Thur., Dec 31, 2015 – Market & Economy Checkup

Thursday, December 31, 2015

Market and Economy Checkup

Data retrieved and compiled 12-31-15 (after market close)

 

Through 12-31-2015 (at the close)

As you can see, today, this week, this month, and spanning over the past 12 months has been a disappointment for equity investors. The only bright spots have been the Nasdaq (ticker ONEQ +5.93% YTD) and the Nasdaq 100 (ticker QQQ +8.43% YTD), and Biotech (tickers IBB +11.47% YTD, and XBI). The Cohen & Steers Realty Majors Index, matched by ticker ICF, posted a +5.96% return in 2015.  Additionally, U.S. Total Stock Market Index, formerly known as the Wilshire 5000, (ticker VTI) posted +0.40% YTD. Winning sectors in the S&P500 (which finished 2015 -0.73%) included Technology Sector (ticker XLK), Health Care (ticker XLV), and Consumer Discretionary (ticker XLY), and Consumer Staples (ticker XLP).

Click here for quotes on the ticker SPY, and all of the SPDR Sector ETFs which match the performance of the sectors constituting the S&P500. Here’s how some indices and sectors and their ETFs did for 2015, ranked in order, from biggest winners to biggest losers (results were taken from a price chart, so this includes price performance only, not including dividends, and also does not include capital gains distributions):

1. IBB the Nasdaq Biotech Index, a widely followed sub-sector of health care wins first place.
2. QQQ, the Nasdaq 100, wins second place.
3. XLY, Consumer Discretionary wins third place.
4. XLV, Healthcare, wins fourth place.
5. XLP, Consumer Staples, wins fifth place.
6. XLK, Technology, wins sixth place.
7. The S&P500 itself finishes for seventh place, down for the year.
8. DIA, the DJIA finishes down for the year, in eighth place.
9. IJH and MDY, the S&PMidCap400 finishes down for ninth place.
10. IWM, Russell 2000 finishes worse, down for the year, and in tenth place.
11. XLF, Financials, were next, finishing down for the year, in eleventh place.
12. XLI, Industrials were next, finishing down for the year, and in twelfth place.
13. XLU, Utilities, were next, finishing down worse still for the year, and in thirteenth place.
14. XLB, Basic Materials, finished down, second to last, in fourteenth place.
15. XLE, Energy, finished down and in last place, fifteenth place. (And after being down so sharply over the past 18 months, something tells me that the energy sector could prove to be a winner going forward, at maybe some point between now and the next six months or so.)
16. Worse still were many foreign stock ETFs, of Europe, the Middle East, China, India, Brazil, The frontier markets, South Africa, Africa, S.E. Asia, Latin America, etc. (click here for quotes on these losers), know that it can always get worse before it gets better, so don’t be too tempted to buy these foreign stock ETFs.  I’ve always said foreign stocks are like gambling and/or lottery tickets! Now there’s always exceptions to what I’ve said, e.g. I like CS, DB, GSK, MNK, BCS, and LYG, which are all foreign domiciled “big pharma” and financials. On that note, checkout ETF ticker ADRU, which is laden with foreign companies (mostly ADRs listed in the U.S.) that might maybe be worth an investment.

There are three strategies that can be put into action on the last day of the year, the first is called “The Bridesmaid Strategy,” second, “The Dogs of the Dow Strategy,” and lastly, the third, “The Small Dogs of the Dow.”

1.  The Bridesmaid Strategy is simple, you simply select the 2nd place winner among all S&P500 sectors, which is healthcare for 2015, and you invest solely in that sector for the following year, being 2016. This strategy is said to beat the S&P500 by over four hundred and eighty basis points (meaning by +4.80%) per year on average, over the long run. So, 2016’s Bridesmaid Strategy would entail investing in the S&P500’s Health Care Sector, matched by ETF ticker XLV.

For further info on “the Bridesmaid Strategy” click here. The article claims The bridesmaid strategy has an annualized return of +14.50% since 1991, and over that same span (since 1991) the S&P500’s annualized return was +9.70.  Seems as though the bridesmaid strategy is absolute dynamite!!!

I’d also note that biotech (which is not a sector of the S&P500, it’s its own index), matched by the ETF ticker IBB, and other healthcare related ETFs could prove to be great investments in 2016, see tickers IHE, XPH, SBIO, and others.

Know that despite the health care sector’s strong performances over the past few years, like everything else, past performance is not indicative of future performance, and does not guarantee future results.  Swim at your own risk!

2.  Also, Click here for 2016’s Dogs of the Dow Components. Click here for an explanation on how (A) the Dogs of the Dow (and (B) the Small Dogs of the Dow) are selected. It’s really a great time tested strategy.  The Dogs of the Dow strategy involves selecting and investing in an equal weight 10% allocation, the 10 highest yielding stocks taken out of the DJIA (on the last trading day of the year); The Small Dogs of the Dow Strategy then chooses only five (out of ten) from that list, in equal weight (20% each), which are the lowest in price per share.

