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13 Feb

Monday February 13, 2017

by

Good morning,

Another week, another all-time record high in nearly all major stock averages.  Aside for the DJTA, the DJIA, S&P 500 and NASDAQ rallied from short covering to record closing highs following a report that President Trump announced his long-awaited tax plan is only a few weeks away.  And the VIX has closed below 11 for the fourth out of the past five week.

Note: Maybe it’s time once again to consider the short SPY/long VIX trade this week.  If we see widening spike spread moves in the SPY/VIX at the open, that may be the optimum time to place the trade.

Adding fuel to stocks was a substantially weak euro and modesty weak yen.  The bond market, too, helped socks, as the yield on the US Treasury 10-year note dropped by a healthy eight basis points to close out the week at a yield of 2.41%.  

And news of reserves at China’s central bank dropping below $3 trillion confirmed the risks associated with deploying capital into emerging markets.  

At the moment, with the BOJ showing no signs of supporting the yen; China fighting capital flight; the Europe Union on the ropes; and emerging markets crying for more US dollars to settle dollar-denominated loans, where else can global capital go?  At the moment, the US dollar appears less flawed than its rivals.  

Yes folks, that’s how bad the global economic outlook is.  If there is no place for capital to earn a risk-adjusted return, the world settles on holding US dollars.

As we recall, then-presidential candidate Donald Trump campaigned hard for his proposal to cut corporate taxes and incentivize US-based global corporations to repatriate as much as $3 trillion parked overseas.  The one-two punch of lowering corporate taxes and repatriating dollars as his plan for regrowing US GDP to 4% has been the catalyst of the three-month-long rally following his win in November.  As unlikely as the president’s proposal to raise US GDP to 4% is, in my opinion, the US is still perceived as the only game in town where lower currency risk keeps investors long US equities, bonds and commercial paper.

Following the Trump announcement during his talk with airline executives on Thursday, stocks immediately got a boost, while the gold price dropped.  On Friday, the trend continued, as the DJIA/Gold ratio settled higher for the week at 16.4, just shy of overhead resistance of 16.5.  

I think a move in the ratio above 16.5 may signal the most rally in stocks this week may have a ways to go, still.  But boy, this market is sure ripe for a shock.  Isn’t it?

As I’ve stated on many occasions in these LT Weekly reports, stocks have been trading at historically-speaking nosebleed levels since late-summer of 2015.  However, when the market takes into consideration the global alternatives at that time, through to the election, and now we learn that former Goldman president, Gary Cohn, is the chief architect of Trump’s new tax plan, we may better understand the source of the stock market rise.  In addition, the expected gutting of Dodd-Frank is a welcome move to replace eventual waning capital inflows from overseas into the US.

THINKING THROUGH THE TRUMP HYPE  

So, circling back to may first LT Weekly report of the new year, of January 3, I suggested that continued strength in the US dollar should provide a lift to US stocks to new highs, a slightly lower US Treasury 10-year note rate from the initial post-election spike to 2.6%, and higher dollar-gold prices.  I’ve been asked to square my outlook for a strong dollar and strong dollar-gold price.  How can we see a rising dollar-gold price in the face of a strong dollar?

Under normal conditions, dollar-gold won’t get a bid while the US dollar strengthens.  However, these times are not remotely close to normal.  Within the context of dollar strength emanating from the rush to a suitable global safety trade, I expect a spillover from this trade to continue this year into the gold market, as well.  Global capital seeking a hedge from declines to smaller and more vulnerable economies will most likely also hedge against systemic risk from the damage that a rising dollar creates to the global financial system.  

What I see coming is a slow, then a suddenly fast realization that the narrative of the president’s economic plan to change from “happy days are here again” to “wait, this is no quick fix” to massive global trade, capital and current account imbalances.  Essentially, the Asian currency crisis of 1997-98 was a mere dress rehearsal for what’s to come.

So what will the financial landscape look like when the narrative changes?  Legacy corporations, banks and countries will go bankrupt.  Central banks will most likely respond with more ‘QE’ to replace lost capital.  Monetary inflation will turn to consumer price inflation in food, energy and staple goods.  Durable goods production and capital spending will drop further.  The forms of capital controls that we see happening in China will come to the West.  Sounds dire, doesn’t it?

The good news is, traders make their biggest fortunes during these rolling financial and political crises.  Those stocks benefiting from rising consumer spending will not do well, while stocks of companies that provide necessary goods and services will prosper.  Which currency people hold will be as important as which stocks they hold.  Did anyone notice Duquesne Capital’s Stan Druckenmiller’s recent move into the gold market?

When asked why he acquired some gold, Druckenmiller told Bloomberg News, “I wanted to own some currency and no country wants its currency to strengthen.  Gold was down a lot, so I bought it.”

Bloomberg goes on to state that Druckenmiller bought his gold stash in December and January.  Hmm.

On January 3, I wrote:

[A] Trump turnaround, is my lead assumption to my expectations of a stronger US dollar against other currencies during the first-half of 2017, but not necessarily against gold, as gold and commodities sniff out upcoming production shortfalls amid expectations of growing demand for materials.

Recapping, in the first six months of 2017, I see higher stock prices, slightly higher bond prices (slightly lower yields), higher commodities prices, and a strong US dollar against rival currencies, but not strong when measured in the dollar-price of gold bullion.  

