been under fire the past few years after regulators discovered Wells Fargo (WFC) was cunningly ushering clients into higher fee trading vehicles, taking a larger cut of commissions.
Wells Fargo did everything it could to rack up costs for high net worth clients. The atrocious behavior was a huge black eye for the entire industry.
Technology has forced down the cost of executing a trade and each additional trade is almost nil after fixed costs because of software and hardware carrying out these functions.
E-brokerages are set for a rude awakening and their cash cows are about to be disrupted big time.
Charles Schwab (SCHW) has 11.2 million brokerage accounts, and no doubt clients will get on the ringer and ask why Schwab charges an arm and a leg to execute trades.
Schwab might as well start charging clients for emails, too.
The cut in commissions has already started to affect margins with Schwab revenue per trade sliding from $7.96 in 2017 to $7.30 in the most recent quarter.
TD Ameritrade (AMTD) is experiencing the same issues with revenue per trade of $7.83 last year dropping to $7.30 last quarter.
The beginning of the year provided e-brokers with respite after euphoric trading sentiment pushed many first-time equity buyers into the markets, making up for the deceleration in revenue per trade.
However, that one-off spike in volume will vanish and margins are about to get punctured by fin-tech start-ups such as Robinhood.
J.P. Morgan’s move to initiate free trades is a huge vote of confidence for upstart Robinhood, which charges zero commission for ETFs, option trades, and equities.
I recently wrote a story on the phenomenon of Robinhood, and the new developments mean the shakeout will happen a lot faster than first anticipated.
TD Ameritrade, E-Trade (ETFC), Fidelity, and Charles Schwab could face a deeply disturbing future if Silicon Valley penetrates under the skin of this industry and flushes it out just like Uber did to the global taxi business.
E-Trade shares have experienced a healthy uptrend and it is now time to pull the rip cord with the rest of these brokerages.
It will only get worse from here.
Investors should be spooked and avoiding this industry would be the right move at least for the short term.
The golden age of trading commissions is officially over.
Turning this industry into a dollar store variety is not what investors want to hear or hope for.
The decimation of commission fees has coincided with the rise of passive investing.
Only 10% of trades now are performed by active traders.
Brokerages earn demonstrably less with passive investing as the volume of trading commission dries up with this buy-and-hold-forever strategy.
Index funds have been all the rage and quite successful as the market has returned 400% during the nine-year bull market.
When the market stops going up, the situation could get dicey.
The real litmus test is when a sustained bear market vies to implode these ETFs and what will happen with a massive unwinding of these positions.
A prolonged bear market would also scare off retail investors from executing trades on these e-brokerages.
Many will take profits at the speed of light not to be seen or heard again until the next sustained bull market.
Moreover, it is certain the global trade war is scaring off retail investors from their trading platforms as the uncertainty weighing on the markets has thrown a spanner into the works.
Tech has been the savior to the overall market with the top dogs dragging up the rest, but for how long can this continue?
Other industries are experiencing minimal earnings growth and tech cannot go up forever.
Regulations are starting to bite back at the once infallible tech narrative.
Chinese tech is also having its own headaches where Tencent has been perpetually stymied by local regulators blocking access to gaming licenses needed to monetize blockbuster video games.
Tencent missed badly on its earnings report and there is no end in sight to the delay.
Social media has been torn apart as of late and the weaponization of its platforms is accelerating with government operations moving onto them to fight against each other.
Interest rate revenues are the saving grace for these brokerages that account for 50% or more of revenue.
As interest rates rise, there will be a bump in interest rate revenues. However, as competition heats up and commission falls to zero, will these clients stick around for the e-brokers to reap the interest rate revenues or not?
Millennials are hard-charging into Silicon Valley start-ups such as Robinhood, and the traditional brokers’ clientele are mainly directed on the lucrative middle-age cohort.
The next development for e-brokers is who can best harness artificial intelligence to best enhance their customer experience and products.
If the Charles Schwab’s of the world must compete with nimble Silicon Valley start-ups in technology, then they will find a hard slog of it.
One of these big e-brokers is likely to implode setting off another round of consolidation.
The race down to zero is fierce, and I would avoid this whole industry for now.
There are better secular stories in technology such as the e-gaming phenomenon capturing the hearts and minds of global youth.
________________________________________________________________________________________________
Quote of the Day
“Expect the unexpected. And whenever possible, be the unexpected,” – said Twitter and Square cofounder and CEO Jack Dorsey.