Leading the way down in 2015 was the energy sector (XLE) (and iShares ticker IYE, -22.21% YTD), plagued by sharply declining crude oil prices, from too much supply, rather than lack of demand.  Their man made supply side shock could put them out of business, and has also caused terrible recessions in Brazil (in 2016 many believe Brazil could turn, and ticker EWZ (-41.27% YTD) could prove to be a major opportunity for speculators, after nearly 8 to 9 years of steep declines!), terrible recessions in Russia (ticker RSX -0.56% YTD), and troubles in Turkey (ticker TUR, -31.46% YTD), Saudi Arabia, and Kuwait, etc. Basically, OPEC is too productive.  There could be nasty times ahead for the energy sector still (and for OPEC nations), even after 18 months of steep declines in oil prices (coming off of 104 per barrel in 2014, to the current 37.04 (for WTI; and 37.28 for Brent) [oil prices retrieved from here, oil-price.net] per barrel on December 31, 2015). Oil peaked in July of 2008 at just over $145 per barrel [click here for that chart], so its been declining for eight years now. There could be easily be consolidation, further layoffs, the slashing of dividends across the board, many bankruptcies, and general doom and gloom for the entire energy sector.  In addition to a very weak energy sector, joining in on the way down, and putting negative pressure on the S&P500 was its sectors including basic materials (XLB), utilities (XLU), and industrials (XLI). Despite lower oil prices, the Dow Jones Transportation index finished down by -17.85% YTD (ticker IYT finished 2015 down by -16.85%).

In addition to ticker EWZ, there may be some great opportunities in the S&PLatinAmerica40 index, matched by ticker ILF (-31.40% YTD).  Additionally, I like to follow the performance of ticker IDV as well, “the International Select Dividend ETF” by Blackrock’s iShares, which posted losses of -10.92% in 2015; and IXG (-4.40% YTD) the iShares Global Financials ETF; and ticker EUFN (-4.99% YTD) the iShares MSCI Europe Financials ETF.  Check them out!

Somehow, I’m still bullish for 2016, as I see lower and low oil prices acting like a tax cut, which is good for consumer sentiment and consumer spending. Low and lower oil is great for the U.S. economy.  Also, the entire energy sector represents only 2.59 to roughly 6.5% of all the U.S. broad based stock indices (just 3.03% of the S&PMidCap400, matched by ticker MDY and IJH).

Sometimes I wonder if too many believe that the USA is a very very oil intensive nation.  We’re not, and we’re certainly not Kuwait, Saudi Arabia, Russia, or Brazil.  I also worry that a lot of the selling “of everything” indiscriminately on low and lower oil (which is the trading action we’ve seen lately) is program trading, or algorithmic trading, or high frequency trading, and if so, eventually, they’re going to have to re-program their machines to interpret low and lower oil prices as beneficial and bullish for the USA and its stock markets, and inflationary outlook, and thus for fixed income prices and yields.  Low and lower oil only hurts two things, (1) the energy sector, and (2) OPEC nations; It is absolutely fantastic for everyone else.

To me, I can’t figure out why so many are so foolishly bearish at this juncture, at mid-cycle, after the first rate hike off of zero interest rate policy. There is no nasty boogey man looming for the markets, in 2016 in my view. Instead, the market could really boogey woogey higher in 2016!  I believe 2015’s performance was a little crummy due to that I describe as “a hang over” from 2013’s unusually strong performance, where many of the U.S. broad based indices rose over +30.00%.  In 2013 e.g. the S&PMidCap400 rose by +31.57%, and the S&P500 rose by +29.60% (the S&P500 can be matched using the ETF ticker SPY), and the DJIA (matched by the ETF ticker DIA) rose by +26.50% in 2013. To me, it’s a shame that 2013’s thirty percent gain couldn’t have been spread out more evenly over the course of three years, in ’13, ’14, and ’15, everyone likes consistency.

High yield U.S. corporate junk bonds (and their indices, matched by the ETF tickers HYG (-5.54% YTD), and JNK) also didn’t do too well in 2015, they’re both down nearly five and a half percent, including their streaming income… on a price performance basis, they’re both down nearly ten percent); It has been odd in the sense that there is no recession in the USA, yet the junk bond market has posted a negative return. The negative sentiment about the energy sector’s fixed income has led to losses in high yield.  Some are worried about many energy sector bankruptcies.

Personally, in the high yield junk bond sector, I like sovereign U.S. dollar denominated high yield junk fixed income, as is indexed by the JPM EMBI, matched by ETF tickers PCY and EMB. Click here for Payden & Rygel’s analysis on the JPM EMBI for this week.  There is also the JPM EMBI Local Currency Bond Index, I really don’t recommend this foreign currency (aka “local currency”) denominated bond index.  King dollar is back!

The markets in 2015 were also worried about slowing China (see tickers FXI -11.91% YTD, ASHR, ASHS, HAO -2.05% YTD, PEK -1.20% YTD), slow Europe (EFA -0.90% YTD), Greece (GREK -39.95% YTD) and its debt crisis, Puerto Rico’s debt debacle, and rising rates in the USA off of its zero interest rate policy (ZIRP), while the rest of the world has been and still is in rate reduction and stimulus mode. None of this was a surprise however, and many have been talking about these issues for years.  China could also prove to surprise to the upside, and not slow as much as is widely believed. Additionally, there’s been worries about global and domestic terrorism, after the tragic events in Paris and California. I believe there is a terrorism discount weighing on the markets right now.  Lastly, there could be worries about the political risks in the U.S. since 2016 is an election year, in what appears to be “the Donald” versus “Hill & Bill” (or really just Hillary). The republicans can’t seem to coalesce around any of their numerous candidates running for president; and the democrats apparently only have leadership from solely one candidate, Hillary.

