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12 Jun

Monday June 12, 2017

by

Good morning!

Stocks were mixed this week.  While the DJIA and Russell 2000 broke all-time price records, Friday’s flash crash of the market-leading, big-name tech stocks has dominated the weekend financial news.  A divergence of a 2.4% decline of the NASDAQ 100 this week against a modest 0.31% rise of the DJIA hasn’t happened since 2008.  Therefore, folks, let’s be on our guard this week, especially as we lead up to the FOMC meeting scheduled for Tuesday and Wednesday.  Prediction: Fed funds range moves up to 1.00% and 1.25%.  

The broader NASDAQ index dropped 1.55% this week to close at 6207.92, while the DJTA closed nearly unchanged for the week at 9327.88.  The S&P 500 closed the week with a modest decline of 0.30% to settle at 2431.77.  As I just mentioned, the Russell 2000 broke another price record, and led the overall market with a 1.16% gain.

Before I delve into my analysis of what happened at 2:50 p.m. on Friday, when the flash crash of the FAANG stocks occurred, let me run down the action in other markets, because a lot of weird things were going on there, as well.

First, the bank stocks.  After Moody’s downgraded Banco Popular on Tuesday, on the next day Spain’s sixth-largest bank goes bust.  Whoops.  I’m sure the Spanish are loving the Americans all over this weekend.  But get this, many of the financial media have said the bankruptcy of Banco Popular was a good thing, calling the bankruptcy, instead, a “rescue” by Santander Bank (SAN), who bought the bank and acquired its assets for a total of 1.00 euro.  

Note: By the way, don’t confuse Santander Bank with my short position in Santander Consumer USA Holdings (SC).

Well, thanks to the corrupt media and central bank string pulling, traders of bank stocks were, therefore, delighted and bid the BKX index to a whopping 4.93% gain this week.  Does this imply, then, that more rescues are good for banks?  What a difference eight years makes.  If the markets were told that the bankruptcy of Lehman Brothers was good for bank stocks, the $700 billion TARP program in the U.S. would have been unnecessary.  I’m kidding, of course.   My advice: stop reading mainstream financial news.  Of course, the bankruptcy of Banco Popular is a symptom of the financial strains in Europe, which is a bigger symptom of the global financial strains of the globe financial system.  When economic growth is robust, rarely do banks go broke.  Got it?

And another rise in the LIBOR rate this week of three basis points to close at 1.117% slipped under the radar of the financial media.  

In the U.S., after reaching a low of 79 basis points, the yield curve (UST10Y minus UST2Y) dropped another basis point to close the week at 86 basis points.  What a remarkable comeback.  Fed intervention?  Of course!  The credit markets are telling us that the financial situation in the U.S. and Europe are deteriorating.  And the savior of the last market calamity of 2008-9, China, is in no position to come to the rescue of the West this time.  China has its own debt overhang to negotiate.

In the currency market, you would think that the U.S. dollar would absolutely soar as a knee-jerk reaction to the news about Banco Popular.  Well, you would be wrong.  Instead, the USD index moved modestly higher by 0.57%, settling the index at 97.24.  

If central banks wanted to manipulate the US dollar higher, there was a great opportunity lost this week, which tells me ‘the fix is in’ to weaken the dollar against other major currencies, but not gold.  Right?  

Speaking of which, the gold price was once again ‘monkey hammered’ with $4.0 billion of notional contracts sold in one trade on Thursday.  So, let’s recap.  Moody’s downgrades Banco Popular on Tuesday.  The bank collapses on Wednesday.  The banks stocks rally on the news, and the dollar gold price drops on Thursday.  Makes sense to me—not!  But, when looking at the history of the gold market and central bank interventions in the gold market, dollar-gold’s drop of 0.69% this week suggests the cartel’s having difficulty controlling the precious metal.

And as a flip side to this last week’s higher gold price and lower gold stock prices, this week’s lower gold price and 0.31% and 2.85% moves higher in the GDX and GDXJ, respectively, reignites the case for chalking up this week’s gold action as a temporary pause to the gold market rally.  After the close of the FOMC meeting on Wednesday, I don’t think there will be any more rate increase for a while.  Both gold stock indexes trade above their respective 200-week MA’s, so don’t rule out a summer rally in your favorite junior mining companies.  I believe a rally is coming.

