July 27, 2016

Shareholders appear to be against the merger of Tesla and SolarCity

Tesla might make it through a recently announced Securities and Exchange Commission probe, but CEO Elon Musk faces serious challenges that could undermine TSLA's growth expectations and funding opportunities.

After all, Tesla under Musk is becoming known for outrageous public forecasts, a lack of sufficient disclosures and arguably, an overpriced stock that's hard to short and nearly impossible to borrow.

So ... 'tell me something I don't know, Dougie.'

OK, here goes:

The proposed $2.8 billion merger of Tesla (TSLA) and SolarCity (SCTY) is in jeopardy, as many shareholders are pushing back against the plan in both private and not-so-private discussions.


July 25, 2016

Could buying stocks now be as risky as picking nickels in front of a train

Today's unprecedented level of partisanship and division between Democrats and Republicans will likely set the stage for more market volatility ahead.

We're already seeing this division and vitriol at this week's Republican National Convention, and we'll probably see it at next week's Democratic convention as well.

In its extreme, this animus could continue to exert a headwind and stasis in fixed business investment, which is already weak. A consumer-spending slowdown could also develop -- in fact, we're already seeing one in high-end homes and expensive art.

But it's not just the hatred between the two parties and their constituents that has me worried about the market. It's also today's valuations, fundamentals, technicals and unusually optimistic sentiment. Nonetheless, many of business TV's "talking heads" are rationalizing the swift rebound that the S&P 500 has seen since the big drop that followed Britain's June 23 Brexit vote. They're saying that the "fundamentals are improving," or that central banks will keep interest rates "lower for longer."

But to be blunt, I think these market watchers are fugazis. I'd note that:

- Many "talking heads" have short memories. They all too often went on TV following the Brexit vote to declare that they "hated" stocks, even though the S&P 500 was some 150 handles below where they "love" equities today. These market watchers are simply "carpet sweepers" who forget or choose to ignore their previous concerns because stock prices have risen since then.

- Central banks are losing their effectiveness.

- We've likely seen a generational low in bond yields.

- The fundamentals aren't improving, Instead, we're seeing numerous signs of peaks in important segments of the global economy.

- Analysts' consensus forecasts for S&P 500 earnings have proven to be too high for a fourth consecutive year. So far, the level of "beats" for second-quarter earnings is running about average -- but much like Monty Python's "Twit Olympics," the standards are low. And all too often, investor-relations departments are manipulating the results, with the sell-side lemmings blindly following anyway.

The Bottom Line

At the very least, this year's election will likely serve as a market-volatility source over the coming months. And at worst, it will represent an albatross around valuations' neck and cause a hiatus in business and consumer spending.

But as the great Howard Marks of Oaktree Capital Management (OAK) once wrote: "Risk lives higher. ... The absence of a risk event's occurrence does not mean risk doesn't exist."

In other words, those of us who worry about risk vs. reward should remember that risk rises and rewards decrease whenever stock prices go up. That's true even in our current market, where buyers live higher and sellers live lower in an investment world that's dominated by volatility-trending and risk-parity strategies that depend more on price action than company fundamentals.

Even hedge funds are increasingly dominated by a quant component that's governed by machines and algos who know nothing of balance sheets or income statements. This helps explain the absence of "downticks" during run-ups like the one we've had over the past two weeks.

However, all of these influences are rapidly moving our markets to the point where buying stocks will be as risky as picking up nickels in front of a steamroller. Still, I've decided to be more reaction-oriented than anticipatory in my strategy -- even though that means I run the risk of losing out on some profits by not being short in a major decline's initial stage.


via realclearmarkets

July 20, 2016

Valeant stock is a value trap

I would continue to avoid Valeant Pharmaceuticals ( VRX) .

As I initially wrote in early May and expanded upon one week later, I've concluded that prospects for VRX's profits and stock price remain highly uncertain.

The bottom line: I don't think you should fish in Valeant's pond -- even as a trade. To me, VRX is a "value trap."


