22 Aug

Monday August 22, 2016


Good morning,

A weak U.S. dollar overshadowed a strong rally in the oil price, slowing the rise of stocks this week.  At the bell on Friday, the DJIA, S&P 500 and NASDAQ closed nearly unchanged for the week, though the NASDAQ’s tiny 0.10% rise was good enough for another record close for the technology-laden stock index.

After rising as high as 13.71 points on Wednesday, the VIX closed the week at another sub-12 point reading of 11.43, the fourth successive weekly close below 12, a consecutive string of which has not occurred since 2006.

While stocks meandered within a 1.1% range throughout the week, West Texas Intermediate Crude (WTIC) traded ferociously higher by $4.62, up 10.38%, to close on Friday at $49.11 per barrel.  WTIC has registered three consecutive weeks of higher prices, moving up a whopping 25.3% from the $39.19 low of August 3.  

The fight in the oil market this coming week may be waged at the $50 level, a formidable barrier for crude to breach since October 2015.  

I should note the insidious rise in commodities prices since the Commodities Research Bureau Index (CRB) bottomed on January 19 at 154.85.  With Friday’s CRB Index close of 188.78, the weighted basket of energy, industrial metals, precious metals, livestock and food commodities has risen 21.9% from the January 19 low.  Therefore, I expect higher inflation readings in the coming months, as these higher across-the-board prices make their way through producer prices and, ultimately, consumer prices.

In the currency markets, as I noted, the U.S. dollar slid this week by as much as 1.88% by Thursday against a basket of major currencies that comprise the USD Index.  Strength in the euro (+1.40%) and yen (+1.12%) led the USD Index lower by 1.25% to close the week at 94.48.  The yen passed 100 yen to one U.S. dollar this week, a first since May 2013.

The U.S 10-year Treasury closed seven basis points higher to close at 1.58%, a 21-basis point rise from the low of 1.37% of July. 8.  Though this move higher in rates may not appear to be very significant, I think the 21% rise in commodities prices since mid-January may prevent the Fed from keeping the 10-year rate low for much longer.  It’s possible that the bond market may be fighting the Fed already.  It’s also very possible that we’ve seen the low in the 10-year rate, barring, of course, a stock market meltdown.

In the precious metals market, the gold price rose marginally by $3.00, or 0.22%, for the week, while the silver price went the other way, falling $0.39, or -1.96%.  Both metals did manage to close above their respective 50-day moving averages.  With a weak U.S. dollar and a very strong crude oil rally this week, the relatively poor performance for the two metals, especially silver, puzzled me.  But, then again, central banks are still meddling in the precious metals market, and this may explain the counterintuitive moves in the metals against a meaningfully move lower in the U.S dollar.

And to add to the mystery of this week’s disconnect between the U.S. dollar and oil when compared with the precious metals market was the price action of the shares of Deutsche Bank (DB), which ended the week with a $0.70 drop, or -4.91%.  

In the past, higher oil prices elicited strong bids concurrently for bank stocks, especially bids for beaten down and troubled banks, as Deutsche Bank has been for some time.  

I’d like to see if the anomaly between what I expect to see in the price of DB and what I get in the coming weeks continues.  Because, if DB doesn’t recover on days it is expected to recover, the bank may be close to experience another free fall in the stock price.  That’s when I go completely defensive, or maybe even go short the major indexes and long the VIX.  I’ll let you know in an Emergency Alert of what I’m doing if DB breaks sharply lower, below $10.

Okay, here’s what’s on my mind.  We’re approaching September, historically the worst month of the trading year.  A complication arises during a presidential campaign year, a period when stocks typically “behave” in the month of September while candidates push to the finish in November.  So, historically, this September’s trade may turn out better than off-election-year September months.

On the other hand, the Trump candidacy adds to the problem I’m having with coping with this unusual market.  I seriously believe the medical problems Hillary Clinton has been exhibiting are a very real, but the established order fears Trump’s brazenness.  As we know, or should know, big business, banks and the nation’s vast military complex control politicians, key appointments, foreign policy and the parties, themselves.  And if that raises your eyebrows, a study of what happened to Henry Wallace during the 1944 Democratic National Convention may lower your brows back.  