And for those playing silver stocks, ditto.  This week’s 0.80% rally of the SIL underscores the strength in the silver market during a $0.30 drop (-1.71%) to the dollar-price of silver this week.

In the oil market, chock up another good call by the JB.  After reaching a low this week of $45.20 on Thursday, the price of WTIC closed Friday at $45.83, down another $2.14 per barrel from the previous Friday’s close.  

Okay, so my call for a $45 WTIC price fell $0.20 short, but that’s good enough, although maybe this coming week’s trade will technically make me correct with my forecast.  

So, will WTIC test $40?  I don’t know, but the easy trade is finished, so don’t become greedy.  Okay?  And by the way, Exxon Mobil (XOM) rose strongly this week, posting a $2.63 rise (3.31%) to close the week at $82.13 per share, but the stock still trades below its 200-week MA.

Okay, let’s get back to the flash crash of Amazon and of the four other FAANG stocks [(Facebook (FB), Apple Computer (AAPL), Netflix (NFLX) and Google (GOOG)] on Friday.  To give you an idea of how the performance of AMZN (as a glaring example of the group) has fared since the company’s surprisingly stellar earnings report for Q4 2014, below, is a graph demonstrating the rise of the stock compared with the NASDAQ and NASDAQ 100 since January 1, 2015.

First, the chart of the NASDAQ – AMZN comparison:

Second, here’s the chart of the NASDAQ 100 compared with AMZN:

From the two charts you can see the appreciation rates of the NASDAQ and NASDAQ 100 were approximately the same since January 1, 2015.  But look at the performance of AMZN.  The stock rallied for a gain of 217% within a 30-month time period.  That’s quite a move for such a large market cap.  No?

But, when we compare financial metrics of the NASDAQ against AMZN, the full picture of how ridiculously priced AMZN truly is emerges.  The forward earnings estimate for the NASDAQ is 21.78 times, which is high enough.  Right?  Well, the forward earning estimate for AMZN is ….drum roll please… 86.55 times!  Wow.  And the PEG ratio?  6.69!  For those not familiar with the PEG ratio, it is a ratio of stock’s PE ratio (numerator) to the growth rate of Amazon’s earnings (denominator).  

“In general, the PEG ratio is higher for a company with a higher growth rate,” states Wikipedia.  When you see a stock with a PEG ratio of 2.00, that’s pretty high unless the company has some strong earnings growth.  A PEG of 3.00 is venturing into ‘bizarro land’, implying unusually strong earnings growth rates that might be justified by sustainable unusually strong earnings growth rates    for some years to come.  

But a PEG of 6.69?  And Amazon’s capitalization is $462 billion?  Sure, the company’s present earnings growth rate is very strong, but the stock won’t become fairly valued at $462 billion by the close of 2017, or even by the close of 2018!  Essentially, Amazon’s expected earnings have been grossly lagging the company’s capitalization.

Want a couple of more metrics for AMZN before I get off this subject?  

As of Friday’s close, AMZN trades at 21.26-time Book Value!  And the stock trades at 36.35-times Free Cash Flow!  Notice the exclamations at the end of each of my sentences.  I mean to use all of them.  This is laughable stuff, but there you have it, once a $1,000 stock this week.

Bottom line to next week: watch the FAANG stocks for more signs of increased volatility.  

Bloomberg writes:

“A crack has finally formed in the foundation of the U.S. bull market.  Now investors must decide if any structural damage has been done,” Bloomberg begins its article, entitled, Nasdaq Megacaps Go Careening Off Course.

“We are probably going to see additional selling pressure on some high-momentum stocks that have spearheaded the rally,” Chad Morganlander, a money manager at Stifel, Nicolaus & Co. told Bloomberg.  “Stocks have become overbought.”

“It’s too early to tell,” Kim Forrest, a senior equity analyst at Fort Pitt Capital Group, said. “I am watching what happens on Monday.”