Position: None


July 18, 2016

Going long Gold and short Stocks, Bonds could be profitable now

The Nikkei 225 had its largest gain in six years this week, while other stock markets around the world continue to rip higher.

But this optimism isn't a function of improving corporate profits or better global economic growth. Instead, it's based on money for nothing -- with the Bank of Japan serving as the world's biggest source of easy money right now.

The three pillars of the current global bull market seem to be Japan's "helicopter money," "cold fusion" (funding fiscal policy with a monetary-policy printing press) and even debt forgiveness. Japan is even likely to soon sell a perpetual-rate bond that carries only a nominal rate above 0% -- essentially a 0% perpetual coupon bond.

But it's my view is that:
-    The idea of offering money for nothing forever will prove to be problematic.

-    Interest rates will soon move higher. As I've recently written, I believe we're already at a generational low for bond yields.

-    Although it doesn't feel even remotely possible now, the bull market's weak foundation will soon become exposed as investor confidence in central banks deteriorates.

-    Smart investors should consider gold.

I believe that global bond markets will soon catch on to what's going on with all of this money for nothing. When that happens, confidence in central banks will disintegrate as the psychology behind lower interest rates abruptly morphs. I think the idea of long-term deflation simply doesn't have a chance -- just look at yesterday's "hot" June U.S. Producer Price Index.

Now, some market watchers think that stocks' recent climb is justified, but I respectfully disagree. Consider that:

-    S&P 500 stocks currently sell at 18x non-GAAP earnings and more than 25x GAAP earnings, and that the spread between the two has never been wider.

-    The S&P 500's annual earnings have fallen for four consecutive years, and I believe that analysts' consensus estimates for 2016-17 are too optimistic.

-    U.S. political partisanship has never been more extreme, destroying any hope for responsible fiscal policy in the near future.

-    As yesterday's horrific terrorist attack in France shows, we as investors and citizens aren't as safe as the markets assume.

Add it all up and the current system of money for nothing -- which is the very foundation of stocks' current global bull market -- simply can't continue in perpetuity. If it could, then 0% interest rates with no consequence would have been with us for the past century.

This gets me back to the idea of investing in gold. As difficult it is for me to calculate gold's intrinsic value, I believe that going long on the metal while shorting stocks and bonds could be more profitable now than at any time in the past seven years.

After all, the bull market in stocks lies on a very weak foundation -- although it certainly doesn't feel that way amid the joyous celebrations that are going on these days in capital markets.

My advice? Yell and roar and sell some more!

Position: Long SPY puts, Short TLT, SPY

via thestreet


July 12, 2016

Twitter to stream US sports content | stock could go higher

Re/Code is reporting an aggressive move by Twitter into sports-content streaming, which might be just what the stock needs.

While it's unclear how much Twitter can pay for the rights to stream NBA games and other sports broadcasts, this move represents the first important, needle-moving action by the company's new management team.

If this effort yields just a modicum of success, it could be a precursor to the company's sale. And a buyer with substantially more money than Twitter could accelerate Twitter's acquisition of streaming content, reversing a recent slump in the service's average monthly users.

Twitter has always offered a unique, difficult-to-duplicate social-media platform. But now, the company finally appears to be providing more exciting niche and value-added product applications.

My guess is that there'll be even more new-product announcements in the months ahead that could "turn on" investors and improve Twitter's takeover appeal.

Personally, I placed Twitter on my "Best Long Ideas" list on June 13 at $14.60 a share, and I've been adding to my stake recently even though the stock has been trading higher.

Position: Long TWTR. 

July 11, 2016

Risk is a part of Investing as well as part of life

All of life is an exercise of taking risk, which is also the essence of investing.

That said, we as investors and traders must always consider risk vs. reward by asking ourselves a fundamental question: "What's the upside and downside to each and every one of my decisions?"

