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11 Jul

Monday July 11, 2016

by

Good morning.

I hope you’re enjoyed the long weekend.

Let’s dig into the Long Term trading game plan for this week.  But first, a quick recap of this week’s market action and my observations.

For the second straight week, stocks staged a strong comeback from the month of June jitters related to a shockingly poor May jobs report and the shocking Brexit vote that followed.  The June jobs report—which showed a net 287,000 jobs created during the month—sent stocks soaring on Friday, with the DJIA, S&P 500 and NASDAQ closing the week higher by 1.10%, 1.28% and 1.94%, respectively, as the S&P 500 settled at 2,129.90, less than a mere point below the all-time record of 2,130.82, set on May 21, 2015.

On the surface, this week’s jobs report seemingly supports the Fed’s narrative of a U.S. economic recovery, but under the healthy headline number reveals an economy continually lopsided by a growing service sector and a depressed industrial sector.  After stripping away hospitality, healthcare and professional jobs, the June jobs report reveals no improvement to the industrial sector, the source of bread-and-butter jobs economists look for in a growing economy.  For June, the Department of Labor reported virtually no change in construction, wholesale, transportation and warehousing jobs, while mining jobs actually contracted an additional 6,000 jobs.

So, my takeaway from the June jobs data is: the report was not good–at all.  Domestic spending on durable goods, housing and automobiles don’t rise without a concurrent growth in solid, household-forming jobs typically offered through industrial production.    

The VIX, too, showed a very bullish tone, this time week slamming lower by another 10.63% to close at a very low reading of 13.20.

But, while stocks continued to climb this week, the bond market continued to reveal the demand for safety also rose.  The yield (inverse of price) on the 10-year U.S. Treasury dropped again to another record low of 1.37%, while the two-year U.S. Treasury moved in the opposite direction, taking the spread between the two maturities down sharply by 11 basis points to close at only 76 basis points.  Wow.  

The action this week in U.S. Treasuries contradicted the move higher in stocks.  If investors ‘buy into’ the Fed narrative of slow-but-sure economic growth in the U.S., why are yields dropping on 10-year Treasury and narrowing along the two-year/10-year yield curve?  Bond yields should be rising, not falling.

Our Deutsche Bank (DB) indicator agrees with the bond market.  Although DB rallied on Friday, the stock was down 6.76% for the week, and now trades at 12.97 per share, off its all-time low of $12.50, set earlier in the week.

Traders of West Texas Intermediate Crude (WTIC), too, agree with bond traders, whose price dropped smartly by 8.44% for the week to close at $45.12, leading the Commodities Research Bureau Index (CRB) basket of commodities to a decline of 3.65%.

The precious metals rally this week was impressive.  Prior to the June jobs report, gold and silver prices plunged, but recovered strongly post-report, as the silver price led the gold price ferociously higher to a close at $20.30, or another 2.49% higher for the week to close above its 200-week moving average for the first time since April 2013.

In currencies, the British pound continued to drop this week, shaving an additional 2.39% off the sterling/dollar cross to close to 1.295.  In all, the pound has dropped 14.4% from the high of 1.5134 on the day of the Brexit vote on June 23.

Okay folks, my analysis of what happened this week in stocks, bonds and precious metals hasn’t changed since the launch of the LT Report.  What I’ve been talking about in past issues of these reports are now clearly impacting all markets in magnitudes no one can miss.  There’s an ongoing crisis in confidence in central bankers and their ability to reverse already-weak and deteriorating economic activity across the Europe, the US, Japan, SE Asia and China.  

Money is moving out of bank stocks and into safety, as many market observers (include me) expect a shakeup in the banking sector this year followed by further intervention by central banks to elevate stock prices.  Another steep drop of the spread between the 10-Treasury and two-year Treasury last week to 76 basis points (and dropping) indicates a flight to safety, which has accelerated since the end of May, reassures me of an anticipated blowout in the money spigots from the Fed is in our future.  

This week’s rally in stocks tells me that a lot of big money is front-running a gusher of monetary easing at the Fed and further strength in the U.S. dollar due to inflows of non-dollar foreign investment into U.S. Stocks.  In other words, the U.S. dollar is the least bad of the world’s major currencies.

This Week’s JBP Stock Ideas

I made no additional trades this week, but have been watching Glu Mobile (GLUU) and Groupon (GRPN), two stocks that have been featured on previous watch lists.  Let’s get to my two open positions and discuss the GLUU and GRPN trades.

Fannie Mae (FNMA)

On June 29, I bought 10,000 of FNMA at $2.03 per share as a long-term play but may sell after a 20% in the stock. As a result of portfolio rebalancing I reduced my size to 5,000 shares.

As I stated in last week’s edition to the LT Report, the FNMA play is a bet on a favorable outcome to an ongoing lawsuit by shareholders brought against the Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac.  The case is referred to as, Perry v Lew.

If I’m correct with the FNMA trade, I stand to gain huge due to the sudden revaluation implied by a transfer of owners of $148 billion paid to U.S. Treasury in the form of dividends that would, therefore, become income paid to investors, implying, literally, a 10-bagger upward in valuation.  

