Hi Again,
Our stocks had a great month in October 2017- the month of all the market crashes! During the past 31 days, our overall portfolio went up 4.62% in 31 days! Over the same period, Twitter went up by 22.23%, Bank of America went up by 8.09%, GM went up by 6.44% (not the highest for the month), and IBM went up by 6.19%. 2017 has been very good for most global equity markets which some call “global synchronized global growth”. In 2017, so far, the US market (S&P500) has been up 15% but most markets like China, India, Europe, Japan, Brazil have been up for 20% to 33% over the first 10 months of 2017. Remember one thing-corrections and crashes also could happen globally! The stocks with the highest growth are some of the most at risk.
Apple hit an all-time high of $169.04 on 10/31/17. Since our average cost is $92.62, our gain (for 29 shares) on Apple for the past 27 months was at 82.51% on 10/31/17. Once again, let me remind you when I asked you to buy and also to hold this stock, some of the best minds on Wall Street like Carl Icahn and billionaire “Mr. Wonderful” of Shark Tank were dumping their holdings of Apple.
Since 1/1/16, Twitter has been bringing down our whole portfolio and there were many times when I wondered if I made a mistake about Twitter. However even though most prudent investors were buying the stock, no prudent investor was selling it. As long as Trump is President, I do not think Twitter would go insolvent. On 10/26/17, finally, surprising everyone, Twitter reported an increase in users, even though revenue did not increase (which will come later). Twitter began the day on 10/26/17 with a gain of 18% for the day! The following day, in just 3 hours, Twitter was up another 5%! Please keep in mind that this huge 23% gain in a matter of hours is partly due to short covering (people who had previously shorted the stock and now had to rush to buy the stock to cover their losses). I love to put money in to stocks with a good future as well as a huge percentage in shorts.
Twenty months ago, when all analysts hated IBM (at $121) , I asked you to buy it. A few months ago, most analysts, including the world’s best stock picker Warren Buffet lost confidence in IBM but we did not lose our confidence. On 10/17/17 evening, IBM reported good earnings and 10/18/17 began with a 9% increase in IBM-raising the price over $161
My strategy is not to maximize your gains in the stock market. People who attempt do that lose in the long run. Always remember to have 50% in cash. Having a prudent discipline is the key to success for the long run. Globally we see what we saw in the late 1920s. Over the past 40 years, market crashes in the US (not Japan) recovered within a short period of time; that happened as central bankers who learned from the 1929 crash (i.e. Greenspan, Bernanke) flooded the economy after each crash. Now the central bankers are out of ammunition. A few months ago, as I reported in my newsletter, according to the IMF, all global debt was at USD $192 Trillion but a few days ago, CNBC reported that now total global debt is at USD $220 Trillion. One day this dam is going to burst! According to the CIA, total global GDP (all goods and services produced) for 2016 was at USD $106 Trillion. President Trump is seriously considering appointing Sanford’s John Taylor as Fed Chair to replace Janet Yellen. Taylor has been an opponent of easy money policies of the Feds; and this could lead to an economic disaster when the Feds do not come to rescue the economy as it did around 2009. I seriously believe that the Dow could go up to 30,000 to 50,000 within the next couple of years and then crash down to 10,000 or so. I also believe that we will have a 1929 style crash where it would take more than 30 years to recover. If you had $10,000 in the market around 3/1/29, you would have got your money back around 7/1/58. The market reached a peak around 3/1/29. Then the drop brought it close to zero in October 1929.After a crash, according to the Elliot Wave Theory, there is a bullish period when everyone thinks that the ‘good old days are back again’; and then they get caught to the next wave down. The 2nd leg down is 3/2 times the first wave. 3/2 is the golden ratio that mathematicians find everywhere in the universe. In fact, by 2/1/37, the market recovered 55% of its original loss. I do not think anyone was prudent enough to get out of the market. Then again, people like Joseph Kennedy was amazed that even his shoe shine boy was investing money in the market, so he sold all his holdings prior to the 1929 crash.