When I ponder that question these days, I find that I remain fearful of the markets and see an unfavorable risk-vs.-reward quotient.

Let's look at why:

Since Wall Street hit its "Generation Low" in March 2009, investors have literally scoffed at untoward events -- whether political, economic, terrorism-oriented or anything else.

But I believe that while the bulls see the Brexit vote as a non-event, they're likely wrong. Instead, I expect that we're already beginning to feel the effects of a slow reversal in the globalization that's long been prominent in our flat and interconnected world.

The dominoes have already begun to fall. For instance:

-The British Pound Is Collapsing. "Cable" is under 130 this morning, which could exacerbate global deflation.
-U.K. Property Values Will Likely Drop. Buoyed by high-paying finance jobs that might now be exported, U.K. property values will probably be in retreat. (Click here to see my colleague Antonia Oprita's analysis of that.) But unlike what happens in America, real-estate collateral is at the heart of many large and small British companies' trade and project finance.

-Liquidity Pressures Are Rising. As Oprita noted in her column, several U.K. property funds have imposed trading gates on redemptions. That's eerily reminiscent of 2007, when several mortgage funds halted redemptions. They ultimately failed anyway, heralding in the Great Recession.

The EU Banking Crisis Takes Center Stage. I believe that the European banking crisis (which I highlighted in Is Deutsche Bank The Canary in the Coal Mine?) will now be in full bloom. For instance, markets ignored the Italian banking crisis for months, but it's likely to take center stage now. The problem will also probably spread to other peripheral European Union countries' banks, which are generally mismanaged, leveraged and befuddled by massive amounts of nonperforming loans. This could ultimately destabilize European politics and spark a trend of more economic populism and less globalization.

America Will Not Be an 'Oasis of Prosperity.' No country is an island in today's interconnected world. We won't be unaffected by the chaos that I expect to occur outside of our borders.

As I've previously discussed, 2016's major economic themes prior to the Brexit vote included an economic ebbing, increased concerns that zero and negative interest rates were destructive and a growing fear that central-bank intervention was becoming impotent.

But now, all of these trends seem destined to worsen in the Brexit referendum's aftermath. The ensuing flight to safety might lead to lower global interest rates, but might not inflate price-to-earnings multiples (as bulls like my pals Tom Lee and Tony Dwyer are arguing).

Indeed, zero and negative rates could have the opposite effect by further retarding a capital-spending recovery while leading to less consumption and more cash hoarding by the savings class. (This is the so-called "Paradox of Thrift.")

The above explains how I expect the Brexit vote to have far worse long-term effects than the market's bulls seem to realize.

Let's take a look at what I think will happen:

The Near Term

I generally agree with Jim "El Capitan" Cramer's assertion that there's always a bull market somewhere -- but I see an unfavorable, limited upside to U.S. stocks these days relative to a potentially deep downside. After all, we have a deteriorating global economic backdrop, elevated price-to-earnings ratios (23x GAAP for the S&P 500) and what I see as a quiet, rotational bear market.

"Safe havens" like utilities, staples and fixed income are seeing strength, with a continued"Great Rotation" of investors moving into those sectors. We're also seeing a continued climb in precious metals. All of that speaks to a U.S. slowdown and/or recession.

These trends have created the appearance of a better market on the surface (i.e., in the S&P 500). But I believe that stocks are suffering under the surface. It looks like transports, autos, housing, retail, banking and other sectors are all breaking down and rolling over.

The Intermediate Term

To me, the market's gyrations since the S&P 500 hit its May 2015 high all point to the ongoing formation of a large, important market top. But as we've learned frequently from the market swings that we've seen since then, false technical signals and damaged chart patterns are the prevailing conditions in our market these days.

That's not surprising given that Wall Street is heavily populated by quants and operates without memory from day to day. But what I'm most fearful of this morning is a market that's providing a wholly unfavorable risk-vs.-reward quotient.

