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6 Mar

Long-Term Report For Monday March 6, 2017

by

Good morning,

Stocks reached to another record weekly close, with the DJIA, S&P 500 and NASDAQ closing at 21,005.71 (+0.88%), 2,383.12 (+0.67%) and 5,870.75 (+0.44%), respectively, on moderate volume.  The DJTA closed up, as well, with a 0.74% gain for the week, but the index failed to close at a record weekly close.  The Russell 2000 closed nearly unchanged.

The VIX closed below 11, once again, to 10.96.  And here’s the anomaly I found this week between stocks and the VIX.  Look at the chart of the DJIA and VIX, below.

 

Notice the 300-plus-points move higher in the DJIA, and the modest drop in the VIX.  The VIX barely moved lower from such a big move higher in the DJIA.  Now look at the subsequent two days of trading, when the DJIA traded modestly lower.  Compare the price action in the DJIA with the VIX.  Why would the VIX plunge on Thursday and Friday on the days the DJIA moved more tamely, but only dropped marginally lower on a 300-plus-point move on Wednesday?

Answer: unadulterated market manipulation.  The options market is being gamed.  By whom?  Central banks.  

And when I witness the concurrent anomalous price action in the bond, stock and gold markets, instead of Adam Smith’s ‘invisible hand’ at work, I feel the ‘invisible hand’ of central banks at work in these markets.  You’ve heard this talk of manipulation (or managed—the polite word) from me before, and probably from many other traders and analysts, as well, but when the talk on Wall Street this week included comments made by Jeffrey Gundlach of DoubleLine, who told Reuters that stocks are “out of sync with the stealth flight to safety,” Gundlach avoids the issue of central bank manipulation.

Read: 80% Of Central Banks Plan To Buy More Stocks

For weeks, ‘smart money’ has been moving out of stocks and into safe-haven assets, such as US Treasuries, German Bunds and gold, with German sovereign debt yields “leading the way down,” Gundlach stated in an email to Reuters.  He also points out the recent relative strength in the dollar-gold price as another sign of a flight to safety in progress.

As I said, last week:

Safe-haven buying is all the rage right now until we get more clarity about France’s political situation.  In the meantime, Dow Theory tells us to stay long US stocks, as dividend-paying stocks make as much sense as holding US Treasury.  Doesn’t it?

Several big hitters came out this week to talk about their thoughts on this relentless move higher in stocks.  In addition to Gundlach, David Tepper, David Stockman and Warren Buffett chimed in with their views of where stocks and bonds are headed, but not one of of these big names emphasized the market volatility awaiting traders if the populist wave appears to gather momentum in Europe in the coming days, in the election of prime minister of The Netherlands, and in coming weeks, in the presidential race in France.

In short, Gundlach told Reuters he’s bearish on stocks; Tepper is bullish; Stockman is bearish; and Buffett is coy, saying in a CNBC interview that stocks are “on the cheap side,” when compared to the alternative yields in the bond market.  But, the 86-year-old founder of Berkshire Hathaway also said there is the risk stocks “could go down by 20% tomorrow.”  

I guess I can take Buffett’s warning to mean stocks are not cheap if interest rates rise further.  The US Treasury two-year note closed the week at a yield of 1.31%, and the 10-year at a yield of 2.48%.  And if you noticed, as I did, the yield on the two-year note soared by 20 basis points this week, following comments made by Fed Chair Janet Yellen this week that suggest she is determined to raise the Fed funds rate on March 15.  

Keep that date, March 15, in your mind.  But first, I want to show you what happens when the Fed enters a rate rising cycle.  Review the chart of the Fed funds rate, below.   

 

Note: Gray vertical stripes denote recessions.  The chart shows includes data from 1964 through 2014.

As you can clearly see, every time the Fed embarks on a rate-rising cycle, bad things happen to the economy.  What’s obvious from the chart is, that the US economy is thrown into recession almost every time the Fed tightens money supply, and, of course, stock prices go into recession, too.

Now the Fed promises more rate hikes this year.  With today’s market trading at an S&P 500 Shiller p/e of 29.36, what could go wrong?  Right?  Well, a lot could go wrong.  

Let’s touch back to the date March 15.

Okay, on March 15, the Fed will make an announcement on rates.  Fed funds futures show a 95% chance of a rate hike coming in only nine days.  

On March 15, The Netherlands closes its polls for the election of a new prime minister.  Anti-EU candidate, Geert Wilders, is favored to win, a potential catalyst for bumping poll numbers higher for French presidential candidate and anti-EU candidate, Marine Le Pen, who, if elected, could throw financial markets into turmoil.

Now comes the third event, scheduled for March 15: the US spending ceiling.  I’ll present this week’s widely disseminated quote by Reagan administration OMB director, David Stockman, who told Fox News correspondent, Neil Cavuto:

There is going to be a debt ceiling crisis like never before this summer and that’s what people don’t realize. They’ve burned up all the cash that Obama left on the balance sheet for whatever reason.

I think what people are missing is this date, March 15th 2017.  That’s the day that this debt ceiling holiday that Obama and Boehner put together right before the last election in October of 2015.  That holiday expires.  The debt ceiling will freeze in at $20 trillion.  It will then be law.  It will be a hard stop.  The Treasury will have roughly $200 billion in cash.  We are burning cash at a $75 billion a month rate.  By summer, they will be out of cash.  Then we will be in the mother of all debt ceiling crises.  Everything will grind to a halt.  I think we will have a government shutdown.  There will not be Obama Care repeal and replace.  There will be no tax cut.  There will be no infrastructure stimulus.  There will be just one giant fiscal bloodbath over a debt ceiling that has to be increased and no one wants to vote for.

