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3 Apr

Monday April 3, 2017

by

Good morning,

In a reversal of last week’s action, stocks, banks, oil, commodities and the US dollar were all winners this week, led by the 5.48% move higher in the oil price.  At the close of trading on Friday, the major stock indexes were all higher, with the Russell 2000 (+2.31%) and DJTA (+2.10%) handily outperforming the DJIA (+0.32%), S&P 500 (+0.80%) and NASDAQ (+1.42%).

The volatility in VIX was high on Monday, with the index reaching a high of 15.11 as the DJIA opened down 184 points during the first minutes of the morning trade.  But soon after, stocks and the VIX reversed course as traders watched the US dollar rebound back to the 99 level on the USDX.  As I’ve stated in past editions of these reports, stocks will be following the performance of the US dollar.  

The SKEW rose modestly by 1.69 points this week, bucking the downward trend of the VIX.  I’m following the SKEW more closely now, more so than the VIX.  

If you click on the link to the SKEW in StockCharts.com, you’ll see an upward-sloping trend.  I find the SKEW a more useful gauge of market sentiment.  And right now, the SKEW tells me that sentiment is creeping to more caution.

And for those scratching their heads about the strange movements in the VIX, here’s a good article posted on ZeroHedge.com that corroborates my past comments about the possibility of the VIX being manipulated by the NY Fed’s Exchange Stability Fund (ESF).  After reading the article, ask yourself, “Who would make such large and perfunctory trades as these?”  Would anyone be surprised if the NY Fed was playing with the VIX?  I wouldn’t.

And market breadth, as measured by the McClellan Oscillator, indicates that last week’s rally was broad-based.

There is no question in my mind that stocks were taking orders from the US dollar this week.  As the dollar rallied from the 98.67 low on Monday, the DJIA bounced off its 50-day moving average along with the dollar’s rally back to the critical 99 level of the USDX.  

Maybe Mario Draghi’s comment on Monday about his rethink of monetary policy at the ECB, and a follow up ‘dovish’ tone by Fed Vice Chairman Stanley Fischer on Tuesday, had something to do with the collapse of the euro and rise in the USDX.  How cynical of me.  

The rally in the US dollar from the Monday low carried through on Tuesday, Wednesday and Thursday, propelling the NASDAQ (+1.42%), Russell 2000 (+2.31%) and DJTA (+2.10%) to this week’s winners over the DJIA (+0.32) and S&P 500 (+0.80) moves, capping a week of a return of risk-on trades, including a sharp move higher in the price of WTIC of $2.63 per barrel, as it now trades back above $50 for the first time in four weeks.

In fact, the moving in WTIC this week calculated to an 8.0% rally from Mondays low of $47.08, the third test and successful bounce off the $47 handle in three weeks.  

As I’ve suggested in past reports, I anticipate WTIC to test the $45 level, and possibly $40, considering the rise of rig counts and record US crude inventories and recent price cutting move by Saudi Arabia for oil bound for Asia.  So, be careful if you insist going long WTIC.

And the bank stocks, which were ‘pounded’ last week by a whopping 4.73%, rallied well this week, led by DB’s 1.96% gain and successful rebound off its 52-week moving average.  The KBW Bank Index (BKX) rallied 1.33%, breaking a three-week losing streak.  And, as I’ve stated, now that DB is flirting again with its 52-week moving average, that troubled bank is back on my radar for clues to overall market sentiment of US stocks.

The Treasury market turned out to be a complete bore this week.  That’s good.  The US Treasury 10-year note closed the week unchanged.  The yield curve budged down one basis point.  No big deal there.  But the spread between the US Treasury and German 10-year narrowed by seven basis points this week, a move I think will be part of a trend in the weeks ahead.  

For those playing bonds, I think the spread between the US Treasury and German 10-year notes may narrow significantly this year.  Why?  Economic data out of Europe shows CPI dropping.  If the ECB’s Draghi begins to indicate a rethink to his tapering of bond purchases, German 10-year yields will likely rise during a concurrent downward pressure on the US Treasury 10-year yield.  

