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5 Jul

Tuesday July 5, 2016


Good morning.

I hope you’re enjoyed the long weekend.

Let’s dig into the Long Term trading game plan for this week.  But first, a quick recap of this week’s market action and my observations.

Well, what a different outcome for the week from what many probably expected at the close of trading on Monday after a two-day, 900-point drop in the DJIA.  After closing below its 200-day and 52-week moving averages on Monday, the anticipation of more trouble at the market open on Tuesday hanged heavy in the air.

In my case, I anticipated further damage to the major averages on Tuesday until the 200-week moving average came into play at 16,300 for the DJIA.  But, I didn’t expect a coordinated market intervention exercise to calm stock markets by the Fed, BOJ, ECB and BOE.  See Fed announcement of June 24 that supports my suspicions.

With the DJIA, S&P 500 and NASDAQ reaching higher by 3.15%, 3.22% and 3.28%, respectively, I think we’re out of danger for now, emboldening me to make some trades this week, as I’ll get into in the second half of this report.

And what a spectacular move in the VIX last week.  Wasn’t it?  After spiking to February levels of above 26, the VIX dropped precipitously to below, an amazing move.

The trading in the bond market and the action in Deutsche Bank (DB) this week told a different story, however, as both the record-low yield in the 10-year Treasury (1.46%) and DB’ dead-cat bounce off record lows confirms my expectation of another Fed interest rate cut in the near future.  That’s good news for stocks.

Other than fall to a 31-year low in the British pound, currencies were remarkably subdued this week.  The USD barely moved after failing to break higher above its 52-week moving average.

In commodities, the picture was consistent with what the bond market and DB tell me, which is: the Fed may soon be joining the BOJ, PBOC and ECB in a race to see which central banker will debase his respective currency the fastest. And if you’ve been a subscriber of the LT Report for more than one week, this will come as no surprise.

This week, it was silver’s turn to inflame commodities prices (I know, silver is truly money), soaring in price by 11.42% by Friday and another 2.9% on Monday in Asia as of the time of this report.  West Texas Intermediate Crude spiked 3.59%, gold rose 1.95% (up another 0.77% intra-day, Monday in Asia) and the CRB Index closed higher by 2.95%.

So, what do I think about the action this week?  

Nothing has changed my thinking regarding the tack central banks may take to elevate stocks since the first addition of the LT Report.  Not one bit.  I’ve previously stated several times the Fed may be reversing course and announce another scheme to assure stock trades.  The action in stocks, bonds and commodities tell me this is a most likely outcome, maybe by the end of the year, in December.

This Week’s JBP Stock Ideas

Because of I saw a continuation of Tuesday’s rebound (probably central bank intervention and short covering) on Wednesday, I initiated two trades this week: Fannie Mae (FNMA) and Kandi Technologies Group (KNDI).  Both stocks have good set-ups and were alerted on June 29.

Fannie Mae (FNMA)

On Wednesday, I bought 10,000 of FNMA at $2.03 per share as a long-term play but may sell after a 20% in the stock.

The play involves my anticipation of a favorable outcome to an ongoing lawsuit by shareholders brought against the Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac.  The case is referred to as, Perry v Lew.   

For those not acquainted with the Fannie Mae saga, an overview of the events that created such a depressed stock is most important in order to understand why our 10-bagger expectations may not be so grandiose after all.

As a brief summary of FNMA’s history (post-Lehman collapse of Sept. 2008), the following events took place:

  • July 11, 2008, the U.S. government notified Wall Street and the public that if the then-housing crisis continued to deteriorate, Fannie Mae (FNMA) and/or Freddie Mac (FMCC) would be “taken over” by the federal government.  The stock price of FNMA plummeted.
  • September 7, 2008, Federal Housing Finance Agency (FHFA) director, James Lockhart, announced that the agency had placed Fannie Mae into “conservatorship,” stating the action as “one of the most sweeping government interventions in private financial markets in decades.
  • June 16, 2010, FNMA was delisted from the NYSE and began trading on the OTC after the stock traded below $1 per share for more than 30 days, where it continues to trade today but at the $2.32 price level.
  • Sept. 17, 2012, FHFA unilaterally decided to grant the U.S. Treasury a “full income sweep” of all earning made from future Fannie Mae operations.  Investors were stunned by the Soviet-style decree issued by a democratically-created government agency.  A slew of lawsuits ensued.

Since 2010, due to stabilizing forces of the Federal Reserve’s extraordinary monetary policy efforts, stemming from the Lehman Brother’s collapse of Sept. 2008, Fannie Mae had begun to make a profit by 2013, the latter of which sparked enormous fury among investors and Constructional experts, as it appeared to them the FHFA not only knew of Fannie’s expected earnings windfalls but also sought to confiscate those earnings from investors.  

In all, since FNMA’s conservatorship of Sept. 2008, Fannie Mae has paid out $148.5 billion of earnings to the U.S. Treasury.  To put that amount into better prospective, $148.5 billion of earnings eclipses the total earnings made by Apple Computer ($549.7 billion market capitalization) between the years 2013 and 2015, as well as exceeds the bailout capital issued to Fannie Mae by $32.5 billion.

If shareholders win in the case, Perry v Lew, heard at the U.S. Court of Appeals, District of Columbia Circuit, I think this stock is going to $20.  That’s right, a ten-bagger potential.  And if you think $20 may be high, Bill Ackman of Pershing Square Capital Management estimates a $40 to $50.  See reference article to the Ackman interview in 2014 by USA Today, here.

Kandi Technologies (KNDI)

And again, on Wednesday, I bought 3,000 shares of KNDI at $6.81 per share.

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

The Electric Vehicle sector is booming in China and supported by the government due to ecological reasons. There’s even an expectation that EV sales in China may grow substantial and may as much as double 2015 sales (source: EB Obsession) and confirmed by the Chinese market leader BYD (source: CNBC News)

KNDI, the second biggest player in China, has a joint venture named JV Company with Geely to commercialize its vehicles.  In the Q1 20016 the joint venture sold ZERO cars, due to an administrative error by Beijing.  Somehow, the vehicles in inventory were excluded from a list of cars qualified for purchase tax exemption. As a consequence you see the drop in share price on May 10, as investors suddenly became uncertainty whether or not the company would reach guidance.

In the meantime, four vehicles were added to the list in April, and sales started to catch up. KNDI, via its joint venture JV Company, stated it expects to sell 5,500-6,000 EV products in the second quarter and a total of 35,000, or more, EV products in the full year of 2016.

From the most recent figures available in the market, in May, JV sold approximately 2,600 units, a pace that suggests the joint venture may indeed achieve guidance for Q2.  Source: EV Obsession

Because the company rarely updates investors as events happen, the stock price tends to react heavy after earnings calls.  I anticipate good news to be eventually communicated, no later than the next conference call, at which time I expect KNDI to move higher.

Leading up to the company’s next scheduled conference call, I would like to continue accumulating shares at approximately $6 per share, but no higher than $6.75.  Presently, KNDI August is range-bound at $6.50 and $7.50.  My sell target is $8.  I’ll issue an alert if I add to my holdings.

Outside of FNMA and KNDI (portfolio) I’m not looking to do much else. However, I am watching GRPN and GLUU for long term entries off previous watch lists, ideally into a market pullback later in the week.

Trade Green!

Jason Bond

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