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3 Jan

Tuesday January 3, 2017

by

I must say, 2016 was a year of surprises to both stock traders and political pundits.

Who would have stuck their neck out and predict a record-low 1.36% yield on the US 10-year Treasury?  

How about the the 1,600-point swing in the Dow, after it was to the amazement of the political handicappers that Donald Trump will become the 45st President of the United States?  And the series of record highs in the DJIA that followed?  

And the ‘Brexit’ vote in June?  Another stunner.  

What a year.

Here’s how the major averages ended 2016.  DJIA: +12.58%; S&P 500: +8.63%; NASDAQ: +6.62%; Russell 2000: +17.53%.  

And the big winner was the Dow Jones Transportation Average (DJTA), which rallied 20.45% in 2016.  After lagging and refusing to confirm a Dow Theory ‘buy’ signal for two years, the DJTA played catch up in spectacular fashion.

Let’s look at how international stocks fared, because I want to make a point that sets up my humble forecast for 2017.  According to ETFdb.com—a great website for keeping abreast of less-popular market action outside of US securities—international stocks (excluding US stocks) performed much less well than US stocks did.  At a return of approximately 4.65% (accounting for the average expense ratio of the three most popular ETFs), the performance overseas was crushed by the performance of US averages.

Why?  Short answer: currency risk.

The year 2016 was the year of the US dollar, no doubt about that.  When the world finds itself in financial trouble or gripped by significant fear of any kind, global capital moves into dollar-denominated securities; it’s a dance that’s been so familiar since the Bretton Woods agreement of 1944, the year the US dollar became the primary reserve currency.

As global investors, currency risk is a vital aspect of international investing, a factor not fully appreciated by the home grown investor who invests in home teams, the latter of which also happens to be the globe’s dominate financial market.  

Of course, European leadership has never liked that fact; they envy the position of the US.  And the Chinese know this, too, and must work harder to overcome this “exorbitant privilege,” as the former President of France, Charles de Gaulle (1959-1969), once referred to the position of the US, with the US dollar as the centerpiece of the new global financial order following WWII.  

In fact, if you look closely, the global financial system centers on the US dollar, both in the Forex and bullion markets.  When trouble strikes, the global ‘risk-off’ trade includes US Treasuries and US blue-chip stocks, then bullion, in order of popularity, as the latest serves to add insurance against a global catastrophe that overwhelms even the US and its allied central banks, as we clearly witnessed during the post-Lehman Brothers time period of early 2009 through to the spring of 2011.  At that time, dollar-gold soared.  Remember?

This year’s financial and political events, especially, should have taught even the most daft among us the true value of ‘old media’ and of the value of wisdom volunteered from financial icons of finance.   Who missed another double-digit gain in stocks during the final weeks of the year. The wise ones.  

What’s the lesson?  Even the most intelligent and equipped among us can be as terribly wrong as a newbie trader, and today’s financial media is actually dangerous to your portfolio.

But, in fairness to the marquee names of Wall Street, I must warn my readers that those financial icons to whom I’ve referred often in these reports will be right; we just don’t know when a bear market will begin.  Indeed, everyone knows stocks trade at a lofty Shiller P/E multiple of 25.76, but, then again, I’m reminded of an anecdote that my colleague in arms, Jeff Williams, of the PennyPro Weekly report, included in a previous newsletter to his subscribers of early December.  

Jeff wrote:

So, let’s close this week’s market wrap portion of the PennyPro Weekly report with a remembrance of the commentary of Gail Dudak, a stock market technician who served as a regular panelist on PBS’s Friday night program, Wall Street Week with Louise Rukeyser (aired 1972-2002).  We’ve included a snippet regarding the controversy surrounding the famed technician that was mentioned in Rukeyser’s obituary, published by the New York Times of May 2006.

