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29 Aug

Monday August 29, 2016

by

Good morning!

This week, all eyes were fixed on Jackson Hole, WY and the content and tone of the scheduled Fed speakers, Chair Janet Yellen, Fed presidents Stanley Fischer and Jerome Powell at the conference.  Initially, Yellen built a case for the possibility of a rate rise in the future, ending her speech with the usual “wiggle room” language to leave the listener unsure of her message.  Stocks rose.

Fischer was next.  His rhetoric was far more hawkish.  Stocks sank.

Then, Powell proceeded to add to Fischer’s assessment for the case for raising rates.  Stocks sank more.

By the close of the week, the DJIA, S&P500 and NASDAQ slid 0.85%, 0.68% and 0.37%, respectively, with the U.S. dollar strengthening from the Jackson Hole conference.  

Oil and gold prices dropped, a typically performance as a result of any Fed event.

The real story in stocks this week came by the VIX, which moved erratically   during the times of the three speeches at Jackson Hole.  After reaching as low as 12.13 on Friday, following, first, Yellen’s speech, then hitting as high as 14.93 in reaction to the Powell and Fisher speeches that followed Yellen’s, the index closed at 13.65, above 12 points for the first time on a weekly close in four weeks.  

Could this be the start of a leg up in the VIX?  That’s what I’m waiting for, in the hopes of buying some stocks on my watch list.   

In my last report, I discussed the VIX’s unusual string of sub-12 readings, an anomaly not seen since 2006.  Well, that string is over, leaving investors a little less confident of the Fed’s intentions in the coming months.

But I’m not buying the “bad cop” performance by Fischer and Powell.  The key speech was Yellen’s, in which she left the door open for another chance of leaving rates unchanged as a way of buying time until after the election to possibly act.  

I’m not stating I’m expecting a rate rise in December; I’m stating I expect nothing from the Fed that may upset the apple cart while the Obama appointee remains at the helm of the Federal Reserve.

And Thierry Wizman at the Macquarie Group agrees with me—mostly, except for the notion of a rate hike in December.  He told Bloomberg News that Yellen’s speech at Jackson Hole amounted to “a whole lot of nothing,” and left him unmoved to change his forecast of a Fed rate hike in December.

If you remember my thoughts of last week, I stated that I expect surprises from the Fed; I just don’t know how those surprises will be orchestrated.  

I cannot come to grips with a Fed plan to raise rates and weaken the banking industry anymore than it now is.  Wouldn’t a rate hike invert the yield curve, telling the entire world that asset-price deflationary forces my take hold for good?  

What would a rate hike do to equities?  And can the Fed control the possibility  of a rapidly declining market?  Does the outcome of the presidential election play a role in the Fed’s decision, post-election?  And why would the Fed exacerbate a strong dollar at this time in the cycle?  

I’ll tell you, it’s tough for me to imagine a rate hike before the presidential election.  

With the dollar rallying this week, West Texas Intermediate Crude (WTIC) closed down by $1.47 per barrel to end the week at $47.64, breaking a 26%, three-week streak of higher weekly closing price.  Resistance at $50 held handily.  Remember what I had stated in the past: if I’m right about the U.S. dollar topping, then the oil price is headed higher.  But along the way, the volatility may become high in both markets.  We’ll see if I’m correct.

And as expected, a weak yen and euro provided no help to stocks.  In my last newsletter, I demonstrated the remarkable positive correlation between a rising yen and U.S. stocks, since February.  The correlative move in both markets was spot on this week: yen down, stocks down.  

I sensed this Friday a little fear entering U.S. stocks.  Let’s see if next week provides a follow through from Friday’s rising VIX.  I anticipate any negative momentum from Friday’s trade will be watched closely by the NY Fed for another intervention.

And to add some comedy to this week’s Fed spectacle, two contradictory pieces of evidence that the U.S. economy doesn’t warrant more expensive money came by way of IHS Markit, whose estimate of Q3 GDP was reported at 1.1%, a growth rate not high enough to accommodate a typical rise in U.S. population.  Instead of the U.S. economy on its way of achieving so-called “escape velocity,” the economy may, in fact, be in for more trouble.

And if Goldman Sachs “believes” the chances of a Fed rate hike in September has increased, then I feel comfortable with my assessment that the Fed won’t raise rates in September.  Didn’t anyone notify Goldman Sachs of the latest downward revision to U.S. GDP (1.1%)?  

And finally, with inflation expectations reaching an all-time low this week, according to University of Michigan’s Surveys of Consumers, if the Fed’s proposed rate hike was actually delivered, the move would be unprecedented.  Historically, the Fed reacts after high consumer inflation expectations, not before.  Why would today’s Fed change from convention?

For more outside reading on the subject of the Fed’s dilemma, I provide two links to Zerohedge here, and here (Bill Gross comments).

The precious metals market ended the week with a drop of $20.30 (-1.51%) in the gold price and a plunge of $0.57 (-2.96%) in the price of silver.  As has happened many times before, some entity dumped a lot of paper gold contracts at once to kill the precious metals rally, this time $1.5 billion of notional contracts were dumped within minutes during Wednesday’s trade.   Similar activity followed at the COMEX on Friday.  Of course, the embarrassment of a gold rally during the Jackson Hole event needed quelling, and it was.

And finally, the bond market, the spread between the U.S. Treasury 10-year note and two-year bill closed at 78 basis points.  At one point, the spread reached a low of 71 basis points, a spread not reached since December 2007, a mere nine months prior to the collapse of Bear Stearns of September 2008.  

Because the financial media aren’t doing their jobs by providing balanced reporting and analysis about the Fed’s colloquy, I needed to do that for you.  If I was interviewing Yellen, I would first ask her why she is contradicting sentiment of the U.S. economy as expressed by the bond market, which is a much more reliable indicator of the health of the U.S. economy than stock prices are.  

