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18 Jul

Monday July 18, 2016

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Good morning.

I hope you’re enjoying the weekend.

Before I dig into the Long Term trading game plan for this week, first, I want to provide a quick recap of this week’s market action and my observations.

Three weeks of trading and three weeks of higher stock prices resulted in two all-time highs in the DJIA and S&P 500 this week, both up 2.04%, 1.49%, respectively.  Incredible.  

Though the NASDAQ failed to reach an all-time high this week (up 1.47%), another important index, the Dow Jones Transportation Average (DJTA), finally closed above its 52-week moving average for the first time since April.  For those steeped in Dow Theory, this week’s advances in both the large industrial and transportation stocks were constructive for further gains in stocks.

Supporting the move in stocks was the VIX, which closed down again this week by 0.53 points to close at only 12.67!  Apparently, traders so little risk.  Hmm.

West Texas Intermediate Crude (WTIC) led a 0.90% rise in the Commodities Research Bureau Index (CRB) this week with a 2.57% rise to settle at $46.28 on Friday.

While the British pound rebounded modestly from nearly three weeks of declines, the yen took over as the weak currency this week, paring steeper losses to only 4.11% against the U.S. dollar after rebounding off its 200-week moving average.  The yen’s sharp decline was enough to push the USD Index to 96.56, settling above its 52-week moving average for the first time since February.

The real action this week, however, was evident in the bond market, where the yield on the 10-year Treasury soared 23 basis points to close at 1.60%.  The spread between the 10-year and two-year Treasuries rose sharply, as well, by 13 basis to close at the pre-Brexit spread of 89 basis points of three weeks ago.  

And as expected during a “risk-on” trading week and concurrent rises in U.S. Treasury yields, Deutsche Bank (DB) rallied strongly, gaining an impressive $1.46, an 11.26% move for the week.

And in the precious metals market, the rally in gold and silver prices came to a halt, with declines of 2.15% and 0.27%, respectively, ending a six-week string of consecutive highs in the metals.  However, the good news is: both metals did close comfortably above their respective 200-week moving averages.  I’m still bullish on the precious metals market, and expect the rally to continue throughout the remainder of the year.

My take on this week’s broad market action can be summed up by stating that, evidence of highly coordinated central banker activity by the Fed, Bank of Japan (BOJ) and Bank of International Settlements (BIS) saved the week from another episode of flattening yield curves and higher precious metals prices, both of which aren’t to the liking of central bankers.  

There’s little doubt in my mind that the sell off in the yen and U.S. Treasury market (resulting in higher yields) was coordinated by one, two or a few central banks (including the BIS) to relieve stress in the banking industry.  

My observation of last week’s action in the yen and bonds suggests to me that DB’s 11.26% rise this week couldn’t have come at a better time while the gold market continued to force vulnerable commercial traders to cover their severely underwater naked shorts gold contracts.  The short squeeze in the gold market has been relentless and damaging to Fed-sponsored bullion banks, with further price rises possibly triggering a default at the Comex and/or LBMA.  

I conclude the bullion banks were(and still are) in trouble, with the risk of a runaway U.S.-dollar gold price unraveling the banking industry if the gold rice isn’t managed higher in a more orderly way.  In short, central banks still have influence over these markets and are determined to aggressively support higher stock prices (at the expense of higher dollar-gold prices).

This Week’s JBP Stock Ideas

As I notified everyone on Thursday, I sold KNDI for a $1,000 profit after holding a small position in the stock for two weeks.  So, I’m hopeful I’m beginning another long winning streak.

Let’s discuss my positions and a few ideas I have kicking around in my head.

Fannie Mae (FNMA)

I’m still long 10,000 shares of Fannie Mae at $2.03.  I noticed this week FNMA’s strong bid at the 52-week moving average at $1.94, which obviously pleased me, as this support is important to my trade at this time.  

FNMA is a stock I’m planning to own for months or years due to the unusual circumstances of the trade.  As I’ve outlined in previous editions of the LT Report, investors await a ruling by the U.S. Court of Appeals regarding legal issues stemming from actions taken by Federal Housing Finance Agency (FHFA) to deny shareholders dividend payments issued by Fannie Mae.

If I’m correct about the FNMA trade, I may stand to make a 10-bagger.  No joke.  A couple of hedge fund managers who own the stock with me have already suggested even higher returns, so I fall on the conservative side of the potential move in FNMA.  It’s certainly a crazy situation.

ProShares Ultra VIX Short-Term Futures (UVXY)

For those of you who don’t know, UVXY is a play on the VIX, and the VIX measures fear in the market. When markets get overbought, traders fear a pullback and start buying protection to hedge their long positions. This is likely why we saw UVXY trade essentially unchanged Tuesday, despite the market rally.

