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26 Sep

Monday September 26, 2016

by

Good morning,

Live from the floor of the NYSE Friday with Jeff Bishop & Kristen Scholer

My new trade journal for the Long-Term newsletter which will include Jeff Bishop’s Long-Term ETFs moving forward. Jeff’s ETF alerts will go out starting this week.

portfolio

If you haven’t heard about Jeff Bishop joining me in the Long-Term newsletter, just review the ads on my new Long-Term trading sales page. Nothing for you to buy here – it’s included FREE with your plan. As I always say, I am constantly working to improve each of my services and this is my next step with the Long-Term.

Alerts will be coming from Jeff this week. They’ll be added to a new online portfolio in the Long-Term content area, right alongside mine called ETF Portfolio. I’ll keep everyone posted as we go.

Onto the market.

The Fed’s decision to again put a hold on an interest rate hike emboldened traders to buy stocks this week, with the NASDAQ leading the way with a 61-point gain to another record high close.  However, the technical damage done by the September 9 selloff has not yet been repaired in the DJIA and S&P 500.  Although both indexes rose this week by 0.76% and 1.19%, respectively, the indexes failed to close above their respective 50-day moving averages.  For those trading indexes, maybe a short spread trade between the Dow Diamonds and QQQ is in order.

And look at the VIX!  After spiking as high as 20 on September 12, traders are back to trading with what they believe is a Fed tailwind wind once again, as the VIX fell to the 12 handle almost as fast as it rose to 20.  

The volatility in stocks on the day of September 9 plunge and subsequently tells me that traders cannot live without the Fed.  And Yellen knows this better than I know it.  

In addition to the Fed’s carefully choreographed disinformation campaign typically preceding high-profile FOMC meetings, I strongly suspect the Fed intentionally stirred as much fear in the hearts of trades leading up the FOMC meeting to again keep the market guessing as well as assess its internal data for clues to whatever it’s watching.

To my way of thinking, the price action of past two weeks clearly tells me that any bona fide tightening of monetary policy by the Fed would trash stocks in a big way, maybe even a cash.   These past two weeks have also solidified my thesis that the Fed is seriously trapped, maybe not as trapped as the Bank of Japan (BOJ) is, but trapped, nonetheless.  I have no idea where there lies any hope of changing course from the money printing trajectory of 2008-16 among the world’s central banks of four major currencies: dollar, euro, yen and British pound.

Now let’s see if you’ve been paying attention this week.  

Did any of my readers see a glaring counter-indicated move somewhere during the rise in the major indexes and the VIX this week?  If you said, “Deutsche Bank,” go to the head of the class.  Not only did DB drop hard again this week by another 4.71% amid a crashing VIX, the stock now trades at a mere 35 cents above its all-time low of $12.40.  Too much smart money and not-so-smart money want out of DB for it survive.  German politicians claim it will take no action in an event of a Deutsche Bank meltdown, but I know this is a lie.

I am not above listening to some scuttlebutt from time to time, but the latest comes from a rather reliable source, who said that a quiet rumor has spread about Deutsche Bank recently defaulting upon some of its debt obligations.

We all know a fire is most definitely raging at DB.  No question about that.  Just consider how a bank with more than $2 trillion of tier-one assets and $311 billion in reported cash on its balance sheet trade at a market cap of $17.4 billion?  These are numbers are reminiscent of Fannie Mae before it collapsed.

Typically, I dismiss rumors as a very low-percentage source of accurate information, but in this case, the odds of this rumor being true may be a 50/50 bet.  And if the rumor is indeed true, to cover a debt default that I imagine must have been a monstrous size would have taken a capital source of equal size.  But who?  Was this another off-the-books swaps window arrangement conducted by the Fed?  

Now imagine a viral video of testimony about a clandestine default swap of hundreds of billions of dollars to bailout Deutsche Bank with the next scene recounting the Fed telling the world that the FOMC committee was split on a decision to raise short-term interest rates.  That, my friends, would destroy the Fed’s credibility, forever.  

