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12 Sep

Monday September 12, 2016

by

Good morning,

With a sudden selloff in stocks on Friday, the break I’ve been waiting for may have finally arrived.  At the close Friday, the DJIA, S&P 500 and NASDAQ dropped 2.2%, 2.4% and 2.4%, respectively, with almost all damage done on Fridays rather orderly sell-off throughout the day.

And stock wasn’t the only asset class sold on Friday.  Bonds, oil, commodities and precious metals sold-off substantially as well, though gold did end the week a slightly higher.

Oh, and the VIX!  The VIX spiked by nearly 40% on Friday to close at 17.50, settling above its 200-day moving average, closing with a reading not witness since the start of a nearly 1,000-point drop in the DJIA in June of this year.

Bargains may be on the way; it’s hard to tell, knowing the Fed intervenes in markets as it sees fit.  But in any event, I’d like to see the major averages test their respective 200-day moving average before I get really interested in a broader range of stocks.  

During an election year, especially one that’s so contested as this one, I expect any move back to the 200-day moving average to be bought—by someone big, maybe algo-driven hedge funds, institutional money, and, of course, the NY Fed if the market doesn’t conform to its wishes.

My long-term readers will tell that I’ve been very cautious during the past few months, especially the past month or so, due to the strangely consistent and ultra-low VIX readings.  Well, my nose was indeed correct.  The “break” I’ve been patiently waiting for may have arrived, though I do not expect a ‘crash’ or anything of that dramatic sort.   

But what tickles my brain is the timing of the suspiciously orderly decline on Friday, running concurrently with the passage of the Justice Against Sponsors of Terrorism Act by Congress on Friday, a bill granting victims of the 9-11 attack their day in court, may have been a coincidence.  It looks likely that the Saudis may be culpable to an extent not yet known but for a few.  Who knows?  

But I do know that tension between the U.S. and Saudi Arabia has now taken a large step up in intensity.  Saudi Arabia has been an American ally longer than I’ve been alive, due to the linchpin of the Arabian super giant Ghawar Field as the hub of the petrodollar system.  Without the decades-long practice of recycling U.S. dollars back into the U.S. Treasury market, the dollar and federal budget become vulnerable to a shock.  On balance, strained relations with Saudi Arabia is not necessarily good for stocks.

The other issue relating to the sudden and violent change of heart among traders of stocks may finally be directed toward the market’s lofty valuations.  We’ve known since the summer of 2015 that valuations were high relative to bonds, but bond prices continued to rise, lowering the yield and providing an additional lift to stocks.  

However, the S&P 500 Shiller P/E of 26.42 ranks as the third-highest P/E in U.S. stock market history.  Only the NASDAQ bubble of December 1999 (44.19) and the stock bubble of 1929 (30.1) rank higher.  For a while now, the air has gotten mighty thin seven-plus years following the rebound of March 2009.

Now, before you begin to think it’s time to run for the hills, the difference today is the unprecedented level of coordination, intensity and focus between the four major Western central banks, the Fed, European Central Bank (ECB), the Bank of Japan (BOJ) and the Bank of England (BOE), to keep stock elevated.  Each one of these bank’s top-ranking central banker is affiliated with the U.S. in some way of another.  Is it a coincidence the head of the BOE is Canadian-born Mark Carney (formerly of Goldman Sachs), the first non-British citizen to head the central bank since the bank’s inception in 1694?  No, it is not a coincidence, in my opinion.  Draghi at the ECB is formerly from Goldman, too.  And Kuroda at the BOJ is past-president of the Asian Development Bank (Asia’s version of the IMF) and an alumni of Oxford in England; he’s been trained well to work within the framework of Japan’s post-WWII colonizer.

So, why is this strong alliance between Western central banks important to know?  Because it appears the Bank of Japan (BOJ) is about to embark on a reverse of the Fed’s “Operation Twist” strategy of September 2011, whereby the Fed began buying longer-term debt, the result of which lowered long-term interest rates to aid the U.S. housing market—a contributing Fed mechanism to induce the “wealth effect” to the global economy.

At that time, if you recall, the DJIA was in the midst of a 2,000 point decline in the summer of 2011 when the then-Chairman of the Fed, Ben Bernanke, announced the ‘Operation Twist’ campaign.  Five years later, the BOJ now leads the global operation to untwist the yield curve back to a steepened one.  It appears Art Cashin may be correct: the Fed does want to raise rates so it can lower them again during a crunch.  How strange?  How desperate?