When the 1987,10/19/87 crash happened and lost 25% in one day, treasury rates rose from 7% to 10%!! For the past few years, treasury rates have been around 2%.On this 30th anniversary of the 1987 stock market crash, on the 10/16/17 issue of Barron’s, the Editor in Chief asked, “Where were you on that Monday in 1987 when you learned the market crashed catastrophically?”. I was watching the stock market on FNN (now CNBC) market coverage. Ben Levisohn asks whether if we are in a similarly precarious position today. The answer is “yes”. Barron’s go on to say, “No one in living memory had seen anything like it, at least not in the US, and in the postmortems conducted to understand just how the Dow managed to drop 508 points (25%-it is like a 6,000 point daily drop today) in once day. Experts found a culprit; so-called portfolio insurance, a quantitative tool designed to use future contracts to protect against market losses. Instead it created a poisonous feedback loop, as automated selling begat more of the same. In fact, 1987 was the first market created by computers. Now, in 2017, that risk is much higher. Hedge fund assets managed via quantitative strategies have risen from $392 Billion in 2008 to $918 Billion in 2016. Just during the first 2 quarters of 2017, it was up to $933 Billion. Over the past few weeks, all the experts who came on TV and in the media to do postmortems on the 1987 crash said that 1987 type crash will not happen again. I think worse crashes could happen. After 1987, under the revised rules approved by the SEC in 2012, market-wide circuit breakers kick in when the S&P 500 Index drops 7 percent (Level 1), 13 percent (Level 2), and 20 percent (Level 3) from the prior day's close. At Level 3, market closes for the day. Unlike a circuit breaker that stops stock trading, the Securities and Exchange Commission's Rule 48 makes it easier and faster to open the stock markets — when there are fears that the market could open with a lot of volatility that would disrupt trading. The idea behind circuit breakers is that investors will return the next day with a ‘cooler head’ and the crash will not continue. I always disagreed with that concept. August 2015 Shanghai crash (8.48% drop in one day) proved me right as the market would close for the day and the very next day, it would fall another 20% in about 5 minutes after the opening and close again. Funds that had to sell to meet obligations or go insolvent, became insolvent. This trend repeated till the Chinese government came up with very strange laws to control ‘market activity’. As most westerners said at that time that China can get away with it as it is a total dictatorship but it is not feasible for the US, Canada, Europe or Australia. We are in a bubble so we could easily go up to 30,000 to 50,000 on the Dow in a matter of months or years. Warren Buffet recently predicted that we could see 1,000,000 on the Dow. Contrarians know very well that when you hear that, it means that we are heading for a crash. I do not think we will see 1,000,000 on the Dow for another 100 years or more. All global markets have been going up so this is not limited to the US. Over the past few months, what has been the best stock market in Europe? Greece! That says it all! With time, people are seeing the market as a casino and not as a place for investments. This is very true for the Peoples Republic of China where their Central Bank printed over USD 35 Trillion over the past decade or so and now responsible for 50% of the global money supply.
Last week was a big week for earning calls for some of the biggest companies in the US. Tech companies like Amazon, Alphabet (Google), Intel, reported very good earnings. At 9.30am Pacific Time on 10/27/17, the Dow was up 0.14% for the day and S&P Tech Index was up 2.99% for the day! This sure reminds me of the 1999 tech bubble but this could go on for years! It took only 52 days, for the Dow to go from 22,000 to 23,000! The bubble is alive and well! The meltup before the storm? Maybe it’s the calm before the storm so said President Trump at a white house photo up on Thursday (10/5/17) evening. What the white house press corps did not realize was that Trump could have been offering sage assessment of the world’s stock and bond markets (all over the world). Calm has descended upon them to an extent unprecedented in modern financial history. Hours before he offered his cryptic statement, the CBOE volatility index (VIX) also known as the fear index closed at its lowest level since 1993! (Randall W Forsyth, Up and Down Wall Street, 10/9/17).