The host of Wall Street Week (“with Louis Rukeyser,” he never failed to add to the show’s title) and self-described champion of the “little guy” could be openly contemptuous of professional investors, a sentiment many of them warmly reciprocated. Mr. Rukeyser reserved his most withering scorn for the “gloomy Guses” and “Wrong-Way Corrigans” who warned of financial troubles that, during the prosperous 1990’s, never transpired.

An eternal bull on the stock market, the more bullish, and less tolerant of dissenting bears he became, the higher the averages climbed. On the program of Nov. 5, 1999, Mr. Rukeyser announced the firing of the veteran panelist Gail Dudak for her 156 consecutive weeks of bearishly errant forecasting. Ms. Dudak heard the news from her neighbors the next morning. The stock market peaked four months later.

On the show, Dudak began questioning high valuations of stocks in the third quarter of 1996, when the Nasdsaq reached 1,250 points and the Shiller P/E surpassed 25-times.  By the time her prognostication was realized more than three years later, the Nasdaq had since quadrupled in price, and the Shiller P/E topped out at an astounding record high of 44-times.  It took an additional nine years following the Nasdaq crash of January 2000 until the Nasdaq’s Shiller P/E touched its mean P/E level of 15-times.

Now, I’ve outlined three points in this year-end report which will serve as the foundation for my expectations for 2017:  1) stock trading comes with many surprises and bogus assumptions. 2) a tidal wave of fear and “animal spirits” are one in the same: both emotion are taken to extremes beyond any reasonable explanation.  3) you must be right in direction AND time frame to make the good call and big bucks, a Dudak lesson.

So, given the context we find ourselves, i.e. slack global demand has been pressuring overseas currencies, including the yuan and euro.  Will 2017 be that much different from 2016?  I say, “No,” at least not during the first-half of the year.  

With a new US president, Donald Trump, grabbing the world by the throat with talk of a new America ready to ‘kick some ass’ once again, international money certainly listens, surmised by the market’s continuing bid amid his complete disdain for the outgoing US President; the negative reaction to Trump by the European Union leadership; the risks associated with a trade war with the Chinese escalating; and the alliance developing with Vladimir Putin of Russia, a supposed enemy of the state.  

The build-up to Trump’s grand entrance into the Oval Office even overshadows Ronald Reagan’s similar feat in 1980-1.  The mood among international investors during the first-half of 2017 may be one of getting into the ground floor of a US turnaround.  Promises by the new Trump administration to enact corporate tax cuts, infrastructure projects, a plan to repatriate hundreds of billions of dollar, and a defense buildup are included on the menu for global investors to sink their teeth into.

Where else can so much capital go?  Bonds?  Europe?  SE Asia?  The BRICS?  Maybe some, as I intimate now.

Therefore, I anticipate a good first-half for stocks in 2017, with FANG stocks underperforming, while industrial, commodities, defense and gold stocks leading the way.  I mention gold stocks in my short list, because I also anticipate consumer price inflation to accelerate during the first six months of 2017.  

The Commodities Research Bureau (CRB) Index doesn’t lie; 2016 has been the first year the index closed up for the year since the commodities rally of Q1 2009 through Q2 2011.  In the first half of this year, I expect the dollar-gold price to participate in a trend of higher commodities prices through to late summer.  Because reopening mines and a ramp-up in production takes time, infrastructure spending (or, more accurately, the anticipation of spending) at a time of tight production capacity may drive commodities higher until the globe’s mines open up fully.

And as the third asset that I anticipate may surprise investors is a rise in bond prices (lower interest rates).  As pressure to repay dollar-denominated debt continues in the wake of falling global demand for goods produced in SE Asia, China, Japan, Taiwan and Korea, foreign currencies will remain under pressure.  This scenario has been playing out in 2016 and should continue until the Trump turnaround reignites global demand for commodities that actually begins to register as overseas GDP growth, sparking consumer price inflation, globally.   

