This country may benefit most from the French presidency election

The global markets have got a huge boost in the passing week due to an avoidance of a perceived disastrous result of the first round French presidency election as there was a high fear that the worst pair of both extreme-right and extreme-left candidates could win the first round that would put EU at a huge risk of collapse. Now at least based on the initial results that suggest that the pro-EU candidate, Macron, may likely win the second round on May 7, the EU seems to have a more solid footing now. All the EU member countries should benefit from this prospect, but the one benefiting most is probably the one that is the weakest link which purely relies on the EU to survive. That’s it, Greece! Think about it, Greece is quickly approaching to the next life-support negotiation within EU to get the next round of funds to allow it to survive! No need to say that no one is so much looking for a stable EU than Greece. For sure the favorable French election has made the Greek stock market jump higher. But actually it seems that the market has already foreseen this result as the Greek stock market, by using the ETF GREK, has already quietly started a clear uptrend since the beginning of the year after hitting its all time low at <$6. Since then, it has gone up over 30% and is trading above $8. Technically it is showing a good strength supported by its momentum, breaking out a year long downward trend.  As long as there is no surprise on May 7 from the final round election result in France. GREK should continue with its uptrend and probably move a lot higher from here!  Of course, the French election on May 7 may also turn it down quickly if Macron dose not win. So trade accordingly!

A trade war has already begun

Trump has made very clear that he is not a fan of globalization and wants to renegotiate trade deals with various countries if he sees unfairness per his judgment. I’m not going to get into any political discussion here but such kind of action may trigger trade wars which could be damaging to both sides. If I ask you which country may be the most likely target for a trade war, you probably will never think about this one, Canada! Yes, believe or not, a trade war with Canada has already begun quietly. But for this war, Canada may probably be the one to blame first.

You all know that in 1994 Clinton has signed the NAFTA with Canada and Mexico for free trades. Trump really hates it and very quickly after he took the power, he signed an executive order to renegotiate NAFTA. While I’m not an expert in this area,  Canada may have actually abused this agreement for their unilateral benefits per the information I have seen. E.g. Canada has imposed nearly 300% tariff on US drywall and over 200% tariff on American eggs. Amazingly, while US has filed many trade complaints against Canada, it has not yet retaliated. Just a few days ago, Canada did it again and placed a tariff on ultra-filtered milk made in the US, which has caused outcry of the US dairy farmers. This time, Trump is not just sitting and watching. He openly called the Canadian trade practices a “disgrace”, “a trading disaster”. Now the US government has also announced to impose a tariff (24%) on the soft-lumber from Canada. I think this is likely just the beginning. The trade wall may get worse before better. No question that such kind of trade walls, if becoming serious enough, will hurt the underlying businesses for both sides but the question is which one may hurt more in this case? I think Canada will likely be the one that will suffer more in the long run. You see, Canada is really a small brother in terms of economy scale and it is heavily relying on the trades with the US, which is overwhelmingly larger economically. Logically if the trade war is escalating, the negative impact on the economy is likely more severe for Canada than the US if you ask me. By its own, Canada is facing some serious economic challenges, one of which is a very significant real estate bubble that may burst anytime probably in a similar scale to that seen in the US in 2008/2009.

I’m not sure Canada can go well in fighting with the US in the trade war. It appears the Canadian stock market has smelled something already and is showing a bearish head-shoulder pattern (see chart of the ETF for Canadian stocks, EWC). If you are long with the Canadian stocks, be careful. Aggressive traders may even consider to short it!