Global Market Comments
August 14, 2018
Fiat Lux
Featured Trade:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
(JPM), (C), (GS), (SCHW), (WFC),
(HOW FREE ENERGY WILL POWER THE COMING ROARING TWENTIES),
(SPWR), (TSLA)
Sometime in the early 1970?s, a friend of mine said I should take a look at a stock named Berkshire Hathaway (BRKA) run by a young stud named Warren Buffett.
I thought, ?Why the hell should I invest in a company that makes sheets??
After all, the American textile industry was in the middle of a long trek toward extinction that began in the 1920?s, and was only briefly interrupted by the hyper prosperity of WWII. The industry?s travails were simply an outcome of ever rising US standards of living, which pushed wages, and therefore costs, up.
It turns out that Warren Buffett made a lot more than sheets. However, he is not a young stud anymore, just an old one, like me.
Since then, Warren?s annual letter to investors has been an absolute ?must read? for me when it is published every spring.
It has been edited for the past half century by my friend, Carol Loomis, who just retired after a 60-year career with Fortune magazine. (I never wrote for them because their freelance rates were lousy).
Witty, insightful, and downright funny, I view it as a cross between a Harvard Business School seminar and a Berkeley anti establishment demonstration. You will find me lifting from it my ?Quotes of the Day? for the daily newsletter over the next several issues. There are some real zingers.
And what a year it has been!
Berkshire?s gain in net worth was $18.3 billion, which increased the share value by 8.3%, and today, the market capitalization stands at an impressive $343.4 billion. (Sorry Warren, but I clocked 30% last year, eat your heart out).
The shares are not for small timers, as one now costs $214,801, and no, they don?t sell half shares. This compares to a 1965 per share market value of $23.80, and is why the media are always going gaga over Warren Buffett.
If you?re lazy and don?t want to do the math, that works out to a compound annualized return of an eye popping 21.6%. This is why guessing what Warren is going to do next has become a major cottage industry (Progressive Insurance anyone?).
Warren brought in these numbers despite the fact that its largest non-insurance subsidiary, the old Burlington Northern Santa Fe Railroad (BNSF) suffered an awful year.
Extensive upgrades under construction and terrible winter weather disrupted service, causing the railroad to lose market share to rival Union Pacific (UNP).
I was kind of pissed when Warren bought BNSF in 2009 for a blockbuster $44 billion, as it was long my favorite trading vehicles for the sector. Since then, its book value has doubled. Typical Warren.
Buffett plans to fix the railroad?s current problems with $6 billion in new capital investment this year, one of the largest single capital investments in American history. Warren isn?t doing anything small these days.
Buffett also got a hickey from his investment in UK supermarket chain Tesco, which ran up a $444 million loss for Berkshire in 2014. Warren admits he was too slow in getting out of the shares, a rare move for the Oracle of Omaha, who rarely sells anything (which avoids capital gains taxes).
Warren increased his investment in all of his ?Big Four? holdings, American Express (AXP), Coca-Cola (KO), IBM (IBM), and Wells Fargo (WFC).
In addition, Berkshire owns options on Bank of America (BAC) stock, which have a current exercise value of $12.5 billion (purchased the day after the Mad Hedge Fund Trader issued a Trade Alert on said stock for an instant 300% gain on the options).
The secret to understanding Buffett picks over the years is that cash flow is king.
This means that he has never participated in the many technology booms over the decades, or fads of any other description, for that matter.
He says this is because he will never buy a business he doesn?t intrinsically understand, and they didn?t offer computer programming as an elective in high school during the Great Depression.
No doubt this has lowered his potential returns, but with the benefit of much lower volatility.
That makes his position in (IBM) a bit of a mystery, the worst performing Dow stock of the past two years. I would much rather own Apple (AAPL) myself, which also boasts great cash flow, and even a dividend these days (with a 1.50% yield).
Warren will be the first to admit that even he makes mistakes, sometimes, disastrous ones. He cites his worst one ever as a perfect example, his purchase of Dexter Shoes for $433 million in 1993. This was right before China entered the shoe business as a major competitor.
Not only did the company quickly go under, he exponentially compounded the error through buying the firm with an exchange of Berkshire Hathaway stock, which is now worth a staggering $5.7 billion.
Ouch, and ouch again!
Warren has also been mostly missing in action on the international front, believing that the mother load of investment opportunities runs through the US, and that its best days lie ahead. I believe the same.
Still, he has dipped his toe in foreign waters from time to time, and I was sometimes quick to jump on his coattails. A favorite of mine was his purchase of 10% of Chinese electric car factory BYD (BYDDF) in 2009, where I have captured a few doubles over the years.