Trading in CBOE Volatility Index options has become a mirror into the collective soul of investors. Even as stocks grind higher, and the Standard & Poor’s 500 index is the least volatile it has been since 1965, an increase in VIX options trading shows investors are having a hard time believing what they are seeing. As a result, many investors have bought upside VIX calls to hedge stocks, and even high-yield bonds, that the volatility market’s trading pattern is at an extreme. Of the almost 12 million outstanding VIX options, 9.15 million are for calls that would increase in value if VIX rises. The VIX tends to jump during periods when stocks swoon. Even though low volatility defines the stock and options market, outstanding puts total 2.5 million. The data suggest that many investors expect historically low levels of volatility could end by year’s end. These VIX observations are not shared to spread fear. As stated before, stock prices seem capable of heading higher as long as economic data and earnings remain in reasonable shape. The intent is to remind investors that risk, and return, coexist in the market. Investors who are too focused on risk, are likely missing out on returns, and vice versa. Many investors now run perpetual hedges to keep the risk of their portfolios in check. This is why VIX has emerged in recent years as a primary hedge for stock and high-yield bond portfolios.(Steven Sears, The Striking Price/Barron’s,10/5/17) This is one big reason why we have not seen much volatility! There is fear and pessimism but it comes in the form these very technical hedges. In my opinion, investors who believe that they are safe as they have these VIX hedges, are operating from a false sense of security. This could fall apart for many reasons. Consider the counterparty risk; what if the VIX ETF becomes unable to make ends meet in a terrible crash? Also, historically, I have seen times when the VIX Index does not really reflect the volatility that is seen in the market. Therefore I suspect, when the ‘big one” (market crash) hits, there will be more ‘blood shed’ than ever before!
Cramer turned to technician Carley Garner, the co-founder of DeCarley Trading, author of Higher Probability Commodity Trading and Cramer's colleague at RealMoney.com, to gauge the likelihood of a corrective drop. Garner pointed to some worrying signs in the monthly charts of the two indexes. For one, the S&P 500's Relative Strength Index, which measures how overbought or oversold a stock or index is at a given time, just reached 80 for the first time since 2007. "A reading over 70 is rare and signals that we're pretty overbought, meaning we've come up too far too fast," Cramer explained. "Over the last 20 years, the RSI on the S&P 500's monthly chart has broken out above 70 just three times ... One, the peak of the dot-com bubble in 1999 and 2000, then right before the financial crisis in 2007, and then the oil implosion in late 2014." Plus, the S&P 500 is running close to its ceiling of resistance at 2600 and its floor of support is in the mid-2100s. Similarly the Nasdaq 100 is showing signs of being overbought and is close to its ceiling of resistance. "Here's the bottom line: the charts, as interpreted by Carley Garner, who's been spot-on for us, suggest that this rally might have a shorter shelf-life than we'd like," Cramer said. "I'm a little more optimistic than that because the earnings from some of these great American companies have been so breathtaking. But you need to hear Garner's message because complacency, for all of us, is dangerous. When everyone else is euphoric after a huge run, it does not hurt for all of us to be a little more skeptical."(Elizabeth Gurdus, CNBC,10/24/17)
Glaxo Smith Kline- Buy 10 more shares to take advantage of the share price falling below 10% of our cost. Last month I assumed that this stock might start to go up again soon but now the loss has increased to about 10% and the dividend yield now is at 5.48%. As long as they do not cut the ‘dividends per share’, the yield as a percentage will continue to go up and that alone would attract buyers in the future. All this time, the general assumption on Wall Street was that Trump and the Democrats continue to complain about prices gouging in healthcare but the Republican congress will not do anything about it. Price gouging in this industry has continued well in to 2017. On 10/31/17, CNBC reported that 40 state attorney generals have filed law suits with respect to price gouging. My thoughts are that after Trump gets immigration and tax cuts, he will work with Dems to control price gouging in healthcare. If not, he might lost his base.