And I want to stress one point before I add meat to my thoughts regarding this political season, or any political season, which is: the only candidate I like is a candidate who puts money in (or doesn’t take money from) my pocket due to my trading activities.  That is where my political activism starts and stops.  Fair enough?    

So, what must these powerful people be thinking about Mrs. Clinton’s health?  

We can almost be assured of some kind of crisis, either financial or geopolitical, will be arriving in the coming four years.  I expect some sort of “reset” in currencies during the next president’s first term.  Therefore, which candidate is more likely to communicate a crisis effectively to the American people to affect as much domestic stability as can be achieved during a real crisis?

In other words, will Mrs. Clinton be able to do the job on behalf of her real bosses?  

Until now, I wanted to leave politics out of my newsletter, but this presidential race (and, at this particular time period) has me wondering if the most important but, lately, mirage of economic vitality in the U.S., the stock market indexes, may suddenly conspire against Mrs. Clinton by September or October, if indeed the powerful people who fund both of these candidates don’t believe they’ll get their money’s worth from one of the candidates, which in this case is Mrs. Clinton.  

I see the media reporting about her health, lately, and has me wondering about what the big boys are thinking about their horse.    

And if you believe Donald Trump is as capricious as his rhetoric has been during the presidential primaries and afterwards, think again.  Trump is much more pliable with more powerful people than himself than, say, a Ron Paul.  Ron Paul was a once-in-a-lifetime true reformer.  Trump is definitely not in the same league as Ron Paul on that score, in my opinion; Trump will most likely work the middle of the road on critical issues and be very strident on issues of less importance to the real power of the vast military industry, banks and multinational corporations.  He’s a lot more thoughtful than he sounds on the campaign trail.

So, be cautious with your index trading.

Okay, enough of that.  Let’s get back to the business of my picks.

This Week’s JBP Stock Ideas

This week, the price action of my picks was very kind to me.  As I alerted on Friday, I sold 500 shares of BEAV for a 5% profit, or a $1,000 gain to my portfolio of cash.  

And my patience with FNMA paid off.  After Monday’s $0.14 move higher (+7.9%), I was whetting my appetite for a trade out of FNMA following an attempted assault of the 50-day moving average (MA).  Tuesday’s tease of just shy of the 50-day MA indicated to me the next substantial move in the stock price is likely to pierce the 50-day MA.  And Friday was the day I knew my gut for reading into the short-term sentiment of the market for FNMA was accurate.  After the stock price moved through the 50-day moving average, I waited for a follow through to the upside.  None came, and the stock fell below the 50-day MA, quickly; so I sold FNMA for 5% profit and another $1,000 to stack on my cash holdings.

As I also mentioned in my Friday Alert, I like FNMA as a long-term hold, especially at prices that may come along the way along with a much better VIX reading.  Here are a couple of examples of how I think about this trade.  If, say, FNMA doesn’t budge in price much while the VIX moves up to near its 200-day MA, presently at 17, I’ll get excited and wait for some sort of capitulation from that point to buy during panic selling.  

This scenario is my ultimate trade scenario, but, realistically, a move in FNMA back to the $1.70 area would be another time to raise my weapon and prepare to strike, along with a much better VIX reading, of course.

These are the two scenarios I’d like to see before pulling the trigger on FNMA again.

In all, I feel very satisfied with the BEAV and FNMA scores during a time of low volatility in the overall market.  

When the market is more volatile, the profits are not as difficult to come by; it’s when times are tough and I’m able to hang in there and still make a living is the time of gratitude after some hard research work, years of experience, and patience paying off.

And the good times kept coming this week with the two positions I have on with EURN and GLUU.  Both stocks were up strongly this week.  EURN, as I expected, did rebound from the mid-$8 level.  With the Euronav’s final half-year financial results expected on August 25 and a huge rally in the oil price this week, EURN had no where to go but up, convincingly taking out the 50-day MA to the upside and clinging to the average throughout the week.  

