November 14 Post

Hello Again,

During October 2019, our portfolio increased by 4.73% (see our score board) and that was after

a 3.91% increase in September 2019.  The total average gain from “day one” (in our portfolio) is at

71.97%. This is a very diversified portfolio. We have, health, auto, oil, banking, country ETF,

entertainment, commodities and technology/consumer goods. Some have temporary losses but one

day when others are not performing well, these could end up being the stars of our portfolio. I asked

you to sell GE due to information on accounting fraud but now it seems like that claim is not true.

If I did not sell my personal call options, I could have made a profit of 500% by now. Then again,

If the same thing happens, I will do it all over again and the reason is that in investments, the

discipline is more important in the long run than making money in the short run. The gain that can

be seen on the scorecard is purely a comparison of purchase prices to the current prices; and that

is misleading. To take the total gain, we have to take the dividend yield as a compounded interest

rate.  The dividend yield on some of our stocks are: Glaxo Smith- 4.42%, GM-3.95%, Ford- 6.75%,

Exxon- 4.77%, Chevron- 3.91%, Schlumberger- 5.54%, Valley National- 3.8%, Apple-3.08%. I am

not listing our stocks that pay less than 3% dividends (i.e Bank of America). Compare all this to the

10 year treasury paying about 2% and 80% of the developed countries having negative rates on their

sovereign bonds.  Now assuming that these dividend rates were constant for the past 5 years, taking

the compounded interest rates, let us calculate how much you have gained from dividends that is

not seen on our scorecard. Solely on dividends, for the past 5 years you would have gained (magic of compounding!):

·       Glaxo Smith-24.14%

·       GM-21.37%

·       Ford-38.62%

·       Exxon-26.24%

·       Chevron-21.14%

·       Schlumberger-30.94%

·       Valley National Bank-20.5%

·       Apple-16.38%

For the past few years only a handful of stocks had significant gains. Recently most stocks in the

market are on the rise-much wider participation. This is very healthy. A couple of weeks ago, a

well known technician predicted that very soon the Dow Jones Industrial Index (DJIA) would

reach 29,000; and at that the DJIA was at 27,500. He also stated that high dividend stock would

lead the rally; and he recommended Walgreens and Dow Chemical. At that point Jim Cramer said

that he would not recommend Walgreens as CVS was better. One week later Walgreens and Dow

Chemical were much higher. This is the magic of technical analysis/chart analysis. The people

who make fundamental analysis their primary method of selecting stocks put the cart before the

horse.

Have a great month!

Fernando

October 27 Post

 Hi Again,

Different sectors are in recession and many sectors are in an economic slowdown but the overall

economy is not expected to get in to a recession as the Federal Reserve is doing everything possible

to prevent a recession in the US. Manufacturing is in a recession for sure. There is a slowdown in

transportation. As you may have noticed, Schlumberger has been in a bear market for a long time

and this shows what is happening in oil and drilling in the US. There has been a lot of oil well

shutdowns in Texas. During the recession created by the mortgage crisis, the only bright spot was

Texas with its booming Oil industry. In 2008, we had 156,588 oil producing wells in Texas. In 2015,

It peaked at about 193,000. In 2018, it was down to 187,000. Now on a monthly basis, it keeps going

Down significantly. Fed Chairman expect US GDP to grow more than 2% in 2019. In most countries,

The tool of using monetary policy to stimulate the economy is over; and that is due to negative

interest rates in most countries. However the US Federal Reserve is not out of ammunition. Recently

I asked a Sr. VP at Western Mercantile Bank if we are heading towards a recession and what they

expect in terms of their revenue for the next 12 months; and he said that they expect their revenue

to grow 20% over the next 12 months. I thought he was overly optimistic but after our conversation,

the Federal Reserve embarked on another program for which that asked not to be called a “QE

Program” to reduce short-term interest rates so banks could lend more and make more money. During

the QE program after the mortgage crisis, the Feds bought 10 year and 20 year treasuries but this

time around the Feds are buying at the very low end Treasuries. For decades, Feds lowered interest

rates to stimulate the house building and buying market which in turn leads to economic growth in

the total economy. In 2018 the Feds started to increase interest rates and home building stocks

took a dive. On 12/24/18, ITB (index for home builders) hit a low of $29.99. On 10/8/19, it was

at $45.27- 51% gain in about 10 months!! Chasing momentum stocks is not a prudent investment

strategy. On the other hand being a contrarian one has to be careful “not to catch a falling knife”.

I was thinking of adding Fedex to our portfolio but I am not sure about Fedex. Last time it reached a

high was on 1/16/18 when it reached $274. Now it is at $150. However the PE is still too high at 88!

A couple of months ago, a Fedex pilot told me that he does not see an economic slowdown affecting

Fedex. He said that business with China has been going down for a few years and it is due to

many companies pulling out of China due intellectual property theft. He also said that there has

been an increase in business with India and Africa. According to this pilot, planes to South Africa go

full but come back empty (all exports from the US) but planes to India gets full both ways. I told him

that their CEO told Wall Street to expect lower revenue figures in the future and he replied, “That is

not what we hear from our bosses”. Interestingly just a few days the FedEx CEO once again told

Wall Street to expect lower revenue figures in the future. If you look at the bigger chart of Fedex,

starting from 1976, the chart made a triple top which is not good for the long term. At this time the

market is close to an all time high and a severe correction would be very healthy for the market but I

do not know if that is in the cards for us.

Have a great month.

Fernando

September 9 Post

Hi Again,

 Insiders, especially CEOs, do not sell stocks of their companies because a recession is coming; they do that when they have reason to forecast a bleak future for themselves. When insiders are buying it is good to buy the stock and the reverse is also true.

New York (CNN Business)The leaders of Corporate America are cashing in their chips,doubts  grow about the sustainability of the longest bull market in American historyCorporate insiders      have sold an average of $600 million of stock per day in August, according to TrimTabs Inv. Research, which tracks stock market liquidity. August is on track to be the fifth month of the yr in which insider selling tops $10 billion. The only other times that has happened was 2006 & 2007,

the period before the last bear market in stocks, TrimTabs said.

The Institute for Supply Management’s purchasing managers index fell to 49.1 in August from        51.2 in July. A reading below 50.0 signals contraction in the industry. This was the first contractionary reading since August 2016. A similar manufacturing index from IHS Markit            fell to its lowest level in nearly a decade on Tuesday. However, “ISM is no stranger to false signals,” Renaissance Macro’s Neil Dutta presciently observed back in 2016.    While a sub-50 ISM is bad news for folks in the industry and a troubling sign       for the economy, these indices need to fall a lot further before they signal that     the U.S. economy is in recession. “A PMI above 42.9 percent, over a period of time, generally indicates an expansion of the overall economy,” the ISM said. In a note to clients           on Monday, Pantheon Macroeconomics’ Ian Shepherdson noted: “It's entirely possible for manufacturing to be in recession—as it is now, and as it was in from Q1 2015 through  Q2 2016—while GDP growth runs at 2% or more.” “Manufacturing now accounts for only      about 12% of GDP, 15% of capex, and less than 9% of payrolls,” Shepherdson added. (Yahoo

Finance, 9/4/19)

The golden question is “Are we going in to a recession?”.  What is the definition of a recession?

Two consecutive months of negative GDP growth. At times certain parts of the economy or

geographical parts of the country could be in a recession. When defense spending was cut

in the 1990s after the end of the cold war, places like Southern California went in to a

recession. These days, 2/3 of the economy is in the service sector and it has been growing

monthly for the past 110 months up to September 2019 (including August 2019). Some

analysts believe that if manufacturing and other sectors affected by trade wars start laying

off employees, it will impact consumer spending (70% of GDP) and we will find ourselves

in a recession. So far we have not had a single quarter of negative GDP growth.

Once again let us consider what technicians have to comment on the immediate future of

the stock market. Technician Carter of CNBC states that first we will test the lows of June

2019 and then we might test the December 2018 lows (S&P 500 at 2350); and if we go to that

level, it would mean that what we had was a “bear rally” and we were not in a bull market.

Several technicians have been showing that the S&P 500 chart is forming a big “wedge”.

On 8/29/19, Sven Henrich, technical analyst, stated that this “wedge mega phone” broke to the

downside, we could have a big crash but if we move to the upside, we could have a huge

rally to the upside. In other words, in 6 to 12 months, we would be at a much higher or a much

lower level than today. Analyst Northman stated that we are currently seeing a “screaming

sell signal” as 9 economies are already in a recession. If the S&P500  falls to 2300, that is a

21% “crash” or a correction. I monitor the VIX index at all times. It is quite interesting how

The fear level increases and decreases in the market. Many analysts believe that if the VIX go

Over 30 it would be very bad for the market. Then again I will not be surprised if people ignore

all this and send the market skyrocketing on the upside. One year before the dot com crash happened, it was very obvious that market was way overvalued but it kept on going up. I prefer

companies with good values and if possible a PE below 20 but never one with a PE over 50.

Just before the dot com crash, the PE on yahoo was at 1,000! Then google replaced yahoo as

the main search engine and yahoo never regained its previous high.

On 8/16/19, on CNBC, Former Chief Economist for the IMF (World’s Reserve Bank) and former Governor of the Reserve Bank of India (23rd) stated the following:

(1)In the past, the bond yield curve inverted as investors wanted a higher return on the short

term than the long term which was the basis for using the inverted yield curve to predict a

recession but now the yield curve is inverted as heavy influx of foreign and domestic cash flows

in to the 10 year treasury is making the 10 year yield fall below the 2 year treasury (2) If Trump

does a temporary deal with China as a cosmetic venture, the market will lose confidence

(3) Current conflicts: USA vs China, Trump vs Fed Reserve and Fed Reserve vs market

(4) Other economies have an impact on the US but the US is not that much affected

(5) For decades monetary stimulus on housing and autos had a major impact on the economy

but now that effect has gone down significantly as we saw during the last recession.

Interestingly the current Chief Economist at the IMF is also Indian but she was a professor

at Harvard.

On 9/6/19, Fed Chair Powell talking from Switzerland stated that the probability of the US

economy going in to a recession is very low and he expect the growth rate to remain between

2% and 2.5% till 2020. He also expects inflation to be around 2% (his target). If it goes below

2%, the Feds might take action. Feds fear deflation more than inflation.

Over the past 6 months, gold(GLD) and utilities (XLU) did very well-they are both up about 20%

In 6 months!  

We are going through a unique period in time. The yield on the 30 year treasury used to be

Over 3% for decades and now for the first time ever, the yield is at 1.91%. International tourism

spending in the US is one of the few areas where the US is running a surplus with $251B.

Seasonally adjusted GDP is expected to be down to 2% in 2019 from 2.9% in 2018. The main

reason for declining yield on bonds and the rise in the dollar is the huge capital inflow from

other countries in to the US. Total sovereign debt is at $60 trillion and 25% of those bonds are

in countries with negative interest rates so cash keeps flowing in to the US. However for the

longest time, the bond market has been on the verge of a bubble. Mark Yusko of Morgan

Creek Capital, on 8/15/19 stated that over the past decade or so many companies bought

back their own stock by issuing bonds as interest rates were low but these companies might

have a problem issuing new bonds to replace the maturing bonds. 

The bottom line is that the probability is high that we might see a rally right now but with

Everything going on globally, it is hard for me to believe that the market will not have a volatile

Time over the next 4 months. However volatility provides opportunities. The Chart of the Dow

Is very bullish for the moment with a “w” forming.

GE- I stopped covering GE in this newsletter. Investment discipline is more important than

making money in the market. When there is  “credible” (subjective) evidence of accounting

fraud, one should sell your holding of that company. In my opinion, the charges leveled against

GE is credible. We cannot disregard the evidence solely due to the fact that with this

Information, short seller stand to gain millions of dollars. There could come a time when it is

safe to get back to GE.

Have a great month!

Fernando

August 15 Post

Hi Again,

In my last edition, I mentioned, “On Monday 7/1/19, “Fibonacci Queen”, Carolyn Boroden predicted that the market could take a small dip on 7/3/19 and/or 7/5/19 and then according to technical analysis the market could go up very strongly” –which happened. Then again, around 7/26/19, Carolyn did it again and this time it was truly amazing! To paraphrase Carolyn, “As we enter the month of August, the market could go down in a significant manner”. Exactly on 7/30/19,

The market started to go down rapidly. On 7/30/19 the Dow was at 27,198 and on 8/5/19, the Dow was at 25,717! For the past 35 years I have been amazed by market technicians. They do not consider “fundamentals” (earnings, economic conditions, valuations. Tweets, trade wars etc).Most of them just analyze the charts. The same methods could be used for the stock market, Individual stocks, bond market, foreign exchange market, commodity market etc. In commodities, technical analysis is the primary method used to trade. Fibonacci numbers are named after the Italian mathematician Leonard In his 1202 book Liber Abaci, Fibonacci introduced the sequence to Western European mathematics of Pisa, later known as Fibonacci. Fibonacci numbers are strongly related to the golden ratio. There are many technical analysts and it is difficult to find a good one that is reliable. I would consider Ralph Acampora to be the world’s best in the field. He did not do his degree in mathematics, statistics, economics or business; he did his degree in theology!! In the 1980s religiously I followed Robert Prechter and that is why I knew that the market would crash on 10/19/1987.

However technical analysis can only give some conditional outcomes if the current “trends’ in certain chart patterns continue or if they change in an expected manner. Things could change so dramatically one who was bearish yesterday could become bullish today. I tend to ignore what they say about the long term. At the present, what the technicians say about the long term is very negative. They expect the market to make a top in 2019 and start going down for years-at least during 2020.