For more than 32 months, the spread between the 10-year and two-year Treasuries has narrowed to 78 basis points, from 260 basis points in January 2014.  Since the Fed is notoriously inaccurate with its economic forecasts, as former Fed Chairman Alan Greenspan as strongly intimated recently, why does Yellen think she can do any better than her predecessors?  

The smart bond money says: we prefer to hold debt and not equity.  Who’s correct?   

I remain cautious with bullish plays on the major indexes until the VIX normalizes.

Now let’s move on my stock ideas.

This Week’s JBP Stock Ideas

It was a bit of a mixed bag this week with my positions, but the weighting of my holdings produced a paper profit of $580 for the week.  Though EURN closed down for the week, GLUU and, my new position, LQMT, closed higher by Friday.  So, overall, I’m pleased this week.

So, what happened to EURN?  After the stock reached as high as $9.51 on Wednesday, Morgan Stanley issued an update to its rating for EURN.  Morgan Stanley downgraded EURN to equal weighting, from an over-weighting.  As a result, EURN opened on Thursday at $8.80, traded down further all day Thursday to close at $8.58, from Wednesday’s close of $9.29.

Though, EURN took a pretty good hit this week, Citi, on Friday, reiterated a ‘Buy’ rating for the stock, and expects Euronav’s board of directors will maintain its $0.85 dividend for 2016.

Yahoo Finance reported comments made by Citi analyst who issued the rating, Christian Wetherbee, who remains upbeat on the crude shipping industry and Euronav in the coming quarters.

“Longer-term, a still controlled 2017 and 2018 tanker order book and expectations for continued growth in the global crude trade keep us constructive on tanker market fundamentals,” Wetherbee wrote in a note.

And Wetherbee touched on a point I made earlier about the early August’s spike down in spot rates, wherein I stated that the market has already priced-in a slowdown in crude deliveries.  After that, prices typically begin to bounce along the bottom, then rise back to more reasonable levels in the following months.  

Longer-term, I see higher shipping rates due to China’s continued and under-appreciated growth story, albeit a less robust growth story than in the past.

“We believe that tanker rates are just past an inflection point in their recovery, and that spot rates will recover at a faster rate than charter rates, due to higher turnover on shorter hires in a rising rate market, allowing for quicker opportunities to reset for-hire rates higher as market fundamentals continue to tighten,” Wetherbee noted.

“As such, with greater than 80% spot market exposure, Euronav presents an opportunity for near-direct investor participation in the tanker market recovery,” the analyst added.

GLUU performed well, up $0.07, or 3.08%, for the week.  There was no specific news about Glu Mobile during the week, so we hold for next week’s action.

Now to my latest holding, Liquidmetal Technologies (LQMT), a stock I alerted on Tuesday.  As I alerted, I bought 200,000 shares at $0.137.  The stock closed on Friday at $0.141, up 2.9% from my fill.

ABOUT LIQUIDMETAL TECHNOLOGIES

Liquidmetal Technologies is the leading developer of bulk alloys that utilize the performance advantages offered by amorphous alloy technology. Amorphous alloys are unique materials that are distinguished by their ability to retain a random structure when they solidify, in contrast to the crystalline atomic structure that forms in ordinary metals and alloys. Liquidmetal Technologies is the first company to produce amorphous alloys in commercially viable bulk form, enabling significant improvements in products across a wide array of industries.

WHY I’M LONG LQMT

On March 10, Liquidmetal and DongGuan Eontec Co., Ltd. entered into an agreement, whereby Professor Yeung Tak Lugee Li, Chairman of DongGuan, agreed to purchase up to 405 million shares of LQMT stock for a purchase price of $63.4 million.  

A term of the deal included the purchase of 105 million shares at $0.08 per share for a purchase price of $8.4 million, which did indeed happen on March 10.  An additional term of the deal included the purchase of an additional 200 million shares at $0.15 per share for a purchase price of $30 million, and the purchase of 100 million shares at $0.25 per share for a purchase price of $25 million.  In total, Mr. Li is eligible (board approved the agreement in May) to purchase 300 million shares for a purchase price of $55 million.  

In addition, Liquidmetal issued a warrant for an additional 10,066,809 shares at an exercise price of $0.07 per share.

So, who is Professor Yeung Tak Lugee Li?  He is the Chairman of DongGuan Eontec Co., Ltd., in China.  The company symbol on the Shanghai Exchange is (SHE:300328.SZ), where the shares are currently priced at (yuan)14.02, or $2.10 per share.  The market capitalization of DongGuan Eontec is approximately $850 million, and is a highly profitable company, with net profit margins exceeding 10%.  The company manufactures next-generation metals for other commercial enterprises involved with the production of consumer products, just as Liquidmetals is in the business of producing.

In 2012, Li founded Leader Biomedical.  

In 2013, he acquired a majority stake in publicly-traded aap Joints, a division of aap Implantate AG in Berlin, Germany.

In 2014, Li acquired EMCM, a biomaterials contract manufacturer, from aap Implantate.

All of these companies that Li purchased are in the business of developing and manufacturing next-generation metals for commercial products.  Therefore, my stake in LQMT is motivated by the modus operandi of Mr. Li reaching LQMT in the near future; he’s in a buying mood.  

If/When and announcement is made regarding Mr. Li’s purchase of the remaining 300 million shares of LQMT, I expect the stock price to soar.  In March 2016, LQMT skyrocketed 132% in 11 weeks following the announcement of Mr. Li’s initial purchase of 10 million shares.  The next move may dwarf 132%.

Trade Green!

Jason Bond

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