When everyone is selling, insiders are quietly accumulating

As I have said several times, retailers relying on brick-and-mortar stores will continue to struggle at least if not totally dying in the future. In the past several quarters, virtually all such retail businesses have suffered, including the discount retailer giant, Target (TGT). Its shares have been knocked down over 30% since the beginning of the year. It is not exaggerated to say that no one is interested in TGT at the moment. But this is the exact time for value investors to step in if they still believe in the underlying business and consider the current troubles may not be permanent but temporary.  The best people knowing about it should be the insiders who are living with the business. You see, when insiders like CEO/CFO or board directors are selling their company’s stock, it does not necessarily they are bearish as there are tons of reasons why they want to sell that is nothing to with business performance or prospects. E.g. they may simply need some money for other family expenses or they may just want to diversify. If you don’t know, Bill Gates has consistently been selling Microsoft shares over years but he is still super bullish about the company. However, when insiders are putting serious money into their own stocks, there is only one reason: they see the value and believe it is oversold, period! In the past few weeks when TGT got decimated to below $60, a slew of executive insiders started to buy big time. I’m pretty sure they know the value of their stock better than you and me. But as an outsider and purely from the valuation perspective, I do think TGT is really very undervalued by all the metrics. This is still a cash generating business with EPS continuing to go in an uptrend in the past decade. At a price of low $50s, its PE is only 11, far below its average around 15. And it is a dividend aristocrat with a history of paying dividend for at least over 25 years. Even better, it is among a few that grow its annual dividend consistently over 10%. At the current price, its dividend yield is 4.5% at a payout ratio just around 50%. There is no reason to expect it will cut its dividend anytime soon with a very healthy cash flow, even if it may continue to struggle for a while before turning around its business.

 

With insiders sending a clear signal, I’m confident to believe that TGT will survive this challenging time period and will come back stronger by adjusting its business model. This reminds me what happened 2 years ago when Walmart (WMT) got similar slaughtering. As I said back then, I believed WMT would turn around. Yes, indeed WMT has certainly adjusted and come back again in a very strong uptrend. One biggest challenge for both WMT and TGT is how to compete with online sales with Amazon. WMT has already started to also introduce the 2 day free shipping services to boost its online business. TGT may likely also follow. Another bigger advantage both have over Amazon has not yet been widely recognized: the automated delivery by drones, the future delivering model. By design, drones have very short flying distance capacity. The widespread physical store locations throughout the country by WMT and TGT may allow them to be more easily using drones to deliver than Amazon. This may be one of the turning points for TGT if they can manage it properly and wisely to substantially boost its online sales.

 

But be cautious as always. We are still talking about a downward trend for physical retailing business. While I do believe the worst has probably been priced in for TGT, any sign of mismanagement about the turnaround plan may knock it down again. If you want to buy, buy it cautiously with a clear exit plan!

This may be a historical time for British Pound

Unless are coming from Mars, you don’t need me to tell you what is happening to the UK. Yes, it has officially started to process to leave the EU. A year ago when Brits went to the poll to vote, the market was largely expecting it would stay. Then it came as a bombshell that the result was to exit! Of course the bloodshed for the British Pound (BP) started. The drop has been relentless for almost one year but I think finally we are probably seeing the light at the end of the tunnel for BP now. Three major reasons:

• While there are still a lot of uncertainties during the next 1-2 years before the Brexit is fully completed, the worst has likely been priced in by the market. There should be no surprise anymore that the UK economy will be negatively impacted to a great extend after leaving the EU. Considering the market is usually overreacting, I think the ultimate outcome may not be as bad as it is expected. Actually I think UK is becoming some sort of “safe harbor” in the EU now when many EU countries including the leading county like France is facing the uncertainty of whether the upcoming presidential election could mean disintegration of the EU. Since such kind of widespread uncertainty has little impact on the UK now, BP may be more and more favored by the currency traders. After all, UK is still one of the most powerful economies in the world and its currency won’t go to dust by any imagination! Additionally, without being in the EU, UK has more freedom to decide its own political and economic policies, especially it will be much less impacted by the illegal immigrants and refugees.
• The sentiment towards BP has rarely been so depressed historically. I saw a report stating that in the whole history since the weekly COT report became available, only two times in the past that the speculative traders were so negative by betting so much short on BP as we are seeing today. But each time, BP mounted a good rebound with 10% or more increase in the months ahead. We are seeing such an negative extreme again. Will the history repeat itself? It is anyone’s guess but I believe the probability is high.
• Throughout history, BP’s exchange rate vs US$ has mostly being over 2 and it has been mostly supported by the 1.4 level. It has only occurred 2 times as well that it dropped below 1.40. Again, each time it went up above in the months ahead. This is the 3^rd time it went down as low as below 1.20. Taking all together as discussed above, I bet it will follow the historical footstep as well to return to its historical norm to go above 1.40. Its technical picture seems also to support this idea with some positive momentum showing up.