In the USA, GDP is expected to expand at a faster pace next year, from approximately 2.50% in 2015, to roughly +2.7% to 2.8% in 2016.  Inflation is expected to creep up, but remain low, maybe going from roughly 0.00% to 0.30% to roughly 1.50% to 1.75% percent in 2016. Additionally, I believe and expect the real estate markets in the U.S. will strengthen, and the U.S. labor market will strengthen as well.  Interest rates are expected in the USA to go from 0.25% percent, to roughly 1.25% at the short end.  On December 31, 2015 the 30 Year Treasury Bond yield currently rests at 3.02%, the 10 Year Note Yield rests at 2.27%, the Five Year Note closed at 1.76%, and the 13 week T-Bill Yield rests at 0.15%. I expect the yield curve to flatten slightly, but remain steep, as all rates should creep up a bit. Maybe the 30 year bond yield will increase 75 basis points in 2016, while the short end rises 100 basis points.  We shall see. Globally, GDP is expected to grow worldwide, at roughly +3%. China is expecting roughly 6 to 7 percent GDP growth, S.E. Asia expects to see +4% growth. Even Europe is expecting to grow in 2016, at a faster pace than 2015’s sluggish growth.

(Chart #1) 12 Month Performance of the U.S. Broad Based Stock Indices

(Chart #2) October 21, 2015 – December 31, 2015

 

In the charts above I have charted the 12 month performance of the broad based U.S. stock indices (chart #1).

Also above (in Chart #2), I have charted October 21, 2015 through December 31, 2015, because usually, October 21st through February 19th of the next year is a great time for equity investors.  Normally, we see seasonal strength in the stock indices between October 21st and February 19th of the following year.  I’ve done research on this and have determined it’s usually because of and due to increases in consumer spending (primarily holiday and travel expenditures), seasonally strong 4th quarter EPS of all the components of the broad based indices, mutual fund window dressing, the Santa Claus Rally, the January Effect, Congress being out of session, new government spending proposals, abatement of tax loss selling, and 401k and IRA contributions, etc. There are many reasons for the markets to do well at year end, and into the new year.  This year’s year-end-rally hasn’t been that great, so far (except for Biotech, see ticker IBB, from October 21st through December 31, 2015) Click here for ticker IBB’s main components. Now, it’s never over until the fat lady sings! And it’s not February 19th of 2016 yet. But so far, performance hasn’t been that great. Regardless, I’m bullish going forward, full steam ahead. I firmly believe that if there is no recession looming, then there will be no bear market. And I firmly believe that there will be no materialization of any recession in 2016, or even early 2017.

2015 also saw some fantastic “blow ups,” including tickers FXCM, MNK, CMG, and VRX (click here for quotes on these). Bottom fishers might want to speculate in these, with high risk funds.  Click here, for list of potential bottom fishing candidates; Know that it can always “get worse” before it “gets better!”

Within the energy sector are also many many stocks that have absolutely stunningly declined substantially off their mid 2014 highs.  There’s plenty to choose from if you dig around a little, which could satisfy the bottom fisher’s quest for the rebound.

Also, BitCoin (click here for the wiki article), was listed in 2015 somehow as a commodity!  GBTC is managed by a company called Grayscale, a Digital Currency Group Company. Click here for the commodity wiki article. I like to say the so-called BitCoin crypto-currency (whatever that means!) is like the board game Monopoly, and its Monopoly Money (backed by absolutely nothing!!! HA!!!).  I suppose even Monopoly money is worth something, like maybe the paper its printed on. This BitCoin BS is the ultimate BS hype bubble right now, and it’s inflating very very rapidly!  See ticker GBTC, it should prove to be highly amusing.  Speculative asset bubbles are fun while they’re inflating, but they’re no fun at all when they go pop for those speculating in them!  So, BE CAREFUL if you play with fire! I like to say it’s currently appreciating due to the greater fool theory, or kinda like hot potato.  Bubbles to me are also like musical chairs, and at some point the music will end, and the bubble speculators will be left without at place to sit.  Click here for the wiki article on bubbles.

I believe Monopoly Money is very similar to BitCoin.

Bubbles can inflate rapidly, but they can also pop, and suddenly burst;  Stunningly devastating losses can mount up and materialize.  Investors might be better off investing in literally trash versus BitCoin (ticker GBTC).  Try what I describe as “The Four Kings of Trash,” Waste Management, Waste Connections, Republic Services, and Covanta, tickers WM, WCN, RSG, and CVA.

This BitCoin (ticker GBTC) mania and euphoria reminds me when the ETF ticker GLD first became listed on the exchanges. GLD (in my opinion) attracted so much money out of the securities markets (after it was listed as an ETF for securities investors for the first time) that it created a bubble in gold, which inflated, over the course of seven years, by roughly +311% gain (from 45 to 185), before popping and imploding.  Today, I believe GLD is still in the process of popping (in my view), and has come back down to 101.46, as of 12-31-2015 (from the roughly 185 peak in July of 2007).  I do not think gold (or the ETF ticker GLD) will see its prior peak for a very very long time.

I like to say: “Bubbles go Pop!“  If you’re interested in reading up on bubbles see the book, available at Amazon, by Daniel Gross: “Pop, Why Bubbles are Great for the Economy.”  You may also be interested in “Extraordinary Popular Delusions and the Madness of Crowds,” and perhaps also “Manias, Panics, and Crashes.” Click here, for a historical long term list of recessions, depressions, and panics in the United States, on Wikipedia, which might also tickle your fancy.

I think commodities shouldn’t be listed on the securities exchanges.  To me, commodities are not securities, and so they should not be listed on the AMEX, Nasdaq, NYSE, etc. for investors to trade like stocks.  To me, commodities, belong at the NYMEX or Chicago Mercantile Exchange, and should solely be traded by commodities traders, in commodities accounts.  I’m not sure why the CFTC, SEC, or the IRS has allowed the subversion of many commodities to be listed as ETFs on the securities exchanges for securities investors.  Speaking of commodities gone wild, it looks to me like coffee, ETF ticker JO, is finally “on the move,” and 2016 could be the year of coffee bean prices!