Buyers live higher and sellers live lower in our brave, new world -- but it's an unpredictable one that's filled with uncertain economic and market outcomes. It's also dominated by volatility-trending and risk-parity strategies and the like that allocate capital based on the market's volatility and price action.

So, consider yourself forewarned. These days, risk can happen fast in our interdependent, interconnected world.

July 8, 2016

Doug Kass agrees with Warren Buffett on stock market forecasters confidence in predicting moves

The investment mosaic is complex, and the "rules" are ever-changing -- just consider what's happened to the S&P 500 in recent days.

The index nearly hit a new all-time high Thursday afternoon, then tumbled following the Brexit vote as markets around the world lost more than $3 trillion in just two trading days. 

Let's look at how this complex mosaic and ever-changing market affect us as traders and investors.

The Complex Mosaic

For most of us, fundamentals, technicals, sentiment and valuation form the basis of our personal investment mosaics.

Mr. Market pays more attention to fundamentals at some times, while sentiment and emotion play the greater role at others. This keeps us on our toes, but it's one reason why I recoil when strategists, pundits and other "talking heads" express themselves glibly and self-confidently, as if they had a crystal ball that could see into the future.

In his 1992 letter to shareholders of Berkshire Hathaway, Warren Buffett had this to say about market prognosticators:

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, [Charlie Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place away from children, and also from grown-ups who behave in the market like children."

The Ever-Changing Market

I've often written that our investment world is flat, networked and interconnected. As such, change can come swiftly -- and like dominoes, the domino at the beginning of the game can typically impact the domino at the end.

Similarly, risk and reward happen fast, so our opinions must be fluid rather than fixed. Exacerbating this swift change is the newest and most-dominant investor class of the past five years -- machines and algos that follow volatility-trending and risk-parity strategies (among other quant techniques).

All of this contributes to a market that's without memory from day to day.

The Value of Experience and a Level Head

Given all of the above, it's helpful for traders and investors to always maintain a historical perspective, keep level-headed and remain flexible in both their market view and positioning. It also helps to be emotionless in times of volatility (even when prices are plunging or surging).

This is particularly true for your portfolio's trading component. The shorter the timeframe, the more opportunistic we should be -- and the longer the timeframe, the more fixed in view we should be.

Taking the Dollars Out of Dogma

I always try to make sure that flexibility guides my trading activity.

Consider what my Real Money Pro colleague Bob Lang wrote in Columnist Conversations with seeming certainty:

"Regardless of the (Brexit) decision, markets were destined to come down, the economy is not humming along at a level that is consistent with market prices. Nothing was going to stand in the way of falling prices." - Robert Lang, Brexit Was Just a Sideshow (June 27, 2016)

I have to ask: "How can anyone comes to such self-confident conclusions?" I mean no disrespect, as everyone is entitled to his or her own opinion (especially if it works for them). But personally, I try to avoid dogma and focus on delivering superior returns.

July 7, 2016

Cash is the alternative

"This morning, [T. Rowe Price's Brian Rogers] mentioned 'T.I.N.A.' ('There Is No Alternative' to stocks).

Isn't cash an asset class and a means of protecting assets? Can't the global bond market be saying that a secular decline in growth lies ahead?"

I've long felt that the concept of T.I.N.A. ("There Is No Alternative" to stocks) is inane -- a figment of the imagination for perma-bulls who rationalize sluggish economic growth and tepid corporate profits.

In fact, it should be abundantly clear that T.I.N.A. is B.S. Personally, I endorse "C.I.T.A." -- "Cash is the Alternative." And that's regardless of the low interest rates that we're currently seeing in America, or even the negative rates available in Europe and Japan.

After all, cash is a legitimate asset class and performs the job of insulating our portfolios from wild gyrations and draw-downs.

So, I say that if the current rally runs it course over the next few days (as seems possible), traders and investors should consider using cash as a protective tool in these uncertain times and markets. And that's even after we bear in mind the puny yields that the world's fixed-income markets are offering.