Twitter- Since 1/1/16, Twitter has been bringing down our whole portfolio and there were many times when I wondered if I made a mistake about Twitter. However even though most prudent investors were buying the stock, no prudent investor was selling it. As long as Trump is President, I do not think Twitter would go insolvent. On 10/26/17, finally, surprising everyone, Twitter reported an increase in users, even though revenue did not increase (which will come later). Twitter began the day on 10/26/17 with a gain of 18% for the day! The following day, in just 3 hours, Twitter was up another 5%! Please keep in mind that this huge 23% gain in a matter of hours is partly due to short covering (people who had previously shorted the stock and now had to rush to buy the stock to cover their losses). I love to put money in to stocks with a good future as well as a huge percentage in shorts.
GM- "Like wide ties, General Motors was out of style for years — until very recently, the skinny tie reigned supreme — but in 2017 the wide tie has made a comeback and so has the stock of GM," the "Mad Money" host said. With shares up over 25 percent since the end of August, General Motors, once a low-growth, bond-like stock, has become "beloved" by the Wall Street analyst community, Cramer said. In the last three weeks, analysts from Deutsche Bank, Bank of America-Merrill Lynch and Barclays peppered General Motors with upgrades and the stock caught a wave of price target raises. One Citigroup analyst was so bullish on the $45 stock that he came out with a possible $134 price target. "That's the kind of coverage you might expect for a fast-growing, cloud-based software stock, not a major American automaker," Cramer said. Cramer found several possible reasons for General Motors' rally. Its shares caught fire right when Hurricane Harvey hit Texas and potentially destroyed half a million cars. Given that many thought the auto industry had peaked before Harvey hit, Cramer saw the rise in General Motors and other auto stocks as a sign that the "peak auto" thesis would be put on hold. Plus, General Motors' monthly U.S. sales have been improving, according to the company's latest earnings report. But a one-off hurricane and an otherwise tepid earnings report hardly explained analysts' infatuation with the stock, Cramer said. The analysts who recently upgraded General Motors cited the company's autonomous driving platform, which Deutsche Bank said would come to fruition much sooner than expected; Maven, its millennial-targeted car-sharing business; and the stock's low valuation. "Really, though, none of this explains why GM's stock has gone from zero to hero in a matter of just months," Cramer said. "Everything I've just mentioned certainly helps, it's a nice background, but none of it gets at the real issue here. The real reason, I think, for the sudden love [is] you're witnessing a re-rating of GM's shares by the analysts and then a total change in the investor base."(Elizabeth Gurdus, CNBC,10/16/17). Cramer is surprised that investors just discovered GM but we got in to GM about 2 years ago! Check our past issues!
Ford- Ford (F) anticipates electric vehicles and various hybrid derivatives to comprise two-thirds of the global vehicle mix by 2030. In our opinion, as the industry progresses to electrification and connectivity, more robust electrical architecture will be needed. It was clear to us that Ford intends to partner with suppliers with technology (although they did not rule out some vertical integration). We believe Delphi (Aptiv) should benefit from advanced electrical architecture design. In addition, the company’s powertrain unit (Delphi Technologies ) should also be a benefactor from the increase in hybrids and electric vehicle propulsion. BorgWarner (BWA) should benefit as well. We note that Ford plans to whittle its engine architectures to 12 platforms by 2022 (versus 17 today) and decrease powertrain capital spending by 32% to $1.2 billion by 2022. In our opinion, Ford is taking a page out of Honda Motors ’ (HMC) playbook about reducing the number of orderable combinations (reducing complexity and saving cost). We think this could lead to more-consistent lad times for suppliers and possible uptake on certain content. (Kwas & Lim, Investor Soapbox, 10/5/17). Yet naming a new CEO (Jim Hackett) and stability in the stock (it’s now up 5.3% year-to-date through Thursday’s close) haven’t curbed selling by