Wrapping things up, I wanted to leave you all with a quote list of my favourite high yield stocks, in no particular order;  Click here for that list.

Lets all hope that the god (or really goddess) of securities and investing, and of wealth, fortune, and prosperity, Lakshmi, brings better times ahead for investors!

Here are three great reports to assess the state of the economy: (1) Click here for the FOMC’s statements and minutes and estimates; (2) click here for the most recent edition of The Economic Indicators; and (3) click here for JPM Asset Management’s “Guide to the Markets” publication and analysis.

Lastly, here’s the current assessment of the U.S. Economy and its markets by Deutsche Asset & Wealth Management [click here for their current report].

Happy Trading!,

Andrew G. Bernhardt

PS- Here’s a great resource on (1) how all iShares are doing, click here; Also (2) here’s how all SPDR ETFs are doing, click here.

[Click here for my comments on the business & economic news daily]

[Click here for my Great Investment Links Page]

[Click here for my Great Investment News Page]

Feb. 22, 2015 – Weekend Update

Sunday, February 22, 2015

“WEEKEND UPDATE- NEW HIGHS FOR STOCKS AT BROAD & WALL”

MORE GAINS FOR WALL STREET. Friday saw most major U.S. stock indices increase, bringing the major market averages into positive territory for the week, thanks to compromise midday on Greece and a German Bailout.  For the week, the DJIA gained +0.67%, the S&P500 gained +0.63%, and the S&PMidCap400 gained +0.94%.  The indices now stand roughly 1.78 to 4.80 percent in the green YTD;  The Nasdaq Composite and Nasdaq 100 indices are getting within roughly 2.78% of highs reached on March 10, 2000, yes really, just 15 years ago!  If the Nasdaq can rise by +2.78% they’ll break even with where they were 15 years ago (before inflation and currency depreciation adjustments of course over the past 15 years).  On Friday, volatility, as measured by the VIX imploded by -0.99 points or -6.47% to 14.30. See the graphic below for daily and weekly performance of the U.S. Major Stock Indices.  In fixed income Friday, Treasuries and High Yield Sovereigns traded higher by +0.20% to +0.40%.  See the graphic below to see how fixed income faired.  I continue to believe the major U.S. stock indices will increase slightly by 2 to 3 percent before taking a few steps back, before making another advance to new all time highs.  I continue to remain bullish, and I believe energy shares and crude oil will trade in a volatile range, but will trade higher given a month or two or more, which I believe will lift all major U.S. Stock Indices to new highs.  Lastly, I think that higher energy prices will bring “hot” (meaning higher than usual) CPI-U monthly figures, which will put upward pressure on fixed income yields in the open market, particularly in the Treasury long term and intermediate maturity sectors.  I am however expecting the next CPI report to come in negative with deflation for the month.  The average monthly CPI monthly increase has been approximately +0.20%; Since oil’s “demise” it’s been quite low, closer to zero, if not negative month to month.  As energy prices (primarily light sweet crude oil) rebounds, I’d expect the monthly CPI-U figures to come in “hot” at nearly twice to three times the historical average, at literally +0.4% to +0.6% month to month for a while.  Treasuries are coming off prices of nearly unprecedented highs, due to unprecedented low yields; RATES ARE RISING, and fast.  Thirty year zeros (as measured by etf ZROZ) are down by -13.33% off their all time highs, which I believe they’ll never see again, or at least, for many many years.  Conventional thirty year Treasury bonds (as measured by etf TLT) are down by -8.64% off of their peak.  Long term (and intermediate) Treasury yields have no where to go but upwards, which will bring Treasury prices down further, due to higher yields.  High yield fixed income yields are not at unprecedented low yields, and therefore, may not sell off as strongly as Treasuries, given equal maturities.  Higher or “hot” CPI-U monthly figures could also put pressure on the FOMC to raise rates, perhaps as early as this summer.  Given the slowdown in Europe, Greece, and in China however, this rate increase program of the FOMC may be delayed, past this summer.  Initially, I believed rate increases would not materialize in 2015, then I believed perhaps the Federal Reserve would raise rates in June of 2015, I’m beginning to believe that perhaps the rate hikes will be delayed past June 2015, maybe in September or in 2016 they will raise rates.  The earliest rates would be increased would be summer (June) of 2015 I believe.  Higher yields at the short end (raised by the Federal Reserve) are likely to push rates up across the board.  I wouldn’t be surprised if long term Treasury Securities saw negative total returns over the next 36 months.  I believe, long term maturity Treasury bond investors (and perhaps intermediate Treasury note investors) are in for a big surprise(!!!), called negative total returns over the next three years, as rates begin to “normalize” in the USA.  I believe investors will be totally shocked at how much can be lost in a Treasury bond as rates increase.  If rates rise by 200 basis points at the long end, there could literally be 30% losses for Treasury bond investors.   Additionally, there could be nearly literally 60% losses for 30 year Zeroes in the Treasury Bond market.  Interest rate risk is measured by duration.  Swim at your own risk!