Now let us look at some fundamentals. We are in a trade war with China. Most of the world is in a deep economic downturn. Thanks to Trump, for the first time in 35 years, China’s economic growth slowed to 6.5%! For many years it was around 8 to 9%. We are at full employment so there is no need for an interest rate cut to stimulate the economy but the Federal Reserve gave another interest cut as “insurance” so that we do not fall in to a recession like most other countries. Since Martin Zweig published his PhD thesis, it has been the “golden rule” , “not to fight the feds”; in other words, when the Feds are increasing rates, get out of the market and when the Feds are lowering rates, get in to the market. However looking at history, there is an exception to that rule.when the Feds are lowering rates when we are headed towards a recession, then the market goes up a year or two after the start of rate cuts. Now the number one question is “Are we heading towards a recession?”. Most experts are undecided as it all depend on Trump and his tweets. China and most US experts believe that Trump will not want the trade when after 2020 Spring so close the election so there will be a minor agreement prior to that and the final solution will come after the 2020 elections. What will happen to the market till then? The tariffs announced by Trump for September 2019 for the first time hit consumer items. Even Trump admits that it is the consumer that has been holding up the economy (about 70% of the GDP). If this Trump move brings down consumer spending, the probability of us going in to a recession is very high. Prior tariffs were mainly directed at ‘cap spending”. The bond market has been dictating what the Federal Reserve should do with interest rates-they have to match rates in the bond market. Due to the dollar being strong and with chaos in the world (negative rates in most countries, political turmoil), trillions of dollars are coming in to the US and in to treasuries which has driven down the yield of the 10 year to about 1.745% (as of 8/10/19); which in turn makes mortgage rates sink to new lows and create economic growth for us in that manner. While “tariff related” stocks may go down, we could see a boom in housing and some other sectors- a basically a sector rotation.

As the market was taking a dive, I thought to myself that it would rise soon and then go down again. This too is a part of technical analysis. I was looking into buying a put option on the market index that would go up when the market takes another dive again. I was focusing more on the NASDAQ market. The ticker symbol for the ETF for NASDAQ is QQQ. On 8/9/19, QQQ ended at 186.49. On 8/5/19, put option on QQQ, with a strike price of 160 was at $3.11. On 8/9/19, QQQ at 186.49, this 160 put option was at $1.71. On the morning of 8/9/19, I placed an order for $1.15 but it did not get filled, naturally. My intention was to buy it around $1.15 and triple my investment in a few weeks when the market takes another dive. It is normal for the market to test previous lows.

We all love to have that opportunity to make a fast killing in the market so I want to share this idea with you. Trump does not care what other Presidents have done since day one and Trump does not listen to his advisors and as he says, he rely on his “gut feelings” which has served him well (from his perspective). Trump keeps threatening to do a very dangerous thing; even though he does not have the legal right to do so. He keeps threatening to fire the Fed Chairman so he can dictate the direction of monetary policy. The reason we have the “central bank” independent is because we do not want the creation of money in the hands of politicians. All developed and developing countries do this or else they will have a difficult time selling their government bonds to borrow money. Even in some poor countries they are giving more independence to their “central banks”. If the time comes where Trump is close to firing the Fed Chair, I will short sell the market (any market-stocks, bonds, foreign exchange). We are sure to see the biggest market crash in global history! This will create so many buying opportunities that we have never seen before!

On the oil front, price of oil has been sinking and oil stock prices have performed even worse; and that is because the debt burden carried by most oil producers who are in to hydraulic fracking in the US. Now that interest rates have gone down, those companies would be able to reduce their debt level. Crude oil prices have been down for many reasons and mainly due to the economic slowdown in most countries. For anyone who is not in the stock market, this is a bad time to get in.

This is the mistake most people make. They get in when they should get out and stay our when they should get in to the market. When it comes to the oil market, as I write this, everyone is bearish and see no end to the decline. It was the exact same story in early 2016. The ETF for US oil (WTI or West Texas Intermediate) was around $10 and I wondered to myself, “how far can it go down?”. If I buy 5 shares at $10, 10 at $9, 20 at $8, 30 at $7, one day I will make some good money so I started “nibbling”. On 2/8/16, it bottomed out at $8.33 and by 5/31/16, it was at $11.62. Now we are in the same kind of a situation with USO at $11.48 and on 12/24/19, it was at a long term bottom of $9.57. The previous bottom was at 6/19/17 at $9.50. “Technically speaking”, we can assume that It is very unlikely that USO will go below $9.50 (“floor”) and if it does, it should not go below $8.33 (“previous floor”). I am going to take advantage of this ‘golden opportunity” by getting in to ‘call options” where I can make more money than in the underlying stock (ETF, USO). The United States Oil Fund was founded in April 2006 by Victoria Bay Asset Management, now known as United States Commodity Funds,[3] and the American Stock Exchange. The fund opened on its first day of trading at about $70 per share. By early 2007, it was at approximately $50 per share. In mid-2008, it peaked at $119 per share. Then in early 2009, it set a low of $24 per share. In late 2013, it was at about $34. The price slid in the second half of 2014, and went below $10 per share in early 2016(Wikipedia)

Currently USO is at $11.28 and on 8/9/19, it rose by 2.92%. A call option with the strike price over $11.28 would be considered out of the money, more risky but more to gain too. I want to buy a call options with an expiry date of 1/15/2021 (plenty of time) with a strike price of $12.50 which is trading at $1.02. In other words, I can buy 1 contract for $102 that controls 100 shares of USO. If the underlying ETF (USO) moves from $11.28 to $12.50, looking at other current prices, I could double my money. When was USO at $12.50 prior to coming to $11.28? On 7/8/19 (about 34 days ago), it was at $12.52! By the way, in 2016 February, when oil bottomed, so did the stock market. What could raise global crude oil prices? If Trump takes military action against Iran, that would raise prices. More so, if there is news that the global economy is improving that would raise oil prices. After all, most central banks have been lowering interest rates to stimulate the global economy.

Have a great month!

Fernando

July 17 Post

Hi Again,

Even with the chaotic market, our portfolio managed to record a net gain of 3.95% for Q2 2019which came to an end on 6/30/19; and during June 2019 we had a gain of 9.47%.  As I have been saying over and over again, it is extremely important to take the advice of technical analysts when trading or investing in financial markets. On Monday 7/1/19, “Fibonacci Queen”, Carolyn Boroden predicted that the market could take a small dip on 7/3/19 and/or 7/5/19 and then according to technical analysis the market could go up very strongly thereafter. Fibonacci numbers are named after the Italian mathematician Leonard In his 1202 book Liber Abaci, Fibonacci introduced the sequence to Western European mathematics of Pisa, later known as Fibonacci. Fibonacci numbers are strongly related to the golden ratio. What happened to Carolyn’s prediction? On 7/3/19, the market did not go down but on 7/5/19 the market declined and went down till the market bottomed on 7/9/19; then as Carolyn predicted the market continue to climb till the market closed on 7/12/19. Now we are at all-time highs on the Dow, S&P500 and on Nasdaq. On 7/12/19, even the Russell 2000 joined others in breaking the past trend and going up. On 7/12/19, even the Dow Transports went up!

With technical analysis, we have to take a day to day approach and watch the technical indicators to make an assessment of the possible future. No one has a crystal ball and the market does not go up in a straight line; in fact, the market always climb a wall of worries; however the probability is high that we could see a major upswing in the market now. One note of caution; prior to 7/11/19, when the Dow went up, Nasdaq went even higher; for example, a 1% gain in the Dow, would come with a 2% or a 3% gain in Nasdaq but on 7/11/19 and 7/12/19, the reverse was true. If this trend continue, it could mean that the market is topping. Also it could mean a sector rotation which happens often. When it comes to the future of the market, fundamental analysis always take a second seat with respect to technical analysis so it would be interesting to see what happens in the near future. If the market goes down, it would be a buying opportunity. When the biggest chemical company in the world, BASF announced a 30% reduction in expected global revenue, that sent a clear message to our Federal Reserve that the global economy is softening in a big way and they have to take pre-emptive action to lower interest rates to boos our economy which is good for the market. The bond market set the trend for interest rates and due to lower yields on treasury bonds, mortgage rates are very low at this time.

Have a great month!

Fernando

June 19 Post

Hello again,

 In December/January I told you that after many years GE has bottomed out and it was ready to move higher and it did; two months ago I told you that Ford was a good buy and one week after that Ford had a significant move upwards; on my last newsletter I told you that the market was ripe for a correction and over the past few weeks we had a correction. Where do we go from here and does it matter? The correction did not last long and people were coming up with many reasons for the correction ending briefly. The main reason given was that the Federal Reserve indicated that it is willing to consider lowering interest rates in 2019. Just before the market started moving up, almost everyone on Wall Street was bearish and they were all talking about how bad this bear run could go. To me that was a clear indication that at least for the very short term the market was ready to rebound. I am a hopeless contrarian! I put a few dollars in to calls that mirror the NASDAQ index which is a mirror of the tech sector. Prior to that NASDAQ took a worse beating than the DOW so I expected a better come back from NASDAQ and it did not disappoint me as my small investment tripled in three weeks. The Federal Reserve did not give a guarantee that it would lower interest rates but these days the Feds just follow the bond market and not vice versa. The bond market has been lowering rates for some time so the Feds will have to follow that example or create a big mess in the financial markets. The bond rates did not go down due to fears of recession, not this time; the bond rates declined as investors were rushing to bonds to find a safety heaven as the stock market was so hectic and pessimistic. 

By observing strange things that go on Wall Street, we could learn a lot about the market. Have you heard of a publicly traded company called, “Beyond Meat”? They make meat substitutes that are better than what is available in the market place. However it does not get my vote as it is loaded with processed food and protein derivatives of plant based foods that sound like cancer causing chemicals. I think it is better to eat a small portion of real meat to be perfectly healthy. Young people these days crave for vegetarian foods and “Beyond Meat” is a big hit among consumers. The IPO came out in May 2019 and with about $40MM in annual sales it was so popular with investors, a few weeks ago the market cap was around $4Billion! It was the sweetheart of the short sellers and most stocks were shorted as buyers were paying a ridiculous price for this stock. Last week BeyondMeat had their first earnings call and they beat all Wall Street expectations with annual revenue rising to $112MM. In one day, the share price went up by about 80% to $188 or so! On 6/11/19, with annual Revenue of $112MM, the market cap is at a ridiculous $7Billion! Why did this happen? Very simple, All the short sellers had to run for the hills and buy the stock at any cost! Whether it is the whole market or a stock of a company, if the short sellers are heavily in to it, and they were wrong about the underlying stock or ETF, there is much to gain for those who are bullish. Even though this happened I would not recommend anyone buying in to “Beyond Meat”-the stock or the product.

So for the market in general what can we expect? Some say “sell in May and come back in September”; which has worked in some years. Some say there will be a “summer rally”; and there have been summer rallies in the past. To get an indication what lies just in front of us, we have to look at technical analysis which has nothing to do with fundamentals (economy, prices, earnings and so on.. The problem with technical analysis is that it is very fluid and fast changing. It could point in one direction and some action in the market could make it turn direction fast. One of the tools used by technical analysts is the VIX index (Volatility Index) which has the nickname, the “fear index”. If the market has done else but move up in straight line for a long time, you could expect to see a low VIX. Recently I came across this proven theory, let us say that the market has been going through a correction and start rising again (as it did recently) then as the market rises, according to conventional wisdom, the VIX should start going lower (lower levels of fear) but when the market rises and if VIX also rises, then this technical analyst states that we are heading towards a major correction as what happened during the Fall of 2018. According to that technician, we could have a major correction very soon. Between 6/10/19 and 6/13/19, Dow did not move much at all but VIX kept moving higher (but slightly).  On Friday 6/14/19, the market went down slightly and the VIX too went down. Next time we have a major move up or down in the market, it would be interesting to see what would happen with the VIX index.

The macroeconomic information we received was good for the economy and bad for the market. Recent upsurge in the market is because more people expect the Federal Reserve to cut rates this year. In fact the bond market has at least 2 rate cuts “baked in” already. Mortgage rates are so low many people care refinancing their houses. The macro information we received on 6/14/19 clearly show that we can expect a rate of growth for 2019 Q2 of 2% to 2.5%. Why would the Feds lower rates when unemployment rate is under 4% and when we are growing at 2.5%? If there is data to support strong growth and if we see inflation raising its ugly head again, The Federal Reserve is sure to increase interest rates and not lower them which is very bad for the financial markets.

 Have a great month!

 Fernando

 

May 3 Post

Hi Again.

Our portfolio did very well during April 2019. Our overall gain rose from 44% to 54.5% (or 7%) in 30 30 days and during the same period our Ford holding rose from a loss of 15.9 to a gain of 15.47%, Apple rose from 105% to a 127% gain, Twitter increased its gain from 30.7% to 59.4% and Bank of America rose from 108% to 130%. Over the past 3 months, our overall portfolio increased 41% In value, while the market (Dow Jones) went up only 6% during the same period. According to “Marketwatch” only 5% of money managers beat market indexes. In order to have a general idea of what to expect from the stock market (or stocks or any market for that matter) we have to take a look at technical analysis which has nothing to do with fundamentals such as revenue, profits etc. Mostly it is chart analysis. Right now the market is closing in on its previous highs so there is a high probability of seeing a correction soon. That is not a bad thing. If we do not get a correction and if the market continue to rise, then the market will get overbought and lead to a dangerous correction.

The CNBC technician Carter who made this statement (I have heard other technicians say the same) on 4/29/19 also stated that Ford chart just moved from a bear market to a bull market. I think I am going to pat myself on the back for asking you all to start nibbling at Ford on my last newsletter. It is was just during the last newsletter I asked all of you to start ‘nibbling’ at Ford but I warned you that Ford could go down for a year or more prior to rising. With a 7% dividend yield that would have given you a wonderful opportunity to accumulate Ford at a very low average cost. As long asFord does not cut the dividend, with each decline of the stock, the dividend yield will continue to rise making it more attractive to investors. A 50% decline in the stock price would raise the dividend yield to 14% while the 10 year treasury is at about 3%. Guess what happened on 4/26/, Ford announced very strong earnings on 4/26/19 and became the 2nd biggest auto maker Ford overtook Tesla. Furthermore Ford stated that they noticed a turnaround in the Chinese economywhich was music to investors. After I asked you to buy Ford last month, I bought call options onFord (expiry date 1/15/2021). On 4/26/19 evening I ran in to an executive at FedEx and he asked me, Did you hear what happened to Ford today? Ford went up by 10%!”. On 4/26/19, in 6hrs my Ford call option rose by a whopping 49%!! That is the magic of options. There are many, many things you can do with options. It is possible to be conservative with options if you so desire.

