Hello Again,
Looks could be deceiving. Common sense dictates that a storm like Harvey is extremely bad for property insurers. Past history shows a different story. State Farm the biggest with over $59 Billion in premiums, share price dropped from $94 to $92 last month. Second biggest Allstate (over $30 Billion in premiums) share price dropped only from $95 to $90. Anyone expecting to follow in Barron Rothschild’s (around 1885) advice, “Buy when there is blood on the street”, would have been severely disappointed. All the real pros of the market are aware that insurance companies make use of these natural disasters to increase premiums for everyone and make much more money in the future. Since they have been down this road before and have no compassion for human beings, they know how to pay out the least. Adam Smith (“Wealth of Nations, 1723-1790) is the father of the free market economy. According to my former professor, in his last edition of “Wealth of Nations”, Adam Smith stated that if there are no government regulations and controls, companies will destroy most people (paraphrasing Adam Smith). “Absolute Greed”. Don’t forget what happened to Valeant Pharmacy (VRX). Their business model was to buy pharma companies with life-saving drugs and increase prices exponentially. Their first excuse, ”Others are doing it” and then the second excuse, “we are doing research”. Republican and Democrat candidates attached this company during the 2016 election. Hedge fund manager, Bill Ackman made many billions out of this process.
Warren Buffet, world’s best investor and 2nd richest man called Valeant Pharmaceuticals a “sewer”. On 5/1/10, their share price was around $15. On 7/1/15, it reached its peak at $257. Through sheer greed, most funds did not sell a part of their holdings to diversify-for which they paid a huge price later. When another Pharma CEO Martin Shkreli increased drug prices by 5,000% overnight, everyone started paying attention to Valeant Pharmacy. First they blamed short sellers. Ex-CEO Pearson and ex-CFO Schiller were looked at by prosecutors. Within a very short period, the stock price tumbled from $257 to $9.25!! 96% drop!! When CNBC asked Carl Icahn if he shorted VRX, he replied, “I wish I did”. Then CEO Pearson who engineered this heartless venture got a heart attack. Through Goldman Sachs, Pearson had borrowed money on margin for the stocks of Valeant he held. Once Goldman Sachs gave a margin call and Pearson could not make the margin call so Goldman Sachs sold his holdings! Add to all that Pearson got fired from Valeant. Divine Justice? There is a “little” thing called, “bad karma”. “We reap as we sow”. In my past newsletters I covered this incident as it was happening.
Storm Harvey did not trouble the stock market. Nuclear weapon tests and threats of North Koreas did not trouble the market. Feds on an ever increasing interest rates trend is not bothering the market. Historically August to October is the worst part of the year is not bothering the market. Welcome to a genuine stock market bubble! Tulips, anyone? In the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then dramatically collapsed in February 1637. It is generally considered the first recorded speculative bubble or economic bubble (Wikipedia, “Tulip Mania”). This is not healthy for the market. This could end soon or go on for a very long time.
Week ending 8/11/17, when stocks gave back 1.4%—the Standard & Poor’s 500’s worst week since November 2016—analysts picked up on the relatively large number of new 52-week lows on both the Nasdaq and New York Stock Exchange. Considering that both indexes were just a few percent off all-time highs, this was a concern. After all, if so many stocks were reaching new lows, it meant that the indexes were driven by only a small number of large stocks. This is called a narrow market, and it usually cannot continue climbing for long. Even worse, the number of new lows on each index was close to 5% of all issues traded. That conjures up thoughts of the infamous Hindenburg Omen, which looks for very large percentages of new highs and new lows at the same time. The theory is that when this happens the market is unstable and prone to a big selloff. Unfortunately for the bears, the number of new highs backed down to a very small number—which rules out a Hindenburg. Yet it still should be of concern that so many stocks are trading at such low levels when the major indexes are doing so well. With Monday’s rebound, the number of new lows dissipated, leaving the market in a bruised condition but still in a rising trend. Both indexes are back above their 50-day moving averages, too. (Michael Kahn, Wake Up Call/Barron’s,8/14/17).
For 196 sessions, stretching back to before the election, The S&P 500 index had avoided falling in to oversold territory, essentially a standard deviation below its 50-day average. This was the 9th longest streak in nearly nine decades, and the longest since a 333 session run that ended in mid-1996, according to Bespoke Investment Group. This streak ended Friday when the S&P500 fell below 2429. Moderation of the bullish bent can be a healthy augurs well for the stock market’s health. On the other hand, it might mean the market’s Teflon phase, in which geopolitical risks and government dysfunction don’t seem to stick, is coming to an end (Barron’s Market Week, 8/21/17).
It is hard to imagine with the major stock market indexes hovering near all-time highs, but there is a growing number of stocks whose market values have been cut in half. Bespoke Investment Group counted at least 20 Russell 1000 stocks that have declined 50% or more from recent 52-week highs.
Once again, price of oil is nearing its recent bottom. We have to watch this closely. Due to low oil prices, we came close to having a meltdown in the bond market. Consider the ETF, “OIL”; it reached a one year low on 6/22/17 at $4.47. It went up to $5.33 on 7/31/17. On 8/30/17, it reached $4.72. This could provide us an opportunity to increase our holdings on Schlumberger, Exxon and Chevron- if the share price drops below our average cost.