My forecast of higher yields throughout the OECD nations is still operative.  But, in the short-term, the rally back to lower yields in the bellwether 10-year note is most likely before we see higher yields triggered by a budget deal in Washington that includes no change to growing US budget deficits.  And a consensus-forecast loss of Marine Le Pen in the French presidential election, if realized, will most likely narrow the spread between the US 10-year and German 10-year note, as a flight-to-quality trade collapses.  Check out BlackRock’s iShare ETFs for ideas about a spread trade between US Treasuries and German Bunds.

And in the precious metals market, silver was the bigger winner over gold, with a gain of $0.51 (+2.86%) this week over gold’s modest +0.22% move higher.  

I’m watching for gold to break above $1,260 and play catch up to the recent big moves in the silver price.  Silver has already broken out above its 52-week moving average.  The only thing bothering me about the precious metals market is, that the GDX and GDXJ didn’t close higher this week, while the SIL managed only modest gains.  If you believe the gold price won’t break $1,260, a great trade of buying gold and selling silver is coming, because the recent rally resulted in a 4.8-to-1 move.  Considering the ratio between the two metals prices is close to 68-to-1, the widen of the spread to back above 70-to-1 is a ‘no-brainer’.

Allow me to end this week’s top half of this report with two items that should compel you to remain alert.  The first is an article I found, entitled, Record margin debt may be a red flag, but analysts say don’t worry, wherein the MarketWatch reports:

According to the most recent data available from NYSE, margin debt hit a record of $513.28 billion at the end of January, topping a previous record of $507.15 billion that had held since April 2015. Margin debt refers to the money that investors borrow to buy stocks, and high levels of it, in periods of market volatility, and can lead to sharper declines. Records preceded both the dot-com market crash and the financial crisis.

However, expecting a similar correction because debt is at a record now would be “naïve,” said Jeff Mortimer, director of investment strategy for BNY Mellon Wealth Management.

“This isn’t a signal to me that markets are reaching an exuberant level like they did in the 1920s or 1990s, when speculation was rampant,” he said. “What our clients are doing is borrowing against the portfolios because interest rates are so low. They’re not leveraging up because they see the market exploding to the upside; they’re using leverage because they can pay it off at any time.”

Oh sure, it’s different this time.  And reread this joker’s nonsense about why ‘it’s different this time’.  

“What our clients are doing is borrowing against the portfolios because interest rates are so low. They’re not leveraging up because they see the market exploding to the upside; they’re using leverage because they can pay it off at any time.

If this guy’s clients aren’t leveraging up because they don’t see the market moving higher, then why are they leveraging up?  And didn’t those leveraging up prior to the stock market meltdown in 1929 and 1999 also think they could “pay it off” at their time of choosing?  But of course, it’s so “naive” of me to think record-high margin debt has no relation to over-exuberance of retail traders.  Good grief.  This is the kind of garbage you hear and read at market tops.  I cannot remember a more stupid comment and ridiculous article than these.  The propaganda effort is quite high at the moment.  That bothers me, and it should bother you, too.

The second article is one posted on ZeroHedge.com, entitled, And Now Fake Consumer Confidence Too: Gallup Says Confidence In The Economy ‘Tumbled’. I’ll let you follow the link, so you can read the latest in corporate, state and media deception.  

If you remember from last week’s edition of these reports, I talked about the importance of consumer and investor confidence.  Proper readings of these vital statistics are essential to my overall analysis of the stock market.  As more and more people come to realize that ‘free journalism’ has reached an all-time low, it appears to me that the market for subscription-based services of independent research and analysis has reached an all-time high.  Right?

Bottom line is: Dow Theory says to stay long stocks.  However, I warn my readers to also hedge with some gold bullion and/or out-of-the-money puts.  Trust me on this one: you’ll be among good company.    

Okay, let’s talk about stocks.

My current portfolio: LQMT, CROX, LC, ANGI GRPN and SIEN

This Week’s JBP Stock Ideas

ROX has been dropped from my Watch List, not because the stock was no good, but because it was too good for me to buy some shares.  The stock just took off from my recommendation.  For those jumping on the stock on March 13, the date of my first alert to the stock, you’ve made an approximate 40% score.   Congratulations.  