Over the past 35 years I have been experimenting with different ways to make money in the market.I have a new idea and I want to share it with you. For many decades investors were willing to pay a high premium to get in to pre-IPO stocks assuming that they could make a big amount of money when the IPO went public. We have all heard of how pre-IPO company employees made millions when the IPO went public. Over the last 10+ years or so mutual funds have got in to pre IPO stocks spending billions of dollars. However lately people who bought pre-ipo stocks or bought on the IPO day lost money. This has been going on for some time but now the situation is getting worse. Recently I heard an analyst say that people who bought Lyft and people who are waiting to buy Uber are not professional investors but people who use Lyft and Uber. Those people do not know if the stock is overvalued or not. When Facebook first came as an IPO this same thing happened. I waited till the stock dropped to $18 and I got in. Then when it was around $22, most analysts were saying that it would take a long time for FB to monetize and it also could go down like “My Space”.

At $22 I sold my shares at a profit but FB shocked the world by quickly monetizing and within a few months the stock rose over $100. Recently the long awaited Lyft IPO came in to the market. As soon as that wasdone 20% of the stock was shorted! On 3/26/19, Lyft IPO came out at $87 and ever since it has been going down and on 4/26/19, Lyft closed at $57. If you shorted Lyft at $87 on 3/26, in 31 days you would have had a profit of 53%. Let me explain how that happens, initially you sell at $87 and then you buy at $57 ($30/$57=53%). For years the talk was Uber IPO will come to the market cap well over $100 Billion but after they saw the Lyft disaster, they are now talking about $90B. My idea is to short sell Uber when the IPO gets to the market with put options. After the Lyft disaster you might think that Uber buyers will act prudently but I disagree. Consumers all over the world who use Uber knows nothing about market mechanics and it is very likely that they will drive Uber IPO to ridiculous levels like Facebook. My only concern is that it might take some time to see put options on the open market; and if that happens, you can short sell but I do not recommend that as it could turn in to a bottomless pit.

Ford shares closed up sharply higher Friday, after the carmarker posted stronger-than-expected first quarter earnings thanks to a surge in U.S. demand for its iconic pick-up trucks that offset weakening international demand. Shares ended up nearly 11% to $10.41, after Ford said earnings for the three months ending in March rose nearly 52% from the same period last year to a forecast- beating 44 cents a share. Ranger as it came to market, and Transit America's best selling van," CFO Bob Shanks told investors on a conference call late Thursday.(M Baccardax, TheStreet,

4/26/19) Ford Motor Co. on Friday regained its status as the No. 2 U.S. car maker in market value, leaving Tesla Inc. behind after a massive earnings beat that stoked a rally for Ford stock.

Ford F, +10.74% shares were at their best since July and amassed the largest one-day gain in a a decade, bringing the company’s market valuation to around $40.7 billion late Friday. Ford Motor Co. shares soared Friday toward the biggest one-day gain in a decade after the car maker’s “massive” first-quarter earnings beat appeared to dispel worries about the company’s ongoing restructuring effort. The company pinned the beat on “strong” results in its North American and credit businesses. Analysts also zeroed in on healthier numbers from Ford’s international businesses. Ford stock gained more than 10% in morning trade, on pace for their largest one-day percentage increase since April 24, 2009. The stock was headed for the highest close since July 25, 2018. “What a relief!,” analysts at RBC Capital, led by Joseph Spak, said in a note Friday. “Ford reported strong results that showed evidence that (Chief Executive Jim) Hackett’s fitness redesign is taking hold.(Claudia Assis, Market Watch,4/26/19)

Remember a couple of years ago when all of Wall Street lost confidence in Disney due to “chord cutting” and huge losses at ESPN? For most Wall Street pundits, the best days of Disney were behind us. The Disney chart made a classic double top leading to a bottom in 2015-2016 period. I told you that I have confidence in Iger as the CEO of Disney and to bet The farm on Iger. Now Wall Street loves Disney with nothing bad to say about Iger and his Team. Welcome to investing on Wall Street! Since that bottom in 20016, to a top at $140, it rose 58%!

A few days ago, just before Apple was expected to make its earnings call, analysts were saying that the bearish sentiment on Apple was at its highest in many years. On 4/30/19, Apple surprised Wall Street on top (revenue) and bottom (earnings) figures and in after hour trading Apple rose 10%!! What is Warren Buffet’s famous saying? Buy when everyone is fearful and sell when everyone is greedy! Last month (3/31/19) our Apple holding showed a gain of 105% and on 4/30/19, it has risen to 127%!

Have a great month!

Fernando

April 4 Post

Hi Again,

 Over the last 2 months, our portfolio gained about 35%. Current chart of the Dow 30 show the

“double bottom” or the “W” sign and that is very positive for the immediate future. However

technicians are warning that it is not going to stay rosy for long.

The Chairman of the Federal Reserve made it official that there would be no interest rate increases

In 2019. Wall Street loved this news. Our central bank was the only central bank that increased rates;

And we did it 9 times while all other central banks were lowering rates which made the dollar rise-

that is till our Feds stopped raising rates. There is an 18 month time lag between implementation of

monetary policy and its effect on the economy. Even though the Feds stopped increasing rates. It is

widely believed that we can expect very low rates of economic growth in the months to come and

some expect a growth rate of about 1.5% for 2019. During Obama’s time we had a growth rate of

over 4% and Trump promised a rate of 5%. Fed Chair addressing the Congress stated that due to the

aging of the population and the decline in the labor participation rate, 5% is impossible. This is why

Europe relies on immigration. However the rate of economic growth rate is mostly due to monetary

policy and it has very little to do with fiscal policies.   

Already there are signs that indicate that we might be heading for a recession. The most important

signal we have received is the inverted yield curve. An inverted yield curve is an interest rate

environment  in which long-term debt instruments have a lower yield than short-term debt instruments

of the same credit quality.  This type of yield curve is considered to be a predictor of economic recession.

Another major signal we got was the decline in the Dow Jones Transportation Index. In fact, only the rails

Are doing well in that index. Fed Ex joined the club by announcing lower expected revenue in the future

due to the global economic slowdown and US led trade wars with increased tariffs.

Even though I felt that Ford could become a good buy in the future, I thought the start “nibbling” at

Ford should come at a time much later than now-may be in a year or two. However what got my

attention was the very high dividend yield of 7%(on 3/24/19) ! We can analyze this in many ways. 

If money managers believed that Ford will not decrease their dividend (per share amount), billions

would have poured in to Ford and that would have lowered the dividend yield by now. This is clear

evidence that most believe that in the coming months or years, Ford will decrease the dividend. Let

us assume that everything remaining the same, Ford cuts their dividend per share by 50%, and if

nothing else changes, it is still yield of 3.5%.GM is a better stock than Ford right now but as of now

the dividend yield on GM is 4.07% (on 3/24/19). There is a high probability that Ford will continue

to fall for another 2 to 3 years but we are investing for the long run and we buy when a stock is out

of favor. Our Twitter had a loss for years and over the past 6 months, it had a gain of 22% to 38%.If

Ford does not cut the dividend and if the stock falls, the yield will continue to rise and make it even

more attractive.Ford chart is a classic technical analysis chart. By end of 2018, the chart had a “head

and shoulders” prior to moving sharply lower and at the end of December Ford made a “double

bottom” at about $7.65. That us a clear sign that Ford was headed higher. On 1/14/19, Ford hit a top

of $8.99 before falling to $8.54 on 3/22/19 with a dividend yield of 7%.If you bought Ford,& sold on 1/14/19m you would have made an 18% profit. Imagine what you would have done with call options.

On 3/24/19, Ford at $8.54, call options expiring 1/15/2021, with a strike price of $7 is trading around

$2 (or $200 for 1 contract that controls 100 shares). In other words, you are paying $9 for an option

Expiring in about 21 months and you are only paying a premium of 50cents per share for such a long period. That is a great bargain.

Ford- Even though I felt that Ford could become a good buy in the future, I thought the start “nibbling” at

Ford should come at a time much later than now-may be in a year or two. However what got my

attention was the very high dividend yield of 7%(on 3/24/19) ! We can analyze this in many ways. 

If money managers believed that Ford will not decrease their dividend (per share amount), billions

would have poured in to Ford and that would have lowered the dividend yield by now. This is clear

evidence that most believe that in the coming months or years, Ford will decrease the dividend. Let

us assume that everything remaining the same, Ford cuts their dividend per share by 50%, and if

nothing else changes, it is still yield of 3.5%.GM is a better stock than Ford right now but as of now

the dividend yield on GM is 4.07% (on 3/24/19). There is a high probability that Ford will continue

to fall for another 2 to 3 years but we are investing for the long run and we buy when a stock is out

of favor. Our Twitter had a loss for years and over the past 6 months, it had a gain of 22% to 38%.If

Ford does not cut the dividend and if the stock falls, the yield will continue to rise and make it even

more attractive.Ford chart is a classic technical analysis chart. By end of 2018, the chart had a “head

and shoulders” prior to moving sharply lower and at the end of December Ford made a “double

bottom” at about $7.65. That us a clear sign that Ford was headed higher. On 1/14/19, Ford hit a top

of $8.99 before falling to $8.54 on 3/22/19 with a dividend yield of 7%.If you bought Ford,& sold on 1/14/19m you would have made an 18% profit. Imagine what you would have done with call options.

On 3/24/19, Ford at $8.54, call options expiring 1/15/2021, with a strike price of $7 is trading around

$2 (or $200 for 1 contract that controls 100 shares). In other words, you are paying $9 for an option

Expiring in about 21 months and you are only paying a premium of 50cents per share for such a long period. That is a great bargain.

Have a great month!

Fernando

March 9 Post

Hello Again,

Nothing much to report this month. Same old story. Economic growth slow down in other countries

is keeping the Federal Reserve from increasing rates. It is the common belief of most that they will

not increase rates further in 2019 which is music to Wall Street. The biggest danger we face right

now is that if we see signs of inflation, the Feds are going to raise rates aggressively; and that will

be the death of this bull market. When addressing the Congress the Fed Chair admitted that we are

not seeing inflation even with the official rate of unemployment under 4% (which is a miracle) due

to the fact that those who gave up looking for work after the 2008 recession are coming back in to

the labor force. At that congressional hearing it was also stated that the time US real wages took a

deep dive was when China entered the World Trade Organization; however real wages have been

falling for 20+ years. Now finally it is on the rise.

When considering the future of the market, we have to look at technical analysis-Wall Street’s

crystal ball! Technical analysts believe that we are currently on the upswing but that is not of long

duration and then we are expected to have a sharp decline to the lows we saw around December

2018. If that happens, it would be another buying opportunity. I am hoping the same would happen

to GE. GE hit a low around $6.50 and it went up to $11.47 around 2/20/19 and it is at $9.45 on

3/7/19. As I was sure of the astronomical rise within a few weeks, I was also sure that it would fall

sharply. Why? Millions of traders were getting in to option trading and that is a good indicator.

Just like a tiger waits for it’s prey, wait patiently for opportunities!

Have a great month!

Fernando

February 11 Post

Hello Again,

From September 2018 to December 2018 our portfolio suffered month after month losses. During

those 4 months our portfolio went down by 22%. However in January 2019 our portfolio gained

9.8%. Why did this happen? As I was saying for a long time the Federal Reserve chairman made it    known that he was going to go easy on increasing interest rates and that started this rally.

Why did they do that? They were increasing rates to cool down the economy but now there are signs

‘of a global economic slowdown so we might have a “goldilocks’ economy in the US- not too hot and

‘not too cold. Are we out of the woods? No, not by a long shot. In the future, if there are actual

‘signs of inflation, the Federal Reserve will have no choice but raise interest rates in a big way.

Then we will see a severe correction in the market. For the past 40 years I have relied on

‘technical analysis’ for making projections. According to the technical analysis, we could have a

‘leg up in the market now and that would be followed by a severe correction going back to

December lows.

I was going to recommend you purchase GE on 12/1/18 but I made the mistake of not

putting it on the newsletter and also not buying call options on GE at that time. However last month

I asked you to buy 500 shares of GE. After having severe losses on GE for a long time, now we have

a net gain of 34.21% on GE! If I had purchased call options on GE on 12/1/18, I could have made a

10 fold gain in 2 months. GE went down to about $6.75 and my intention was to buy in the money

Call options with very little risk. Now I hear that millions of people are in GE options. This makes me

‘believe that GE could have a severe correction which would give us another buying opportunity.

Whether it is the market or a company stock, it is not abnormal to test previous lows prior to

‘moving up again in a stable manner.

As with the market, if GE goes down, start nibbling (buying) again!

Good things happen to those who are patient.

Have a great month!

Fernando

January 8 Post

Hi Again,

Happy New Year!

The last three months were brutal to the market. Our portfolio alone dropped close to 25%.

All kinds of analysts blame this and that but there is only one driver and that is the Federal Reserve

Bank (the Central Bank of the US). I have been warning of this for a long time. As Martin Zweig

coined it in the 1980s, “Do not fight the Feds”. That is the most important advice one could get

when it comes to market activity. There is always a time lag between policy implementation and the

effect it has on the economy. That is the trickster. Most of the time the Feds keep tightening for too

long and create an unnecessary deep recession and then they have to go to the other end of the

spectrum and loosen monetary policy too much. When Trump heard that the market was going

down due to interest rate hikes by the Federal Reserve, he asked his staff if he has the power to

fire the chairman of the federal reserve who he just appointed. Many past presidential advisors stated

that no other president would have asked that question. The Federal Reserve is independent so that

our monetary policy will be safe from politicians. Trump mush have assumed that if he fired the

fed chairman, the market would sky rocket. What would have happened if Trump fired the

fed chairman? If that was an option, Jimmy Carter would have done that in 1979. If the President

fired the fed chairman, all people all over the world will lose confidence in the dollar as the main

protector of inflation, the federal reserve will now be run by political stooges. The bond market is

much more bigger than the stock market and the bond market drives the equity market as well as the

foreign currency market, which is the biggest financial market. Such a move would drop the bond

market so much it could raise mortgage rates to over 20%. Equity markets all over the world could

 drop more than 66% (technically the most a market could drop).Already analysts are saying that

there is a 35% probability of a recession and some are calling it a Trump Recession. There is a more

of a probability in 2020. Is this for sure?