Stockman has been making the rounds with his warning of what may happen on March 15.  In addition to his appearance on Fox News, Stockman was also interviewed on Greg Hunter’s program, USAWatchdog, wherein he painted the same dire picture, but added more detail.  

And get this, according to Stockman, under the law, an impasse between the White House and Congress regarding the budget legally ends with the president picking and choosing which bills are paid from incoming tax receipts each month.  

I’m not going out on a limb, here, but I believe President Trump may not mind taking control of the federal budget for a while.  If the US budget is not agree upon, how will that exertion of power by the new president go over with the ‘fake’ news outlets?   

Calls for impeachment will most likely result.  Could all of this happen?  Who knows?  Stranger events have already happened.  

In the case of Stockman’s scenario, I’m not even sure if the media will be talking about the nuances of the US budget as we approach March 15.  Maybe the media will go dark on the subject, but you should know what’s happening in Washington on that day, as June 30 is the day that Washington could shut down.  

Remember, a Washington shut down happened before, once on November 14, 1995, and again on October 1, 2013.

In any event, we have three events on March 15 that warrant your attention: Dutch election, FOMC meeting, and beginning of the federal budget ceiling.  Let’s see how the markets cope this week.  Stay long, hedge your ETF portfolio, and remain vigilant.

Okay, let’s talk about the stocks I’m watching now.  

This Week’s JBP Stock Ideas

My current portfolio: LQMT, CROX, LC, ANGI and GRPN

On March 1, I alerted that I sold 1,000 shares of WTW at $14.40, for a $2,000 score.  I was in and out of WTW without even seeing the company’s earnings.

On March 1, I alerted a sale of KNDI at $4.05, a $10,000 loss.  The stock just didn’t attract the buyers during the month of February.  

On March 2, I alerted the purchase 5,000 shares of GRPN at $4.24 per share.  Buyers are showing up, which is what I was waiting to see before jumping in.  I’ll be holding GRPN for a few months.  My target price is $8.00.

MY WATCH LIST

SIENTRA (SIEN)

Sientra (SIEN), a maker of silicone breast implants and a budding successful turnaround story from an unfortunate factory stoppage at its third-party manufacturing facility in Brazil, Silimed Industria de Implantes Ltd.  A little more than a year ago, due to a European regulatory agency issuing a marketing suspension of all products made at the Brazil plant, after flaws were found in some silicone implant products made at the facility, trouble came to Sientra, but through no fault of theirs.  

Although Sientra manufactured implants at the plant employed production standards approved by the US FDA, and were independent of other processes at the facility, Sientra voluntarily suspended operations in September 2015 until a third-party inspector verified Sientra’s implants were not among those produced by the methods of other Silimed customers exporting to the European market.  

Following the news of Sientra’s voluntary production suspension, the share price of SIEN crashed to as low as $3.34 by mid-November, from a high of $26.67 reached in late-June.  

As a result of the work stoppage, Sientra’s revenue plummeted in Q1, Q2, Q3 of this year to a fraction of the company’s Q3 2015 peak sales performance.  But since the stock’s November low, SIEN is coming back steadily following an announcement in early-February 2016 that stated the Brazilian plant is again operating and shipping product.

Previous customers who suspended orders to Sientra are coming back to the company, who, at the height of Q3 2015, supplied between 7% and 12% of all implants to a US market, with estimates ranging from $200 million and $300 million per year of revenue, and growing.

On December 5, 2016, SIEN soared to as high as $10.22 (27.6%), following a news release by the company of an FDA pre-market supplement (PSA) approval for the company’s four new implant styles and shapes.  These new products will be added to its present line of nine offerings.  The company expects to begin delivery of the four new implant in Q4 2017.

My take: I like the stock for its hidden future trend of higher revenue, as the results of a survey conducted by the company of the customers affected by the work stoppage at the Brazilian plant indicated that nearly all customers expect to order Sientra products again when they become available.  

And there is a good reason for this nearly-perfect positive response.

First, Sientra is the only company of the three operating in the US (the other two: Mentor, Natrelle) who offers a two-year guarantee against ‘capsule contracture’, an issue of primary concern of most patients and surgeons.  Sientra’s rate of contracture is, indeed, the lowest of the three makers.  And the company also hold the distinction of offering implants with the lowest in incidents of rupture.

This is a big deal, as far as I’m concerned.  Imagine if you were undergoing an implant procedure.  Wouldn’t you want an implant with the highest reputation of product safety?  Of course, you would.

Second, patients report that Sientra implants feel more natural, which is definitely another big win for Sientra.

In short, Sientra’s implants are best of breed, which weighed heavily on my decision to engage this stock.  I expect revenue to regain the $10 million-plus per-quarter level.

Read Sientra’s Quick Fact Sheet

ABOUT SIENTRA

Sientra, Inc., a medical aesthetics company, develops and sells medical aesthetics products to plastic surgeons and patients in the United States.  The company offers a portfolio of silicone gel breast implants for use in breast augmentation and breast reconstruction procedures; and breast tissue expanders.  It also provides body contouring and other implants, including gluteal, pectoral, calf, facial, nasal and other reconstructive implants.  Sientra, Inc. was incorporated in 2003 and is headquartered in Santa Barbara, California.

Source: Finviz.com

Until next time…

Trade Wise and Green!

Jason Bond

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