That, a Trump turnaround, is my lead assumption to my expectations of a stronger US dollar against other currencies during the first-half of 2017, but not necessarily against gold, as gold and commodities sniff out upcoming production shortfalls amid expectations of growing demand for materials.

Recapping, in the first six months of 2017, I see higher stock prices, slightly higher bond prices (slightly lower yields), higher commodities prices, and a strong US dollar against rival currencies, but not strong when measured in the dollar-price of gold bullion.  

Topping the losers list may be the FANG stocks and the FANG wannabe stocks.

Well, those are my expectations.  Save this newsletter, and let’s see how I did by June 30.

Okay, let’s get to my revamped Watch List, and a single trade I made this week, the sale of ANFI.  

I’ve dropped four stocks (SIEN, NVTA, UAA and NGD), and added one (FNMA) to the Watch List.

This Week’s JBP Stock Ideas

TWITTER (TWTR)

Original report: 11/14/2016

On November 5, I alerted a Call position I took in TWTR at a strike price of $20.

To read my rationale for the Twitter Call, follow the link to my report: ‘Twitter Takeover Play’.

My bet with a Call option includes the possibility a suitor who can fix Twitter’s sluggish attempt to monetize the company better will strike by the expiration of my March 2017 Call.  

At the close of Friday’s trade, the contract settled at $0.58.  The option expires in 73 days.

I’ve been asked, from where do I expect a bidder for Twitter to come: Alibaba (BABA).

ABOUT TWITTER (TWTR)

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

AMIRA NATURE FOODS (ANFI)

Original report: 11/29/2016

I closed out my 5,000 shares at a price of $5.95 for a $9,000 loss.  Tax selling destroyed this stock’s performance since my purchase.  

I learned something on this trade, but my lesson didn’t include the fact that tax-selling is widespread in December, but learned that overlooking end-of-year tax-selling cost me.  

This oversight is akin to a master chess player blundering; it happens.  I’ll review the stock again this month to see if bargain hunters are re-entering the trade.  I’ll let you know.

KANDI TECHNOLOGIES (KNDI)

Original report: 12/17/2016

As I alerted on Wednesday, December 14, I bought 7,000 shares of KNDI at $5.44 per share.

Here’s why I bought the stock.

I have traded KNDI earlier this year for a nice profit.  Since then, the stock has come down significantly from the $6 and $8 range, dropping to as low as $3.40 in mid-November amid concerns of a hold to incentive payments due from the Chinese government.

So, what was the result of the hold on the company’s subsidy payment from the Chinese government?

On November 9, Kandi released a compete earnings report disaster.  Revenue crashed to $6.4 million during Q3, down from $50.5 million, or -87%, from Q3 of last year.  The company cited a freeze of incentive payments as the reason for the decline.

Kandi’s primary business is selling electric-vehicle parts to an electric-car joint venture, Kandi Electric Vehicles Group Co., with automaker Geely Automobile Holdings (NASDAQOTH:GELYF).  The partnership is heavily dependent upon subsidies from the Chinese government, whose economic development plans include the development of electric vehicles.

However, because of nationwide investigates by Beijing into fraud allegations across the industry, incentive/subsidy payments throughout the industry have been frozen until the government completes its investigations.  In the case of Kandi Electric Vehicles Group, without government funding, only 184 units of EV products were sold in Q3, a 96.9% decrease, y-o-y.

In response to the dramatic drop to revenue during Q3, Kandi Chairman and CEO, Mr. Hu Xiaoming, stated, “China’s central government preceded a review on the subsidies paid to all the EV manufacturers, which caused the 2015 subsidy payments remain unpaid industry-wide. The delay in subsidy payment heavily impacted the Joint Venture’s production and sales, which resulted in a significant decrease in our EV parts sales.”

Hu further stated that Kandi had been working with government officials and expressed confidence that the subsidies will be coming “soon.”

Earlier, in September, five of Kandi’s rivals were fined and removed from the list of companies eligible for subsidies.