Is it all gloomy for the future? No, not at all. It all depends on the Federal Reserve. The circumstances are such that we could have “Goldilocks” economy andmarket in the US-not too hot, not too cold. The Federal Reserve has been increasing interest ratesto cool down the economy as they believe that since we are at full employment, inflation is ready to raise its ugly head. The logic is that if we are at full capacity, then we have to pay more for capacity

which will passed to the consumer in terms of inflation. 

If we wait to see signs of inflation then the Feds have to raise rates so high, we

could end up with a very severe recession. Already there are signs of the economy slowing down and

it is much worse in other countries. Trump’s tariffs scared investors so much Chinese market lost 2.5

trillion in 2018. China hit back hard and our technology companies, which have been carrying the

US economy are having a major slow down as it was evident from the Apple announcing a 38%

drop. Technology company revenues are heavily (70%) dependent on international sales. Due to

Trump tariffs, those companies will have a bleak future and the ripple effect could be seen all

over the economy. For example, expect real estate prices to drop around silicon valley.So how is this

all good for the market? Now if the federal reserve believe that the slow down that is coming due to

past actions is enough to cool down the economy, they might stop raising rates or even lower rates

which would be hugely beneficial for the market. Remember Martin Zweig’s golden words, “Do

not fight the feds”, the other side of the coin is when the feds are loosening monetary policy, buy

stocks and do not sell stocks!

A note of caution. This time around we do not have a point of reference when it comes to predicting

what might happen with an economic downturn or a recession; the reason is that for the first time

in history we had zero percent interest rates in the US and negative interest rates in Europe and

elsewhere so Corporate debt level is sky high and they cannot sell bonds at these rates to cover for

the existing or maturing bonds so we could see a calamity that we never thought possible. Even the

Managing Director of the IMF warned that this level of corporate debt is a huge risk to the world

economy. On the bright side, analysts believe that Trump tax cut is being used by companies to

reduce their debt level.

GE- Last month when I wrote my newsletter I was going to ask you to increase your GE holdings by buying 500 to 1,000 shares of GE but I made a terrible mistake of not doing it. My idea was to

Start buying at that stage and buy more as the share price dropped. Over the past 30+ days, GE share

Price rose by 24% !! Strangely the share price bottomed out at $6.66! Some people might call it the

Devil’s number but it is also fibanocci number used to measure the technical movements in a stock.

Better late than ever. I suggest that you buy 500 shares of GE and be prepared to buy more if the

Price drops further. When we buy 500 shares on 1/1/19, we bring down the average cost to the share

price on 1/1/19 which is $7.57 (down from $20)

Apple- Apple stock cratered 10 percent Thursday, a day after slashing revenue guidance in a rare acknowledgement of waning sales.. The stock ended trading at $142.19, its lowest price level since July 2017. The plunge makes for Apple's worst day of trading since January 2013, and it extends a painful year-end trend for Apple into 2019. The stock, which once traded above $230 per share, shed 30 percent in the fourth quarter of 2018. Thursday's losses push Apple's market valuation below $700 billion and behind the market cap of Alphabet to become the fourth most valuable publicly traded U.S. company — down from the top spot just two months ago. The company has lost $450 billion in market valuesince its peak of about $1.1 trillion last year. Apple cited longer upgrade cycles and headwinds in China as causing lower-than-expected iPhone sales. Apple now expects revenue for its fiscal first quarter to be as much as $9 billion lower than previous projections. It's the admission shareholders had been waiting for, after months of reported supply-chain cuts and a major shake-up to the company's sales reporting structure. Apple said in November it would stop reporting individual unit sales and revenue figures for its main product lines. As of Thursday's close, Apple has lost 17 percent in the last 12 months, and almost 40 percent since 52-week highs.(Sara Salinas,”Apple Suffers”,1/4/19)

Have a great month

Fernando

December 11 Post

Hi again,

Most investors were under the impression that after October, it would be back to good old days but as I predicted that did not happen.  Technically we are in a bear market. A few days ago, 70% of the companies on the S&P 500 were down 20%+. I do not think this is typical bear market which would last at least 12 months.

The Federal Reserve has been increasing interest rates and they are promising to do more in the future. As Martin Zweig used to say in 1980s, “do not fight the Feds”. Already there are signs of the economy weakening and that is not such a bad thing. This might prompt the Feds to go easy on tightening the money supply to avoid future inflation. The Federal Reserve is very afraid of inflation making a comeback.

 I wish you a Merry Christmas and a Happy New Year!

Fernando

November 12 Post

Hi Again,

We just got done with the two worst calendar months (historically) for the market. Looking at the scorecard you can see that we had a gain of 6.63% in August and in September and October with the market calamity we only lost 5.75%. That is not bad at all! Is the worst over? May be not. The real cause of the correction of the market was high interest rates caused by a hostile Federal Reserve who is afraid of inflation and they want to be proactive and raise rates for that purpose. Historically they always overshoot so why should this time be any different? Just wait and see.

 GE- General Electric (GE) just got its second credit-rating downgrade this month. Moody’s cut the industrial giant’s rating two notches, to Baa1 from A2. The analysts said that problems in GE’s power-generation business could cause “considerable” damage to its cash flow: “The weaker than expected performance… is not only attributable to a considerable drop in market demand and ensuing heightened competition, but also to GE’s misjudgment of financial prospects and operational missteps,” the firm wrote. This follows a similar downgrade from S&P, which cut GE’s rating to BBB+ from A on Oct. 2. Both ratings firms cut GE’s short-term credit rating from their top tier to their second-best rating. This is notable because GE used to be one of the biggest issuers of commercial paper, as we pointed out yesterday. It’s not clear that this will be the last downgrade for the troubled conglomerate, which is shedding businesses and restructuring its core power business. Fitch put the company’s rating on watch for a downgrade earlier this month. GE also announced Tuesday that it was cutting its dividend, and perhaps more importantly, that the SEC had expanded its probe of the company’s accounting practices to include a $6 billion charge from the first quarter and a $22 billion third-quarter charge.(Alex Scaggs, Bonds,10/31/18)

 GM- General Motors (ticker: GM) stock slipped a little Thursday, but analysts expect more gains now that they have digested its upbeat third-quarter earnings report. Where we were: GM has struggled year to date, but its most recent results demonstrated that tariff headwinds aren’t the whole story. Where we’re headed: The quarter reinforced analysts’ bull thesis on the auto maker. In a year that’s been tough on auto makers, GM has held up better than Fiat Chrysler Automobiles (FCAU) and Ford Motor (F). Now that it has reported better-than-expected results, bulls are even more enthusiastic about the stock. As a reminder, GM’s results handily beat bottom-line estimates, while it expects higher fourth-quarter earnings per share than analysts had expected. The company acknowledged tariffs were a headwind, but remained optimistic about its prospects through the end of the year (Teresa Rivas, Real

Time Analysis, 11/1/18)

 Exxon and Chevron- Chevron (CVX) and Exxon Mobil (XOM) are trading higher Friday following third-quarter earnings reports. Where we were: Despite higher oil prices, major energy players have lagged the market this year. Where we’re headed: Both stocks are moving higher after reporting results, capping a series of upbeat reports from oil majors. Markets turned negative midday Friday, taking the Energy Select Sector SPDR ETF’s (XLE) with it. Yet Chevron and Exxon were still notching gains thanks to upbeat results. Chevron earned $2.11 a share on revenue of $43.99 billion, while analysts were looking for EPS of $2.06 on revenue of $47.17 billion. World-wide net oil-equivalent production was 2.96 barrels a day in the quarter, up from 2.72 million barrel a year ago, a new record. Exxon earned $1.46 a share on revenue of $76.61 billion. Analysts were looking for EPS of $1.22 on revenue of $72.91 billion. Its oil-equivalent production was 3.8 million barrels per day, although that was a 2% year-over-year decline.(Teresa Rivas, Sector Focus, 11/2/18)

 IBM-  As the market digested International Business Machines ’ (ticker: IBM) $34 billion pact to buy Red Hat (RHT), a deal announced Oct. 28, investors decided they didn’t quite like it. IBM shares sank to a near-decade low on Halloween.

That was when two IBM directors pounced, buying the stock on the open market on a day it slipped to $114.09, an intraday low it hasn’t traded at since July 2009. Shares have lost nearly a quarter of their value so far this year. James Owens, retired chairman and CEO of Caterpillar, and an IBM director since 2006, bought 1,000 IBM shares for $114,673, an average of $114.67 each. Owens made the purchase through a trust. His most recent buy was on May 16, 2017, when he paid $263,180 for 1,718 shares, or $153.19 each on average. He now owns 6,000 IBM shares through the trust. Sidney Taurel, chairman emeritus of Eli Lilly, and that company’s former CEO, bought 4,311 IBM shares for $495,846, or $115.02 each, on average. Taurel has been an IBM director since 2001, but this buy was his first on the open market. IBM declined to comment. (Ed Lin, IBM Insiders,11/2/18)

 Apple- “ Apple Reduces Disclosure; Typically Not a Good Sign,” wrote one analyst about the iPhone maker’s latest quarterly earnings report. And that about sums it up. Last Thursday, Apple beat estimates for revenue and earnings, reported just OK guidance for the Christmas quarter and said it will no longer break out iPhone sales going forward. This last item, in particular, seemed to rankle investors. Apple stock (AAPL) tumbled almost 7% on Friday, and kept falling on Monday. Apple stock is now down about 10% since the report. One reading of Apple’s shift on disclosure, after all, is that Apple has so successfully saturated the globe with high-priced smartphones that it will struggle to grow unit sales from here, and would rather not point that out for investors each quarter. Consider another interpretation, however: Apple wants investors to focus on its earnings, not its units, because steady, rising earnings are the path to a higher stock valuation.(Jack Hough, “Apple changed..,11/5/18)

Have a great Thanksgiving!

Fernando

October 9 Post

Hi Again.

On Friday,10/5/18, the market (Dow) was down 250 points at one time. Why did that happen?Interest rose sharply in the bond market which made analysts fear that the Federal Reserve would do the same. A sudden, sharp rise in interest rates is what caused the market crash on 10/9/87. All market crashed took place in October. Be careful!

 A general malaise? Three stalwart NYSE stocks are trading at or near annual lows: GeneralElectric, General Mills, and General Motors. GE and GM set new lows just last week. The Car maker could bear the brunt of a trade war. General Mills is being crunched be a generational shift away from cold cereals and package foods. GE? There’s a menu of problems. Which will be first to rise from the mat? Perhaps General Mills, which Wells Fargo Securities analyst John Baumgartner rates outperform. Last week, General Mills reported solid fiscal first-quarter earnings but light revenues. Baumgartner trimmed his target price by $1 to $50, which still implies 16% upside. (Barron’s Market Week, 9/28/18)

Have a great month!

Fernando

September 10 Post

Hello again,

I will begin this newsletter with a pat on the back. During the month of August, the market,(Dow30), rose by 2.16% or increased from 25,415 on 7/31/18 to 25,964 on 8/31/18. On theother hand, our portfolio had a monthly gain of 6.63% and this is because I asked all of youto buy more of Apple when all analysts were negative on Apple and Carl Icahn sold of his Apple holdings.

“Sure, the robots might take over some day, but for now businesses are stuck with humans,and they are finally being forced to pay more to employ them. “Wages grew at a 2.9% annualrate in August, the government said on Friday (9/7). That is the best since 2009. Wage growthspooks investors, as it cuts in to company profits and could push inflation higher, thusconvincing the Federal Reserve to raise interest rates more quickly. But for workers, the anemicwage gains of the past9 years might be finally over. More small businesses are looking to hirethan in the last 30 years. (Barron;s Market Week, 9/7/18)Developing countries are facing a perfect storm, according to Larry Brainard, TS Lombard’sChief emerging market economist. In the research firm’s September message to clients, hewarned, would be bargained hunters that emerging markets have not neared a bottom.While problems in Turkey and Argentina have not been “systematic”, Brainard wrote that acombination with several other crises now brewing could lead to a broader problem. Among possible events Brainard sees:  Further escalation of the US/China trade spat Likelihood of a market friendly candidate emerging as a winner in Brazil’s elections Real risk of a financial crisis in Turket when Europeans cut of financing as bad debt rise. Due to trade war fears, most stock markets of emerging markets like Brazil and China arehaving severe corrections; some are down as much as 35% within the past few months. Someanalysts are fearful that that is an indicator or what will happen to our market in the near future.Historically, September has been the worst month for the stock market and October is the monthwhen we had all our market crashes. 

They say talk is cheap, but tariff talk has been expensive for oil and stock investors. The latest round of retaliatory tariffs took a bite out of crude prices as China slapped a 25% charge on $16 Billion worth of goods, including petroleum products. US crude was carved out of the list; it might have been spared for now, only to be used later if the trade war escalates. He adds that crude also could have been given a temporary pass to allow previously purchased barrels to land without additional cost to Chinese refiners. This also buys refiners time to find alternative sources. The news is neither light nor sweet (Michael Tran, RBC Capital Markets,8/10/18)

Looking at our historical record is a good way of learning lessons for the future. About 20 years ago I worked for a boss who used to be a financial analyst at Intel during its hayday. He told me that I should invest in AMD which was Intel’s #1 competitor. A few years ago, there was not a single person on Wall Street who could say a bad thing about Intel and who could do the opposite of AMD. In 2015, I purchased some AMD for about $2.50. A few months later the stock price went down to $1.80.Till January 2016, the price fluctuated around $2. I gave up and sold my holdings. Now everyone hates Intel and everyone loves AMD, a couple of days ago, it had an intra day high around $30.. Just imagine buying at $2 and selling at $30! This happens to most professionals.