And if you may think my suggestion of a potential 10-bagger move higher in FNMA sounds outrageous, Bill Ackman of Pershing Square Capital Management estimates FNMA may be worth as high as $40 to $50, a 20-to-25-bagger move from today’s $1.90  See reference article to the Ackman interview in 2014 by USA Today, here.

Kandi Technologies (KNDI)

Again, on June 29, I bought 3,000 shares of KNDI at $6.81 per share. As a result of portfolio rebalancing I reduced in my size to 1,500 shares.

Kandi Technologies Group, headquartered in Jinhua, Zhejiang Province, has established itself as one of China’s leading manufacturers of pure electric vehicle (“EV”) products (through its joint venture), EV parts and off-road vehicles.

The Electric Vehicle sector is booming in China and supported by the government for ecological reasons. There’s even an expectation that EV sales in China may grow substantially, maybe doubling 2015 sales (source: EB Obsession) and confirmed by the Chinese market leader BYD (source: CNBC News)

In the Q1 20016 the joint venture sold ZERO cars, due to an administrative error by Beijing.  Somehow, the vehicles in inventory were excluded from a list of cars qualified for purchase tax exemption. This created a substantial drop in the stock price.

In the meantime, four vehicles were added to the list in April, and sales started to catch up. KNDI, via its joint venture JV Company, stated it expects to sell 5,500-6,000 EV products in the second quarter and a total of 35,000, or more, EV products in the full year of 2016.

Leading up to the company’s next scheduled conference call, I would like to continue accumulating shares at approximately $6 per share, but no higher than $6.75.  Presently, KNDI August is range-bound at $6.50 and $7.50.  My sell target is $8.  I’ll issue an alert if I add to my holdings.

Glu Mobile (GLUU)

GLUU is back onto the front burner, and is one of my favorite stocks to trade.  Since the disappointing guidance that came with the company’s earnings report, released May 4, the stock has steadily marched back 16.4% off the May 4 low of $2.13.  With support at $2.00, the action since the report has impressed me as a sign of strength at the low end of the $2.00 and $2.50 range.

First, I like GLUU because of its very low valuation when compared with Zynga (ZNGA) and Electronic Arts Inc. (EA).  At a Price-to-Sales (P/S) of 3.13 and 5.26, respectively, GLUU’s P/S of 1.30 appears awfully low to me.  The stock barely trades above Book Value, and the cash position of the company $160 million represents nearly half the company’s valuation as a dismantled enterprise.

Glu Mobile continues to sign celebrities to contracts to promote its games. Each announcement by the company about a newly-signed contract with a celebrity invariably pops the stock, which gives us an incentive right there to play it.

Will another Kim Kardashian game come around for Glu Mobile?  Sure.  But who knows when, is the obvious question?  But while we wait, the stock remains rather depressed when compared to its brethren game makers, so I’m watching the stock again.

Groupon (GRPN)

And to end this week’s watch list of ideas with a bang, I come to Groupon (GRPN, a stock I love to trade for its volatility, which at the moment is approximately 5.2% during any given month.  And the volatility may markedly increase, if I’m assessing the potential impact of a successful turnaround strategy will have on the stock’s price accurately.

On Apr. 28, Groupon reported Q1 revenue of $732 million and EBITDA of $31 million, both beating Wall Street estimates.  Management reiterated its 2016 revenue guidance of between $2.75 billion and $3.05 billion, while increasing EBITDA guidance to a range of $85 million and $135 million.

Since the appointment on Dec. 16 of new CEO Rich Williams to Groupon’s executive team, the company has wasted no time with its turnaround effort.  Groupon has shutdown 17 underperforming markets and two lackluster joint ventures, including two businesses in the Japanese and Brazilian markets.  According to the company’s earnings call, one prong to the turnaround strategy involves eliminating non-core functions from what the company has shown works for them.

The second prong involves executing a strategy to boost marketing spending and efficiency of that spending.  As outgoing founder and CEO Eric Lefkofsky stated in the news release of his departure, “Cracking the code in local commerce is not easy. ”  And it’s not, as I see it.  Relying upon one-time revenue catches from discounting and “couponing” has neither help to build a loyal consumer base nor a higher-quality participating merchant clientele as much as Lefkofsky had envisioned.  

In other words, it appears that Groupon’s core customer is more concerned with high-quality products and the service they get from merchants than discounted pricing alone.

As further evidence of company’s management effort to turn around Groupon came on June 22, when the company announced its new on-demand delivery service, OrderUp, is partnering with Mexican food chain restaurant, Qdoba, to offer more than 40 markets delivery service for the restaurant to add to the Baltimore, Cincinnati, Nashville and a few other smaller markets, with more promised to come.

And finally, Maxim Group initiated coverage of GRPN, attaching a “buy” rating and a $5 price target for the stock.

My target entry is the $3.00 to $3.25 range, with a goal of $4.00 to $4.25 as we move toward the company’s Q2 earnings report scheduled for July.  I’ll alert my subscribers of any moves I make on GRPN in an email Alert.
Trade Green!

Jason Bond

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