On 29 November, KNDI announced that its wholly-owned subsidiary Kandi Electric Vehicles (Hainan) Co. Ltd received a subsidy payment of RMB 100 million (approximately US$14.5 million) to support its research and development expenditures for a new model of electric vehicle.  This news of a subsidy payment to one of Kandi’s subsidiary suggests to me that the subsidy payment to the joint venture may in fact be sent “soon.”  Why would Beijing clear a Kandi subsidiary but not the partnership?

News on progress of new factory in Hainan:

In the last earnings call, the company announced the following:

“Our Hainan facility construction proceeds smoothly and we have started to install the equipment as scheduled. We also made progress on the designed product in Hainan’s factory. We expect this product could be well received by the market. With respect to the production license for the new energy vehicle, we have accomplished last or fundamental work. We made our endeavors in the application and hope to opt in the license within 2017.”

This news release clearly indicates progress is being made according to the company’s production plans.  I am expecting news from the company at some time between now and mid-2017 regarding the vehicles expected to be produced at the plant.  

Insider buying:

On five separate days, from November 23 through to December 2, CEO/president Hu Xiaoming, 10% owner of Kandi Technologies Group Inc. (KNDI), purchased a total of 230,000 shares at a total transaction cost of more than $1 million.  Hu’s purchase price range of $4.16 and $4.99 suggests to me the range of support for the stock will fall within this range and strongly suggests to me that Hu really does believe that the frozen subsidy payments due the company are, indeed, on the way.

The Play:

With 15.2% of the stock’s float held short, any positive news may drive the price rapidly higher, similar to the 11% price spike on November 29, the day of the news release regarding subsidy payments received related to the Hainan facility.

Currently, support may be found at the $5 level.  I will be looking for a breakout above the $6 level.  The next resistance level may be at $7.

In the meantime, there’s a lot of time for news to be released about the company’s frozen subsidy payments before the company reports Q4 earnings is released, scheduled for early March.  

My question is: if the CEO has bet $1 million on a favorable outcome to Q4 and/or imminent news regarding the company’s frozen subsidy payments, why wouldn’t you follow the CEO with your own stake?

Update:

Though there was no news about the stock, the short interest has risen to 16.03% of the stock’s float, up from 15.2%.  The stock has now reached 14.65 days to cover.  Wow.  This stock is spring-loading, for sure.

On December 27, CEO and President, Hu Xiaoming, bought another 57,060 shares at $5.15, for a total purchase price of $293,859.  Xiaoming now holds 12,342,411, according to the SEC.  That’s more good news.

ABOUT KANDI TECHNOLOGIES (KNDI)

Kandi Technologies Group, headquartered in Jinhua, Zhejiang Province, is engaged in the research and development, manufacturing and sales of various vehicle products. Kandi 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.

LIQUIDMETAL (LQMT)

Initial report: December 14

There was no news to report this week.  This week, the stock traded in a range of $0.205 and $0.215.

As I alerted on Wednesday, December 14, I bought 100,000 shares of LQMT at $0.196, and plan to increase my stake by an additional $30,000 in the future.  

LQMT is a long-term trade, and has been a winner for me in the past.  On November 1, I sold LQMT for a $4,300 profit from a two-month hold.   

I now expect to be holding the newly-acquired shares for at least six months.  My price target is $0.40, at minimum.  

I attended the new CEO conference call on December 8 (after the close), and believe LQMT is a sleeping giant, with the potential to be profitable and to be listed on the AMEX in the coming years.

WHY I’M LONG LQMT

Background:

On March 10, Liquidmetal and DongGuan Eontec Co., Ltd. entered into an agreement, whereby Professor Yeung Tak Lugee Li, Chairman of DongGuan, agreed to purchase up to 405 million shares of LQMT stock for a purchase price of $63.4 million.  