Anyway, my post-FOMC decision analysis includes commentary of the action in both the precious metal and bond markets.  Here we have metals prices spiking higher along with bonds prices and tech stocks following the FOMC meeting. What’s different this time is that, in the past, an FOMC meeting of this sort would have dropped the gold price and utterly smashed the silver price. We had been seeing that scenario play out for more than four years.  Haven’t we?

Well, this time it didn’t happen.  

Sure, captive cash flowed back into bonds and, to some extent, stocks, but the gold price moved sharply higher by 2.4% while the silver price shot to the moon by a little more than 5% and through its 50-day and 200-week moving averages without trouble.  This action tells me big money is now confirming my bet the Fed had never intended to restrain money supply by its own hands; instead, it intends to hyper-inflate the U.S. dollar.  And what evidence do I have to back my assessment of sentiment among the big money?  

Just look at the mighty NASDAQ, at record highs this week.  Right?   In terms of the value of many competing currencies of the U.S. dollar, the NASDAQ has made overseas investors even more returns in their own currency than U.S. investors have made in U.S. dollars, though the U.S. dollar now buys more overseas goods.  

But let’s look at the core of central bank reserves: gold bullion.  In terms of a unit of gold, the NASDAQ is down nearly 19% since late November of 2015.  Link here to stockcharts.com.

The point is: if you’re a foreign investor (many subscribers to Long-Term Weekly appear to be foreigners by a look at their names and IP addresses), you’re making more money in your currency of trade from my stock ideas than my American clients are.  And more importantly and more to my real point, those wondering if the Fed can pull off inflating asset prices indefinitely can answer that question for themselves by calculating the number of gold units necessary to buy a share of the NASDAQ.  Beginning in late-November, anyone can see that the Fed has been successful with monetizing debt and elevating asset prices, but the price paid has been the purchasing power of the U.S. dollar in relation to asset prices.

In other words, holding some gold maybe a good idea, but holding stocks is another good idea, too.  At times, the gold price trades violently, but can be offset by stocks priced in U.S. dollars.  The bad idea in all of this central bank machinations is to sit on too much cash as a long-term strategy.  

If the Fed and its central banker cohorts must plug debt holes in amounts of many trillions of dollars, as they have already, they most certainly will in the future.  And it must continue to do so if their intent is to elevate stock and bond prices during the monetization process.

If you believe central banks can do this successfully for a lot longer than many now may imagine, as I believe they can, then holding stocks may be an important part of your overall investment strategy, as many prudent fund managers have iterated.  

Mailbag:

Tammi Z. from Glendale, Arizona writes:

Tammi: “…Marc Faber said the Dow could go to 100,000.  What do you think of that?  I mean is this guy for real?”

JB: I think Faber is exactly correct for the reasons I discuss in this week’s newsletter, as I imagine you’ve just read.  

Remember, too, what Warren Buffett said on CNBC, not too long ago.  He said the DJIA may go much higher if interest rates move much lower, especially during a period of negative nominal interest rates.  Buffett and Faber are talking about the same potential of the DJIA under extraordinary conditions.  

We don’t get any thoughts about asset allocations from Buffett, but Faber recommends holding 25% of your net worth in stocks.  As for the other 75%, he recommends  25% in gold, 25% in bonds, and 25% in real estate.

I should add, too, that your email reminded me to make sure I discuss this very point about monetary inflation and the historical impact it has had upon stock prices in other time periods and places.  This time may turn out to be no different, as we’ve just witnessed an example this week from Yellen’s remarks following the FOMC meeting on Wednesday.  So, yes, the Fed can hyperinflate the U.S. dollar and stocks prices much, much more than it already has.

Thank you for the thoughtful email, Tammi.

Okay, let’s talk stocks.  

As I alerted on Monday, I closed out ASUR for a nice profit of 15%, or $4,150, with an average exit price of $6.24.  The trade was held for 12 short days.  

Not bad.

And to give you the magnitude and power of compounded returns on a trade such as the one with ASUR, a 15% return in 12 days equates to making a 7,002% return in 52 weeks.  I’ll take it!

I also want to review my present position in LQMT and share my thoughts on the two stocks on my watch list, MSTX and FEYE.