The bottom line: "Goodbye T.I.N.A. ... Hello C.I.T.A.!"

July 6, 2016

Now may be a good time to cut down on Long Bank stock positions

Let's start the day by talking about why I'd suggest using bank stocks' current strength to sell or reduce your exposure to the sector.

Now, my background and "street cred" in the banking industry runs deep. Back in the early 1970s when I was one of Ralph Nader's "Nader's Raiders," I helped Nader and the Center for the Study of Responsive Law author the book Citibank.

Several universities used the tome as a banking textbook. For example, my sister Barbara read it as part of her banking class at the University of Wisconsin. 

Later, I covered banks, thrifts and GSEs for Putnam Management in Boston in the mid- to late-1970s after I graduated from Wharton with an MBA. Institutional Investor magazine voted me the buy side's No. 1 bank-industry analyst, and I've been trading and investing in banks stocks ever since.

I bought a basket of bank stocks on Monday, purchasing longs of Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley. However, this was a trade rather than an investment, and I sold the stocks after the banks saw about a 10% increase in just two days.

I'd say that you should consider paring down any bank-stock positions as well, based on the sub-optimal regulatory and fundamental outlook that I see for the sector's 2016-17 profits. I also see numerous other headwinds to adequate (and historical) returns and valuations, including:

Overly Optimistic Earnings Estimates

I believe that analysts' consensus earnings-per-share predictions for 2016-17 are too high.

After all, I think bank profits are exposed to foreign-exchange losses, low absolute interest-rate levels, an ever-flattening yield curve and high restructuring charges (principally related to Britain). I also think capital markets could be moribund in 2016's second half, contributing even further to profit weakness.

High Regulatory and Compliance Costs
These expenses will remain elevated, and a possible Democratic presidential win will likely further raise non-core expenditures.

Fewer Jobs to Cut
The banking industry has been cutting its way to profits by eliminating jobs.

However, there's a limit to how long you can do this, and most banks are quite lean now.

Stress Tests That Don't Matter Much
Financial firms extended their upward move into after-hours trading yesterday following the Federal Reserve's release of mostly positive bank "stress tests."

However, this might have just been a short "relief rally," as the results came in materially in line with expectations and the pro-forma dividend yields that passing the test allows banks to provide will give the sector only limited support.

Also bear in mind that the banks have essentially "reverse-engineered" their stress-test results, and that it gets easier and easier to pass the Fed's review over time. It's as if you took the SAT every year -- your results would likely improve as time went by.

That's exactly what's happening with the stress tests. Passing them is no biggie, but the markets are ecstatic (for now).

Buybacks That Don't Matter Much
While banks have increased share buybacks, that's been in line with forecasts and not appreciable in an absolute sense (and relative to shares outstanding).

Besides, haven't we learned from Apple (AAPL) and other stocks that buybacks and return of capital aren't the sine qua non?

Counterparty and Contagion Risks
As I discussed in Is Deutsche Bank the Canary in the Coal Mine?, the European banking industry is weakening -- exacerbated by the Brexit vote, which only reinforces deflationary fears and pressures.

This presents U.S. banks with counterparty and contagion risk. In fact, I'd go one step further and say that heavily leveraged Deutsche Bank (DB) and its frighteningly enormous derivatives exposure single-handedly represent an even greater systemic risk than AIG (AIG) did 10 years ago.

Unimpressive Return on Capital
Banks use 8% ROIs to justify what many view as inadequate and inexpensive valuations. But the above market and regulatory headwinds mean that many firms produce what I think are inferior returns on investment capital.


The Bottom Line

The banking sector is one of the few market segments that I have a broad knowledge of.

Of course, I'm never self-confident of view, and my base of understanding doesn't guarantee that my judgment about the group will be correct. But I believe that my background with banking puts me on terra firma here

July 5, 2016

Bond collapse could be devastating for long term Bond investors

As I've noted in the past, the 10-year U.S. Treasury yield has approximately equaled 0.9x to 1x of the U.S. nominal growth rate (real Gross Domestic Product growth plus inflation) over the past five decades.

