Good morning,

Stocks were mixed this week for the second straight week.  While the DJIA and DJTA average made gains this week, tech stocks and small-caps sank.  

The FAANG stocks were mixed to lower on the week, and the grocery stocks were crushed following the bid from Amazon (AMZN) for Whole Foods (WFM).

Bank stocks held up well following the FOMC meeting and the decision that came out of the meeting to raise overnight interest rates.  But then again, with fed fund futures trading at a 100% chance of a rate hike during the meeting, traders of bank stocks had long ago discounted the hike.  The exception this week was Deutsche Bank (DB), which closed at $17.67 per share (-$4.81%) on Friday, falling below its 200-day MA for the second time this year.  

Watch DB this week for signs of renewed worries among traders of stresses building in the banking system due to the Fed’s rate hike on Wednesday, as the stock sits on its 52-week MA.  While I don’t expect a calamity this week, the fact that DB has dropped 12.6% since May 23 against a backdrop of a 2.55% rise in the BKX during the same time period doesn’t warm me all over.

The performance of the FAANG stocks should also be watched this coming week.  The initial focus of the ‘flash crash’ of AMZN on June 9 has, so far, resulted in a yawn in the case of AMZN and Facebook (FB).  But the slide since June 9 in the share prices of Apple Computer (AAPL) and Netflix (NFLX) of 8.21% and 7.14%, respectively, will have my eyes glued to those tickers.  

If you remember, the last sizable correction in the S&P 500 during the Dec. 2015 and Jan. 2016 time period was led by the FAANG stocks.  So, why hasn’t the major averages responded to these significant drops in AAPL and NFLX?  I don’t have a theory except to suggest that either we’ll see a nice rebound in these two stocks, or we’re witnessing the ‘tell’ of an imminent drop in the DJIA and S&P 500 in the coming days.

And the troubling action continued this week in the debt markets, as well.  Following the announcement of a 25-basis-point rise in the fed funds target range on Wednesday, the UST10Y rate dropped another five basis points to close the week at 2.16%, taking the yield curve down another two basis points to 84 basis points.  We’ll see 2.00% soon.  

Sure, the action in the UST10Y could have been worse following the FOMC meeting, but the hike was expected.   What I didn’t expect was the spread between the UST10Y and LIBOR dropping like a stone as it did this week, as the eurodollar curve flattened by another 13 basis points to close the week below 100 basis points at 95 basis points.  Folks, that’s not a good thing.  We should be hearing some chatter about this soon.  

And if you noticed, too, the US dollar still trades significantly below the 99.00 level, even after the Fed failed to deliver the ‘dovish’ language that the market expected following the rate announcement.  Instead, the Fed said it expects to raise rates one more time this year.  I’m reading more “policy error” language throughout media, but I think the policy error was two years ago, at a time when the Fed should have started inching rates higher in its effort to restock its quiver.

I think the entire US dollar rally that began in 2014 is over.  I’ve changed my viewpoint on the US dollar.  Now I believe that the long runway of ‘hawkish’ language of the past two years was fully priced into the US dollar market by January 2017.  My bet is, that the US dollar heads down from here, because I suggest that the Fed may weasel out of its promise to raise the fed funds rate.

So, what does this all mean for the gold market?

In my opinion, the dollar-gold price is poised for a run in the second half of 2017, and may outperform stocks.  My prediction in January of a $1,325 gold price by June 30 fell short by $28.  And with 10 days left in the first half of the year, odds are that I will fall short.  But I’m pretty confident that $1,325 will be taken out during the second half of this year, because smart money has been positioning against the crowd of traders, who have been long the US dollar for two years now, will capitulate to the short side during the second half of this year.

From my experience, the action of the US dollar this week signals further weakness and higher dollar-gold prices in the coming weeks.  The relative strength of the junior gold mining index, stubbornly trading above its 200-week MA, serves as another sign of expected dollar weakness.  If I’m right, your favorite junior mining stocks may return some serious cash in the coming months.

And two more trades to consider for those who play the precious metals and stocks markets, and they are: the platinum/gold ratio and gold/silver ratio.  Both ratios are approaching extremes again, both of which suggest to me the odds favor rising platinum and silver prices relative to the gold price in the coming weeks.