Feb. 20, 2015, Major U.S. Stock Indices

[http://finance.yahoo.com/futures Click here for an energy prices update] Friday saw USO an etf of West Texas Intermediate decrease by -2.36% to 18.65; USO is now -52.71% off its peak of the past 12 months; reached in late June ’14;  USO is also +14.42% off rock bottom, set on January 29th at 16.68.  I believe oil will remain very volatile, perhaps an options strategy called an at-the-money straddle using two week out expirations could prove to be very lucrative; I believe oil is going a lot higher (maybe another 10% or more), and soon (over the next few weeks).  I would base this estimate of mine on the oil-VIX which is extremely high right now.  If the oil-VIX implodes, it will bring higher oil prices. On Friday light sweet crude oil traded lower by -1.97% or -1.02 per barrel to $50.81.  Volatile oil is making the Russian stock market (as measured by the etf RSX) very volatile.  [Click here for an Oil-VIX chart & update]

PE Multiples & Yields of Major U.S. Stock Indices, Feb. 20, 2015

As you can see the PE Multiple of the DJIA is lower than other major U.S. Stock Indices; The dividend yield of the DJIA is 2.21%, and it was 2.20% last year.  The 30 year Treasury bond yield is 2.73%,and the ten year Treasury note yield is 2.13%.  Therefore, with such high dividend yields on equity indices it’s difficult to be bearish and I believe the stock market has some potential to move higher.  [Click here for Yields on Treasury Securities, http://finance.yahoo.com/quotes/^IRX,^FVX,^TNX,^TYX]

Select Quotes of Interest, Feb. 20, 2015

In the Fixed income markets, see the graphic above to see how Treasury etfs traded (ZROZ, TLT, IEF, TIP, STIP) and how high yield etfs traded (U.S. dollar denominated high yield sovereigns being etfs EMB and PCY) (as well as high yield corporate fixed income being etfs HYG, JNK, and QLTC).  The 30 year Treasury Bond yield closed at 2.73%, and the 10 year Treasury Note yield closed at 2.13% [Data from here: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield%5D. 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.  When higher energy prices materialize in the future, inflation could pick up as measured by the CPI-U, which may or could send e.g. Treasury Security yields higher, while also pressuring the FOMC to raise rates at the short end.

Friday saw the US Dollar trade slightly lower versus the Ruble, but slightly higher versus the Euro; The Euro gained approximately +0.13%, 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 $1.1384, and also can now be exchanged for 61.8745 Rubles.  [http://finance.yahoo.com/currency-investing  Click here for an update on all major cross rates.]

I believe the catalysts for today’s and this week’s stock market increase were Greece and its debt negotiations with the Euro Zone and with Germany, as settlement talks came to a positive note on Friday, the market took off;  Consequently, on Friday, an etf of Greek stocks (etf ticker GREK) increased by +10.06% to 14.11.  The etf GREK has been on a tear lately!

Above is a summary graphic of the weeks scheduled economic data releases.

[Click here for updates on Futures vs. Fair value, http://www.cnbc.com/id/17689937]. 

On the 25th, after the close, Transocean, ticker RIG reports eps;  Shares have gone from roughly 43.14 to 17.01 in the past 12 months (they have also recently announced a major cut to their dividend). I believe the stock could move up or down by 1.50 per share immediately after its eps report.  Perhaps its time for RIG to stop declining, and to begin a new bull run?

I would suggest that perhaps 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 any particular “hype stock” just before eps are released; Placing the trade just a minute or two before the close (3:00PM Central Time) on its earnings release date (if it reports that day after the close, or the next morning before the opening bell).  It certainly is amusing to see what happens to hype stocks just after their eps releases in the aftermarkets and on the first full day of trading post eps.  Most sink fast!  

“Hype stocks” to me would be e.g. GOOGL, TSLA, PCLN, P, FB, AAPL, LNKD, AMZN, EBAY, NFLX, TWTR, BABA, GPRO, and Z, and also what I would describe as “Big Momentum Players” such as e.g. CMG, GMCR, AZO, V, and MA etc. (a sub group of hype to me).  This list of Hype and Big Momentum Players is just off the top of my head, and is in no particular order, nor is it any particular science for choosing these types of volatile securities.  RSX, GREK, PGAL, EWI, EIRL, EWP, TUR, FXI, EWZ, and CUBA are also very volatile etfs found in places worldwide with high geopolitical risks.  West Texas Intermediate matched by the etf USO is also a very volatile etf to trade as of late.