Buffett expounds at great length the attractions of the insurance industry, which today remains the core of his business. For payment of a premium up front, the buyers of insurance policies receive a mere promise to perform in the future, sometimes as much as a half century off.
In the meantime, Warren can invest the money any way he wants. The model has been a real printing press for Buffett since he took over his first insurer in 1951, GEICO.
Much of the letter promotes the upcoming shareholders annual meeting, known as the ?Woodstock of Capitalism?.
There, the conglomerate?s many products will be for sale, including, Justin Boots (I have a pair), the gecko from GEICO (which insures my Tesla S-1), and See?s Candies (a Christmas addiction, love the peanut brittle!).
There, visitors can try their hand at Ping-Pong against Ariel Hsing, a 2012 American Olympic Team member, after Bill Gates and Buffett wear her down first.
They can try their hand against a national bridge champion (don?t play for money). And then there is the newspaper-throwing contest (Buffett?s first gainful employment).
Some 40,000 descend on remote Omaha for the firm?s annual event. All flights to the city are booked well in advance, with fares up to triple normal rates.
Hotels sell out too, and many now charge three-day minimums (after Warren, what is there to do in Omaha for two more days other than to visit PayPal?s technical support?). Buffett recommends Airbnb as a low budget option (for the single shareholders?).
I was amazed to learn that Berkshire files a wrist breaking 24,100-page Federal tax return (and I thought mine was bad!). Add to this a mind numbing 3,400 separate state tax returns.
Overall, Berkshire holdings account for more than 3% of the total US gross domestic product, but a far lesser share of the government?s total tax revenues, thanks to careful planning.
Buffett ends his letter by advertising for new acquisitions and listing his criteria. They include:
(1) ?Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) ?Demonstrated consistent earning power (future projections are of no interest to us, nor are ?turnaround? situations),
(3) ?Businesses earning good returns on equity while employing little or no debt,
(4) Managemen
t in place (we can?t supply it),
(5) Simple businesses (if there?s lots of technology, we won?t understand it),
(6) An offering price (we don?t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
Let me know if you have any offers.
To read the entire history of Warren Buffett?s prescient letters, please click here: http://www.berkshirehathaway.com/letters/letters.htm.
While driving back from Lake Tahoe last weekend, I received a call from a dear friend who was in a very foul mood. He had bailed on all his equity holdings at the end of last year, fully expecting a market crash in the New Year.
Despite market volatility doubling, multinationals getting crushed by the weak euro and the Federal Reserve now signaling its first interest rate rise in a decade, here we are with the major stock indexes sitting at all time highs.
Why the hell are stocks still going up?
I paused for a moment as a kid driving a souped up Honda weaved into my lane of Interstate 80, cutting me off. Then I gave him my response, which I summarize below:
1) There is nothing else to buy. Complain all you want, but US equities are now one of the world?s highest yielding securities, with a lofty 2% dividend. That compares to one third of European debt offering negative rates and US Treasuries at 1.90%.
2) Oil prices have yet to bottom and the windfall cost savings are only just being felt around the world.
3) While the weak euro is definitely eating into large multinational earnings, we are probably approaching the end of the move. The cure for a weak euro is a weak euro. The worst may be behind for US exporters.
4) What follows a collapse in European economic growth? A European recovery, powered by a weak currency. This is why China has been on fire, which exports more to Europe than anywhere else.
5) What follows a Japanese economic collapse? A recovery there too, as hyper accelerating QE feeds into the main economy. Japanese stocks are now among the worlds cheapest. This is why the Nikkei Average hit a new 15-year high over the weekend, giving me yet another winning Trade Alert.
6) While the next move in interest rates will certainly be up, it is not going to move the needle on corporate P&L?s for a long time. We might see a ?% hike and then done, and that probably won?t happen until 2016. In a deflationary world, there is no room for more. At least, that?s what Janet tells me.
This will make absolutely no difference to the large number of corporates, like Apple (AAPL), that don?t borrow at all.
7) Technology everywhere is accelerating at an immeasurable pace, causing profits to do likewise. You see this in biotech, where blockbuster new drugs are being announced almost weekly.
See the new Alzheimer?s cure announced last week? It involves extracting the cells from the brains of alert 95 year olds, cloning them and then injecting them into early stage Alzheimer?s patients. The success rate has been 70%. That one alone could be worth $5 billion.