A term of the deal included the purchase of 105 million shares at $0.08 per share for a purchase price of $8.4 million, which did indeed happen on March 10.  An additional term of the deal included the purchase of an additional 200 million shares at $0.15 per share for a purchase price of $30 million, and the purchase of 100 million shares at $0.25 per share for a purchase price of $25 million.  In total, Mr. Li is eligible (board approved the agreement in May) to purchase 300 million shares for a purchase price of $55 million.  

In addition, Liquidmetal issued a warrant for an additional 10,066,809 shares at an exercise price of $0.07 per share.

So, who is Professor Yeung Tak Lugee Li?  He is the Chairman of DongGuan Eontec Co., Ltd., in China.  The company symbol on the Shanghai Exchange is (SHE:300328.SZ), where the shares currently trade at (yuan)14.02, or $2.10 per share.  The market capitalization of DongGuan Eontec is approximately $850 million, and is a highly profitable company, with net profit margins exceeding 10%.  The company manufactures next-generation metals for other commercial enterprises involved with the production of consumer products, just as Liquidmetals is in the business of producing.

In 2012, Li founded Leader Biomedical.  

In 2013, he acquired a majority stake in publicly-traded aap Joints, a division of aap Implantate AG in Berlin, Germany.

In 2014, Li acquired EMCM, a biomaterials contract manufacturer, from aap Implantate.

All of these companies that Li purchased are in the business of developing and manufacturing next-generation metals for commercial products.  Therefore, my stake in LQMT is motivated by the modus operandi of Mr. Li taking control of LQMT with plans to move LQMT onto the AMEX.

On December 14, the company announced that it has named Professor Lugee Li as President and Chief Executive Officer of Liquidmetal Technologies.

“Professor Li has served as a member of the Company’s Board of Directors since March 10, 2016 and is the sole owner of Liquidmetal Technology Limited, a Hong Kong company that is the Company’s largest shareholder,” according to the news release.  “Professor Li will not be taking any compensation as a result of his appointment as President and Chief Executive Officer.”

Now that Li has taken control of Liquidmetals, I expect rapid progress.  This trade idea is very similar to FNMA, in that the stock is at an inflection point. Right now nobody is paying attention to the stock, just as no one was paying attention to FNMA when I bought 40,000 shares of the stock at $1.72.

With Li on board, I’m going to be patient with LQMT, as I expect the stock to start and stop until more news from the company begets more investors and liquidity moves to higher prices during the coming year.

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

FANNIE MAE (FNMA)

Woohoo!  No, I’m not reliving my $12,800 score in FNMA on November 23, a 74% return from holding the shares for a lousy two weeks; I’m just happy to back on the lookout for another entry point into one of my favorite trading stocks of all-time.

And, yes, FNMA has made me good this year, and then some, including my blunder with ANFI.  

That’s how this market works—or not works, if you think about this business within a philosophical sense.  Individually, this fight for profit is a struggle within each of us to maintain the FNMA scores and eliminate the ANFI blunders.

Okay, following my sale of FNMA, the stock has consolidated at a wide range of $3.50 and $4.25, as investors await the next significant development in the controversy surrounding the future of FNMA.  

As a reminder to my long-term subscribers, read my article of almost a year ago, If Trump Wins The White House, FNMA Soars.  In the article, I suggest that Trump, the businessman, fully understands the wrong perpetrated by the US government against stockholders of Fannie Mae.  That’s not too hard to conclude, and is why the stock soared following his win at the polls.

From the article, follow the links, because if you do and read the supporting documentation of my article, you’ll come away with a firm grasp of the political and legal issues involved with FNMA and the stakes involved to traders of the stock.

Trump takes the oath of office on the 20th, so now what?  As I see it, the issue of Fannie Mae’s future now becomes more of a political than a legal one.

Changing the structure of Fannie Mae may turn into a tough fight for Trump on Capitol Hill.  The idea of a nearly eight-decade-long legacy government GSE being throw to the wolves (as Democrats might see it) will drain a lot of political capital that each president starts with when initially entering the Oval Office.  FNMA is no Social Security issue, but it is huge, especially, with Democrats, and ranks as a high-profile political fight I expect between Trump and Democrats, for sure.