Japan’s Operation Untwist relieves the Fed from changing policy and losing credibility; it really doesn’t want to raise rates.  If the operation fails, the Fed can always say, “Well, we had to change course and hold off on our interest rate rise campaign because of that crazy man in Japan, Kuroda.”  I cannot help to sense the old “good cop, bad cop” potential here if the BOJ (directed by the Fed) mistakenly unleashes a Mad Max scenario.

The bottom line to Japan’s interest rate operation is: the global markets may be affected adversely in the short term, maybe taking stocks for a ride down during the adjustment.  Higher bond yields may apply downward pressure on stocks across the globe, conversely to what’s been driving the stock market higher since 2009 (i.e. lower rates).

“[W]ith cross asset correlation soaring, not to mention with risk-party and CTA funds approaching record leverage, the risk is that investors frontrunning a perceived change in the BOJ’s policy in two weeks time could lead to a dramatic selloff in JGBs, which then spreads across to global fixed income markets, all of which trade like connected vessels,” stated Royal Bank of Canada (RBC) in a note.

As RBC reminds us, more than $13 trillion of negative-yielding debt will take a massive hit to balance sheets of those holding these debt instruments, if, in fact, the BOJ manages to successfully manhandle a steepening of the global yield curve.  

“The impact of the BOJ’s stimulus is that the bond markets worldwide are becoming one market,”  Chotaro Morita of Tokyo-based SMBC Nikko Securities Inc. told Bloomberg News.  “If there’s a reversal of policy, you can’t rule out that it would roil global debt.”

“The BOJ’s policy review will point to a rebalancing of its monetary policy aimed at maintaining or increasing downward pressure on short-to-medium term real interest rates (and in turn put downward pressure on the yen) while engineering a steepening of the yield curve,” Guha and Tedeschi wrote in a note to clients.

Doubleline’s Jeffrey Gundlach sees a potentially treacherous moment in central banking history.  In his latest presentation, titled, Turning Points, Gundlach told his audience, “this is a big, big moment” for investors, and asserted confidently that “interest rates have bottomed” and “may not rise in the near term as I’ve talked about for years.”

“They [the Fed] want to show that they are not guided by the markets,” he continued.  “The Fed wants to show, at some point, that they can’t be replaced by WIRP (World Interest Rate Probability). The only way they can do that is to tighten when WIRP is below 50.”  But by seeking to wrest control from the market, Gundlach warned that the Fed may end up “blowing itself up.”

“… I think it’s the beginning of something and you’re supposed to be defensive,” he concluded.

As a small trader, I couldn’t agree more with Gundlach.  However, I would be delighted if stocks corrected a good 20% from the August highs, and as soon as possible.  With a 20% correction, smaller-cap stocks bargains would pop up everywhere.  

But I also have that aching feeling that 10%, back to the 200-day moving averages, is all we may get—if that!  Maybe I’m becoming too cynical as I get older.  I just don’t think the time is ripe for central banks to lose control of ZIRP just yet.  Direct stock and corporate bond purchases by the Fed, mandated fixed-income allocations at pension funds and other qualified plans, and who knows what else can be forced upon us to save the U.S. Treasury remain as future options to Washington.

This Week’s JBP Stock Ideas

LIQUIDMETAL (LQMT)

After bouncing off near the $0.16 price level on Tuesday and, again, on Thursday, Liquidmetal (LQMT) soared back up to $0.175 pr share.  The stock may continue to get some good ink due to the growing realization on Wall Street of the stock’s potential to surprise.  

Given the secrecy surrounding anything Apple does, or may do in the future, the anticipated release of the Iphone 7 and Iphone 7-plus is the final step before plans and speculation of the new features and enhancements will come with subsequent Iphone releases, including rumored LQMT technologies for the making of the iOS device home buttons, touch sensors, and tamper-resistant screws.  

For most traders of the stock, the intrigue behind the Apple deal with LQMT is definitely worth the $0.175 per share price of admission. How many 10’s of millions of these Apple Iphones are produced each year again?  You get my point.

As for me, my price of admission to LQMT was $0.137 per share, making my score on the trade, so far, $7,600 in approximately two weeks.  I still own 200,000 shares.