GM- Autonomous and electric cars—the Auto 2.0 movement—are gaining momentum, and today's players will likely see increased competition, says Morgan Stanley.  The best bet for General Motors (ticker: GM)? Breaking out its Cruise division. Where we were: Technology gives companies like GM and  Tesla an advantage in the Auto 2.0 movement, for now. While Tesla's technology often steals the headlines, it's hardly the only company working on electric and autonomous cars. For example, General Motors' Cruise division is a bright spot for the company: The company is targeting a 2019 launch for Cruise's robo-taxi service and if it gets the technology right, the unit could bring in $17 billion in earnings before interest, taxes, depreciation, and amortization by 2030. That's a big if, however. As Morgan Stanley's Adam Jonas warns, if Cruise "doesn’t achieve independence soon....the market might have reason to forget about it." He reiterated an Overweight rating and $46 price target on GM on Thursday, but writes that "each month brings more evidence of an auto cycle past its peak and a growing backlog of competition focused on Auto 2.0."  (Teresa Rivas, Sector Focus,9/6/18)

Apple- As Apple (AAPL) preps for its biggest day of the year next week, at least one Wall Street firm has raised its price target on the company's stock in anticipation of the launch of three new iPhones. Canaccord Genuity set its price target at $250, up from $220, saying it expects the launch will "drive a continued strong upgrade cycle," encouraging people to buy higher-margin, more expensive iPhones. "Given the strong consumer satisfaction with iPhones, we anticipate Apple will continue to grow its global share of the premium smartphone market," analyst T. Michael Walkley wrote in a note Monday. Apple's share of the worldwide smartphone market, including both premium and less costly phones, slipped to 11.9% from 12.1% in the second quarter of the calendar year, according to the market researcher Gartner. This left it at No. 3 in the world, after Samsung Electronics (South Korea: 005930) and Huawei Technologies, both of which posted year-over-year gains. Walkley expects Apple to offer two new OLED-screen iPhones and a more affordable LCD iPhone on Sept. 12. If the devices' launch leads to gains in market share, as he expects, that could lead to more gains for the stock, the analyst says. Apple shares are up 35% this year, through Tuesday's close.(Jon Swartz, Tech Trader Daily,9/4/18)

Have a nice month!

Fernando

August 6 Post

Hello Again,

The market has been stagnant for some time now. After dramatically moving up within a short period of time, this is not unusual. Increase in interest rates by the Federal Reserve to slow down the economy while the rate of growth in the economy is expected at 5% for this quarter, makes me believe that the Federal Reserve will create a mini recession to cool down the economy. To that effect, the trade war came at the best time as that alone might create the desired slow-down in the economy.

I would like to take this opportunity to take a victory lap. Many months ago, all analysts were negative on Apple. They declared that Apple is dead as a growth company and we could all expect a decline in the price. At that time, after making billions of dollars, Carl Icahn sold all of his Apple holdings and he stated that Apple has a negative future in China. When all this was taking place, I asked you to buy more of Apple and the shares of Apple owned by us increased. Our average cost of Apple is at $92. On 8/2/18, Apple became the first publicly owned company to have a market cap of one trillion dollars and the share price ended the day at $207 per share. Apple’s future looks very rosy according to their latest Wall Street call. Now Jim Cramer predicts that Apple will go up by another 50% to $300 per share! Along the way, Apple missed many golden opportunities. For the longest time, they had the biggest cash balance on their balance sheet-over $200 billion. As most analysts state, they should have bought Netflix when it was cheap or they could have done the same with companies like Square and Facebook. Apple is known not to have made a single huge acquisition but that does not mean that they will not do so in the future.

GE- General Electric's (GE) lead director, H. Lawrence Culp Jr., has bought $2.5 million in shares of the troubled conglomerate on the open market. He paid an average of $13.04 for 191,000 GE shares on July 24. Culp, who made the transaction through a holding company, now owns a total of 373,400 shares through that entity and through family trusts. The stock has dropped about 24% so far this year, excluding dividend payments. Despite its problems, GE does have its bulls. Culp, who joined GE's board earlier this year, is the former CEO and chairman of Danaher (DHR) and retired from that company in 2014.(Ed Lin,RealTime Analysis, 7/27/18)

GM-While earnings and tariffs play tug of war with stock performance, it's obvious that some companies would be hit harder than others in a trade war. Auto makers are a prime example of companies that have a target on their backs when trade tensions flare. But what if there we didn't have to worry about tariffs? Well, in that case, General Motors (GM) looks like a better buy than Ford Motor (F), says Piper Jaffray's Alexander Potter. Potter writes that "it's clear that GM is outperforming Ford in China." He points to GM's success in the luxury space as "particularly notable," as he estimates the Cadillac brand represented 16.7% of GM's second-quarter sales in China, up from 13.6% in the same period last year. He believes this will boost GM margins, and may even help the auto maker log better-than-expected income from its joint venture (versus guidance of $2 billion). Yet that's only if things carry on as is, a big if given worries about the escalating tit-for-tat trade war between the U.S. and China. Potter write that both GM and Ford would be hit hard by a trade war: "In addition to absorbing higher import duties, both companies would probably cede share if consumers began boycotting U.S. brands. So far no boycotts have materialized, but recent market-wide sales declines are probably due to trade-related price confusion, and GM/Ford are not immune."(Teresa Rivas,Sector Focus,7/25/18)

EXXON- Exxon Mobil (XOM) will report earnings a week from Friday, but JPMorgan's Phil Gresh warns that even though expectations aren't very high, the second quarter will probably still not provide the "panacea" for the energy giant's woes. Exxon has slipped 2.8% year to date, underperforming other oil majors such as Chevron (CVX) and ConocoPhillips (COP), along with the EnGresh reiterated a Neutral rating and an $88 price target on the shares today, writing that his earnings estimates are in line with consensus, but that "it feels like upside could be fairly limited."ergy Select Sector SPDR ETF (XLE), which is up 3.6% since the start of 2018. He writes that on the upstream (exploration) side, earthquake-recovery efforts likely hurt volumes, prices, and cash flows at the PNG LNG project that Exxon is spearheading, while maintenance and production issues in areas from Canada to Kazakhstan may also weigh on the quarterly results. In all, Gresh warns that Exxon could notch another year-over year and quarter-over-quarter production decline, the eighth quarterly production decline in the last 10 quarters.(Teresa Rivas, Sector Focus,7/20/18)

IBM(IBM) this afternoon reported Q2 revenue and profit that topped analysts' expectations, and re-affirmed its profit outlook for the year, led by sales of mainframes and operating-system software, sending its shares higher in late trading. Most other lines of business were flat to up slightly in the quarter. Chief Executive Ginni Rometty called the results "strong," and said they showed IBM's "progress and momentum in the emerging, high-value segments of the IT industry." Added Rometty, "More clients are engaging IBM on their journey to the cloud, and deploying IBM Cloud, Watson AI, analytics, blockchain and security solutions. "This demonstrates IBM's unique leadership in providing innovative technology coupled with deep industry expertise, trust and security." Revenue in the three months ended in June rose to $20 billion, yielding earnings per share of $3.08, excluding some costs. Analysts had, on average, been expecting $19.85 billion in revenue and $3.04 per share in net income. IBM's gross profit margin declined from a year earlier by half a point, to 46%, while its pre-tax The biggest increase among all IBM's businesses, percentage-wise, was its "systems" business, including its mainframe computers, up 25%, at $2.2 billion.operating profit margin rose to 13.9% from 12.7% a year earlier. IBM's "cognitive solutions" products, including its Watson business, was flat from the prior-year period, at $4.6 billion. Its "Global business services" business was upIBM said its revenue from cloud computing rose by 23% over the trailing twelve-month period, to $18.5 billion. 2% and "technology solutions and cloud platforms" revenue was also up 2%.(Tiernan Ray, Tech Trader Daily, 7/18/18)

Apple I would like to take this opportunity to pat myself on the back. Many months ago, all analysts were negative on Apple. They declared that Apple is dead as a growth company and we could all expect a decline in the price. At that time, after making billions of dollars, Carl Icahn sold all of his Apple holdings and he stated that Apple has a negative future in China. When all this was taking place, I asked you to buy more of Apple and the shares of Apple owned by us increased. Our average cost of Apple is at $92. On 8/2/18, Apple became the first publicly owned company to have a market cap of one trillion dollars and the share price ended the day at $207 per share. Now Jim Cramer predicts that Apple will go up by another 50% to $300 per share! Along the way, Apple missed many golden opportunities. For the longest time, they had the biggest cash balance on their balance sheet-over $200 billion. As most analysts state, they should have bought Netflix when it was cheap or they could have done the same with companies like Square and Facebook. Apple is known not to have made a single huge acquisition but that does not mean that they will not do so in the future.

Apple    (AAPL) doesn’t report results until after the closing bell on Tuesday, July 31...but it’s never too soon to start pontificating about what to expect. The stock’s received a couple price target boosts today as analysts contemplate what Apple might say. Morgan Stanley’s Katy Huberty has dug into the work of quantitative analysts to find that probably the current quarter, not the one that Apple is reporting, is likely going to be lighter than expected. Huberty sees Apple probably delivering an "in-line June quarter but providing a slightly weaker-than-consensus September quarter outlook due to a possible October launch of the 6.1-inch LCD iPhone." Still, Huberty, who has an Overweight rating on the stock, raises her price target to $232 from $214 to reflect the fact that peer stocks are getting more richly valued of lateLTiernan Ray,Tech Trader Daily,7/25/18)

Have a great month!

Fernando

July 3 Post

Hello Again,

The Dow Jones Industrial Average has dropped 328.09 points, or 1.3%, to 24,252.8 after President Donald Trump ratcheted up the trade-war talk with warnings to U.S. trading partners, and on reports that the administration would put restrictions on Chinese investments in U.S tech companies.  The S&P 500 fell 1.4% to 2717.07, and the Nasdaq Composite slumped 2.1% to 7532.01. But that might only be the beginning, claims Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "Markets are starting to price in the possibility of a trade war with China, however, I would argue that a true trade war–one that drives us into a worldwide recession–would lead to a 20% or more drop in prices, so we haven’t priced one in yet," he writes. "Instead, what we are experiencing is how the Trump administration is applying pressure to the Chinese so that they will eventually agree to some type of compromise (e.g. this is part of the negotiation)." I'm not sure I want to hear that word–"negotiation"–in this context again. We've been hearing it since Trump first started ratcheting up the trade talk, and through each iteration of the process. At some point, however, the negotiations, if that's what they are, will start to take their toll on the economy. And that point might be here. JPMorgan's David Hensley notes that June's flash manufacturing PMI points toward an "unusual sharp drop in expectations versus current conditions," and that the results, which were released last Friday, "hinted that manufacturers are getting worried, especially in the U.S."(Ben Levisohn, Real Time Analysis, 6/25/18).

The yield curve, the spread between the 10-year and two-year Treasury yields, is the flattest it has been since August 2007. It may even invert at some point. What are good ways to play the flat yield curve? Chief investment officer, Stone Investment Partners. “Inversion has an amazing record of forecasting recession…but stocks have typically continued to rise (sometimes sharply) after the inversion with a median gain of 13.1%.…Bottom line: the flattening yield curve is not a reason to flee stocks.”. Analyst, Canaccord Genuity, “Although many fear [financials] may underperform…the history of the past two cycles suggests otherwise. We would add to our overweight sectors of financials, info tech and industrials with an intermediate-term time horizon.” Chief economist & market strategist, MKM Partners, “Contrarian investors should take a look at interest-rate sensitive defensive sectors like utilities, stables and real-estate investment trusts, which may gain their footing as growth momentum peaks.…” Equity Strategist, Morgan Stanley, “We still think it is too early to go full-on defensive, but it probably is not too early to start shifting out of some of the extreme cyclicals and picking up a few more defensively oriented names.” (Barron’s Review, 6/22/18)

Oil prices look set to temporarily hit $90 a barrel during the first half of next year, if not sooner, and risk spiking to as much as $100 a barrel, depending on geopolitical events and other factors, say Bank of America Merrill Lynch analysts. But they do not see an immediate major jump in prices. For this year, they forecast an average price of $70 a barrel for Brent crude, the international benchmark. They forecast $75 for next year. Their previous forecast was $60. Prices could climb significantly next year, however. The analysts have a target of $90 a barrel during the second quarter of 2019, with a risk it could go to $100 a barrel. Futures on Brent were trading as high as $78 Thursday. "Looking into the next 18 months, we expect global oil supply and demand balances to tighten driven by the ongoing collapse in Venezuelan output. In addition, there are downside risks to Iranian crude oil exports. Plus we see a high likelihood of OPEC working with Russia in 2019 to set a floor on oil prices," they wrote.(Patti Domm, Market Insider, 5/10/18).

The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896. Out of the original Dow 30, only GE remained, that is up to 6/19/18 when GE got replaced by Walgreens.