And two other markets of interest this week were the oil and copper markets.  The WTIC price hit my $45 target on Wednesday.  Okay…okay…hold your applause, please.  Those still short should be careful.  Exxon Mobile traders were covering their short positions this week, and at anytime Saudi Arabia may fight back with an announcement of deeper production cuts.  We have to remember that Saudi Arabia is trying to IPO its state-owned oil producer, Saudi Aramco.  And launching an IPO when oil prices trade below $50 per barrel doesn’t ‘dress up’ the offering.  Right?

Following weakness in the oil price was the copper market, which sold off in a five-day decline this week to close the copper price at $2.564 (-$0.086), and the share price of Freeport McMoRan (FCX) at $11.42 (-7.61%).

With all of this depressed action in commodities prices, the Fed is raising rates?  Hmm.  

Also this week, with macro data showing weakness in all aspects of housing and retail, I wasn’t surprised that the NY Fed dropped its expectation of Q2 GDP growth to 1.9%.  Didn’t the same Fed raise its forecast for Q2 GDP to 2.3% from 1.9% on May 26, two and one half weeks before the FOMC meeting?  Talk about malicious guile.  But the Fed raised rates anyway.

It’s quite obvious to anyone willing to look at the data that the Fed is raising rates as the US economy slides into what will most likely be an ‘official’ recession.  I have a feeling the NY Fed will once again have to lower its Q2 GDP forecast, or, if not, we’ll see a revision during the announcement of the Q3 GDP number.  So, why should we wait for the official word?  

Has the market priced a recession in the valuations of the S&P 500 yet?  Of course not.  That’s what has me worried, especially after this week’s action in the debt and US dollar markets.

So, after this week’s action in tech, FAANG stocks, DB, debt markets and US dollar, what do I think?  The risk of a nasty surprise outweighs potential rewards of a repeat of 1999.  In that year, stock valuations were as high as they are now, but we know stocks soared throughout that year by record amounts.

From CNN Money:

The year’s stellar gains occurred as the U.S. economy is poised to record the longest expansion in history.

In fact, so many market records were set in 1999 it’s almost mind-boggling.  

For example:

1) The Nasdaq composite rose 85.6 percent, the biggest annual gain for a major market index in U.S. history.

2) The Dow industrials gained 25.2 percent in 1999, a record fifth year in a row that the blue-chip index posted a double-digit percentage gain.

3) The S&P 500 rose 19.5 percent, a record fifth straight year the index posted a double-digit gain.

4) A record 203.9 billion shares were traded on the New York Stock Exchange and a record 265.6 billion shares changed hands on the Nasdaq.

Did you catch the bold text (my addition), “the U.S. economy is poised to record the longest expansion in history.”  Aren’t we hearing that this present economic expansion is the second-longest in US history?  But, as we really know, the present “expansion” is a phony one, making the comparison to the real economic expansion leading up to 1999 that more eerie.

Let me close the first half of this report with a story about the math teacher and streetwise gambler.  

The math teacher asked the gambler: if I flipped a coin 50 times, and each time the result was a ‘head’, what are the odds of the next flip resulting in a head?  The gamble smirked and replied, “A head, of course.”  The math teacher retorted, “Wrong.  Statistically, the odds will always be 50/50 for each flip.”  The gambler laughed and said, “Pal, don’t be a sucker.  After 50 straight heads, don’t you know the coin is rigged?”  

Yup, in a rigged game of fiat money printing and issuance of credit through the Fed’s clandestine “windows” of liquidity and trading desks, stock prices might see more ‘heads’ for some time.  Who knows?  But one thing we do know is, that the purchasing power of those stock prices in the future may not reflect today’s purchasing power.  Makes sense?

Okay, let’s move on to my holdings.  I have some good news there.    

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

This Week’s JBP Stock Ideas

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

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

LQMT 0.285, +0.006, (+2.15%); CROX $7.25, +0.09, +1.26%; LC $5.61, -0.17, -2.94%; SIEN $8.07, +0.42, +5.49%; GRPN $3.22 +0.18 (+5.92%); SC (short) $11.55 +0.11 (-0.96%).

So, it was another good week for my holdings, especially when compared with the meager overall gains of the major averages and carnage elsewhere.

