Macro: The Bottom Line (2/10/2014)

Muddled messages on the US economy

New Fed Chair Janet Yellen is barely a week into her term. But if the past week's economic data releases are any indication, she certainly has her work cut out for her. For at the moment, the economic figures are painting - at best - mixed messages on the state of the US economy.

First, we had the ISM Manufacturing index on Monday. Think of this as a barometer of US manufacturer confidence. Long story short: after several months' worth of strong readings, the index plunged from 56.5 to 51.3 in December, suggesting that a pullback in manufacturing activity is in store. As all of you on the East Coast can attest to, a good part of the drop can be attributed to the horrendous weather conditions we've seen lately. That being said, weather is unlikely the only culprit. As the Wall Street Journal* noted, the recent breakneck buildup in inventories - which was also a strong contributor to the US economy's 3.2% growth rate in the 4th quarter - may be taking its toll. Indeed, when you have a glut of stockpiled goods, at some point orders will slow.

Second, Friday saw the release of the second downbeat employment report in a row. The headline job creation number (+113K jobs created in January) was not much consolation for the even more dismal +75K number in December. With employers churning out jobs at a 200K+ clip just three months ago, the slowdown is truly astonishing. Again, weather quickly comes to mind. But with certain weather-sensitive sectors - especially construction (+48K jobs) - creating jobs at an admirable rate - some underlying weakness is likely at play. Adding to the confusion, a separate household-based survey showed that Americans were reentering the workforce and finding jobs, pushing the unemployment rate to a five-year low of 6.6%. So all in all, a very mixed report that's gotten economists scratching their heads.

 

All we can do at this point is wish Chairman Yellen good luck in deciphering these enigmatic signals from the economy. While it's unlikely to force the Fed into a U-turn from continuing its stimulus reductions, it'll certainly have some FOMC members thinking harder about the true state of the recovery.

 

*Here's the link to the WSJ article: http://blogs.wsj.com/moneybeat/2014/02/03/dont-blame-the-weather-for-disappointing-ism-report/

Two distinctive trends unfolding

First, what are you seeing from the chart below?

Easy, isn't? You see two stocks are moving up handsomely in the past 5 years, KORS and DLTR and the other two down painfully, JCP and SHLD. Correct, but do you know what it means?

DLTR and KORS represent two ends of the American population: Dollar Tree (DLTR) is a discount retailer for low-income class and Michael Kors (KORS) is a luxury retailer for high-end class. Clearly in the current economic environment, both stocks are booming because they are targeting either poor people or rich people. So who is suffering? The middle class! Both JC Penny (JCP) and Sears (SHLD) are targeting the middle class and both are struggling for survival.

These trends will likely continue for a long time. DLTR is experiencing a correction and KORS is just breaking up. So both are worth considering for a long haul.

A speculative penny stock that could triple or more

Penny stocks are very risky but somehow people just love to play with them. The general feeling is that penny stocks can more easily appreciate than blue chips. After all, it will be a double if a $1 stock increases just by $1. In reality, it is not that easy. Percentage-wise, you still have to increase by 100% before doubling, regardless of if it is from $1 or from $100. The key is to find the right stock with good catalysts. Trading in penny is supper risky as they can easily go out of business. So never go all in with your house money, regardless how much you are convinced! For me, it is more of an informed gambling: I bet with small money but if I win, I expect something big. Last year, I bought a small biotech, Inovio Pharmaceuticals (INO), which is developing vaccines for influenza & cancers. I went in at $0.54 and luckily it went up to $2.57 as of now. Percentage-wise, it is a huge jump by almost 400% but as I said I only put in a small amount. I will see if it can go 10 times up.

I found another penny stock, which is quite interesting. The company is called Capstone Turbine (CPST). Ten years ago, the stock was trading over $90 as it was supposed to revolutionize the power-generation industry by using its micro-turbines that promised a great deal of flexibility for onsite power in remote areas, and could also serve as a backup source in the event of blackouts. But this promise never materialized and it has lost over 95% of its value. But now, it seems to see a light at the end of tunnel. It starts to produce and make the micro-turbines commercially available. Revenues have started to be generated.  I like its prospects and we may see it move fast upwards if the Street also sees its potential. What if it returns back to its old highs from here?

Again, it is purely speculative and you may lose all the money if it does not work out. Trade accordingly.

