October 31, 2016

Clinton email revelation impacts the market

To summarize, Friday afternoon, I have been trying to document how and why I have moved from an outsized net short position at noon on Thursday to one of my lowest gross/net positions...

I have done this despite continuing to be negative with regard to the market's outlook over the next six months, but being negative does not nullify an attempt to be opportunistic (in a trading kind).

I believe my rationale and how I react to a volatile and relatively illiquid market influenced by a news event is instructive. Or at least I hope so.

To be sure, I have not been frozen. Rather, I have purposely gone step by step in explaining (in brief terms) why and how I reduced my portfolio exposure and took profits this afternoon.

Again, my experience is that the spinsters are moving full-speed ahead with incomplete information. My job as a money manager is to capitalize on this in order to deliver superior investment returns.

That revelation of the Clinton emails materially impacted the market and brought the S&P 500 Index down to the important support level of 2120 discussed in my opening missive of Friday morning.

Perhaps, most importantly, Friday's action and news underscores the opportunistic trading nature of this market being favored over the buy-and-hold crowd.

This will no doubt change at sometime in the future. I have not given up on my investment shorts and longs. But, for now, I am more of a trader than investor as I "take" what Mr. Market gives me.

This has been a great week, a fantastic month and an even better year.

And we still have two months to go!

October 23, 2016

UBS on Apple performance in Asia

UBS Group (UBS) hosted its Asia telecom analyst, Jinjin Wang, for an investor call to discuss Apple (AAPL) in China. 

According to the analyst, China has been weak for Apple the past two quarters despite growth in domestic brands; the firm estimated 8% iPhone increase in fiscal 2017, which assumes a more moderate decline in China with new-to-Apple customers down 10%. China might be about half of new customers.

UBS will see what Apple reports next week and management's commentary; greater China is almost 25% of revenue at an above-average margin.

Apple knows it lost market share in China this year. It has blamed the product cycle and macroeconomic conditions, suggesting the losses may be temporary.

Jinjin said macroeconomic factors might be contributing factors, but more important are (1) lower-cost offerings from OPPO Electronics, Vivo and Huawei, which are gaining share thanks to advertising and strong offline distribution, and (2) less consumer embarrassment in owning a domestic brand.

UBS says Apple's brand remains strong, but the Apple Store can be difficult to access and slow.

Position: Short AAPL.

October 19, 2016

Dangers of embracing inexpensive stocks like JC Penney

From my perch JC Penney is a several-year investment and not a trade. I have made the point several times and in my more lengthy analysis on the company.

JC Penney is one of only a handful of longs for me. By my calculation it possesses good upside/downside over a one- to three-year period if it can execute its stated goals.

I have observed that the current quarter will likely be adversely impacted by unseasonably warm weather, so expectations, from my perch, are low/limited. 

However, I think we are setting up for a better fourth quarter for the company if the weather cooperates and its merchandising strategy gets customer transaction.

I hold several low priced stocks with attractive upside/downside but I don't discuss these investments in my Diary because I understand the predilection of many to fly to these stocks like bees to honey.

But higher-priced stocks can be rewarding. As an example, I have made it clear that DuPont (DD) is my favorite large-cap long. The shares have risen by nearly 50% in a relatively flat market since I purchased it. But I know for sure that subs have neglected this $68 stock (which was $52 in early 2016) in favor of JC Penney (by a multiple factor!).

Bottom Line: Subject to risk profiles, there is a role for speculative stocks in everyone's portfolio. But low-priced stocks like JCP (and others) are almost always speculative and should be weighted accordingly and relative to your appetite for risk. My advice is to always do your own homework and pay more attention to attractive priced higher-priced stocks that I (and other contributors) are long, consider buying deep in the money calls if you want the "high."

Position: Long DD, JCP (large)

October 16, 2016

November elections will not be good news for the markets

In light of the news over the last week, the odds of a Clinton presidential win have risen considerably according to the London betting parlors.

At Paddy Power, Clinton's odds have improved further to 1-6 odds as Trump's odds have eroded to 5-1. In other words, if this was a horse race the race track likely would take no win bets (and take it off the board) because it is a near-guarantee that Clinton will be the next president of the United States.