On the Republican side, throwing Fannie Mae to the wolves, if you will, represents the other side of a clear victory for one party over the other.  A Republican dream is to allow the private sector to bid for tranches of Fannie Mae’s $5 trillion mortgage holdings.  That’s huge business!

What would a privatization that do for mortgage interest rates?  

Rates would soar, of course.  In droves, potential homeowners would be shut out of the mortgage market, and the US economy would take a whopping hit.  Oh, and the 30-year mortgage?  Forget about it.  The advent of the 30-year mortgage was facilitated by the mere existence of the GSE in the first place.  Instead, a 15-year loan would probably become the longest fixed-term loan a borrower could achieve.

Now, picture a prospective homeowner, whose principal and interest payment each month would result to as much as 71% leap under a fully-privatized plan?  At a 15-year mortgage term and a, say, 5.5% interest rate on a $170,000 loan, his payment would jump to $1,389 per month, from $811.  

So, forget about that!  A cold-turkey, fully-privatized plan won’t happen.  Even the staunchest anti-Fannies would not vote for such a draconian plan.  Under a scenario, even remotely close to this one, would quickly become Trump’s ‘Obama Care’.

So what is more likely to result as a compromise?

The most likely scenario is one that compromises between upholding stockholders’ rights and a fix to the impediments that already work. That’s where the expertise of Trump’s nominee for Secretary of Treasury, Steven Mnuchin, a Goldman Sachs alumnus, comes in, who stated on November 30 that he would like to see Fannie Mae privatized “reasonably fast.”

“We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again,” he told Fox News.  “But we’ve got to get them out of government control.”

Ah, so what do I read into Mnuchin’s comments?  I think a recapitalization plan may be the settlement Trump and the Republicans hope to achieve, as a first step.  That would delight the Democrats, but tick-off Republicans.  So, what to do?  

To get Republicans aboard a recapitalization plan, Mnuchin and Company may propose a “slow motion” to privatization plan, as I suggested, a plan of which may involve a decade-long unraveling of the implied government backing of mortgages.

A wrinkle to the slow-motion compromise may also involve a slow-motion recapitalization scheme for Fannie Mae, which may actually be the mechanism that facilitates an orderly unwinding of government control, similar to the present FDIC scheme of backstopping the banking system.  

I’m aware that reserves at the FDIC are a joke, but this framework may be in Mnuchin’s head as part of a compromise between political parties and between plaintiffs and the FHFA in the ongoing lawsuits.  Essentially, a deal may come down to a matter of initially and adequately funding an FDIC-like scheme to backstop the mortgage market, while at the same time let the taxpayer off the hook of Fannie’s balance sheet—in theory, of course.  But that may be the pitch Mnuchin can make to both Republicans and Democrats, and may serve, too, as a great talking point for Republicans to make to their constituencies.

As investors of FNMA, there are many more scenarios that involved FNMA stockholders getting paid through a windfall deal (fast or slow) than scenarios that shaft stockholders.

Unlike the financial media hyping the Fannie Mae issue as the next Ali-Frazier fight (Am I showing my age?), as I see the political path to a profit buried in the FNMA trade, a Trump deal to unlock Fannie Mae’s balance sheet to settle lawsuits is doable.  In that case, $4 for FNMA represents a potentially huge discount to its underlying value.  

I’ll let you know what I decide to do about FNMA.

ABOUT FANNIE MAE

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New Deal, the corporation’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations (or “thrifts”).  Its brother organization is the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac.

Final note:

As I mentioned in my email of December 29, I’m snooping around GRPN and FIT for a play on the ‘January Effect’ I think these two stocks may benefit from.  I’ll keep you posted.

Until next time…

Trade Green!

Jason Bond

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