Sunday, March 29, ’15 – “My Thoughts & Market Update”

Sunday, March 29, 2015

My Thoughts & Market Update

The Major U.S. Stock Indices declined the week of March 23rd through the 27th, see the graphic below for their 1 day, 5 day, 1 month, 52 week, and YTD performance.

Market Performance (through Friday, March 27th, 2015)

As you can see the DJIA, the DJ Transports, and the DJ Utilities are now down YTD.  I remain bullish, as I believe the economy may have had a recent soft patch due to the extreme winter weather and blizzard in the north east as of late.  I believe the economy will make a comeback and the markets could appreciate going forward from there.  Jeremy Siegel believes the DJIA could reach 20,000 by yearend. (Click here for that video & article).  If we get to 20,000 by December 31, 2015, that would be a +12.9136% move, from Friday’s close of 17,712.66.  The labor market continues to improve, and inflation remains very very low;  According to many economists, lower energy and fuel prices should also bolster and assist economic growth;  Know that in 2007 through 2009 lower oil and energy prices really didn’t bode well for the economy worldwide (there have been reduced payrolls and reduced capital spending in the energy space, and energy company stocks comprise about 10 percent of the S&P500 and lower oil prices do not bode well for these companies or for their earnings, nor does a very strong dollar… a strong dollar can lead to wider trade deficits, less exports, more imports, and diminished earnings brought home from large multinational corporations.  Peter Lynch always said “earnings drive the market.”).  Click here for the highlights of the BEA’s Economy at a Glance.  Yellen (I believe) will have to have the CPI actually increase (by the average +0.20% per month for a few months in a row) before she can justify perhaps raising interest rates;  I continue to believe that rates could remain close to zero through June, possibly through September, and into 2016 due to low inflation, and the weakest economic recovery on record, post any recession. Additionally, China, Japan, and Europe appear to be weakening, which may pressure the Federal Reserve to keep rates low.

Lately, Yellen has also voiced some concern over demographics, and lack of population growth, and economic growth going forward (see this article).  As we all know (or as we all may know), the birth rate, the fertility rate, and the age of first marriage have really changed since the ’60s with the advent of birth control.  Basically, women are having few children, and they’re having fewer children later in life (women’s labor force participation rates have changed, family units have become more broken over time, and the age of first marriage has also increased greatly, all since, on average, 1960).  This is straining Social Security, as the direct transfer from the working to the retired doesn’t work very well, if there are fewer and fewer children, because these children who never are born or had (due to birth control pills), don’t grow up, and they don’t find themselves in the labor force working, to make e.g. Social Security and all the generous entitle programs more solvent; on the contrary they become less solvent with less and less children and lower birth rates and lower fertility rates.  This could be a major headwind for 1st world countries going forward well into the future, in the coming decades (Japan and Europe have major problems as well with this, as birth control pills have become even more popular over there relative to the U.S.).  These concerns could be used as an excuse to keep rates very very low by historical standards.  Maybe some day, creditors will be rewarded?  Know that you can buy fixed income on margin (Reg T allows for initial margin maintenance requirements of less than 50% for Treasuries, Agencies, and Municipals), and there are low margin interest rate brokerages, such as Interactive Brokers (and others) who is rated very highly by Barron’s Magazine.  Click here for The Board of Governors, Federal Reserve System, FOMC’s website, of Economic Forecasts, transcripts of Minutes, and their video news conference (of March 18th, 2015).

Below is the economic calendars for this past week, and for next week.

Economic Calendar Last Week (above)

Economic Calendar This Week (above)

Below is a bond yield matrix, of current yields by issuer, credit quality, and maturity.  I have circled in red what I think should be avoided, and I have circled in green, and have put in a black rectangle, what I think looks good, in my view.  I believe ten years is as far away in terms of maturity that anyone should speculate with.  Also, click here for Bill Gross’s Fixed Income Investment Commentary.  Last month Bill Gross (who is widely believed to be “The King of Bonds”) discussed the board game Monopoly, this month he talks about pets and dogs.

Bond Yields by Issuer, and average credit quality, and maturity, through Friday, March 27, 2015.

Kiplinger’s March Economic Outlooks (above)

Notice how Kiplinger believes oil will be trading significantly higher.  I think ticker USO (which matches the performance of West Texas Intermediate crude oil) is beginning to look appealing, as is XLE (the energy sector etf), and some individual energy and oil company stocks… such as tickers XOM, BP, BPT, CVX, and COP.  These could prove to be great long term holds, for patient investors, some of these securities sport high dividend yields.