I will continue to reiterate that I’m currently bullish on the major U.S. stock indices.  I believe a theme of higher crude oil prices will potentially materialize over the next few weeks, if not becoming more of a longer term theme, for the next year, if not longer.  I also believe that Greece has bought itself another 4 to 6 months (starting Feb. 20th) before anyone has to really worry about its ability to repay interest and principal on its debt.  Also, if Russia ever stops sabre rattling that would be the next catalyst for the markets to move higher.  If oil moves higher I believe that will bode well for energy sector shares, and for the stock indices in general, bring about higher prices still.  I also think that investors may begin selling longer duration and longer maturity fixed income of all kinds, and with the proceeds they may purchase stocks, resulting in higher yields on fixed income, and also higher stock prices.  Higher energy prices may bring about higher monthly CPI-U inflation figures, resulting in a fixed income sell off, and higher interest rates, over the next 6 to 12 months, if not for the next 36 months.  Interestingly, I believe that the higher credit quality fixed income may sell off more than the lower credit quality fixed income.  I would base this upon the unprecedented sovereign yields worldwide and in the USA.  To me, this means that Treasuries at the long end, may suffer great losses as rates “normalize.”  For 2015 I am most bullish on equities and the S&PMidCap400, the S&P500, as well as the DJIA. The DJIA has the lowest PE Multiple among all the major U.S. Indices currently.  I am also bullish on Financials (including XLF), REITs (particularly Hospital REITs such as HCP, HCN, SBRA, OHI, NHI, and/or the etf ICF), and the “Big Tobacco” (e.g MO, PM, RAI, BTI, etc.) sectors;  In fixed income I like high yield etfs e.g. EMB, PCY, JNK, HYG, and QLTC (it may be a great time to snatch up some CCC rated fixed income!).  Options can be used to “hedge” fixed income ETFs as well, in strategies such as level one covered call writing (of e.g. at-the-money monthly calls).  I believe the best thing to do is to trade long term deep in the money LEAPS calls on stock indices, combined with very high allocations to high yield fixed income (along the lines of 10 to 20 percent in index options, and the remainder 80 to 90 percent in high yield fixed income).  If the JPM EMBI (matched by etf ticker: EMB) is good enough for high allocations of fixed income of the Yale and Harvard Endowment funds (and other large time institutional entities) then why trade Treasury Securities?  I think people (or any entity) who buy Treasuries are “ripping themselves off!”  Treasuries to me, generally speaking are for short term investing, and maximum preservation of capital.  To me all fixed income with maturities over 10 years are extremely dangerous, the interest rate risk right now is very real even including Treasuries.  The only type of Treasury I’d endorse right now is short term (0-5 years to maturity) inflation linked TIPs, via etf ticker STIP.  All high yield fixed income indices (which are BB rated) have, over the long run, always closed at a new all time high every 18 rolling month period.  Consequently, every or any time that high yield fixed income indices are trading well off their all time highs, I’d view it as a major buying opportunity!  Happy Trading!

By Andrew G. Bernhardt

Friday, Feb. 13, 2015 – “STOCKS RALLY ON WALL STREET!”

Weekend Update & On Friday, February 13, 2015

“STOCKS RALLY ON WALL STREET!”

STOCKS GAINED GROUND ON FRIDAY & FOR THE WEEK! Friday saw most major U.S. stock indices increase by about +0.260% to +0.75%.  Volatility, as measured by the VIX imploded, and decreased by -0.65 points or -4.24% to 14.69. The DJIA +46.97 points or +0.26% to 18,019.35; The S&P500 +8.51 points or +0.41% to 2,096.99; The S&PMidCap400 +7.93 points or +0.53% to 1,502.78 (a new all time high).  See the graphic below for daily and past 5 day performance of the U.S. Major Stock Indices.  In fixed income Friday, long term treasuries sold off, while the entire high yield sector of U.S. Corporate and Sovereigns rallied by about +0.14 to +0.28%.  See the graphic below to see how fixed income faired Monday.  I continue to believe the major U.S. stock indices will soon plow through previous all time highs, by three to four percent, before taking a few steps back, before making another advance higher.  I believe the only thing that could delay this would be pessimism on Greece and also on Russia’s sabre rattling against its neighbors.  Germany is likely going to “bail out” Greece again;  They’ve got too much to lose if they decided not to bail out Greece.  If these issues can be resolved, the markets would in my view, move higher strongly.  I continue to remain bullish, and I believe energy shares and crude oil will trade in a volatile range, but will trade higher given a month or two or more, which I believe will lift all major U.S. Stock Indices to new highs; as it will certainly bode well for the energy sector’s shares, which represent about ten percent of all major broad based stock indices.  Lastly, I think that higher energy prices will bring “hot” (meaning higher than usual) CPI-U monthly figures over the next 12 months to 18 months, which will put upward pressure on fixed income yields across the entire yield curve in the open market, particularly in the Treasury long term and intermediate maturity sectors.  I believe it’s safe to say we’re going to be in a reflationary environment in the next 12 to 24 months.  The average monthly CPI monthly increase has been approximately +0.20% historically in the past;  Since oil’s “demise” (of late June 2014) month to month CPI figures have been quite low, closer to zero, if not negative.  As energy prices (primarily light sweet crude oil) rebounds, I’d expect the monthly CPI-U figures to come in “hot” at nearly twice to three times the historical average, at literally +0.4% to +0.6% month to month for a while.  Treasuries are (by a two to three weeks) off prices of nearly unprecedented highs, due to unprecedented low yields that were struck.  Thirty year zeros are down by -11.42% off their all time highs as measured by etf ZROZ, and I believe they’ll never see those highs again, or at least, for many many years.  Conventional thirty year Treasury bonds are down by -7.44% off of their price peak, as measured by the etf TLT, which also may never see its highs again, or at least for a very long time.  Interest rates were at historical and unprecedented low yields!  Long term (and intermediate) Treasury yields have nowhere to go but upwards, which will bring Treasury prices down further, due to higher and higher yields.  High yield fixed income is not at unprecedented low yields, and therefore, may not sell off as strongly as Treasuries, given equal maturities.  I fear most for long term maturities and their investors, the interest rate risk is a real risk to be wary of.  Higher or “hot” CPI-U monthly figures could also put pressure on the FOMC to raise rates, perhaps as early as this summer.  The CPI can be greatly influenced by volatile energy (as in light sweet crude oil) prices.  Higher yields at the short end (raised by the Federal Reserve) are likely to push rates up across the board, in intermediates and long term Treasury yields.  I wouldn’t be surprised if long term Treasury Securities saw negative total returns over the next 36 months (until about February of 2017 to February 2018).  I believe, long term maturity Treasury bond investors (and perhaps intermediate Treasury note investors) are in for “A BIG SURPRISE(!!!),” called negative total returns over the next three years, as rates begin to “normalize” in the USA.  I believe investors will be totally shocked at how much can be lost in a Treasury bond as rates increase.  If rates rise by 200 basis points at the long end, there could literally be 30% losses for Treasury bond investors.   Additionally, there could be nearly literally 60% losses for 30 year Zeroes in the Treasury Bond market if interest rates were to increase by +200 bp.  Interest rate risk is measured by duration.  Swim at your own risk!