 

Macro: The Bottom Line (2/3/2014)

 

• Emerging market woes continue as three central banks pull out the stops
• The Bernanke era comes to an end, but the Bernanke paradigm is here to stay

The drama in the beleaguered emerging markets continued this week, with markets still intently focused on the yawning external deficits and increased financing vulnerabilities in these countries. In fact, anything with an "emerging markets" tag on it (with the exception of the officially managed Chinese yuan) wilted before the relative safety of the USD and US Treasuries. The Fed's decision to taper a further $10bn from its QE program on Wednesday certainly didn't help, plus data showing yet another strong quarter for US growth (again driven by inventory and exports), certainly didn't help. The situation was such that three EM central banks - those of India, Turkey, and South Africa - decided take matters in their own hands, raising interest rates in an attempt to spare their currencies from further carnage. In the case of Turkey, the rate hike was a whopping 5 percentage points! The worst part though, was that for all the drama that accompanied the announcements, they actually didn't do much. In fact, the currencies of all 3 countries, and those of many others (including Argentina, the theme of last week's post) are in no better shape than the same time last week. The moral of the story is: tampering with interest rates is a Band-Aid solution, and nothing more. Until the emerging economies tackle their structural problems head on (overvalued currencies, rigid/uncompetitive labor markets, distortionary price controls, runaway public spending etc. etc.), they will never be fully immune from speculative attacks. You never know when the next George Soros will come swooping in ... 

 

The Bernanke era comes to an end: The mayhem in the emerging world almost overshadowed the leadership change in the world's most powerful central bank. After eight years, Ben Bernanke's tenure as Fed chairman formally came to an end on Friday. For better or for worse, the Bernanke era has truly transformed central banking's place in economic policymaking. Whereas central banking used to be a simple exercise in hiking short-term interest rates when inflation pressures ticked up (or vice versa), it's now much more than that: bond and mortgage purchases, emergency loans to banks, collateral swaps, banking supervision, forward guidance etc. etc. One needs to look no further than the quintupling of the Fed's balance sheet to $4 trillion (and the hundreds of billions more in euros, yen, and pounds that have been pumped into the markets) to recognize the scale of the paradigm shift. And with that, be under no illusions: the Bernanke paradigm is here to stay. Though the new FOMC chair is named Yellen, this will remain very much a Bernanke-esque Fed. We've mentioned this several times and we won't belabor it too much further, but as a reminder: the low rates and activist central banking won't go away anytime soon.

I cannot get enough

Apple (AAPL) plunged about 10% in just few days. Long-term readers must know that this is the time I love the most: great stocks are encountering short-term setbacks! I don't think Apple will have risk to go much further down. Eevn if it does go down further, it won't be long before it comes back strongly. It has just gone too far too fast and needs to take a breath to accumulate energy to run again!

If you haven't bought any AAPL, this is a great time to establish your long-term positions. But you are also having a fantastic chance to get some quick income within days. Apple is going to deliver its quarterly dividend ($3.05 per share) to anyone who holds its shares on Feb 5, even just for one day! As I have shown you several times, buying around the ex-dividend time is a great strategy to get some quick income. By using the very conservative covered-call option technique, you can easily make hundreds or even thousands within days or a couple of weeks,  in addition to the dividend itself. I just did this for CSCO, MSFT, and TGT in the past few weeks and I will definitely do it again for APPL!

A dire warning - "Insiders Are Selling Like Crazy.....Short U.S. Stocks, Buy Treasuries & Gold"

Marc Faber is famous for predicting the financial crisis in 2008/2009 and he has always been very bearish for the overall market conditions. So take his warning with a grain of salt. But fundamentally I'm at his boat and become more and more worrisome that how people would simply ignore the risks and be unanimously euphoric.

Stocks will go up until they don't

Amazon reported earnings last week. What would you think about the market reactions to the following earning report?  "Amazon.com Announces Fourth Quarter Sales up 20% to $25.59 Billion." And its operating income actually beat estimates -- $510 million vs  $489.9 million. Its shares should shoot up to moon, right? Nope! Amazon's shares fell almost 10 percent a few minutes past 4 p.m., after the company reported the earnings. What went wrong? Well, whether a stock goes up or down is often not about the actual results but about the expectation which has already been factored into the stock price. For Amazon, the expectation for its sales was over $26 Billion. In the past few years, the market has become more and more lavish in expecting what Amazon can do, which has pushed its price to an unbelievable valuation: 20 times its sales. No company, regardless how wonderful the business it, can meet this kind of unrealistic expectation. Yes, its share price can keep going up until it cannot. I think this is just the beginning that the market is coming back to the reality. This reminds me of another crazy expectation for a stock used to be the Wall Street darling: the First Solar (FSLR). The high expectation pushed it to $300 per share until the final reckoning kicked in: its share price dropped like a rock to $10. The lesson? Any dream will come to the time of wakening and any stock price will eventually follow and reflect its real business status, not the inflated expectation.

Last year, I made two predictions for Alexion (ALXN) and Tesla (TSLA). Both were and are still the darlings of the Street with unbelievable valuation but both are still going against the gravity and keep going up, big time. Of course my prediction that they would go down from this high level has been a total failure. Yes, I'm wrong until now but I have my words here that the reality will kick in eventually at some time. I don't know when but I know it will. Just be careful, extremely careful if you are long for such darling stocks.