Select Quotes of Interest (Friday, March 27, 2015)

[CLICK HERE for an update on the above quotes]

Notice how most of the Major U.S. Indices are now 2 to 3 percent off their all time highs.  Perhaps it’s a good time to get invested (indexing based investments over the long run are a great idea, see tickers VTI, DIA, SPY, MDY, IWM, ICF, and QQQ).  Buying on dips can prove to be a great idea, over the long run.  Notice how USO (which matches the performance of West Texas Intermediate Crude Oil) is now 56 percent off its 12 month highs, and XLE the energy sector etf is 24 percent off its 12 month high.  I’m bearish on the etf IBB as I believe the hype surrounding biotech is and has gotten extreme;  Some major components of IBB have doubled in stock price in the past three months and have triple digit pe multiples!  Some of these companies think they’ll cure cancer!  I’m also bearish on the long end of the yield curve, so ZROZ and TLT are, I believe, going to continue their downward slide, as they have extreme interest rate risk, as measured by duration, and I believe interest rates will increase all along the entire yield curve, in my view (which will most harm bonds at the long end).  Surprisingly, junk bond spreads are quite normalized, and junk bond current yields are not at unprecedented (or nearly unprecedented) low yields as Government, and AAA, fixed income yields are.  I believe there are opportunities to be had in BBB and BB rated “junk” aka high yield fixed income;  See tickers EMB (EMB is my favourite- and The J.P. Morgan Emerging Market Bond Index (“The EMBI”) has also been a long term favourite of the Harvard and Yale Endowment funds, as well as a favourite among many Pension funds).  Also see tickers PCY, JNK, HYG, and perhaps even QLTC (these are all in the junk bond and high yield space); Ticker SJNK is a short term maturity junk bond etf also, and may well prove to be a great long term investment as well (talk with your advisor, there’s tons of opportunities to be had, and CONSTANTLY!).  I believe the 30 year Treasury bond has perhaps had a sea change, and that we’ll potentially never again see the low yields reached (and high bond prices reached) of January 29th, 2015.  I believe rates could move significantly higher over the years from here.  I believe the bond market rally (at the long end of maturities) of roughly 1982 to January 29th 2015, is over!  I believe that investors will be shocked at just how much can be lost in 30 year Treasuries (and 30 year Treasury Zero Coupon securities) over the next 15 years.  In 15 to 20 years, investors may be able to purchase Treasury bonds issued in January and February of 2015 at MAJOR DISCOUNTS.  Beware of duration of your fixed income portfolio, the interest rate risk might be at extremes at this time.  Lower durations and maturities of ten years or less have significantly less interest rate risk versus their 30 year fixed income counterparts.

PE Multiples of the Major U.S. Stock Indices (as of Friday, March 27, 2015)

Notice how the DJIA has a PE Multiple of just 16.63, that’s cheap to me, and I believe it can only mean (or suggest) it may move higher this year;  Additionally, the dividend yield of the DJIA has increased in the last 12 months from 2.43 to 2.51 percent for the DJIA, which I believe is a bullish indicator.

Headwinds for the stock market continue to be the following: increased violence (and the waging of war) in the Middle East, Russia’s “Sabre Rattling,” and the default risk of (Russia) and Greece.  Additionally, I can’t see how negative interest rates in Europe can be good for that region of the world.  I’m not sure how or why or how their stock markets are up roughly 10% this year (as measured by tickers EFA and IEV, and EWG, et al).  Know that the economies of Japan and China are also slowing down.

Click here for a copy of the most recent CPI-U Data Release; and click here for the most recent GDP Release.

Happy Trading!

Andrew G. Bernhardt

[Click here for my Great & Useful Links Page]

[Click here for all the tickers I like to follow daily]

[Click here for Futures vs. Fair Value, to see the Implied Open]

[Click here for Yellen’s Worries on Low Population Growth] – Which I say is because of birth control pills;  This could lead to $85 Trillion dollar Federal Government deficits in the USA in the future (see Kotlicoff’s “The Coming Generational Storm”). Who would you blame for this (the birth control pill issues, and enormous deficit projections in Europe and the United States)??  Would you blame the incompetent lawyers and the ABA, or the incompetent medical doctors and the AMA who prescribe the birth control pills?!  Why are these pills legal with such nasty economic consequences?  Feel free to leave comments below.

Wednesday, Feb. 18, 2015 “Goldman Sach’s 2015 Economic Outlook”

Checkout this youtube video presentation by Goldman Sach’s Jan Hatzius- the Chief Economist, Global Investment Research at GS (4 minutes and 21 seconds).

https://www.youtube.com/watch?v=4-2DaqL59-E

Andrew G. Bernhardt

On the Securities Action of Monday, February 2, 2015

On the Securities Action of Monday, February 2, 2015

STOCKS RALLY ON WALL STREET!  Monday saw a broad based rally across the board on Wall Street. Volatility, as measured by the VIX imploded and was -7.34% to 19.42. The S&P500 finished up + 1.30% or 25.86 points to 2,020.85, the DJIA was up 1.14% or 196.09 points to 17,361.04 In fixed income, Treasuries were down while high yield sovereigns and corporate debt rallied.  I’m remain bullish and believe stock prices will go higher, lead by the energy sector, as I believe oil will trade higher from here.