executives. In fact, excluding big 2016 sales by Fields and Henry Ford’s great-grandson William “Bill” Clay Ford Jr. (who holds the elaborate doubled title of executive chairman and chairman), selling of common shares has ramped up significantly year-to-date in 2017, to $7.1 million from $4.1 million in all of 2016. Fields and William Ford sold $9.7 million and $14.8 million in stock, respectively, in 2016. We’ve recently written about General Motors ’ (GM) executives who sold into stock strength. Interestingly, many Ford executives sold their shares at prices for modest gains from the end of 2016--and even at small losses. The last time a Ford executive bought common shares was in November 2011 when Bill Ford paid $9.89 each for 25,000 shares. The only person who’s bought common shares since then is Ford director John C. Lechleiter, who retired as Eli Lilly’s (LLY) CEO at the end of 2016; he bought $128,000 in Ford stock that year but none yet in 2017.(Ed Lin, Inside Scoop,10/6/17)
GE-Even though the share price is not below the average cost, buy 10 more shares at this time to make use of this low price. Buy when everyone hates the stock! Watching General Electric struggle is painful, said Bob Nardelli, the company's former transportation CEO and power systems CEO. GE's famously predictable stock price has fallen 26 percent this year. John Flannery replaced Jeff Immelt as CEO in June. Earlier this month, the company made several management changes and and added Trian Partner's founding partner and chief investment officer Ed Garden to its board of directors. "(Those were) some of my best days, both with the colleagues I the had chance to work with. I was blessed and fortunate to get mentored by Jack Welch, who was clearly the best leader, the ultimate leader and the ultimate CEO," Nardelli told CNBC's "Fast Money" on Monday. "We always had that yin and yang kind of thing going on so we were able to have steady, predictable earnings quarter after quarter, year after year. And that's probably what's missing a little bit," he said. "If you look at the goes ins and the goes out, there's been a lot of goes outs, but not a lot of goes ins." He said he doesn't know if he would point his finger at any one person for GE's struggles. However, he did say GE needs to maintain its dividend or else risk losing confidence — and shareholders.(Angelica La Vito, CNBC, 10/16/17) The options market is treating General Electric’s dividend cut as a fait accompli. GE’s (ticker: GE) options are priced as if the 96-cents annual dividend will be reduced to 71 cents. Stock investors, however, are speculating that the dividend will be lowered even more sharply to 60 cents a share. The discrepancy between GE’s options pricing, and some analyst commentary, illuminates the controversy surrounding GE’s third-quarter earnings that will be released early Friday. The company is considered to be in such bad shape that investors are braced for the new chief executive to pretty much say or do anything to show investors that he understands the enormity of GE’s problems. In anticipation, many investors have bought bearish puts, which increase in value when stock prices decline, to hedge or short GE stock. JPMorgan Chase (JPM) has been an early, persistent GE bear, and now Goldman Sachs Group (GS) is advising clients to prepare for the stock to trade lower on earnings, and even after a Nov. 13 analyst-day meeting. The company is expected to reduce financial guidance for 2017, and perhaps beyond.(Steven M Sears, The Striking Price, 10/19/17)
IBM- Twenty months ago, when all analysts hated IBM (at $121) , I asked you to buy it. A few months ago, most analysts, including the world’s best stock picker Warren Buffet lost confidence lost in IBM but we did not lose our confidence. On 10/17/17 evening, IBM reported good earnings and 10/18/17 began with a 9% increase in IBM-raising the price over $161