[Click here for current Yields on Treasury Securities, http://finance.yahoo.com/quotes/^IRX,^FVX,^TNX,^TYX]

Stocks for the Week

Feb. 13, 2015, Major U.S. Stock Indices

Index PE Multiples and Index Yields

[http://finance.yahoo.com/futures  Click here for an energy prices update] Today we saw USO an etf of West Texas Intermediate increase by +2.29% to 19.62; USO is now -50.25% off its peak of the past 12 months; reached in late June ’14;  USO is also +20.37% off rock bottom, set on January 29th at 16.68.  I believe oil will remain very volatile, perhaps an options strategy called an at-the-money straddle using two week out expirations could prove to be very lucrative; I believe oil is going a lot higher (maybe another 10% or more), and soon (over the next few weeks).  I would base this estimate of mine on the oil-VIX which is very elevated right now.  If the oil-VIX implodes, it will bring higher oil prices.  Another strategy that could prove to be lucrative for options traders would be a long bull call ratio back spread on USO.  Still another trading opportunity may be to initiate a protective married put trade on USO, selecting two weeks into the future as an expiration for the put, and purchasing a put that’s “one notch” in the money. Friday saw light sweet crude oil trade higher by 1.57 per barrel, or +3.10% to $52.78 per barrel.  Higher oil likely sent the Russian stock market (as measured by the etf RSX) up by +2.21% to 18.05; RSX now stands -33.27% off its peak of the past 12 months, while also now trading at +44.40% off rock bottom.  [Click here for an Oil-VIX chart & update http://data.cnbc.com/quotes/.OVX]

Select Quotes of Interest, Feb. 13, 2015

In the Fixed income markets, see the graphic above to see how Treasury etfs traded (ZROZ, TLT, IEF, TIP) and how high yield etfs traded (U.S. dollar denominated high yield sovereigns being etfs EMB and PCY; As well as high yield corporate fixed income etfs being HYG, JNK, and QLTC).  The 30 year Treasury Bond yield closed at 2.63%, and the 10 year Treasury Note yield closed at 2.02% [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 as oil stabilizes and remains in a trading range, and continues to appreciate, that there will be some major opportunities in the energy sector in equities, and in the energy sector’s high yield fixed income, as well as in high yield fixed income indices; Also I continue to believe that oil as stabilized (and if it continues 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.  When higher energy prices materialize in the future, inflation could pick up as measured by the CPI-U, which may or could send e.g. Treasury Security yields higher, while also pressuring the FOMC to raise rates at the short end.

King Dollar has seemingly returned, which I believe will lead to a higher U.S. trade deficit, and a higher quality of living for those in the USA, as our dollar will be able to purchase more abroad, effectively “importing deflation” a disflationary pressure. The U.S. Dollar can now be exchanged for a Euro at a cost of approximately $1.1420, and also can now be exchanged for 62.4350 Rubles.  [http://finance.yahoo.com/currency-investing  Click here for an update on all major cross rates]

Here’s a list of all the Economic Data due for release next week

(Minutes of the FOMC, due the 18th, will be the most fun to examine)

I believe the catalyst for this week’s stock market gains involved Greece and speculation that Germany is going to bail them out, yet again;  Investors are worried about a possibility of a “Grexit,” meaning that Greece may exit the Euro Union and/or the Euro Zone, and halt its use of Euros, etc.  However, the European Union likely will put pressure on Greece to stay in the Euro, since its invested so much into bailing it out already.  I believe that Greece will be pressured to remain in the Euro Zone and that the markets will press on higher as that news is released;  Shares in Greece gained ground strongly Friday, as pessimism dissipated in anticipation of a German Bailout.  An etf of Greek stocks (etf ticker GREK) increased by +5.08% to 13.65.

[Click here for updates on Futures vs. Fair value, http://www.cnbc.com/id/17689937]. 

The next most exciting earnings report will be PCLN, next week.  Get ready, and fasten your seat belts… This stock is the epitome of HYPE!  It could well move over by ±50 to ±52 dollars per share, just minutes after its eps release.  I believe it could increase by 50 bucks just minutes after its eps release.  Shares closed at $1,091.95 per share on Thursday, and at 1003.37 on Friday.

I believe that a married protective put trade on PCLN could prove to be very lucrative, as PCLN is trading, as of the close Friday, at 1,003.37, and the 1005 February Week 4 put is trading at 32.40!  As long as PCLN trades up by more than the cost of the put (on or before expiration of February 27^th), the trade would be profitable.  32.40 per share is just 3.23% of the price of the shares, and also represents the maximum loss on the trade (minus the amount that it’s already in the money, roughly 2 bucks!), if PCLN were to collapse all the way to zero.  (32.40-1.63)/1003.37 is the max loss, which is 3.06% (the cost of the protective put, relative to the current share price); So long as it rises by that amount before expiration the trade here would be profitable.  I continue to believe that PCLN could move up or down by roughly $51 dollars during the week of February 16, 2015.  It might move more than that.  It could move up all week prior to eps, and then gap open to the upside by 51 dollars the morning after eps release, and then PCLN could continue to move up for a whole extra week, or longer.  It’s anyone’s best guess.  I am convinced there will be an instant 51 dollar or more move the morning after eps release.  I’d estimate, that it will take the whole technology sector upwards with it.  GOOGL and the Nasdaq Composite (and the Nasdaq 100) could be the primary beneficiaries of a good eps report from PCLN.  A married protective put trade on GOOGL could also prove to be very lucrative.