Feb. 2, 2015, Major U.S. Stock Indices

The DJIA is now -4.10% off its peak reached at some point in the past 12 months, the S&P500 is -3.47% of its peak, the S&PMidCap400 is -2.10% off its peak, the Nasdaq Composite is -2.87% off its peak, and the Russell 2000 is now -3.76% of its peak, the Wilshire 5000 is now -3.15% off its peak. XLF, an etf basket of financials, was up +1.61% to 23.38, and now stands -7.00% off its peak reached in the past 12 months. XLE as basket of energy shares, was up +3.06% to 77.87. XLV, a basket of pharmaceuticals was up +0.56% to 69.66.  ICF a basket of REITs was up -0.03% to 103.80.  Crude oil traded up strongly, for the second trading day in a row, USO an etf of West Texas Intermediate, traded higher by +4.49% to 18.62.  USO stands down -52.79% off its peak reached at some point in the past 12 months, I believe in late June.  I believe oil will remain volatile, but I think that it has bottomed, and that higher prices of oil will drive energy sector shares higher, which will lead the market higher.

Quotes of Interest

[http://finance.yahoo.com/futures]  Click here for an energy prices update.

In the Fixed income markets, ZROZ traded lower, down -0.24% to 138.65, TLT traded down by -0.38%, IEF traded lower by -0.12% to 110.23, TIP was down -0.07% to 115.55. EMB was up +0.10% to 111.49, PCY was up +0.38% to 28.89, HYG was up +0.39% to 90.21, JNK was up +0.23% to 38.84, and QLTC traded higher by +1.78% to 49.18. The 30 year Treasury yield settled at 2.25%, the 10 year Treasury yield settled at 1.68% [data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield]. I continue to believe, and will reiterate, that if oil can stabilize in a trading range, or start to appreciate, that there will be some major opportunities in the energy sector in equities, and in their high yield fixed income; Also I continue to believe that when oil stabilizes (or begins to appreciate) that there will be some major opportunities in high yield fixed income funds, such as the ones listed above, EMB, PCY, HYG, JNK, and QLTC.

The US Dollar traded slightly lower versus the Euro on Monday, the Euro gained approximately +0.32%, as measured by the etf FXE. I continue to believe the Ruble and the Euro are still too high, and will further deteriorate, making the dollar stronger. The U.S. Dollar can now be exchanged for a Euro at a cost of approximately $1.1335, and also can now be exchanged for 68.0945 Rubles.

[http://finance.yahoo.com/currency-investing] Go here for an update on all major cross rates

I believe the catalysts for today’s stock market gains were predominately higher oil, the release of the Federal Budget by the Obama Administration. The Budget proposal calls for an increase in defense spending of +4.50% from last year, and in sum is $3.99 trillion of expenditures, (+6.4% increase from last year) and with an estimated revenue stream of $3.53 trillion; The estimated deficit is projected to then be $474 billion dollars.  Government economists are estimating and projecting that deficits will be 2.5 to 3.5 percent of GDP annually for the next 10 years.

What we need is a President and Congress who will actually try to balance the budget and/or try to run a surplus.  The Executive and Legislative branches of Government shouldn’t crowd out investment and crowd out borrowing until there’s a panic in the markets and a recession; They borrow like there’s no tomorrow.  They are siphoning money away (by borrowing billions per day!) from other causes with their deficit spending.  We also need a Legislative Branch that doesn’t e.g. reduce regulations mortgage lending standards, to literally let anyone buy a home, as they did in 2000 through 2008.  This I believe set the USA up for a real estate downtrend which began in roughly 2003 or 2004, which ultimately took the rest of the economy downwards with it starting in late 2007 through 2009.  They shouldn’t have been able to buy these homes in the first place.  We also don’t need a Congress so foolish that it thinks it can punish financials (banks, brokerages, insurance, and reinsurance companies) with hefty fines, penalties, and indictments, from Federal Prosecutors at the DOJ, who crazily believe that their “crack down” on these financials will stop the economic cycle and prevent future recessions.  It was their idiocy of excessive borrowing, and changing of rules to let fools buy homes in the first place that caused the economic troubles of the late 2007 through 2009.  Their new regulations will do nothing but cause more trouble.  Increased lending standards that literally prevent spending (by limiting credit and limiting loans) is ridiculous.  Ben Bernanke couldn’t even refinance his home recently!  We need a “do nothing” Congress.  Lastly, I believe that Elizabeth Warren’s protections of the consumer are ultimately damaging these same consumers, by harming their investments.  We don’t need a Consumer Protection Financial Bureau, we need a Corporate Protection Financial Bureau.  What does Elizabeth Warren want ultimately?  Zero percent profit margins?!  Should all companies have to reorganize into a 501(c)-3 Corp?!  The Congress and its members needs to think at a higher level (or at least try).  This could perhaps start with higher standards for the LSAT (the law school admissions test) and for law schools in general, since most of our Congress is filled with lawyers.  It begins with education and higher standards. 