Once again, I’ve added Castle Brands. Here’s what I’m thinking.

If you’ve given up finding the almost-impossible-to-find value and growth stock, with a potential of being taken over as a ‘kicker’ to this proposition, Castle Brands (ROX) is a stock you should spend some of your valuable time reviewing.

 

For starters, we surely got that significant pullback in the stock and the rebound I was looking for, all in one week—this week, during the week of the company’s Q4 earnings results.  I, again, like ROX at this time.  

On June 15, Castle Brands reported a jump of 7.0% to a record $77.3 million of annual revenue.  Gross profit expanded by 11% to $31.7 million, while net income rose by $2.2 million, to end fiscal 2017 with a $0.5 million net profit, a first profitable year since the company’s inception in 2009.

Adjusted EBITDA soared by 46%.  Nice, and shows good leverage of the company’s P/L.

And in the products categories, revenue of Goslings Stormy Ginger Beer increased 23.3% to $20.0 million, and was a strong bump that was consistent with my expectation, given the Walmart deal in late February, of course  The metrics of Castle Brands’ Jefferson bourbons were also strong, prompting the company to add approximately 3,600 barrels of aged bourbon and begin the process of approximately 6,400 barrels of new fill during the second half of the fiscal year.

It’s now clear, Castle Brands has completely turned the corner to a profitable enterprise.  And the outlook for the company appears very good, maybe better than traders now believe.  With the company’s increase to 80.1% of ownership of its distributor, Grosling-Castle Partners, Castle Brands has achieve vertical integration of the no. 1-selling ginger beer of the U.S.  

Castle Brands’ mention in its news release of its exclusive contract with Grosling-Castle Partners—that won’t expire until January 1, 2031—is a moot point now that Castle Brands has complete control of its distributor.  And with its relationship with Walmart coddled like a newborn baby, it appears Castle Brands has sewn up a moneymaking machine that JD Rockefeller and Warren Buffet can really appreciate.  I certainly appreciate this strategic coup.

While Rockefeller and Buffet wouldn’t be interested in such a ‘small potatoes’ company of only $315 million market capitalization, my readers and I certainly are.  I like playing companies that have not yet grown big enough for the institutional and hedge fund investors to take notice.  In fact, institutions hold a small lead over insider ownership of ROX, 6.3% against 4.4%, respectively.  Let’s see what happens to the share price of ROX when the ‘big boys’ become interested.

In closing, let me get to the punchline of ROX.  

On April 27, Bloomberg reported that Castle Brands is working with financial services firm, Perella Weinberg Partners.  Speculation is, that Castle Brands may be in the process of seeking advice about initiating a buyer of the company.  

Bloomberg penned:

The New York-based company [Castle Brands] is working with advisers at Perella Weinberg Partners on a potential sale, the people said, asking not to be identified as the information is private. Castle Brands may also attract bigger rivals, such as Diageo Plc, the world’s largest distiller, and Pernod Ricard SA, the people said. Heaven Hill Distilleries Inc. may also consider a bid, the people said. Castle Brands had a market value of about $260 million at the close of trading on Tuesday.

No final agreements have been reached and the sale process may not result in a deal, the people said. Representatives for Perella Weinberg, Constellation, Sazerac, Diageo, Pernod Ricard and Heaven Hill declined to comment. Castle Brands didn’t immediately respond to requests.

If you know the spirits industry as know it, collectively, industry giants dominate US market share, and for years have been buying companies like Castle Brands as if these companies are office supplies.  So, either Castle Brands is seeking advice as to the company’s value (or potential future value), or is finding a way to stave off the spirits giants a little while longer, giving the company some more runway to grow and raise the premium paid by a potential suitor.

Essentially, no matter which scenario (or variation) is most plausible, shareholder might one day wake up to a surprise and immediate big ‘score’ in the stock.  This may happen at any time.  In any event, if nothing comes out of Castle Brands’ meetings with Perella Weinberg, ROX is expected to be a winner in both the shorter-term and long term.  

And with the major averages trading near record highs, a good ol’ fashion growth and value play makes a lot of sense at this time, especially when the stock’s price is only pennies higher on the day of the Bloomberg article is taken into consideration.

Until next time…

Trade Wise and Green!

Jason Bond