SIEN: SIEN had been on my Watch List, as well.  But, as alerted on Wednesday, March 29, I bought 1,000 shares of SIEN at $8.21.  I think I got a good price.  The 200-day moving average is $8.20, and the stock has been successfully rallying off the 200-day moving average (and $8.25) for five consecutive days, especially on Monday during the 184-point drop in the DJIA.

The stock rallied from my entry of $8.21, which is a good start.

I intend to watch the stock for another purchase of 1,000 shares between $8 and $8.40, and hold the stock for between six and 12 months.  My stop is below $7, a price at which support had been established in November.

LQMT: As you know, I have quite a large stake in LQMT, 100,000 shares worth.  So, what’s new with LQMT?  

Earnings were released Tuesday, but the p/l is not particularly important at this stage of the company’s development.  But, of course, the increase of working capital through a private placement with the company’s new chairman and CEO, Professor Lugee Li, is of the most importance.

Liquidmetal reported $56.06 million of working capital, up from $3.33 million.  Li has a record of growing companies from nothing to exciting enterprises engaged in leading technologies in metals and composites, a new frontier for servicing the medical devices industry, among other industries.

If you’ve been a subscriber for more than a couple of months, you’ve been following the progress of Liquidmetals along with me.

For those new to the stock, Professor Li became chairman and CEO of Liquidmetals on December 14.  In February, the company purchased its new manufacturing facility.  Accompanying the earnings report of March 28, Li said in a statement:

We [Liquidmetals] recently announced the purchase of a new, larger manufacturing facility, as well sourcing alternative manufacturing platforms and materials from China-based Eontec. With these investments, we are actively moving towards increasing our manufacturing capabilities, expanding the range of products we will be able to manufacture, and providing lower cost solutions to our customers. We believe that these investments, when combined with an improved capital structure and future strategies, will allow us to accomplish our goal of expanding the Liquidmetal brand and future profitability.

Also on March 28, Liquidmetals announced it had passed biocompatibility tests “for use in medical implants and is now pursuing collaborations with medical implant companies.”

This step is important, in that the company now may move on to discussing new composite materials with potential customers and/or partnering with makers of implantable devices, including devices used in cardiology, otology (ears) and orthopedics.  

The market for such devices is estimated to $73.9 billion per year, globally.

Here’s what I’m looking to add to the long term portfolio this week.

Fannie Mae (FNMA)

After the Trump victory in November, shares of Fannie Mae (FNMA) soared to as high as $5.00, from $1.65, an amazing move for only 16 days of trading.  At that time, Trump was viewed as a pro-investor president, likely to nominate a treasury secretary who would take sides with investors.  

Optimism and profit-taking held FNMA within a large trading range of $3.50 and $4.50, until February 21, the date the U.S. Court of Appeals ruled that investors have no standing to sue the Federal Housing Financing Agency (FHFA).  On the news, the stock plunged to $2.71, from the opening price on February 21 of $4.18 per share.

So, what now?  

Well, according to Height Securities analyst Edwin Groshans, further appeals are the only course left for investors, unless FNMA investors would like to wait as much as an estimated 11 years, according to Groshans, to recoup Fannie Mae’s value through earnings.

However, if suitors take their case against the FHFA, a successful ruling for the plaintiffs would realize “instant value,” according Groshans.

“It is our view that despite the string of court losses, legal action is the path that has the best chance of monetizing GSE preferred shareholder investments,” Groshans told Benzinga.

I agree with Groshians’ assessment.  What else can investors do?  The court system is the only way to go, as I see it.  

I’ve add FNMA to my Watch List because of the risk/reward profile of the stock.  Famed investor, Bill Ackman, of Pershing Square Capital Management estimates FNMA to be worth as much as $47 per share, if the plaintiffs prevail in the courts.  

I have no problems with Ackman’s estimate.  All I know is: FNMA is a clear double-digit stock price, when/if the value is released to investors and not retained by the FHFA.

Until next time…

Trade Wise and Green!

Jason Bond

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