Of course, as with any trading, there is no guarantee, especially regarding the timeframe. If you want to bet with this idea, be clear about your downside protection, e.g. a stop loss at its recent low around 1.17 with FXB.  

Demise of another sector

Nowadays, e-commerce has become the norm reaching to almost each aspect of our life. With the fast pace advancing of new technologies making e-commerce more and more customers-friendly and easy for doing all kinds of business and activities online, many traditional business sectors are dying, either lowly or quickly. We know the retail industry relying on physical stores or malls is going down fast. Another sector is also following the path and will soon become the history of the past. I’m sure you will agree with me that the traditional newspaper industry, while still available, may totally disappear in the near future at least not in the current format! Are you still reading newspaper, especially the paper ones? Hardly you will see anyone around you, either on the street or in hotels etc, is reading newspaper anymore. There are so many sources of news these days available online with a lot of them free of charge and I don’t know how the subscription-based newspaper industry, even in the electronic format can effectively compete to survive. Not only about the costs as a major hurdle for them, the slower pace of reaching out to readers with news will also make them obsolete. As a saying goes, when you see the news on the paper, it is outdated already.

 

From the trading perspective, betting for a slow motion demise of the news industry is likely a good choice. Given the uncertainty of when this downside risk will accelerate, one idea is to buy the long-term out-of-the-money puts that can be used as a hedge for your long portfolio. Without much money involved, it may potentially bring you 5-10 times money back if indeed the downward trend starts to pick up. One can consider to buy such puts for Gannett (GCI), the holding company for USA today and NY Times or News Corp (NWS), owner of The Wall Street Journey.

The last chance for Staples?

I have suggested to short the whole retail sector last week. One example of a dying company is Staples (SPLS) specialized in office supplies. It used to be a great company to own until the advent e-commerce. You have certainly noticed that Staples have been busy to close out its stores throughout the country and it is on the verge of bankruptcy, which is just a matter of time if no miracle appears. But a miracle may be brewing for it!  On Apr 4, The Wall Street Journey reported that Staples is considering to sell itself and is “in talks with potential private-equity bidders”. The news made SPLS jumped over 15% instantly. If successful, it will be worth at least $7 billion or more. Currently its market value is just below $6 billion. In other words, a potential 15% or more gain is possible if Staples indeed gets a buyer.

 

I believe this is very likely an event actively undergoing as Staples can no longer live by its own. Similar to Macy which has publicly announced its intention to be sold, Staples may just follow this path before too late and this may very well be just its last chance available. If you are a risk taker, buying SPLS now may be a tradable idea as long as you are not too aggressive and watch your stop loss. At least no one should be aggressively short SPLS at the moment without knowing exactly what is in the card for it.

Hillary's loss brings this opportunity to you

I talked about some ideas related to Trump’s initiatives after he took over the power. And today a quick idea related to the Hillary’s loss for the presidency election.