Let's assume that this historical relationship still holds true, and that America is seeing roughly 1.5% to 2% real GDP growth and a 1% to 1.5% inflation rate. That equates to 2.5% to 3.5% nominal GDP growth.

Under that scenario, history would indicate that the 10-year Treasury yield should be about 2.85% -- 136 basis points higher than the roughly 1.49% that we're seeing this morning. Even if we assume that this relationship should move down to a more conservative 0.7x, the 10-year yield should still be at 2.10%, or 61 basis points above current levels.

Now, there are several reasons why investors are attracted to a 1.49% 10-year Treasury yield even though that equates to only about 0.5x nominal GDP vs. the historically normal level of approximately 0.95x. Let's check those out:

ZIRP, QE and ECB Bond Buying

The Federal Reserve's Zero Interest Rate Policy and three rounds of Quantitative Easing have been anchors to our low interest rates in recent years. So has the notion of secular economic stagnation.

But many are convinced that the negative interest rates we're seeing in Europe and elsewhere (caused in a large measure by European Central Bank bond buying) are an even more potent reason why U.S. interest rates are so low.

Some investors argue that U.S. Treasuries are attractive because they provide relatively strong returns compared to other geographies. For example, the 10-year Treasury's 1.49% yield handily beats the 10-year German bund's roughly -0.12% current payout.

But to me, the concept of relative value between investments is greatly overrated, and at times, even absurd. As Real Money Pro subscriber "Badgolfer" wrote a bit back in the comments section of my column:

"I think there are gonna be history books written about this period that rational people will read at some point, [and] they are gonna ask this question of economic historians with complete bewilderment in their voice:

'Professor Jones, did investors REALLY invest in bonds of basically bankrupt countries that printed money to make interest payments and [buy back] bonds they just issued in failing currencies? ... Were investors really that stupid?'"

This seems to me to be true when some investors call Treasury bonds "attractive." To say the 10-year Treasury's low yield is attractive vs. the 10-year bund's negative one is like saying that New York Yankees DH Alex Rodriguez is attractive because he's hitting .220 when first-baseman Mark Teixeira is only hitting .190. In reality, both stink.

T.I.N.A. Is B.S.

I also reject the idea that stocks are "attractive" because they're cheap relative to bonds right now. This is known as "T.I.N.A." -- "There Is No Alternative" to stocks -- but I don't buy it. If bonds are overvalued, where does that leave stocks?

Or how about another "relative" notion -- that U.S. stocks are the "best house in a bad neighborhood" when compared to foreign equities? If non-U.S. economies are problematic and their share prices vulnerable, I think that argument holds little water in our flat and interconnected global economy.

The Bottom Line

My grandmother summarized the fallacy of "relative concept" best when she used to tell me: "Dougie, two wrongs don't make a right." 

Stated simply, I believe that fixed-income markets around the world are in a bubble of monumental proportions -- and as is the case with most bubbles, the irrational is being rationalized.

That's why I've chosen to short bonds. I recently made a long of the ProShares UltraShort 20+ Year Treasury (TBT) -- a 2x inverse play on the Barclays U.S. 20+ Year Treasury Bond Index -- our Trade of the Week. I also put the iShares 20+ Year Treasury Bond ETF (TLT) on my "Best Short Ideas" list Wednesday.

Of course, using leveraged ETFs like TBT as a Trade of the Week is all in the timing. But I'm basing my near-term optimism for this trade, in part, on the fact that despite the global economy's recent chaos, commodity prices continue to act well. For example, copper was at a two-month high at last check.

While it should be clear from the points above that I like shorting European bonds even more than U.S. ones, I know the average U.S. investor doesn't have the ability to short foreign debt.

Still, I can say with a high degree of probability that when this whole bond bubble blows up, it will wipe out years of profits for many!


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