Schlumberger- Even though the share price is not below the average cost, buy 8 more shares to take advantage of the low price. Since we added this stock, our gain has fluctuated between 1% and 30%. Schlumberger's third-quarter earnings results shed more light on the state of the oil and gas industry than Wall Street realized, CNBC's Jim Cramer said on Monday (10/23/17). "The long-term commentary here was a lot more bullish than some people seem to realize. After spending years in purgatory, Schlumberger now says that the oil industry's about to get back on track," the "Mad Money" host said. On Schlumberger's conference call, CEO Paal Kibsgaard said that, as supply and demand for oil fall into balance, producers will start spending again, giving oilfield services giants like Schlumberger an eventual boost to their numbers. "The best thing that could happen to Schlumberger long term is a healthy oil market where crude can go higher. The company believes we're getting there, but the oil service industry might need to experience some near-term pain first," Cramer said. "At these levels, with oil possibly making a major comeback next year ... I think you're getting an excellent buying opportunity in the best stock of the best company in the entire industry, Schlumberger."(Elizabeth Gurdus,CNBC,10/23/17)
Bank of America-With Bank of America’s third-quarter upside, we’re raising our full-year 2017 earnings-per-share estimate to $1.81 from $1.77; our 2018 and 2019 EPS estimates are unchanged at $2.10 and $2.30 per share, respectively. Our target price is unchanged at $31. We continue to recommend purchase of Bank of America (ticker: BAC) shares and are that much more encouraged in prospects for outperformance given year-to-date results. Better revenue growth, visible operating leverage and manageable credit-cost incApplying our weighted average valuation methodology (using a 35% weight on our blue-sky scenario, a 50% weight on our base-case scenario, and a 15% weight on our gray-sky scenario), our target price stands, at $31, translating to a price-to-forecasted-year-end 2018 book value of 1.2 times (1.7 times price/tangible book value (TBV)).reases will drive realization of franchise value. [We rate Bank of America at Outperform.] (Credit Suisse, 10/17/17) At a time when the financial sector has been left behind by a strong stock market rally, BofA has stood above the crowd even as it has had to withstand some of the same headwinds as other banks. The second-largest U.S. bank by assets reported third-quarter earnings of 48 cents a share, ahead of Wall Street estimates. BofA did say it had seen a 22 percent slide in bond trading, mirroring a broader industry trend. Moynihan (BofA CEO also praised the pro-business environment created by Washington, which he said is helping his company succeed, in particular the lowering of regulatory barriers.(Jeff Cox,CNBC,10/26/17)
Alcoa-We increase our 2018 earnings before interest, taxes, depreciation and amortization (Ebitda) estimate on Alcoa to $2.4 billion from $2.08 billion and 2019 to $2.28 billion from $2.05 billion to reflect improving aluminum and alumina prices. We are downgrading to Hold from Buy. We are cautious on the alumina breakout, even as Alumina Limited has traded up a strong 40% year-to-date as spot alumina prices have climbed from $300 per ton to $390 mainly due to Chinese environmental restrictions, while bauxite prices have been tempered by Guinea exporting to China. We believe that the increase in the alumina price may be short-lived given as alumina is less energy-intensive and less polluting than aluminum production, creating less environmental-curtailment upside. In the short term, two-thirds of Chinese alumina production is in the four key provinces looking to curtail pollution during the winter months of November to March. We expect an alumina price on the order of $360 per ton in 2018 drifting down sub-$350 by end of decade, although would note uncertainty caused by shortage of coke and pitch (which limits margins as well). We now recommend Hold on Alcoa as the cycle may be long in the tooth (we do not fully buy into the broader macro reflation trade), valuation is less compelling, and we believe a Rio Tinto merger is less likely until prices normalize. We still see a merger catalyst in the medium term but believe we should be on the sidelines until alumina prices reset. We note a 7%-plus free-cash-flow yield in 2018 and capital deployment optionality but minimal potential benefit from tax reform.(Justin Bergner, Hot Research PM, 10/5/17)
Apple- Apple hit an all-time high of $169.04 on 10/31/17. Since our average cost is $92.62, our gain (for 29 shares) on Apple for the past 27 months was at 82.51% on 10/31/17. Once again, let me remind you when I asked you to buy and also to hold this stock, some of the best minds on Wall Street like Carl Icahn and billionaire “Mr. Wonderful” of Shark Tank were dumping their holdings of Apple.
Have a great month!
Fernando