GE- The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second-oldest U.S. market index after the Dow Jones Transportation Average, created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P Global, it is the best known of the Dow Averages, of which the first (non-industrial) was originally published on February 16, 1885. The averages are named after Dow and one of his business associates, statistician Edward Jones. The industrial average was first calculated on May 26, 1896. Out of the original Dow 30, only GE remained, that is up to 6/19/18 when GE got replaced by Walgreens. General Electric’s sweeping restructuring plan announced this morning drew cheers on Wall Street despite the likelihood that the company’s dividend will be lower after the company spins off its large health-care business in the next 12 to 18 months. GE shares (ticker: GE) are up 97 cents, or 7.6%, to $13.72 after the stock recently hit a new 52-week low of $12.61. Investors are pleased about the combination of actions that GE announced today, notably the health-care spinoff, a plan to reduce net debt at the core industrial company, and continued asset and debt reduction at GE Capital. The dividend, now an annualized 48 cents, is expected to decline by an unspecified amount after the health-care split to reflect what the company called “health-care industry practices” and “industrial peers.” This means the combined dividend of the new GE and the health-care division will be lower than the current payout. The stock now trades for about 14.5 times projected 2018 earnings of 94 cents a share and yields 3.5%.The remaining part of GE will be dominated by three divisions—the now-troubled power-generation unit, a maker of utility-scale natural-gas turbines; aviation, GE’s crown jewel; and GE Capital, a financial-services unit. GE Aviation is the leading maker of commercial jet engines in the world, operating in an effective duopoly in both the narrow-body and wide-body aircraft markets. GE put forth some ambitious goals, notably to make up all the lost earnings from the health-care division, a leading producer of imaging equipment like CT and MRI scans. The unit generated over $3 billion in operating income last year and is expected to produce more than $4 billion in earnings before interest, taxes, depreciation, and amortization, or Ebidta, in 2018. GE aims to offset the lost profits with cost reductions and earnings gains at the remaining businesses—notably power generation and aviation—by 2020. That lofty goal seemed to catch some analysts by surprise on the company’s earnings conference call this morning.(Andrew Bary, Feature,6/25/18)

IBM-The US patent and trademark office just issued its 10th million patent since 1836. You might think patents are important enough to drive stock prices; you would be wrong. The US patent leader isn’t Apple, Alphabet (Google) or Amazon. It has long been IBM, which scored a record 9,043 patents in 2017.and has held the patent crown for 25 years straight. Number 2 on the list is Intel, with a third of IBM’s patents but a market cap of almost double. Given the Big Blue’s stock price has hardly changed over the past decade, patents don’t appear to predict stock prices. (Nicholas Colas of Data Trek, Market Week, 6/22/18)

Have a great month!

Fernando

June 6 Post

Hi Again,

During May 2018 we had a gain of 5.61% on our portfolio and the gain for the past 2 months was 6.55% while we lost 5.44% in March 2018. This truly explains what is going in the stock market right now. The stock market sky rocketed for about 15 months ending around January 2018. This happens during the last few stages of a bull market. No one knows for sure when this bull market will end and how long the next bear market soul last. We can hope for a good correction followed by a short bear market. However our strategy should be prepared for the worst so then we would be able to face any possible outcome. As I have said from day one, if you keep 25% to 50% of your funds in cash, you will be ready for any outcome.

For many years I have been ringing alarm bells about Deutsche bank, the biggest bank of Germany. They have over 70 trillion dollars in derivatives which are not on their balance sheet. Their argument is that it is hedged properly. I have studied hedges for the past 30 years and any expert will be able to tell you that there is nothing as a perfect hedge. Remember how banks felt secured prior to 2007 as they were properly hedged to take care of their mortgage activities? People did not see themselves as ‘greedy’, they replaced the word “greed” with “optimism”. Just prior to the 1929 stock market crash, JFK’s father, Joe Kennedy, first head of the SEC, saw the greed of the masses and in order to protect his assets sold off his stock holdings prior to the crash. If and when Deutsche bank implodes, there is no entity in the world capable of saving a 70 trillion mess created by this bank. The JP Morgan too has over 5 trillion in such derivatives. Last week it was in the news that US authorities placed the Deutsche bank on a watch list about a year ago.

 Deutsche Bank AG just ended a roller-coaster week. June doesn’t look any less harrowing. Shares of Europe’s largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm’s health. It’s part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good. First came the reports Thursday that the German lender is on a U.S. regulatory watchlist for problem banks. Then on Friday, S&P Global Ratings cut its credit rating. In a sign of dimi Deutsche Bank AG just ended a roller-coaster week. June doesn’t look any less harrowing. Shares of Europe’s largest investment bank are trading near a record low, as short sellers pile on and credit derivative traders once again signal doubts about the firm’s health. It’s part of a painful pattern for the bank and its investors: Another spate of bad headlines keeps outweighing the good. First came the reports Thursday that the German lender is on a U.S. regulatory watchlist for problem banks. Then on Friday, S&P Global Ratings cut its credit rating. In a sign of diminished standards, investors expressed relief that the grade dropped only one level. “They dodged a bullet,” said David Hendler, founder of Viola Risk Advisors and an analyst who’s followed the industry for more than three decades.(Sridhar Natarajan, Business/Bloomberg,6/1/18).

We are currently at full employment; last time it was this low was in 1969. According to economic theory, if it goes any lower, we could reignite inflation so you can expect the Federal Reserve to increase interest rates to slow down the economy. If that, the outlook for the market will be very bad.

Have a great month!

Fernando

April 2 Post

Hi Again,

Over the past few months, some people thought that the stock market goes up without going down. Unrealistic expectations! Markets go up and markets go down. Every time the market goes down, all kinds of pundits come up with reasons or excuses. Many months ago I asked you if you are ready for the Trump crash; but Trump is not to blame for the crash that is coming and he cannot take credit for the current bull market. This bull market is very old. Markets are like dogs. This market is over 9 years old and that is very old for a market. This is the 2nd longest bull market since 1990; and this is the 4th longest bull market since 1960. All bull markets, like all humans got to die one day. In the 1980s Martin Zweig became famous on Wall Street for his theory that got his Ph. D-“Do not fight the Feds”. By Feds, he meant the Federal Reserve Bank (US Central Bank). They are watching what economists call the “Phillips Curve”-the relationship between inflation and the unemployment rate. After reaching a certain level of unemployment, in order to keep inflation at bay, the Feds increase interest rates to slow down the economy. They always try to have a ‘soft landing’ but most of the time, they miss their targets. In the 1970s, it was believed that full employment with no inflation was considered to be around 6%, now as the unemployment rate dips below 4%, we are seeing signs of inflation but the Feds cannot afford to wait to see significant rates of inflation as at that time, they have to raise interests in a big way causing a recession. Fiscal stimulus created by the Administration is only causing the Federal Reserve to increase rates faster than earlier projected.

On 3/22/18, Jim Cramer shouted, “This was nothing but a tsunami of selling stocks”. For months we have been told by pundits that we are experiencing synchronized global economic growth but latest reports show weak growth in Europe and in some other countries. European banks stocks got hit badly. The market is still waiting to see how China (PRC) will respond to Trump’s tariffs. Tech companies that get as much as 70% from overseas, are very nervous. Heavily subsidized agriculture sector in the US could become another target of China. When Trump talked about tariffs for US steel to protect it from China, I wondered why Trump does not take a different route to achieve the same goal. If we have tariffs on steel, all things made by steel would be more expensive than what other countries produce with Chinese steel so the US will become less competitive in many industries (i.e. cars). I was wondering why Trump did not want to do the same thing China was doing; in other words, we too could subsidize the US steel industry as Chinese do and make our steel even cheaper. Recently, a professor of economics at a prominent university in the US also proposed the same route for Trump. Trump can work with US companies to use a mixture of subsidies and technology to have our sell at a lower price point than the Chinese.

What we have been going through for the past 2 months (volatility and the correction) is good and it has contributed to the overall health of this bull market. Market going up in a straight line is never a good thing. The market could go even lower and that too is good.

EXXON-In an analyst meeting today, oil giant Exxon Mobil (XOM) laid out an aggressive earnings target and capital expenditure plan for the next five years. The company also said it would “broaden and deepen” its engagement with shareholders and stakeholders. Exxon Mobil Chairman and CEO Darren Woods said that 2018 capital expenditures for 2018 would be $24 billion, including chemical, upstream, and downstream businesses, a bit higher than 2017’s $23 billion. Next year it will jump to $28 billion and rise to about $30 billion in the 2020-25 period. Woods said that the company’s average return on capital employed would rise to double-digit percentage levels, or about 15%, by 2025, assuming a $60-per-barrel oil price, from the current 7% level. Much of the company’s guidance was predicated on $60 oil. f oil averages about $40 per barrel, Exxon sees a 35% potential increase in earnings by 2025, Woods said, compared to a gain of about 135% if oil remains around the current $60 price. With $60 oil, the upstream business would triple divisional profit by 2005, thanks to the discovery or addition in 2017 of resources with 10 billion barrels of oil equivalent (BOE) potential; a fivefold increase in tight oil production in the Permian basin of Texas; and the addition of 25 start-up projects adding a net 1 million BOE per-day production. The downstream part of the business, which includes refining and chemicals, should double earnings at $60 oil. That will derive from improved proprietary technology; a 20% margin improvement from a shift to higher-value products like jet fuel and away from fuel oil; and integrating Permian Basin production into downstream production. Like other oil companies, Exxon has sharply cuts costs since 2014, when oil prices were about twice where they are now. In the upstream business, there was a 22% reduction in operating cash costs through 2017, said upstream head Neil Chapman. He said that production would grow to around 5 million BOE per day by 2025 from last year’s 4 million, which was down 2% from 2016. When pressed for a dividend growth number, Woods declined to give one. He said that “we are confident we can reliably grow the dividend at $40-per-barrel oil.” Excess cash beyond dividend needs and company investment plans will go to shareholders in the form of buybacks, he said.( V Racanelli Real Time Analysis, 3/8/18)

 IBM-The Street today was digesting what it heard yesterday from International Business Machines’s (IBM) CFO James Kavanaugh and CEO Ginni Rometty in their analyst briefing. Today the stock closed up $3.10, almost 2%, at $159.31, after dipping slightly yesterday, suggesting investors are warming to what they heard. Kavanaugh, in a phone conversation, intimated that avoiding explicit targets was somewhat by design. The discussion, which was not in person but rather webcast — you can view a replay on IBM’s investor relations site — included a reiteration of long-term intentions by Kavanaugh, including “low single-digit revenue growth.” He also provided some new metrics, such as the company’s "as-a-service” business at some point achieving "an exit run rate of growth of 15-20% annually." The event is part a “wave” of events IBM will have, he said, as a new approach to talking with the Street. The next even is on March 20th, IBM’s annual “THINK” conference, in Las Vegas. There will be various “deep dives” on topics such as Watson A.I. and blockchain throughout the year, he said. Reaction has been mixed. Among the most bullish, Katy Huberty of Morgan Stanley this morning reiterated her Overweight rating, and $198 price target, writing that IBM is positioned to lead in a “new computing cycle” dominated by tIf things seem a bit vague, that is perhaps because, Kavanaugh tells me, he has learned the hard way that setting traditional financial targets can be a vexed matter.hings such as A.I. She believes that the bottom line is “IBM is returning to growth." “You’re talking to the guy who put in place the original long-term financial roadmap for this company years ago,” Kavanaugh reflected.(Tiernan Ray, Tech Trader Daily,3/9/18)

Disney- Investors were clearly excited by the Netflix’s potential venture with Barack Obama. Netflix is planning to spend nearly $8 billion on content in 2018, so it won’t have any trouble paying the former president. The skeptics who long questioned Netflix’s big-spending ways have been steamrolled by the impressive numbers. In the U.S., the company finished 2017 with 53 million paid streaming customers. Netflix has another 58 million customers abroad, a figure that has more than doubled in two years. Just 5% of the company’s publicly available stock is now held short -- the lowest level in at least 10 years. Netflix’s stock surge gives it a market value of $144 billion, not much below Walt Disney at $157 billion. That creates an interesting opportunity for investors. Disney shares have languished over the last year, but the company is about to take a major step into Netflix’s terrain. Later this year, the company will launch a direct-to-consumer ESPN streaming service, for $4.99. By 2019, the company plans an entertainment package, as well. That product gets all the more impressive once Disney closes its deal for 21st Century Fox . Imagine a platform with exclusive rights to Pixar movies, Disney princesses, and Marvel superheroes. It’s a compelling offer, if my young daughters are any guide. Having tired of Netflix’s choices, most mornings they now turn on our Apple TV and pull up the Disney app that comes with our cable subscription (Disney’s forthcoming streams won’t require cable authentication). In a note to clients today, BTIG analyst Rich Greenfield said that Disney could “win the streaming war” if it stopped trying to protect its legacy movie business. He points out that Black Panther should reach $1 billion in global box office revenue this weekend.(Alex Eulie, Review & Preview, 3/9/18)

Apple- While many investors are focused on device sales at Apple and other tech companies, services could be the way forward as the company tries to work its way toward a $1 trillion market cap. “Over the last five years, the vast majority (86%) of Apple’s 8% annual revenue growth was driven by iPhone sales,” Morgan Stanley analysts wrote in a Thursday note. “But as replacement cycles extend further and device installed base growth slows to single digits (from 14% over the last two years), it is through monetization of Apple’s (AAPL) Services business that we see the company still generating mid single digit revenue growth.” Morgan Stanley, which has a $203 price target—about 21% above current levels—on the Barron’s Next 50 stock’s shares, suggested several “levers” the company could use to accomplish this. (David Marino-Nachison,3/22/18)

Have a great month!

Fernando

March 2 Post

Hi Again,

The correction we had was extremely healthy for the longevity of this bull market. A market that shoots up with no pullback is very dangerous. The late Sir John Templeton often reminded us that "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." Prior to the recent correction, euphoria among retail investors was so high, people were sharing pictures of their 401K statements. As with any correction/crash, many analysts will find many causes and reasons for the correction and this correction was no exception. One main reason was not only the 10 year treasury went over 2.85% but 4 more interest hikes were expected in 2018. After making a lot of money in the stock market for the past 9 years, some bought bonds (NOT bond funds) to keep their capital safe. In 1977, writing about the power of interest rates, Warren Buffet, one of the best in the stock market and one of the richest in the US stated, “1% increase in interest rates lower the S&P 500 market cap by 16%”.  Over the past 60 years, US Presidents have taken credit and also got blamed for market activity but it is monetary policy that drives stocks and other markets as well as the economy. Using mathematical economics, it can be shown that monetary policy is much more powerful than fiscal policy in energizing the economy. When Bill Clinton was President, he said, “Whatever I do, it is the bond market that is determining my fate; this is unbelievable”. At that time James Carville, who was a top aide to Clinton said, “If reincarnation was true, I always wanted to come back as the US President but now I want to be reborn as a bond trader’.

