Greetings to everyone,
Once again, I ignored the advice given by Goldman Sachs on TV and made money! In my May edition of this newsletter I mentioned that the Chinese market was in bubble territory so I shorted the Chinese market by buying put options (which goes up when the market goes down) on the ETF, “ASHR”. I did that right after I saw the Goldman Sachs man in charge for China on CNBC saying that the Chinese market was not ready to go down. The put options I purchased are up by 25% and they have more to go on the upside. Since those remarks were made by Goldman Sachs, the Chinese market has gone down by 26% (bear market territory). As I mentioned in my last edition, the Chinese market had gone up 50% in 6 months and 100% in one year.
At the Shenzhen exchange, famous for its many tech firms, half of stocks with analyst estimates have a forward PE above 50 (current DOW30 P/E is at 16.12). I prefer companies with a P/E below 25. Some compared their current market condition to our NASDAQ market around 1999 where Yahoo had a P/E of 1,000 (approx.). They were adding 3 million new retail clients every week and 75% of those people did not have college degrees-most of these people left the educational system when they reached 15 years of age. It is safe to assume that these people were treating the market as a casino and it is no secret that the gaming industry does a good job in ‘such’ markets. US gaming analysts state that casinos around China are losing business as most Chinese believe that the Chinese government will be able to keep their market from a major sell off. Also China got introduced to the free market economy only a few decades ago. Margin financing in the Chinese market is around $600 Billion (Credit Suisse states that 9% of Market Cap is from margin bought stocks)! Just imagine all the margin calls!! I believe that this downturn has more legs but it might not go down a straight line. After the 2007 crash, Chinese investors stayed away for 7 years. Our market started going up in 2009. Most Chinese investors believe that their government will protect them from a major sell off so the market looks more attractive than casinos. It would be impossible to stop a major downturn as it would be like JP Morgan who tried to stop the 1929 crash. It is like trying to stop an avalanche with sand bags! The ripple effects could be felt all over the world.
The previous time I made money going against Goldman Sachs was when I purchased the ETF known as OIL that relates to the commodity oil (WTI). In March of 2015, when WTI was at $45, experts from Goldman Sachs were saying that WTI will fall to $25. Please note that WTI was at $110 (approx.) in July of 2014. At that time investing in oil (commodity) was a ‘no brainer’. My strategy was to make an investment at that time and if the price of WTI dropped to $25 to increase my investment by about 10 times and thereby reduce the average cost of the investment. WTI did not go down from $45 and it went up to about $61. I sold at $61 with a profit close to 25% (in 3 months) and sine then WTI has been falling to about $57. If it drops to $45 or so, I will re-enter the market again. Hopefully then it will slither down to $25. Even if the world goes in to a depression (unlikely), it is almost impossible for WTI not to go upwards of $45 in the long run and experts such as T Boone Pickens expect WTI to go over $100 in 12 to 18 months. As Jim Cramer is fond of saying now, most good oil companies are still trading as if WTI price was still at $45 but he used to recommend good oil companies when WTI was at $45. Disregarding his advice, I went with the commodity oil through the ETF, “OIL” as when you do that you do not have to worry about the debt level held by companies and other negative factors that could have an impact on the underlying company.
Now for the US market. For the past year or so I have been repeating over and over again that this market is over-valued and it is dangerous to invest in this market unless we see a 10%+ correction. IPOs coming to the market is at an all-time high; this is a very bad sign that the market is a near a top. On 6/24/15, Carl Icahn was on CNBC and he too stated that he was concerned about the market valuation. I have been admiring and following his moves since the 1980s. He is one of the best activist investors in the world! I made the mistake of not buying Apple stocks or call options when Carl Icahn got in to Apple last year-which led to an almost quadrupling of the stock price. If I am not mistaken, his investment was around $1Billion. Yet, his company lost money in 2014 due to the severe decline in oil prices. You win some, you lose some! According to Carl Icahn, this overheated stock market reminds him of the market in 2007-just before the dreadful fall. As I have indicated in my previous newsletters, the high yield market is in bubble territory. According to Carl Icahn, this is like the mortgage crisis in 2007 and he stated that some are putting out ‘fudged earnings’. On that day (6/24/15) when Carl Icahn came on CNBC, Netflix had a 1 to 7 split which made some people bullish but he who got in to Netflix long time ago, sold his holdings of Netflix with a profit of about $2 billion. In his mind, Netflix could face severe competition in the future. However Carl Icahn stated that he will not sell Apple and if it goes down, he will buy more. This is why I always ask readers to keep at least 50% of the portfolio in cash. Another point I have been making for years is that it is better to miss out on some gains to protect your capital. Being 100% invested in this market is dangerous. Carl Icahn was saying that the yield on the high yield was only 2% more than a good corporate bond and the people who invest in high yield are risking 40% of their capital to get 2% more on the yield! As Greenspan stated, “Irrational Exuberance” (speaking of the stock market, decades ago). According to Carl Icahn, he has other long position other than Apple and he is hedging these investments by shorting the high yield market as there is a link between the 2 markets. I too started shorting the high yield market by buying put options on the ETF, “HYG”.
Carl Icahn gave this warning on 6/24/15 and on 6/29/15, Dow Jones Industrial Average dropped 350 points!! That evening I checked on Asian markets and I found that they were all down again for another 2% yet the US investors tried to rally the market on 6/30/15-even though the news was bad from Greece. This is another bad sign that the US market is over-heated. The US Federal Reserve was determined to raise interest rates but due to what was going on in Europe and the warning they received from the IMF, they held back for now. The Feds also admitted that we are close to full employment so pretty soon we should start seeing inflation rising. Low oil prices have helped us to keep the rate of inflation low. The Feds also do not want to raise interest rates now as that would further increase the value of the dollar and become a problem to all US companies that do business outside the US. My feeling is that when they get to increasing interest rates, they might have to be more aggressive than they are currently planning on doing as inflation is the biggest enemy of a good economy.
Now for Greece, Europe and the Euro; as I indicated in my previous newsletters, a few months ago, and all professionals were bearish on Euro/Dollar. At that time I started shorting Dollar/Euro. Initially my investment increased but then came Greece. Initially my investment went up because the European economy was definitely getting stronger. Greece is small compared to the total EEC but if Greece leaves the Euro, Spain and Italy might follow that example. Initially that might bring down the Euro.
Greece has been living beyond its means with the aid of the EEC. Some say that it is in the interest of Germany to have Southern European countries in the Euro to keep the Euro low compared to the dollar; if not US companies will take market share from their own export market. In other words, without the Southern European countries, the Euro will be much stronger than the US dollar. Also Europeans are more concerned about inflation than the US. In the long run, I am still bullish on Euro/USD(Dollar).
Till we meet again, PEACE!
Fernando