8) US companies are still massive buyers of their own stock, over $170 billion worth in 2014. This has created a free put option for investors for the most aggressive companies, like Apple (AAPL), IBM (IBM), Exxon (XOM), Wells Fargo (WFC), and Intel (INTC), the top five repurchasers. They have nothing else to buy either.
They are jacking up dividend payouts at a frenetic pace as well and are expected to return more than $430 billion in payouts this year (see chart below).
9) Oil will bottom in the coming quarter, if it hasn?t done so already. This will make the entire energy sector the ?BUY? of the century, dragging the indexes up as well. Have you noticed that Conoco Phillips (COP), Warren Buffets favorite oil company, now sports a stunning 4.70% dividend?
10) Ditto for the banks, which were dragged down by falling interest for most of 2015. Reverse that trade this year, and you have another major impetus to drive stock indexes higher.
My friend was somewhat set back, dazzled, and non-plussed by my long-term overt bullishness. He asked me if I could think on anything that might trigger a new bear market, or at least a major correction.
I told him to forget anything international. There is no foreign development that could damage the US economy in any meaningful way. No one cares.
On he other hand, I could think of a lot of possible scenarios that could be hugely beneficial for US stocks, like a peace deal with Iran, which would chop oil prices by another half.
The traditional causes of recessions, oil price and interest rate spikes, are nowhere on the horizon. In fact, the prices for these two commodities, energy and money, are headed lower and not higher, another deflationary symptom.
Then something occurred to me. Share prices have been going up for too long and need some kind of rest, weeks or possibly months. At a 17 multiple American stocks are not the bargain they were 6 years ago when they sold for 10X earnings. Those were the only thing I could think of.
But then those are the arguments for shifting money out of the US and into Europe, Japan, and China, which is what the entire world seems to be doing right now.
I have joined them as well, which is why my Trade Alert followers are long the Wisdom Tree Japan Hedged Equity ETF (DXJ) (click here for ?The Bull Case for Japanese Stocks?).
With that, I told my friend I had to hang up, as another kid driving a souped up Shelby Cobra GT 500, obviously stolen, was weaving back an forth in front of me requiring my attention.
Whatever happened to driver?s ed?
I have discovered a correlation in the market that you can use for the rest of this year, for all of 2014, and probably for the next 20 years. Whenever the Treasury bond market (TLT) takes a dive, bank shares rocket. This is a particularly happy discovery, as my model-trading portfolio is long bank shares and short the Treasury bond market.
By buying bank shares here you are playing the second derivative of the short bond trade. Banks are about to go from being less profitable to more profitable during a falling bond, rising interest rate environment. Every trader on the street knows this, hence the sudden renaissance of the financials.
Take a look at the charts below prepared by my friends at Stockcharts.com. They show that after tracking nicely with the S&P 500 for most of the year, Financials suddenly started to drastically lag the market in October. That was on the heels of the bond market rally triggered by the Federal Reserve?s failure to taper in September.
Fast forward to two weeks ago, when I correctly called the top of the bond market and started slamming out the Trade Alerts to buy puts as fast as I could write them. Since November 1, financials have become the top performing sector of the market, and it is dragging the (SPY) upward kicking and screaming all the way.
I?ll tell you what is happening here. Traders are dumping story driven momentum stocks like Tesla (TSLA), and piling into the biggest lagging sectors for fresh meat. The dive in Treasuries gave them all the excuse they needed. That?s why the Financial Select Sector SPDR ETF (XLF) has bolted out of nowhere to a new five year high. The same is also true for Wells Fargo (WFC) and our favored Citigroup (C).
The financials rally could continue until the sector becomes overbought relative to the rest of the market, which could be well into next year. And yes, before you ask, that includes Morgan Stanley (MS) and Goldman Sachs (GS), which are really more structured like banks now in the wake of the Dodd Frank bill.
So I am going to take profits here on my existing long position in the Citigroup (C) December $45-$47 bull call spread. With the shares now trading just short of $52, we are now too far in-the-money to get much further benefit from a continued appreciation. Better to go into cash now, so I can reload on the next dip, which could happen next week.
We grabbed 80% of the potential profit holding the position a mere seven trading days. This is my 15th consecutive closing Trade Alert, and the 20th including my remaining open profitable positions. I have only six more to go until a break my previous record of 25. It doesn?t get any better than this.
Time to enter more bids on eBay for Christmas presents. That black Chanel Classic handbag with gold trim is looking pretty good. Do you think a new Brioni suit will fit into Dad?s stocking over the fireplace? Santa?.hint, hint!
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