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.

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