My baseline election expectations remain:

* A Clinton presidency

* The Democrats regain the Senate

* The Republicans retain the House of Representatives

As I wrote previously:

"A Clinton presidency will likely produce fiscal (legislative) gridlock (Democratic control of the Senate and Republican control of the House) and inertia at a time in which monetary policy has lost its effectiveness. There will simply be too much animosity between the parties to assure compromise following such a heated campaign that has been filled with personal and party attacks on the part of both Republicans and Democrats.

A Trump presidency will likely produce a broad swath of uncertainty as it related to ambiguities and the absence of details of policy. As well, passage of Trump initiatives could prove too debt-heavy and hard to legislate, with opposition outside and even within the Republican Party.

From my perch, both outcomes are market-unfriendly, have not been priced into the markets, will produce additional uncertainties and ultimately might lead to a contraction in valuations."

We must get fiscal.

With monetary policy losing its effectiveness, after the election and in early 2017, everything will come down to how smoothly and successfully a Clinton administration is capable of negotiating toward fiscal policy compromises with a Republican House led by Paul Ryan.

Indeed, a successful baton pass from stimulative monetary policy to a substantive expansion in fiscal policy might hold the single most-important key to the stock market outlook next year.

Unfortunately, given the increasingly vocal and hostile right wing of the Republican Party, I am not very optimistic.

Ergo, the November election will not likely be market-friendly and could provide another important headwind to equities.

October 11, 2016

Expecting economic growth to show signs of decelerating October 2016

Bank and insurance company shares have had a spirited advance this week based on better-than-expected U.S. economic data and talk of the ECB tapering its QE. That said, over a three- to six-month time frame I remain unequivocally bearish on both stocks and bonds.

Bonds have declined in price, and yields have risen to multi-week highs.

Given my negative market outlook and my view that economic growth will show signs of decelerating in the weeks ahead, it appears unlikely to me that the move higher will carry much further.

Which gets me to Hartford Financial Services Group ( HIG), my "Trade of the Week." Hartford's shares have risen from $42 to $44.30 -- over 4% in a lackluster market -- since I discussed the idea on Monday.

Today I plan to reduce HIG from a large-sized to medium-sized position (on a scale higher), and at the same time I am going to expand my insurance short book of Lincoln National (LNC) and Metlife (MET), which are currently small-sized positions.

I am also watching Financial Select Sector SPDR Fund (XLF) for an entry point on the short side in the days ahead. Goldman Sachs and Morgan Stanley, on further strength, will also be short candidates.

On the ProShares UltraShort S&P500 ETF (SDS) , I live at under $16.40 as another entry point, which would imply one more surge higher in the indices. Same for $217-ish for a short re-enter.

I plan to add to gold on any further weakness as a hedge against central bank lunacy.

Finally, I plan to maintain a large short on iShares Barclays 20+ Yr Treas. Bond ETF (TLT) , reflecting my continued view that bond yields made a generational low in July and will track a slow but steady rise higher in the months ahead.

Again, I am trading opportunistically and will remain flexible, though I have a negative market outlook over the next six months; I do not plan to take on many long-term leases.

Position: Long HIG (large), Short MET, LNC (small).

October 10, 2016

Deutsche Bank has risk exposure of 12 times Germany's GDP

I recently wrote that ... "It's plain and simple: The major money center banks are bad actors; they have demonstrated this time and time again, learning little from The Great Decession in 2008."

The most offensive and dangerous player in the banking world is Deutsche Bank (DB). And the most offensive and dangerous investment advice is from those who are not concerned with Deutsche Bank and the potential systemic risk that the bank could deliver to the global financial system.

Avoid Deutsche Bank like the plague and avoid anyone -- and that includes our money center CEOs who were also silent on the subject of derivatives in 2007 (!) -- who tells you not to be concerned with the German financial institution.

As I wrote back in the summer, Deutsche Bank is the canary in the coal mine.

Forget the structural inability of DB's core bank to make money in a negative interest rate environment. Many other banks in Europe have the same problem.

Forget that Deutsche Bank's market cap of $18.8 billion compares to troubled Twitter's $15 billion market cap in the market cap playoffs I mentioned last weekend in Barron's.

That's the little and inconsequential stuff.