What we had since 2008 was an abnormal bond market and interest rates. US Reserve Bank and World’s central banks had to do go in to this untested territory to save the world from a depression after the mortgage crisis. However, the US Federal Reserve should have moved to higher interest rates to ‘normalize’ rates long time ago. What is going on is the normalization of rates. Fixed-income heavyweights are also wading into the discussion with investors such as Bill Gross suggesting the bond bear market is indeed here. The panic we saw was nothing as the 10 year old Treasury could double or more to 5% or 6% in the near future. To make matters worse, to their own detriment, Chinese have stopped buying treasuries as they used to do. The US Federal Reserve is in the process of unloading what they bought in quantitative easing so all these factors and the Feds raising interest rates to avoid inflation, we should expect the 10 year Treasury to rise in the future.

There are two main methods to analyze stocks or financial markets-(1) Fundamental Analysis (2) Technical Analysis. Most investors mainly use fundamental analysis.  Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. When it comes to a stock, it involves considering financials, sales, sales growth, future expectations, price to earnings, management and so on. A similar method is used for economies, the macro markets and so on. Technical analysis of stocks and trends is the academic study of historical chart patterns and trends of publicly traded stocks. Technical analysis of stocks and trends employs the use of tools such as bar or candlestick charts and trading volumes to determine the future behavior of a stock. I do not believe that this definition does justice to technical analysis. Anyone who wants to study this subject should read the 530 page book by John Murphy titled, “Technical Analysis of the Financial Markets”. It is said that investors and traders who employ fundamental analysis at the total exclusion of technical analysis put the cart before the horse. I have been a big believer in technical analysis since the mid-1980s. Most market pundits would agree that the world’s best market technician is Ralph Acampora. On 2/13/18, talking about the recent unexpected volatility, this is what Ralph Acampora stated (comparing historic S&P500 chart with the historic interest rates chart):

·       The past 30 year trend for interest rates broke recently and for the next 30 years, you can expect interest rates to go up.

·       He disagreed with most fundamental analysts that this means the end of bull markets for the stock market. As evidence, he showed how interest rates rose from 1941 to 1982 but the stock markets also moved up from 1941 to 1982 (with corrections and bear markets)

·       This secular bull market is not over.

·       If the stock market go sideways or down from time to time, it is a very good thing (as it only contributes to the longevity of the overall bull market)

 All people, even the greatest market pundits make mistakes and we all learn from our mistakes. One of those pundits is Leon Cooperman (75 years old), CEO of a hedge fund of $3.5billion.A couple of days after the two 1.000 point drop days on the Dow, someone asked Cooperman, “what did you learn from this correction?: He thought for a minute and stated, “I found that I am stupid”: and he continued, “I teach others that arrogance is a luxury we cannot afford”. Why did he see himself as stupid? That was another reason for the recent correction. As I was stating in my newsletter for many months, now there is an ETF for Volatility called VIX and most people were getting a false sense of security by hedging on VIX. It is like credit insurance without considering the counterparty risk. On the other side of the equation, there were others who were making a lot of money for the past 3 to 5 years betting that low volatility will continue and not reverse with no notice. Cooperman was one of those people. Every time the market went down 1.000+, not only these people lost more than 80% in a day; that also contributed to the ‘mini crash”. Some experts are asking the SEC and the government to ban these instruments. I do not agree as their errors give us opportunities to get in to good stocks at low prices.

Rick Santelli has been an expert on the commodity markets that includes the treasury market, foreign exchange market and so on. He reports from the Chicago Board of Trade where commodities are traded. Politically I do not agree with him as he is on the extreme right wing of the Republican Party. Rick was in opposition to the Federal Reserve that went down to 0% plus quantitative easing that was employed to save the economy after the 2008 mortgage crisis. However I feel that the Federal Reserve waited too long to normalize rates. When the market went down 1,000+ pints as the 10 year treasury rate went up to 2.85%,Rick Santelli was shouting (he really does!), “This is nothing. This is going towards normalization and normal rates are around 5% to 6%. For the past 10 years what we had were artificial rates created by central banks around the world”. I totally agree. If the stock market fell more than 10% for the 10 year Treasury yield going over 2.85%, imagine what the market would do when the 10 year yield is over 6%-most investors will sell stocks to buy bonds. At the same time, people in bonds will lose most of their capital. All experts agree that the bond market is much more dangerous than stocks right now. If you are in bonds, be in the actual bond and not in bond funds; that way if you wait till the bond matures, you will get 100% of your initial investment.

Since the 1980s I have had a lot of respect for Carl Icahn as a demi-God (over 60years of experience in financial markets) when it comes to market activity. He has made his share of mistakes too but we all learn from our mistakes. Once an inventor stated, “I love making mistakes as whenever we make mistakes, we learn valuable lessons”. On 2/6/18, soon after the two 1,000+ point drops in the stock market, Carl Icahn made the following points (words of wisdom!):

·       What we experienced was a rumbling that comes before the big earthquake. At times, the earthquake comes soon after the rumbling and at times, the earthquake comes after 10 years after the rumbling. No one knows when!

·       Derivatives, ETFs, double or triple the index ETFs are very bad for the long term health of all financial markets.

·       There is too much leverage in the market; there are too many people involved in the market. Market will implode!

·       There is no difference between the current time and 1929. Mr. Icahn kept repeating “1929”. “Eventually what will happen to us will be worse than what happened to us in 1929. (The index took 30 years to get back to the previous level held in 1929 and that was around 1959.).

·       People are using the market as a casino.

·       Our market is a casino on steroids.

·       No one knows when this market will blow up.

·       Banks and markets should be regulated. Deregulation always lead to disasters. Even Blackrock (World’s biggest asset manager with $5.7 Trillion under management with clients in 100 countries) wants more regulations on ETFs. derivatives and leveraged products.

·       “A major, major, major correction is coming and this is not it”.

·       In 2017, Mr. Icahn predicted a crash but the market went up 9%.

·       Huge market crash will take place within the next 3 years.

·       Market going up in a straight line as it did from November 2016 to January 2018 is hugely dangerous.

·       Bitcoins and Cryptocurrencies ate ridiculous and extremely dangerous.

·       Too much money flowing in to index ETF funds.

·       “This is a bit like 2008”.

·       Passive investing (index funds) is in a bubble.

·       Nobody can predict when the market will hit a bottom.

·       This is not the beginning of the end but do not have all your money in stocks and bonds. When the bond yield go up, the value of your bond will go down. Remember!

Sentiment toward hedge funds has turned around, according to new data from Preqin that tracks the proportion of institutional investors planning to increase or decrease their hedge fund exposure. Now, 27% of these investors plan to boost their allocation in 2018- the biggest chunk since December 2013, and 46% plan to maintain what they’ve got. According to data from Hedge Fund Research, after a rocky 2016, hedge funds returned 11.45% in 2017, helping to lure investors back. Preqin data show clients added a net $44.4billion in 2017.  Just before the market fell 1,000+ points, many people were posting pictures of their 401K statements on Facebook! Euphoria could last for days or years but we all know how this story will end! On 2/26/18, Goldman Sachs stated that they started keeping track of margin borrowing in 1980 and at this time it is at an all-time record high. Warren Buffet announced that this margin borrowing is worrying him. This is euphoria! This is not about being optimistic about the future, this is about valuations and investor “mass” psychology. Also on 2/26/18, Goldman Sachs stated that if the 10 year old bond rate goes up to 4.5%, the stock market would drop by 25% but they did not expect that to happen in 2018.

According to the IMF, total debt in the world is around $195 Trillion a couple of years ago and now it is over $230 Trillion. According to the World Bank in 2015, the US had the biggest economy with $18 Trillion (23%) and China was at $11 Trillion (14.8%) and fast catching up to the US. For decades, size of the second biggest economy was less than 50% of the US economy. Good old days! On 2/27/18, when the new US Federal Reserve Chairman testified at the US Congress, it was stated that total debt in the US is at about $100 Trillion and 15% of that is public debt. In other words, 42% of total global debt is in the US; and this include federal, state, local government, corporate and consumer. The recent tax cut added another $1.5Trillion to the debt. The Fed Chair stated that the US has enough assets to back up the debt level but that is not true for China. In other words, we could see a huge economic disaster in China in the future. Bond markets, foreign exchange markets trade on expectations of the future. As Bill Gates recently stated, we could easily have a worse disaster than 2008 in the future. When President Trump proposed a 25% increase in duties on imports on 3/1/18, many (mostly Republican) analysts reminded us that this is what led to the great depression in 1930.

It is an article of faith among economists that rising global protectionism intensified the Great Depression of the 1930s. History looks back at the infamous Smoot-Hawley Act, which jacked up tariffs in the U.S., as a disastrous step that stymied the international economic cooperation needed to alleviate the worst economic catastrophe in modern history. Even the U.S. State Department says the act "quickly became a symbol of the 'beggar thy neighbor' policies of the 1930s." Between 1929 and 1934, world trade declined by about two-thirds. Here we are, almost 80 years later, and possibly about to make the same mistake.(Michael Schulman,Time,1/19/2009).

“No one outlawed the business cycle”, an analyst once stated. This business cycle has to come to an end one day. As it has done in previous decades, the Federal Reserve will try to create a ‘soft landing” (very mild recession) but they are known to make mistakes. Many economists predict a recession during the 2019/2020 period. Inflation is the enemy of the economy so to be proactive, the Federal Reserve raise rates before we see real inflation. As the commodity prices rise, as it has been doing lately, it is a sign of inflation coming back. As the Feds are increasing interest rates and also not buy back any treasuries, the government will need to find more buyers for treasuries to pay for the $1.5 Trillion added to the deficit due to the new tax cut. China and other countries are also slowing their treasury purchases. All these factors will drive interest rates in the future. One reason why we had a 1987 market crash was Japan as a protest stopped buying treasuries and drove the interest rate (yield) up so investors sold stocks to buy bonds. Proceed with care!

Twitter- On 2/8/18, 9am, when the Dow was down 500 (or 1.98%), Twitter was up over 4.50. As noted earlier, Twitter (TWTR) was an island of calm in the storm of the broader market today, rising $1.33, or 4.4%, to close at $31.51. Helping that rise was an upgrade by RBC Capital’s Mark Mahaney, who raised his rating to Sector Perform from Underperform, and raised his price target to $31 from $18, writing that the company’s Q4 report on Wednesday evening was “not just less worse,” but actually better. The “fundies,” as he refers to the fundamentals of the business, “are clearly improving,” observes Mahaney, so “our Underperform call was wrong." Among those improvements is the 12% rise in daily average user count, which shows the product improvements of late have been successful. And the forecast for ad revenue to rise by double digits this quarter was the ‘biggest surprise” for him, and “speaks to growth sustainability for the near/medium term." Moreover, there is “clearly a cash flow story here,” after a total of $550 million of free cash flow last year. (Tiernan Ray, Tech Trader Daily,2/9/18). On 2/9/18, Joshua Brown (CEO, Ritholtz Wealth Management), a very astute investor, stated that if not for the correction we were having with the overall market, Twitter would have gone up to $35 or $40 after announcing that for the first time Twitter made a profit. He went on to say that people were focusing on the number of the users rather than the quality of the users; as well as thIn 1999, Money magazine named him "arguably the greatest global stock picker of the century."[2]e usefulness of the platform. For years he used to be negative on Twitter but a few months ago, he bought the stock. My regret is not asking you to buy more when the Twitter fell to $14.62 several times over the past 3 years. Market technicians would say that there is a floor at $14.62. The reason I did not recommend more buying was that this is a company with terrible financials; which I usually avoid.

GE- Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. GE shares are down 16% so far in 2018, following 2017’s 50% plunge. Despite the loss in altitude, they may not yet warrant a Buy rating. Don’t tell Pimco that, however. It picked up 2.19 million more GE shares in the fourth quarter, pushing its investment to 9.19 million shares. (Ed Lin, Inside Scoop, 2/14/18)

Schlumberger- Oilfield-services firm Schlumberger slumbered through 2017 as shares lost 17%, excluding dividends. MassMutual sold 25,700 Schlumberger shares in the last quarter, ending the year with 26,100 shares. It was another prescient stock sale for the firm. Schlumberger has lost another 4% this year. We noted that in January, Schlumberger’s strong fourth-quarter report failed to rally the stock.(Ed Lin,Inside Scoop, 2/22/18)

Apple- - Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. Apple shares surged 48%, excluding dividends, in 2017, trouncing the 20% gain logged by the Standard & Poor’s 500 index. We’ve suggested that Apple shares looked cheap after the early February punishment meted out by the market. We contemplate seeing “$125 billion of fresh spending on stock buybacks, dividends, or both.” Pimco bought 331,800 additional Apple shares in the fourth quarter, ending the year with 366,250 shares. Through Tuesday’s close, Apple is down 2.5% so far this year. (Ed Lin, Inside Scoop, 2/14/18)

 Have a great month!

Fernando

Hi Again,

The correction we had was extremely healthy for the longevity of this bull market. A market that shoots up with no pullback is very dangerous. The late Sir John Templeton often reminded us that "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." Prior to the recent correction, euphoria among retail investors was so high, people were sharing pictures of their 401K statements. As with any correction/crash, many analysts will find many causes and reasons for the correction and this correction was no exception. One main reason was not only the 10 year treasury went over 2.85% but 4 more interest hikes were expected in 2018. After making a lot of money in the stock market for the past 9 years, some bought bonds (NOT bond funds) to keep their capital safe. In 1977, writing about the power of interest rates, Warren Buffet, one of the best in the stock market and one of the richest in the US stated, “1% increase in interest rates lower the S&P 500 market cap by 16%”.  Over the past 60 years, US Presidents have taken credit and also got blamed for market activity but it is monetary policy that drives stocks and other markets as well as the economy. Using mathematical economics, it can be shown that monetary policy is much more powerful than fiscal policy in energizing the economy. When Bill Clinton was President, he said, “Whatever I do, it is the bond market that is determining my fate; this is unbelievable”. At that time James Carville, who was a top aide to Clinton said, “If reincarnation was true, I always wanted to come back as the US President but now I want to be reborn as a bond trader’.