Due to greed, South Korean market was rising to new highs without taking tensions between the US and North Korea. A couple of months I was tempted to short sell the South Korean market by buying put options on the ETF, “EWY” but I did not follow through. From 7/24/17 to 8/10/17 (10 days), EWY fell from $71 to $66, that could have been a 100% profit on some put options. Since 8/10/17, EWY has been rising sharply which shows that they are not taking North Korea/US tensions seriously. With the hydrogen bomb test a couple of days, I placed an order for some put options on EWY (expiring January 2018) for a mere total cost of $65. In 1987, I was managing my father’s investment and since I was following the technical analyst Prechter, I knew that we could have a serious correction between August 2017 and November 2017 so I persuaded my father to buy put options on the US S&P500 Index. One day prior to the crash those were worth $1 per contract and the day after the crash the same options were worth $70 per contract! I asked my dad to do that as a hedge against all the stocks and mutual funds he owned.
GE- GE Cuts Wind-Energy Stock Stake by $30M. General Electric is big on natural gas and health-plan software, and less of a fan of a wind-energy stock. GE (ticker: GE), in some of its last investment moves under former Chief Executive Jeff Immelt, disclosed positions in Tellurian (TELL) and Castlight Health (CSLT) common shares while cutting its stake in TPI Composites (TPIC) by nearly two-thirds. GE unveiled in a regulatory filing that as of June 30 it held just under 900,000 shares of TPI, a maker of blades for wind turbines, valued at $16.6 million at the time. That’s a 2.7% stake, down from a stake of 7%, or 2.4 million shares, as of March 31 valued at $46 million.
The Journal has already noted that new GE CEO and Chairman-elect John Flannery has bought $2.7 million in shares for his 401(k) plan. But GE Vice Chair Beth Comstock has taken the opposite tack, selling 25,000 shares on Aug. 9 for $633,000, or $25.65 each. Why sell now? It’s Comstock’s first stock sale since Nov. 26, 2014, and she got a better selling price then: $26.82, on average. Our colleagues at MarketWatch have noted that she is seen by company insiders as a “close ally” of former CEO Immelt. Whether or not Comstock is less upbeat on GE, her transaction probably won’t take the wind out of the company’s sails.(Ed Lin, Inside Scoop.8/16/17) Warren Buffet’s Berkshire Hathaway dumped its 10.6 million share stake in GE in the 2nd quarter. Ge declined to comment on the move. The sale came in the same quarter that GE replaced CEO Jeff Immelt with GE executive John Flannery (Barron’s, 8/21/17).
IBM- Century-old IBM (ticker: IBM) has a product history that spans from punch-card tabulators to cloud analytics software, but over the past five years, it has been busy manufacturing disappointment on Wall Street. A remarkable 16 of the company’s past 20 quarterly financial reports have triggered one-day stock declines, averaging 4.5%. It’s a wonder that shares have lost only 28% of their value over that stretch. Now it’s time to buy. No, really. Three reasons: The shares are cheap. They pay a lot. And the main factor that has been pushing them lower is about to reverse. In short, investors could make 35% over the next year. IBM’s challenges stem from a long shift in computing power from hardware to software, and from local machines to the cloud. That has resulted in lower margins for many types of machines and limited growth for on-location technology services. IBM’s revenue has declined from over $104 billion in 2012 to an estimated $78 billion this year, while its profit has shrunk from $17.6 billion to an estimated $12.9 billion. Neither of those measures is an ideal gauge of IBM’s turnaround progress, however. Some of the revenue decline has been voluntary—the result of walking away from commodity hardware business. The profit drop has been skewed by tax swings, but even pre-tax profit has been pushed and pulled by things like restructuring charges and patent sales. A new analysis by Morgan Stanley finds that gross profit--that is, product- and service-level profits that don’t factor in corporate-level contortions—is both a relatively clean measure for tracking IBM’s progress, and one that has had a high correlation with its share price movements. It’s about to begin pushing higher for the first time in five years. IBM has invested more than $30 billion in what it calls strategic imperatives: social, mobile, analytics, cloud and security technology. Growth in these lines has been obscured by declines elsewhere, but is poised to begin shining through. Last year, revenue from strategic imperatives reached 41% of total revenue, up from 22% in 2013. This year, it could reach 51%. At the same time, a new mainframe developed to help protect financial services companies from cyber-attacks could bolster results in coming quarters. IBM’s most recent quarterly numbers, published last month, showed continued declines on total revenue and adjusted profit, and were poorly received by investors. But Morgan Stanley’s Katy Huberty saw something to like. Gross profit margin from incremental business came in at 90%, compared with 73% on average over the past three years. That’s a sign IBM is playing for profits rather than growth. She predicts a return to overall gross profit growth beginning in the fourth quarter of this year, and continuing into next year.(Jack Hough, “Ahead of the Crowd”,8/24/17).
Apple- Apple set a budget of about $1 Billion to buy and produce original content over the next year. The phone and computer giant could produce up to 10 television shows (Barron’s, 8/21/17).
Have a great month!
Fernando