ABOUT LIQUIDMETALS (LQMT)

Liquidmetal® Technologies researches, developments and commercializes amorphous metals. The company’s revolutionary class of patented alloys and processes form the basis of high performance materials in a broad range of medical, military, consumer, industrial, and sporting goods products.  Discovered by researchers at the California Institute of Technology, Liquidmetal alloys’ unique atomic structure enables applications to achieve performance and accuracy levels that have not been possible before.  As the company controls the intellectual property rights with more than 70 U.S. patents, these high performance materials are dramatically changing the way companies develop new products.

Source: Liquidmetals Technologies

ASURE SOFTWARE (ASUR)

As I alerted on Wednesday, September 7, I bought 5,000 shares of ASUR at $5.41.

First of all, I like Asure Software as a play on the mega-trend within Fortune 500 companies and their smaller brethren away from large human resources departments.  As computing technology rapidly displaced non-professional workers during the 1990’s, the sophistication of human resources software technologies and platforms has only grown in scope.  If management can maintain its momentum in servicing this growing niche market, ASUR may be another consistently upwardly trending stock for some time.

The acquisition of Mangrove Software definitely turned into a coup for Asure.  With the integration of the Mangrove’s proprietary human resources solutions, the cost synergies really put a boost in Asure’s strategic position, margin, EBITDA and net profit as evidenced in the company’s latest earning release.  

It’s not the first time small-cap companies have grown rapidly through acquisition; it’s a less-talked of means of greatly enhancing shareholder value if the opportunity arises and executed correctly.  In the case of Asure, it appears the acquisition of Mangrove could serve as a case example for students.  

Therefore, my rating of management, a key factor in my plays, is quite high, higher than the poor examples we’ve witnessed at much larger companies such as Yahoo and Hewlett Packard to name just two that come immediately to mind.  Because of the small size of Asure, future investors most likely will wake up too late and pay much more to own this stock, which suits me fine.

Q3 earnings, scheduled for November 14, may really jolt this stock, as has already happened during the company’s August 15 earnings releases.  After closing on the August 14 at $4.98 per share, Asure shocked investors with an excellent quarterly report and upward guidance.  The stock soared as high as $6.68, a 34.1% pop following the release of Q2 earnings.

Q2 earnings revealed higher revenue, which was expected due to the full accretion of Mangrove, but the company’s cost structure proportionately dropped significantly after backing out acquisition costs (overlooked by many traders, I’m sure), with significantly higher gross margin to boot.  As a result, EBITDA grew by a whopping 87% during the quarter.  And the stock trades at a forward P/E of only 29.9  Heck, the collective dogs of the bloated S&P 500 trade north of 26 times!

When company CEO’s talk about “synergies,” it has become an overused description with undefined tangible expectations for the bottom line.  In Asure’s case, the company actually delivered “synergistic” cost reductions and strategic enhancement during Q2, and is expected to continue through future quarters.  A 29.9 multiple at this stage of the company’s newly enhanced business model is damn cheap, in my opinion.

And maybe the company’s CEO, Pat Goebel, sees what I see in that, as evidenced on September 2, when the company filed notification of his 50,000-shares purchase of ASUR at $5.29, a mere nine days following the company’s SEC filing that the company had regained NASDAQ compliance.  Slick.

With the next earnings call scheduled for November 14, I anticipate an upward bias to the stock’s price due to the most recent spike of August 15 that undoubtedly drew a lot of attention from speculators (like me) who believe lightning does hit twice, which in the case of ASUR may be a pretty good assumption.  What I’d like to also see is some discussion by Goebel in regard to progress made with the company’s Version 8 product, scheduled for launch in October.  The Version 8 might be a catalyst for more rapid revenue growth, as Goebel intimated in his statement following the company’s earnings report of August 15.  That, too, is a nice wild card to look forward to.

As far as my expectations of the stock’s price action, I’m watching the $5.40 – $5.50 range for how much resistance traders demonstrate if/when the stock reaches that range.  If resistance is weak, my sights are on $6, a level at which the stock would then trade at 33-times earnings.  That’s not at all an unreasonable forward P/E for this stock.

ABOUT ASURE SOFTWARE (ASUR)

Asure Software, Inc. provides cloud-based software-as-a-service (SaaS) time and labor management, and workspace management solutions worldwide. The company offers a suite of solutions to help clients optimize and manage their mobile workforces and their global workspaces.  Asure Software serves approximately 7,000 clients, many of which are Fortune 500 clients to small and mid-sized businesses.  Asure Software, Inc. was founded in 1985 and is headquartered in Austin, Texas.

Trade Green!

Jason Bond

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