What we had since 2008 was an abnormal bond market and interest rates. US Reserve Bank and World’s central banks had to do go in to this untested territory to save the world from a depression after the mortgage crisis. However, the US Federal Reserve should have moved to higher interest rates to ‘normalize’ rates long time ago. What is going on is the normalization of rates. Fixed-income heavyweights are also wading into the discussion with investors such as Bill Gross suggesting the bond bear market is indeed here. The panic we saw was nothing as the 10 year old Treasury could double or more to 5% or 6% in the near future. To make matters worse, to their own detriment, Chinese have stopped buying treasuries as they used to do. The US Federal Reserve is in the process of unloading what they bought in quantitative easing so all these factors and the Feds raising interest rates to avoid inflation, we should expect the 10 year Treasury to rise in the future.

There are two main methods to analyze stocks or financial markets-(1) Fundamental Analysis (2) Technical Analysis. Most investors mainly use fundamental analysis.  Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. When it comes to a stock, it involves considering financials, sales, sales growth, future expectations, price to earnings, management and so on. A similar method is used for economies, the macro markets and so on. Technical analysis of stocks and trends is the academic study of historical chart patterns and trends of publicly traded stocks. Technical analysis of stocks and trends employs the use of tools such as bar or candlestick charts and trading volumes to determine the future behavior of a stock. I do not believe that this definition does justice to technical analysis. Anyone who wants to study this subject should read the 530 page book by John Murphy titled, “Technical Analysis of the Financial Markets”. It is said that investors and traders who employ fundamental analysis at the total exclusion of technical analysis put the cart before the horse. I have been a big believer in technical analysis since the mid-1980s. Most market pundits would agree that the world’s best market technician is Ralph Acampora. On 2/13/18, talking about the recent unexpected volatility, this is what Ralph Acampora stated (comparing historic S&P500 chart with the historic interest rates chart):

·       The past 30 year trend for interest rates broke recently and for the next 30 years, you can expect interest rates to go up.

·       He disagreed with most fundamental analysts that this means the end of bull markets for the stock market. As evidence, he showed how interest rates rose from 1941 to 1982 but the stock markets also moved up from 1941 to 1982 (with corrections and bear markets)

·       This secular bull market is not over.

·       If the stock market go sideways or down from time to time, it is a very good thing (as it only contributes to the longevity of the overall bull market)

All people, even the greatest market pundits make mistakes and we all learn from our mistakes. One of those pundits is Leon Cooperman (75 years old), CEO of a hedge fund of $3.5billion.A couple of days after the two 1.000 point drop days on the Dow, someone asked Cooperman, “what did you learn from this correction?: He thought for a minute and stated, “I found that I am stupid”: and he continued, “I teach others that arrogance is a luxury we cannot afford”. Why did he see himself as stupid? That was another reason for the recent correction. As I was stating in my newsletter for many months, now there is an ETF for Volatility called VIX and most people were getting a false sense of security by hedging on VIX. It is like credit insurance without considering the counterparty risk. On the other side of the equation, there were others who were making a lot of money for the past 3 to 5 years betting that low volatility will continue and not reverse with no notice. Cooperman was one of those people. Every time the market went down 1.000+, not only these people lost more than 80% in a day; that also contributed to the ‘mini crash”. Some experts are asking the SEC and the government to ban these instruments. I do not agree as their errors give us opportunities to get in to good stocks at low prices.

Rick Santelli has been an expert on the commodity markets that includes the treasury market, foreign exchange market and so on. He reports from the Chicago Board of Trade where commodities are traded. Politically I do not agree with him as he is on the extreme right wing of the Republican Party. Rick was in opposition to the Federal Reserve that went down to 0% plus quantitative easing that was employed to save the economy after the 2008 mortgage crisis. However I feel that the Federal Reserve waited too long to normalize rates. When the market went down 1,000+ pints as the 10 year treasury rate went up to 2.85%,Rick Santelli was shouting (he really does!), “This is nothing. This is going towards normalization and normal rates are around 5% to 6%. For the past 10 years what we had were artificial rates created by central banks around the world”. I totally agree. If the stock market fell more than 10% for the 10 year Treasury yield going over 2.85%, imagine what the market would do when the 10 year yield is over 6%-most investors will sell stocks to buy bonds. At the same time, people in bonds will lose most of their capital. All experts agree that the bond market is much more dangerous than stocks right now. If you are in bonds, be in the actual bond and not in bond funds; that way if you wait till the bond matures, you will get 100% of your initial investment.

Since the 1980s I have had a lot of respect for Carl Icahn as a demi-God (over 60years of experience in financial markets) when it comes to market activity. He has made his share of mistakes too but we all learn from our mistakes. Once an inventor stated, “I love making mistakes as whenever we make mistakes, we learn valuable lessons”. On 2/6/18, soon after the two 1,000+ point drops in the stock market, Carl Icahn made the following points (words of wisdom!):

·       What we experienced was a rumbling that comes before the big earthquake. At times, the earthquake comes soon after the rumbling and at times, the earthquake comes after 10 years after the rumbling. No one knows when!

·       Derivatives, ETFs, double or triple the index ETFs are very bad for the long term health of all financial markets.

·       There is too much leverage in the market; there are too many people involved in the market. Market will implode!

·       There is no difference between the current time and 1929. Mr. Icahn kept repeating “1929”. “Eventually what will happen to us will be worse than what happened to us in 1929. (The index took 30 years to get back to the previous level held in 1929 and that was around 1959.).

·       People are using the market as a casino.

·       Our market is a casino on steroids.

·       No one knows when this market will blow up.

·       Banks and markets should be regulated. Deregulation always lead to disasters. Even Blackrock (World’s biggest asset manager with $5.7 Trillion under management with clients in 100 countries) wants more regulations on ETFs. derivatives and leveraged products.

·       “A major, major, major correction is coming and this is not it”.

·       In 2017, Mr. Icahn predicted a crash but the market went up 9%.

·       Huge market crash will take place within the next 3 years.

·       Market going up in a straight line as it did from November 2016 to January 2018 is hugely dangerous.

·       Bitcoins and Cryptocurrencies ate ridiculous and extremely dangerous.

·       Too much money flowing in to index ETF funds.

·       “This is a bit like 2008”.

·       Passive investing (index funds) is in a bubble.

·       Nobody can predict when the market will hit a bottom.

·       This is not the beginning of the end but do not have all your money in stocks and bonds. When the bond yield go up, the value of your bond will go down. Remember!

Sentiment toward hedge funds has turned around, according to new data from Preqin that tracks the proportion of institutional investors planning to increase or decrease their hedge fund exposure. Now, 27% of these investors plan to boost their allocation in 2018- the biggest chunk since December 2013, and 46% plan to maintain what they’ve got. According to data from Hedge Fund Research, after a rocky 2016, hedge funds returned 11.45% in 2017, helping to lure investors back. Preqin data show clients added a net $44.4billion in 2017.  Just before the market fell 1,000+ points, many people were posting pictures of their 401K statements on Facebook! Euphoria could last for days or years but we all know how this story will end! On 2/26/18, Goldman Sachs stated that they started keeping track of margin borrowing in 1980 and at this time it is at an all-time record high. Warren Buffet announced that this margin borrowing is worrying him. This is euphoria! This is not about being optimistic about the future, this is about valuations and investor “mass” psychology. Also on 2/26/18, Goldman Sachs stated that if the 10 year old bond rate goes up to 4.5%, the stock market would drop by 25% but they did not expect that to happen in 2018.

According to the IMF, total debt in the world is around $195 Trillion a couple of years ago and now it is over $230 Trillion. According to the World Bank in 2015, the US had the biggest economy with $18 Trillion (23%) and China was at $11 Trillion (14.8%) and fast catching up to the US. For decades, size of the second biggest economy was less than 50% of the US economy. Good old days! On 2/27/18, when the new US Federal Reserve Chairman testified at the US Congress, it was stated that total debt in the US is at about $100 Trillion and 15% of that is public debt. In other words, 42% of total global debt is in the US; and this include federal, state, local government, corporate and consumer. The recent tax cut added another $1.5Trillion to the debt. The Fed Chair stated that the US has enough assets to back up the debt level but that is not true for China. In other words, we could see a huge economic disaster in China in the future. Bond markets, foreign exchange markets trade on expectations of the future. As Bill Gates recently stated, we could easily have a worse disaster than 2008 in the future. When President Trump proposed a 25% increase in duties on imports on 3/1/18, many (mostly Republican) analysts reminded us that this is what led to the great depression in 1930.

It is an article of faith among economists that rising global protectionism intensified the Great Depression of the 1930s. History looks back at the infamous Smoot-Hawley Act, which jacked up tariffs in the U.S., as a disastrous step that stymied the international economic cooperation needed to alleviate the worst economic catastrophe in modern history. Even the U.S. State Department says the act "quickly became a symbol of the 'beggar thy neighbor' policies of the 1930s." Between 1929 and 1934, world trade declined by about two-thirds. Here we are, almost 80 years later, and possibly about to make the same mistake.(Michael Schulman,Time,1/19/2009).

 “No one outlawed the business cycle”, an analyst once stated. This business cycle has to come to an end one day. As it has done in previous decades, the Federal Reserve will try to create a ‘soft landing” (very mild recession) but they are known to make mistakes. Many economists predict a recession during the 2019/2020 period. Inflation is the enemy of the economy so to be proactive, the Federal Reserve raise rates before we see real inflation. As the commodity prices rise, as it has been doing lately, it is a sign of inflation coming back. As the Feds are increasing interest rates and also not buy back any treasuries, the government will need to find more buyers for treasuries to pay for the $1.5 Trillion added to the deficit due to the new tax cut. China and other countries are also slowing their treasury purchases. All these factors will drive interest rates in the future. One reason why we had a 1987 market crash was Japan as a protest stopped buying treasuries and drove the interest rate (yield) up so investors sold stocks to buy bonds. Proceed with care!

Twitter- On 2/8/18, 9am, when the Dow was down 500 (or 1.98%), Twitter was up over 4.50. As noted earlier, Twitter (TWTR) was an island of calm in the storm of the broader market today, rising $1.33, or 4.4%, to close at $31.51. Helping that rise was an upgrade by RBC Capital’s Mark Mahaney, who raised his rating to Sector Perform from Underperform, and raised his price target to $31 from $18, writing that the company’s Q4 report on Wednesday evening was “not just less worse,” but actually better. The “fundies,” as he refers to the fundamentals of the business, “are clearly improving,” observes Mahaney, so “our Underperform call was wrong." Among those improvements is the 12% rise in daily average user count, which shows the product improvements of late have been successful. And the forecast for ad revenue to rise by double digits this quarter was the ‘biggest surprise” for him, and “speaks to growth sustainability for the near/medium term." Moreover, there is “clearly a cash flow story here,” after a total of $550 million of free cash flow last year. (Tiernan Ray, Tech Trader Daily,2/9/18). On 2/9/18, Joshua Brown (CEO, Ritholtz Wealth Management), a very astute investor, stated that if not for the correction we were having with the overall market, Twitter would have gone up to $35 or $40 after announcing that for the first time Twitter made a profit. He went on to say that people were focusing on the number of the users rather than the quality of the users; as well as thIn 1999, Money magazine named him "arguably the greatest global stock picker of the century."[2]e usefulness of the platform. For years he used to be negative on Twitter but a few months ago, he bought the stock. My regret is not asking you to buy more when the Twitter fell to $14.62 several times over the past 3 years. Market technicians would say that there is a floor at $14.62. The reason I did not recommend more buying was that this is a company with terrible financials; which I usually avoid.

GE- Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. GE shares are down 16% so far in 2018, following 2017’s 50% plunge. Despite the loss in altitude, they may not yet warrant a Buy rating. Don’t tell Pimco that, however. It picked up 2.19 million more GE shares in the fourth quarter, pushing its investment to 9.19 million shares. (Ed Lin, Inside Scoop, 2/14/18)

Schlumberger- Oilfield-services firm Schlumberger slumbered through 2017 as shares lost 17%, excluding dividends. MassMutual sold 25,700 Schlumberger shares in the last quarter, ending the year with 26,100 shares. It was another prescient stock sale for the firm. Schlumberger has lost another 4% this year. We noted that in January, Schlumberger’s strong fourth-quarter report failed to rally the stock.(Ed Lin,Inside Scoop, 2/22/18)

Apple- - Pimco is the largest bond investor, but it also manages quite a bit in equities. According to S&P Capital IQ, Pimco now oversees $5.1 billion in U.S. equities. We spoke with Daniel Ivascyn, Pimco’s group chief investment officer, in July. While U.S. stocks were “a little expensive,” Ivascyn said Pimco has “a mild preference for financials, housing-related investments, and investments tied to the consumer.” The appetite for consumer-tied stocks hadn’t abated by the fourth quarter, when Pimco increased its investment in Apple(ticker: AAPL) more than tenfold. It also quadrupled positions in Intel (INTC), Merck (MRK) and Pfizer (PFE), and bulked up its investment in General Electric (GE) by a third in the period. Apple shares surged 48%, excluding dividends, in 2017, trouncing the 20% gain logged by the Standard & Poor’s 500 index. We’ve suggested that Apple shares looked cheap after the early February punishment meted out by the market. We contemplate seeing “$125 billion of fresh spending on stock buybacks, dividends, or both.” Pimco bought 331,800 additional Apple shares in the fourth quarter, ending the year with 366,250 shares. Through Tuesday’s close, Apple is down 2.5% so far this year. (Ed Lin, Inside Scoop, 2/14/18)

Have a great month!

Fernando