If anyone tells you to buy Deutsche Bank or that we should not be concerned about its influence on the world's banking community and the systemic risk that Deutsche holds (like an annoying drone hovering over investors) tell them this.

I cut my teeth on bank research starting when I co-authored "CITIBANK" with Ralph Nader while getting my MBA at Wharton. I proceeded to follow financial industry on Wall Street for four decades.

There is no industry that is more opaque than the banking industry. And Deutsche Banks takes the cake.

Deutsche Bank has gross notional risk exposure in its (opaque) derivative portfolio of approximately $50 trillion (yes, that is trillions of dollars) That is 12 times annual German GDP (of less than $4 trillion). In a sleight of hand in its balance sheet reporting, DB nets out cross-exposure and currently reports that it only has a bit more than $12.5 billion in net derivative exposure.

Pay particular attention to the credit default swap rates at Deutsche Bank, which have trended from about 90 basis points at yearend 2015 to almost 250 basis points currently. I suspect they will be trending higher in the months ahead.

After American International Group AIG and the banking industry delivered those toxic financial weapons of mass destruction in the mid-2000s, one would think investors would have learned.

But clearly many haven't.

And don't do Deutsche Bank!

October 5, 2016

Peak NIKE ?

Nike has been an institutional darling and sell-side favorite for years; in early 2016 its price-earnings multiple reached nearly 30.

As Jim "El Capitan" Cramer relates, the historical enthusiasm for the shares was not surprising considering the company's doubling in sales since 2007 and large gains in profitability.

Nike's shares, after peaking in November 2015 at about $70 a share, now stand at under $54 a share after reporting two consecutive quarters of slowing comp sales (the minuscule rise in North American future orders were eye opening) and a contraction in gross margins. The stock is the worst-performing equity (year to date) in the Dow Jones Industrial Average. 

The (downside to the) life cycle of companies is swift these days, with innovation transforming the competitive landscape of numerous industries and companies and, especially in consumer franchises, with the ebb and flow of popularity moving as swiftly as a Sandy Koufax baseball.

Like Nike, I see a shifting competitive landscape for similarly popular companies like Apple, Starbucks, Coca-Cola and Disney (all of these I am short) and, in the fullness of time, reduced secular profit-growth prospects (compared to both history and consensus expectations).

Each of these companies, as I have written in my Diary, have different challenges. Some sell an expensive product that is exposed to demand elasticity, commoditization, a possible consumer slowdown and/or a maturing market. Others face changing consumer tastes, and others are threatened by technological innovation.

But, from my perch, they all share a common characteristic of Nike: Both their rate of EPS growth and the returns on invested capital have likely peaked, and they're substantially higher (with the exception of Apple) than market valuations are vulnerable.

They also all share marked reductions in share prices from recent highs:
Apple $132 to $115
Starbucks $63 to $54
Coca Cola $47 to $42
Disney $120 to $91

And with my forecast of less-than-stellar future earnings prospects could come even lower stock prices and a cheer from the ursine crowd who, through hard-hitting analysis and skepticism, adopted (ahead of the consensus) a negative and contrarian point of view.

This, as I mentioned in my opener, is the essence of what I try to deliver in my Diary.

Position: Short AAPL, KO, SBUX (small), DIS (small)

October 4, 2016

Deutsche Bank asset valuations an illusion

I cannot understand the developing meme that concerns with regard to Deutsche Bank (DB) operations and balance sheet health are "overdone." On the latter point, DB and the other European banks haven't even marked their portfolio (private or sovereign debt) to anywhere near market.
The asset valuations are an illusion at DB and the other European financial institutions.

One day of rumors of a lower settlement with the U.S. Justice Department is not enough to eradicate the aforementioned concerns.

That is what I have heard all day in the business media, from too many who failed to see the emerging and consequential banking problems in the last cycle (when to some of us the problems were as clear as day).

Let's leave the fact that the credit default on DB's subordinated debt has widened to over 2011's desperate levels.

- Deutsche Banks' market capitalization is $17.7 billion.
- A troubled Twitter (TWTR) has a market capitalization of about $16.4 billion.