So, dollar-gold opens 2017 with a price of $1,151.40 per ounce.  Today, the price is $1,235.90 (+7.3%); the US Treasury 10-year note opened at a yield of 2.45%.  It now trades at 2.41%.  Commodities are slightly higher, while the harbinger of the commodities complex, Dr. Copper, has so far soared 10.8% this year.  The USD Index is slightly lower, leaving me just short of a home run so far this year.

Am I bragging?  No.  After I sort out the nonsense, hype, delusional commentary and “fake news” that passes as relevant information, what’s left is a clear picture of the chess moves that obviously must be played by central banks, irrespective of President Trump’s economic agenda.  We won’t be assessing the impact of Trump’s proposed tax cuts and plan to repatriate some of the $3 trillion parked at overseas banks until sometime in late 2018.  In fact, we won’t even know what Trump’s tax proposal is until as late as March.

However, we do know, that when reports of China struggling to stabilize the yuan via the sale of reserve assets (dollars), the world’s largest exporting nation is experiencing slack demand?  If the global economy has softened considerably, where will capital go to preserve its value?  Answer: US dollar, precious metals, commodities, resources and staples stocks.  

Since the opening price of January 3, the following returns have resulted in the best-of-breed commodities stocks:

Alcoa (AA): +33.9%

Freeport-McMoRan (FCX): +17.1%

Potash (POT):+4.9%

Barrick (ABX): +21.8%

BHP Billiton (BHP): +8.4%

S&P 500: +2.8%

For those subscribers who have considered my views of the investment climate in my January 3 report, you’ve done very well.  And I’ve done very well.  And if the VIX tells us anything, markets are soon to become a little wild.  So, hang with me; we’ve only seen the first act.

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

This Week’s JBP Stock Ideas

You’ll notice this week’s edition of Long-Term Weekly only includes my Watch List.  I felt that after a position is taken on a stock, only significant news about the stock in question will be updated in these reports.  New subscribers will have access to old reports, so repeating the information here is superfluous.

I’ve also pruned my Watch List to include my most interesting and potentially profitable trades, of which include LendingClub (LC), Sientra (SIEN) and Weight Watchers (WTW).

LENDINGCLUB (LC)

The company has been in a turnaround phase following revelations in May 2016 that Lending Club CEO, Renaud Leplanche, had sold $22 million of loans to an investment bank, Jefferies, that did not match the client’s requirements, i.e., fraud.  On May 16, the U.S. Department of Justice served a subpoena for records involving the company’s dealings with Jefferies.  

As a result of the terrible publicity surrounding the questionable ethics of the company’s CEO, LC had lost nearly 57% of market capitalization due to the scandal, but has since recovered much of the initial drop, rallying back.

But this ‘turnaround’ stock may be just beginning.  

The company has regained confidence among its credit suppliers in the banking industry as a result of LendingClub improved internal controls, a new CEO, and continued leadership in this new industry segment.

Competitive forces have entered the mix for LendingClub.  As peer-to-peer gains traction in the Internet lending space, many of the company’s competitors will most likely drop off from the race in this new and exciting form of lending.  LendingClub, however, shines in this environment, as the company’s seeks to consolidate business left behind by fallen competitors.

Traders of LendingClub were delighted with news in late 2016 that National Bank of Canada awarded open credit lines with the company in the amount of $1.3 billion.  This award signals the end of LendingClub’s fall from grace, impelling Jeff to highly recommend LC as a potential huge play in the exciting alternative lending space.

Earning for Q4 is scheduled for February 14, a Tuesday, after the closing bell.  Consensus is a loss of $0.03 per share on revenue of $121.93 million.  I estimate a loss of a penny per share on revenue of $126.4 million.

ABOUT LENDINGCLUB (LC)

LendingClub Corporation, together with its subsidiaries, operates as an online marketplace that connects borrowers and investors in the United States. Its marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, super prime consumer loans, unsecured education and patient finance loans, and unsecured small business loans. The company also offers investors an opportunity to invest in a range of loans based on term and credit characteristics. It serves investors, such as retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans, and university endowments. LendingClub Corporation was founded in 2006 and is headquartered in San Francisco, California.

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

WEIGHT WATCHERS (WTW)

I’ve add WTW as another turnaround stock with potential of surprising investors.  And with 18.6 million shares sold short and only 27.39 million shares floating, the risk of a massive short squeeze may be unlike any other stock I’ve featured in these reports.

The company’s earnings report is due on February 23, after the bell.  The Q4 consensus earnings per share is $0.18 per share on revenue of $271.4 million.  I’m expecting $0.20 per share on revenue $274 million. If my estimate is closer to the actual result, how high can this stock go with two-thirds of the stock’s float held short?  There’s no doubt, the risk lay with the shorts.  

The added factor to WTW is the cache the company inherits from Oprah Winfrey, who, according to a October 2015 13D filing with the SEC, holds 10% of WTW, with an option to buy another 5% of the company’s shares.

In short, I think the worst is behind WTW.  And if I’m correct, the rally that can come from a good portion of the 18.6 million shares covering will be a sight to see.  If you’re short this stock, be careful, because too many traders are on one side of this boat.  

And don’t think Oprah Winfrey won’t be defending her approximately $40 million investment in the company.  Do a Google News search with the search term, “Oprah Winfrey Weight Watchers” and the parameter of retrieving articles of the past week.  You should find eight.  At any time, Oprah could protect her investment by skillfully ‘plugging’ Weight Watchers on any given day.

ABOUT WEIGHT WATCHERS (WTW)

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, exercise, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges.  Weight Watchers International, Inc. was founded in 1961 and is headquartered in New York, New York.

Until next time…

Trade Wise and Green!

Jason Bond

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