At one point on Monday, EURN reached $9.20, so I think I’ll hold for a while longer and monitor the action at the 50-day MA.  The oil price is in an uptrend, driven by the sentiment in the currency markets of a topping U.S. dollar, so EURN may benefit greatly from this macro undercurrent in the coming weeks.

And so far, no word from the company about shares it may have bought back in early August.  I suspect the company did not buy any shares, because the last time the company bought shares during a buyback operation, the announcement of the activity came within one week of the purchases.  So, during the first three trading days of August, when the share price reached $8.40 many times during these three days of trading, I expected an announcement of a buyback during this past week.  There have been no announcements.  Good.

The share price of GLUU closed in the green for me this week, as well.  I’m looking for a test of the 50-day MA at approximately $2.33, six cents from Friday’s close of $2.27.  I’m targeting $2.50 as a level to reevaluate my 10,000-shares holdings of GLUU.  I’ll let you know if/when the stock reaches $2.50.

There was no news about the company this week.

Okay, let’s wrap up this week’s newsletter with a report of another billionaire and successful money manager who’s “spooked” about the level of the stock indexes, along with me.  If you didn’t catch the news, Paul Singer of Elliott Management interviewed on CNBC on Thursday.  

Singer’s track record has shown to have beaten the S&P 500 by approximately 500 basis points (5%) since 1994!  Okay?  This guy is no slouch.  Here’s what zerohedge.com wrote about the salient point of the Singer interview:

[Singer warned] that the bond market is “broken”, and when the unprecedented central bank actions of recent years can no longer prevent a market decline – which considering that both the BOJ and ECB are running out of monetizable bonds may be sooner than many expected – “the subsequent loss of confidence could be severe.”

During the NBC interview, Singer talked about the bond market and the importance of the health of that market has on the stock market.  And if you remember in my newsletter of August 15, I wrote a response to an email from “Stan the Man” in Liverpool, U.K., discussing the very same issue:

Q: Do you think the Fed will eventually catch up with Japan’s negative interest rate policy?

A: Good question, Stan; it’s the $64,000 question.  Isn’t it?  My short answer is: yes.  

If the U.S. bond market allows a Japan-like monetary policy, then the Fed has room.  But we have to remember that 61% of global forex reserves are held in U.S. dollars.  The Japanese yen represents only 6% of central bank reserves.  The question is: will global markets tolerate paying the U.S. Treasury for the privilege of holding U.S. dollar-denominated securities.  I doubt it.  

So, as long as the 10-year bond rate doesn’t skyrocket due to a proverbial dollar strike, stocks are supported by the yield advantage of higher-yielding blue-chip stocks over U.S. sovereign debt yields.  

Singer didn’t talk much about stock valuations during the CNBC interview, per se, because relative yields matter to trillions of dollars of U.S. pension funds.  Instead, he talked about the importance of bond market, a proxy for the U.S. dollar.  The bond market will show cracks first, then quickly will reflect on stocks.  

If the world’s bondholders will tolerate negative real interest rates, that’s one thing, but for the world to literally tolerate paying the U.S. Treasury to hold U.S. sovereign paper, that’s another.  You won’t be seeing the Chinese paying the U.S. Treasury for holding American I.O.Us.

But, I really don’t expect U.S. yields to match Japan’s yields, though the fed may try to affect that.  Japan is already experiencing blow-back in the form of rising yields (holders dumping Japanese sovereign bonds).  I think a lot of momentum traders got involved with that trade, which you won’t likely see in the U.S. bond market.

By the way, I’ve been keeping track of who’s coming out and warning of better prices in stocks to come.  

Adding Singer to the list of other “spooked” traders besides myself, including David Tepper, Carl Icahn, Bill Gross, Jeff Gundlach, Stan Druckenmiller and George Soros puts me in pretty good company.  

I’m sure all of these men haven’t stopped trading; they’ve stopped make big bets, waiting for better prices.  I, however, have an advantage in that, I’m not charged with scaling in $500 million dollars into two or three stocks, spread over a few weeks.  I can move in an out of trades quickly, in a flash.

Trade Green!

Jason Bond


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