Res ipsa loquitor.

via thestreet

October 3, 2016

Warren Buffett has spoken to Wells Fargo

As most are aware, Warren Buffett and I crossed swords at Berkshire Hathaway's Omaha Nebraska annual meeting in 2013 when The Oracle invited me to pepper him and Charlie Munger with questions from the stage as Berkshire's "credentialed bear."

Thursday morning in posts on RealMoneyPro, I made several claims of information I had obtained from my contacts regarding Warren and his investment in Wells Fargo.

My Claim #1. Warren had discussions with a member or members of senior management and/or member(s) of the board of directors expressing his dissatisfaction with the bank's ethical lapse. I went on to claim that the board was now directly informed and acutely aware of his consternation and Warren's view of the need to remedy the bank's conduct, posthaste .

My Claim #2. For now, Warren was content and committed to his $23 billion Wells Fargo investment - the largest individual investment in Berkshire's portfolio.

My Claim #3. Subject to Fed regulatory approval and/or share price, Berkshire may buy additional shares of WFC.

At around noon, through my pal Becky Quick's reporting, a representative in Warren's Omaha office declared my claims "false," though he didn't clarify what part or parts he was referring to.

Subsequently reports from Becky Quick (after directly speaking to Warren) as well asadditional reports made by Charlie Gasparino at Fox Business, Reuters and Bloomberg News confirmed part of my first claim that Warren had indeed spoken to John Stumpf, Wells Fargo's CEO and board chairman about the alleged fraud and that he had expressed his consternation.

Let me start with the caveat: I have learned through my research leading up to the 2013 Berkshire meeting that one has to be very careful of how we phrase questions to Warren. He is quite good at not responding to questions that he doesn't want to answer, especially when questions are not structured perfectly for him to answer. That is a lesson that I learned, particularly from Alice Schroder. Warren is exceptional at deflecting questions he doesn't want to answer by making jokes, answering a question other than the one is asked, etc. He has had tons of practice.

I wanted to make several relevant points to his pushback that my claims were "false" -- one by one:

Claim #1: My (first) claim that the Wells Fargo board knows of Warren's dissatisfaction with the ethical missteps at the bank. I claimed that Warren had conversations with one or more members of WFC senior management and/or board members admonishing the bank for unethical conduct. I was informed that he told them to clean up their act posthaste. My understanding is that this displeasure was likely communicated by one or more people to the board of Wells Fargo.

So I essentially said the board of directors, as a result, now had direct knowledge of Warren's view of their ethical missteps and had been admonished to rectify that or any other lapses. My intent was not to say that he formally addressed the board but rather that through his acquaintances and associations had so informed the directors.

By contrast, Warren said this claim was "false" stating to CNBC:

"It's dead wrong to imply I've spoken to the board directly ... Going to the board implies I've gone around Stumpf, the guy who is under fire."

Again I didn't claim that Warren Buffett made a presentation to the board of Wells. He cleverly responded to a claim that I didn't make -- he simply answered a different question/claim.

Claim #2: I offered that Warren, for now, was committed to WFC investment. I will stick with this claim as well.

Claim #3: Berkshire might purchase more Wells Fargo shares. Most analysts and investors are aware that Berkshire's investment in WFC went up to 10% recently because of WFC's repurchase program and not because of incremental purchases as Berkshire has not added to the position since October 2015:

From Bloomberg News: Berkshire said in the application that it hasn't bought shares in Wells Fargo since Oct. 21. Buffett's company learned that it crossed the limit in March, when the bank updated its share count to reflect buybacks. Berkshire told the U.S. Securities and Exchange Commission that month that the stake had reached 10 percent.

That said, my third claim was that, subject to regulatory approval and share price, Warren might consider the purchase of additional shares of Wells Fargo. Warren also denied this claim as "false," suggesting to reporters that Berkshire has no intention of buying more Wells Fargo stock. However, here is an exact quote from Warren -- from a July interview that he has never rescinded -- indicating as clear as day that he wants the option or has the intention to buy more WFC stock:
"Berkshire is seeking permission to retain its current ownership position in Wells Fargo and to acquire additional shares of common stock of Wells Fargo for investment purposes, " Buffett's Omaha, Nebraska-based company said in an application to the Fed. "Berkshire does not have any specific transaction or dollar value in mind with respect to any such potential purchases."

Bottom line: Despite Warren's protestations, I will stick with all three of my claims made....