This Week’s JBP Stock Ideas

LIQUIDMETALS (LQMT)

Although LQMT traded this week in quite a large band of 2.8 cents, or 19.9%, there was no news to digest or act upon.  The stock eventually settled at $0.163, down 3.55% for the week.  

However, two healthy signs of the stock’s strength were evident throughout the week.  

The first sign: good volume.  For the seventh-straight week, volume continued to run higher than the previous seven weeks and by a wide margin.  

The second sign: price action at significant moving averages.  As LQMT sold off to below the 50-day and 200-week moving averages of $0.154 and $0.15, respectively, suddenly strong bids for the stock rushed in, a very good sign.

I still own 100,000 of LQMT at a price of $0.137 per share (up 19.0%), with a profit of $2,600 in four weeks.

ABOUT LIQUIDMETALS (LQMT)

Liquidmetal® Technologies researches, developments and commercializes amorphous metals. The company’s revolutionary class of patented alloys and processes form the basis of high performance materials in a broad range of medical, military, consumer, industrial, and sporting goods products.  Discovered by researchers at the California Institute of Technology, Liquidmetal alloys’ unique atomic structure enables applications to achieve performance and accuracy levels that have not been possible before.  As the company controls the intellectual property rights with more than 70 U.S. patents, these high performance materials are dramatically changing the way companies develop new products.

Source: Liquidmetals Technologies

MAST THERAPEUTICS (MSTX)

As we know, MSTX completely imploded, down 79.28% for the week.  Though I was wrong in my outlook for the upcoming FDA decision regarding the company’s phase III drug candidate, vepoloxamer, I was certainly correct not taking the trade.  That’s the important thing.  

After many years in this business, my wrongheaded assessment of MSTX serves as an example of why my ego is always left at my office door.  I care not whether I’m right or wrong about a stock, per se; it’s a depletion of my bank balance that can hurt me.  And in this case, MSTX did not hurt me or my readers, as I did not alert to a position taken in the stock.  

I’ve learned to not take a position ahead of an FDA decision that could inflict a magnificent loss, as was the case with MSTX.  Although I thought I had the psychology of the trade grasped, I didn’t think the stock warranted my neck sticking out to a potential big loss, as I anticipated an unfavorable FDA decision would most likely devastate the stock.  And as we know, MSTX was devastated.

So, I was right on that score.  Those holding MSTX took a whopping loss, and I (we) dodged a bullet, which reminds me of a quote from the legendary stock trader of the 20th century, Jesse Livermore.

“When you know what not to do in order not to lose money, you begin to learn what to do in order to win.  You begin to learn!” —Jesse Livermore (1877-1940)

Making money trading stocks isn’t just about making money; it’s also about not losing a lot of it in the process.  Okay, fair enough?

FIREEYE (FEYE)

The big news affecting the share price of FEYE this week was, of course, the  announcement made by Yahoo during the late trading hours on Thursday of a security breach at the company, affecting approximately 500 million user accounts.

The breach at Yahoo happened in 2014 and may have been perpetrated by a “state-sponsored actor,” Yahoo said in a statement.

Following the Yahoo announcement, the share price of FEYE spiked to as high as $14.56 Thursday on 7.37 million shares, then to as high as $14.90 Friday on another 7.1 million shares before closing at $14.37 per share, up 2.5% for the week.  

With volume in the stock averaging 4.5 million shares per day during the past 30 days of trading, FEYE certainly got the attention of the shorts (14% of float), who provided lots of fuel in addition to new money coming into the stock.

As far as my hypothetical target price of $13 per share for FEYE—a price at which I would start examining the stock’s price action more closely—Monday’s trade came as close as $13.38, the low for the day.  Although FEYE doesn’t qualify as the stock that “got away” from me, a little more selling on Monday, of course, would have led to a nice surprise of a more than a 14% move.  

No big deal, really.  I still like the stock, but at a price I like, which is still, at the moment, $13 per share.

Again, I’ll alert subscribers if/when I pick up some shares of FEYE.

ABOUT FIREEYE (FEYE)

FireEye, Inc. provides cybersecurity solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information.

Trade Green!

Jason Bond

P.s.  Enjoy the presidential debate on Monday night.

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