At 12.67, the VIX has reached an extremely low reading and runs contrary to risks present in stock values.  The lowest reading I’ve seen in the past five years is 10.28 in June 2014.  The average reading during the same five-year period is approximately 19.50.  So, today’s 12.67 is quite outside the statistical norm.

Therefore, I bought 5,000 UVXY at $6.90 on Wednesday, with the goal of scoring a swing trade of between a 5% and 20% profit, driven by a market sell-off or period of consolidation.

If I’m right, we might be able to get approximately $0.50 per share profit, or better, out of this position possibly during the coming week.

Glu Mobile (GLUU)

Last week, I stated I like GLUU because of its very low valuation when compared with Zynga (ZNGA) and Electronic Arts Inc. (EA).  The stock’s Price-to-Sales (P/S) of 1.44 is quite a depressed metric for GLUU when compared with ZNGA’s P/S of 3.22 and EA’s P/S of 5.34.  GLUU barely trades above Book Value, with half of the value held in cash of $160 million.

GLUU rallied nearly 9% this week, but until I see a pullback in the overall stock market, I won’t chase GLUU.

Euronav NV (EURN)

Now let’s turn our attention to Euronav (EURN), which I intend to buy 2,000 shares, may be above the $8.70 level.

WHAT DOES EURONAV DO?

Headquartered in Antwerp, Belgium, Euronav NV, together with its subsidiaries, owns, operates, and manages a fleet of vessels for the ocean transportation and storage of crude oil and petroleum products worldwide. The company operates through two segments, Tankers; and Floating Production, Storage, and Offloading Operations. As of March 24, 2016, it owned and operated a fleet of 55 vessels, including 30 very large crude carriers, one ultra large crude carrier, 22 Suezmax vessels, and two floating, storage, and offloading vessels.

RATIONALE

As I stated in my email Alert on Friday, there are multiple catalysts that may elicit a strong bid for EURN, including a bounce higher in the price of crude oil, a positive global economic report, or a rally in the U.S. dollar against the euro to name a few obvious ones.

Because EURN is a foreign stocks, priced in euros, there are a few things you should know about foreign stocks priced in other currencies besides the U.S. dollar.  Before the market opens in New York, EURN first trades in Europe in euros, on the Euronext Brussels.  

If, for example, EURN gains 0.30 euro on Euronext, arbitrageurs will take EURN on the NYSE up $0.33 (0.30 euro times 1.10).  If, after a period time, EURN closes unchanged, but the euro drops to 1.02 against the U.S. dollar, arbitrageurs will take EURN higher by $0.08 per share due to the new exchange rate of the euro against the U.S. dollar.

Because I’ve been on record as a U.S. dollar bull, the latest political crisis brought about by the Brexit vote (encouraging other countries to leave?) and jitters regarding Deutsche Bank (DB), Societe Generale and a few Italian Banks, such as Veneto Banca, Vicenza, Atlante and Unicredit may advantage U.S. dollar investors, just as U.S. investors of British stocks fared well during the pound’s double-digit decline against the U.S. Dollar following the Brexit vote.   

And as a last rationale: I may even get some help with a prospective trade from the Euronav, itself.  See my source document here.   

The news release states:

ANTWERP, Belgium, 1 July 2016 – Euronav NV (NYSE: EURN & Euronext: EURN) (“Euronav” or the “Company”) today announces that the Company has purchased 192,415 of its own shares on Euronext Brussels for an aggregate price of EUR 1,528,211.

Date Quantity   Avg. price    Low price     High price           Total price

24 June 2016   75,270  7.8714 EUR  7.714 EUR 8.000 EUR  592,480.28 EUR

27 June 2016    117,145   7.9878 EUR  7.960 EUR      8.000 EUR  935,730.83 EUR

Following these transactions, the Company now owns 1,042,415 own shares (0.65% of the total outstanding shares).

Euronav may continue to buy back its own shares opportunistically. The extent to which it does and the timing of these purchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations.

Take note of the highest price paid for EURN by the company during the share buybacks of June 24 and 27.  Eight euros.  With the exchange rate on Friday of 1.10 U.S. dollars per euro, Euronav paid no more than $8.80 per share on these two dates.  

I view this news release as an indication of the company’s desire to support the stock below the 8 euro ($8.80) level.  Since the company reported 140 million euro ($154 million) as of March 31, it’s likely the company may again support the stock at below 8 euro ($8.80) in the event of another pullback in the stock.  The news release may also embolden traders to buy shares of EURN at $8.80.  Make sense?  It does to me; it a Pavlovian thing, I guess.  

But, we all know this game isn’t new, of course; we’ve all witnessed share buyback programs and “safe” supports all along the S&P 500.  Haven’t we?

If I decide to strike at EURN, of course you’ll be the first know in an email Alert.

Trade Green!

Jason Bond

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