So, what do I say about these two disparate viewpoints about what to expect from AMZN, going forward?  I say: who knows what will happen?  Flip a coin.  

And if you think I’m wimping out on a prediction, let me remind my reads that two Yellen phone calls, one to the NY Fed’s William Dudley, and another to the Swiss National Bank during the weekend aren’t far-fetched assumptions.  I would be equally unsurprised by a market rally of the FAANGS, or a market meltdown of these stocks next week.  

However, what I can say is, a contracting U.S. Treasury yield curve, a relentlessly rising LIBOR rate, a broken gold market, a collapsed European bank and, now, flash crashes of the five darlings of the U.S. stock market aren’t signs of a healthy economy or financial system.  If the Fed intends to throw everything at this global financial system, we will know for sure soon enough, maybe this week, by how effective the NY Fed, PPT, the BOJ and SNB are with supporting all vital markets.  But don’t expect any honest analysis of why markets react as they do from news outlets such as Yahoo News, NY Times, CNBC or Wall Street Journal.

Okay, let’s move on to my holdings, where we will find some good news.    

No changes to my holdings, I’m still long LQMT, CROX, LC, SIEN, GRPN and short SC in my portfolio

Again, this week’s trade was kind to my portfolio.

The gains (or loss) to my portfolio this week are as follows:

LQMT 0.279, -0.004, (-1.34%); CROX $7.16, +0.22, +3.17%; LC $5.78, +0.18, +3.21%; SIEN $7.65, +0.15, +2.00%; GRPN $3.04 +0.01 (+0.33%); SC (short) $11.44 +0.09 (-0.79%).  

Total return this week: $790.  Total return: $4,810, 16.1% annually.

My last trade was an add on June 2, where I bought an additional 15,000 shares of GRPN.  I’m averaging down in a stock that has been become bizarrely depressed.  And for those of you who missed it, my thinking about GRPN is as follows:

GROUPON (GRPN)

Originally, I purchased 5,000 shares of GRPN on March 1.  I bought the stock with the bet that the persistent rumor of Alibaba having an interest in buying Groupon made a lot of sense to me, whether the rumor was in fact true, or not.  A takeover of Groupon actually makes sense for Alibaba in a strategical sense, in that it’s well-known that Alibaba must expand globally to achieve meaningful growth.  And why not enter the largest economy of the world?  The US.  Right?

Alibaba is looking at Groupon’s Price/Book of a measly 0.37-times.  And it appears that Groupon most certainly qualifies as a potential buyout target by anyone at this price level.  The company’s earnings have been better than expected since Q3 of 2015, except the most recent quarter’s revenue miss (Q4 2016).

After the Q4 revenue miss, I haven’t been sure of this stock’s appreciation potential outside an Alibaba, or alike takeover, deal.  But the stock’s Price/Book is awfully low to give up on the stock just yet.  With approximately 30 million customers on Groupon’s books, Alibaba may be mighty tempted to buy a customer book of this great size ‘on the cheap’.

But, in the meantime, Groupon is in the process of pruning its most unprofitable markets and accentuating its best markets, of which the US is no. 1.  Over time, I expect gross margin to increase and trickle through the p/l in the August earnings report.  

In May, two research firms have announced two diametrically different assessments of GRPN.  On May 4, Maxim Group rated GRPN a ‘buy’, with a target price of $5.50.  But on May 31, UBS rated GRPN a ‘sell’, with a target price of $2.85, which is not far from my latest $3.03 purchase of June 2.

How strange it is that two research analysts see GRPN is such different lights.  UBS has stated that Groupon’s gross margin won’t be enough to facilitate the company’s growth initiatives.  I say, UBS states the obvious, and the stock already more than reflects this concern, with an upside surprise as the more likely scenario as we head into the August report.

So, I have two scenarios that I’m betting on.  One is a suitor, and the other is an operational surprise from the August earning report.  

The short position in GRPN has risen to 9.65% of float, with 4.75 days to cover, indicating sentiment among traders is quite low.  I like that; a possibility of a sizable short squeeze only adds to my reasoning for owning the stock.

Until next time…

Jason Bond

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