Also with the President’s budget release, I believe Obama is suggesting that he’d like to bring back foreign earnings of multinational corporations held offshore, by suggesting a new tax levied of 14% on those accumulated earnings and 19% on recently earned profits abroad, in an effort to have those earnings brought back to the USA.  The OMB projects and estimates that interest payments on our national debt (to debt currently at $18 trillion and 82 billion dollars) will be 13.5% of expenditures in 2025, up from just 6.5% today.  For “The Debt to the Penny,” (the total U.S. Federal Government Debt Outstanding) click here: http://www.treasurydirect.gov/NP/debt/current.  The $18 trillion of Federal Government debt doesn’t include State, County, Municipal or Local Debt, nor does it include private sector debt, or corporate, or agency debt.  Americans sure like borrow and spend!  There are few corporations on the S&P500 with zero debt. Click here for an article and listing of 26 companies with zero debt (as of May 29, 2014):  http://americasmarkets.usatoday.com/2014/05/29/debt-free-26-u-s-companies-shun-debt/

Click this link for a White House OMB website with many links on the Obama Budget: http://www.whitehouse.gov/omb/budget/Overview.  Click this link for a White House OMB release website with the entire Federal Budget (it’s 150 pages long, and is a PDF of 2.3 mb in size): http://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/budget.pdf

Economic data releases on Monday were weak across the board, I believe fueling traders’ expectations that higher rates will be delayed by the FOMC. Also next week newsworthy reports will be Monday’s Personal Income and Outlays came in as expected at +0.30%, Personal Spending was weaker than expected at -0.30% (expectations were for -0.20%), Core PCE Prices came in as expected at 0.00%, ISM was slightly weaker than expected (at 53.5, while expectations were for between 54.7 and 55.0), and Construction Spending came in at +0.4% while economists were expecting +0.8% to +0.9%.

In notable eps reports due I think CMG will be amusing, as will WYNN, both eps are reports due after the market close on Tuesday the 3rd.  I believe that CMG may move by ±51.00 on Wednesday the day after it reports eps.  Yes, really fifty-one dollars of an increase or decrease in per share prices for CMG for Wednesday.  So fasten your seat belts!  We’re about to find out how many burritos were sold at CMG!  I believe that a long bull call ratio back spread with net credit characteristics may be lucrative; Especially if also combined with a long bear put ratio back spread with net credit characteristics on CMG, placed tomorrow just a minute or two before the close (3:00PM Central Time).  WYNN could perhaps move by ±7.70.  It will be amusing to see what happens.  Happy earnings speculation!

In other news, BP reported its quarterly eps, which beat expectations, but were lower than year ago (during the same quarter); BP reported $-969 million in earnings versus $1.51 billion a year ago.  BP traded higher Monday, up +2.65% to 39.86.  Looks to me like shares of BP reached rock bottom around January 12, 2015.  XOM traded higher as well, and Monday was up +2.47% to 89.58; CVX was higher Monday as well, +3.44% to 106.06.  XOM and CVX look to me like they may have bottomed on the 29^th and 30^th of this month.

I remain bullish, and believe that higher oil prices may lead the energy sector higher, which I believe will lift all major U.S. stock indices. 

Some energy sector stocks currently have very high dividend yields (which I’d caution could or may be cut, but then again, they may not be cut).  Checkout the yields on XOM yielding 3.20%, CVX yields 4.20%, BP yields 6.20, BPT yields 13.80%, and RIG currently yields 18.40%.  I believe that if oil has stabilized these stocks also have some room for major price appreciation of the shares over the long run (within a couple years).  Lastly, the etf XLE (a basket of energy related large caps) is currently -23.31% off its peak reached in late June of 2014 (101 and change was its peak, and closed Monday at 77.86).  XLE could be a winner going forward for traders and investors who are patient for a few years.  Happy trading.

Below are some more fun charts of economic data.

By Andrew G. Bernhardt