If you are not aware of, Hillary is a big advocate for controlling firearms during her campaign and there was a widespread fear that people would not be easily buy guns if HC got elected. Again, I’m not talking about politics here and your opinion on the gun control has no interest to me. From the pure investing perspective, the firearm companies had greatly benefited from the expectation that HC had a good chance to win. So people were rushing in to buy guns before too late. As such virtually all the gun stocks were going up substantially before the election. Then the unexpected drama was unfolded  when HC lost surprisingly. When the fear was instantly gone with more strict gun control, the euphoria for the gun stocks also got burst immediately. They got crashed miserably since Nov 8. This brings me to the idea about one of the best gun stock, American Outdoor Brands (AOBC). You probably have never heard about this name but it is a well-established firearm company, used to call Smith & Wesson established since 1850s.

This is a very profitable company with the profit margin over 15%. Its sales have doubled in the past year and it has consistently increased its earnings year over year (5 times in the past 5 years). In a nutshell, this is a great company with good ongoing business. But the stock prices are not necessarily aligned with the underlying business status during the short term, but more related to the mood of traders. As you can see from the chart, AOBC has moved up sharply in the past two years during the most intensified campaign period, more than doubled.

Clearly there was some euphoria with the perceived high probability of HC’s election winning. Whenever there is euphoria, the crash will also be great if the heightened expectation is not met. This is exactly what has happened post-election and AOBC has got lost most of its gain pre-election, reaching $18 at the latest low. With this kind of freefall, AOBC has become a very cheap stock at the moment. In addition, the sentiment to it has got extreme pessimism with a short interest over 24%, meaning a quarter of traders for AOBC are holding short position betting it will further go down. High short interest is usually a contrarian indicator and when it goes more than 15%, it is already quite extreme. With almost no one is interested in AOBC anymore, a turning point may be not far from the corner. Any piece of good news or even not so bad news could trigger a upside run and if that happens, a monumental short squeeze will occur to push its price to explode as those aggressively short traders will have to rush to buy back shares to cover their short positions. I of course don’t know if and when this may happen but per my experience, this is a good bet at the moment. But don’t bet with your mortgage as it may very well go down further before recovering. If you buy now, maybe use the recent low of $18 as a stop loss if the idea is wrong. 

The weakest link

A while ago, I talked about the dire prospects for commercial properties and malls and I expected the ETF for commercial properties SPG would go down substantially in the years ahead. There is no telling how this terrible trend will end. I guess it is easily understood that the underlying problem is the megatrend for a dying sector, the retail business relying on brick-and-mortar stores. For hundreds of years, people have been used to go shopping to stores but this has suddenly changed drastically and will only continue more aggressively. Pioneered by Amazon and becoming a normal shopping pattern only in the last decade, on-line retailing has become the norm covering almost all the aspects of our life. It is becoming so easy to buy something with just a click without going out, as such shopping in the physical stores is increasingly becoming a history. The augmented reality technology that is quickly coming to our life will only accelerate this mega downtrend. So if you are thinking about some short ideas, especially if you want to do some hedging for your portfolio if the overall market gets a serious correction, shorting the physical retail companies is likely a safe bet. When everything goes down, the weak hands will go down most for sure.

 

You can short individual companies like JC Penny, Sears, GameStop etc. But a safer way to go with this megatrend is to short the whole sector. The best choice is probably the S&P Retail Fund (XRT). Since this for the whole sector, it certainly also includes some on-line retailers like Amazon (AMZN) but the thing is, over 80% of the companies in the fund are not Internet-based retail business. As such, it largely reflects the downtrend for this brick-and-mortar business. To prove it, just compare the price charts between AMZN (the blue line) and XRT in the past two years, a clear divergence!

 

After its peak in early 2015, XRT got a crash through early 20116 and then kind of stabilized with side-way fluctuations in the past year. But recently it has broken the one year support line. I guess it is probably due to the poor earnings we have seen reported by so many retail stores for the past quarter. This will likely continue in a big way to the downside. But be aware that the relentless selloffs in the past few weeks in this sector has caused a bit oversold for it. Very likely it will have a dead cat bounce. The most probable overhead resistance for XRT should be around $42.5. When that happens, place a short on it will most likely be a winning trade!