I would suggest that perhaps 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 any particular “hype stock” just before eps are released; Placing the trade just a minute or two before the close (3:00PM Central Time) on its earnings release date (if it reports that day after the close, or the next morning before the opening bell).  It certainly is amusing to see what happens to hype stocks just after their eps releases in the aftermarkets and on the first full day of trading post eps.  Most sink fast!  Some actually rise after eps reports, AAPL and some other totally Glamorized Tech Stocks are notorious for this.

“Hype stocks” to me would be e.g. GOOGL, TSLA, PCLN, FB, AAPL, LNKD, AMZN, EBAY, NFLX, TWTR, BABA, GPRO, and Z, and also what I would describe as “Big Momentum Players” such as e.g. CMG, GMCR, AZO, V, and MA etc. (a sub group of hype to me).  This list of Hype and Big Momentum Players is just off the top of my head, and is in no particular order, nor is it any particular science for choosing these types of volatile securities.  RSX, GREK, TUR, FXI, EWZ, and CUBA are also very volatile etfs found in places worldwide with high geopolitical risks.  West Texas Intermediate matched by the etf USO is also a very volatile etf to trade as of late.

I will continue to reiterate that I’m currently bullish on the major U.S. stock indices.  I believe a theme of higher crude oil prices will potentially materialize over the next few weeks, if not becoming more of a longer term theme, for the next year, if not longer.  I also believe and would reiterate that the geopolitical risks involving Greece’s sovereign debt and interest payments will be resolved, and also that Russia may stop sabre rattling soon.  This will bring about higher prices for stocks, and for all major U.S. stock indices, which could reach new all time highs very soon.  I also think that investors may begin selling longer duration and longer maturity fixed income of all kinds, and with the proceeds they may purchase stocks, resulting in higher yields on fixed income, and also higher stock prices.  I also believe investors will “go on a dividend hunt,” and/or will “go on a financials hunt” with their raised cash from any potential future fixed income selling.  Higher energy prices (of light sweet crude oil and/or west Texas intermediate) may bring about higher monthly CPI-U inflation figures, resulting in a fixed income sell off, and higher interest rates, over the next 6 to 12 months, if not for the next 36 months, as rates normalize in the USA (and potentially elsewhere in other nations).  Interestingly, I believe that the higher credit quality fixed income may sell off more than the lower credit quality fixed income.  I would base this upon the unprecedented low sovereign yields worldwide (which in some countries are literally negative) and in the USA.  Also I am estimating the USA will be entering a reflationary (meaning accelerating inflation) environment over the next 12 to 24 months.  My projection of a reflationary environment will be offset by I believe a stronger dollar because I believe that “King Dollar” has returned!  I’d also expect consequently a higher trade deficit, as imports become cheaper and more appealing, increasing standards of living for all U.S. Dollar denominated investors and consumers worldwide.  To me, this means that Treasuries at the long end, may suffer great losses as rates “normalize.”  For 2015 I am most bullish on equities and the S&PMidCap400, the S&P500, as well as the DJIA (which has the lowest PE Multiple among all the major U.S. Indices).  I am also bullish on Financials, and REITs (particularly Hospital REITs such as HCP, HCN, SBRA, OHI, NHI, due to their strong dividends, and historical dividend growth), and the “Big Tobacco” (e.g MO, PM, RAI, BTI, etc., due to their strong dividends, and historical dividend growth) sectors;  In fixed income I like high yield etfs e.g. EMB, PCY, JNK, HYG, and QLTC.  Options can be used to “hedge” fixed income ETFs as well, in strategies such as level one covered call writing (of e.g. at-the-money monthly calls against the fixed income ETFs).  Trading very deep in the money call options (with expirations two or three years into the future) on stock indices, combined with very high allocations to high yield fixed income could prove to be a great lucrative strategy if rebalanced annually;  Selling weekly or monthly expiration, slightly out of the money calls by e.g. 1.5%, against the long calls, could also prove to be very lucrative; Effectively morphing the trade into a level three long diagonal bull call debit spread.  If the JPM EMBI (matched by etf ticker: EMB) is good enough for the fixed income of the Yale and Harvard Endowment funds (and other large time institutional entities) then why trade Treasury Securities?!  I think people (or any entity) who buy Treasuries are “ripping themselves off!” (even when rates are not forecast to increase)  Treasuries, to me, generally speaking, are for short term investing, and maximum preservation of capital (I believe, this may only be achieved with short term Treasuries going forward for a year, or two, or longer- as I believe interest rates, and the CPI-U inflation figures will increase faster than expected, and faster than is the historical average going forward over the next year).  I’d estimate that the CPI-U may increase by roughly +3.60% to +4.20% over the next 12 months (February 2015 to February 2016).  It may be a great time to invest in TIPS (Treasury Inflation Protected Securities, at the short end) via etf ticker STIP (for maximum preservation of capital style investing; STIP (short term Treasury Inflation Protected Securities, TIPS) is the only kind of Treasury Security I’d endorse right now, and only for maximum preservation of capital style investing).  Interestingly, all high yield fixed income indices (which are BB rated) have, over the long run, always closed at a new all time high every 18 rolling month period.  Consequently, every or any time that high yield fixed income indices are trading well off their all time highs, I’d view it as a major buying opportunity!  Happy Trading!

By Andrew G. Bernhardt