Global Market Comments
March 1, 2019
Fiat Lux
Featured Trade:
(OH, HOW THE MIGHTY HAVE FALLEN),
(BRK/A), (AXP), (AAPL), (BAC), (KO), (WFC), (KHT),
(AMGEN’S BIG WIN), (AMGN), (SNY), (REGN)
Going through Warren Buffet’s letter to the shareholders of Berkshire Hathaway (BRK/A) you can’t help but notice that his performance nosedived from a breathtaking 21.9% in 2017 to a much more sedentary 2.8% last year. That is with an S&P 500 down -4.4%, including dividends.
That compares to my own 23.67% profit for 2018. But Warren has a much higher bar to reach. He does this with a staggering market capitalization that was pegged at $496 billion as of today. At best, the combined buying power of my Trade Alerts is only about a billion dollars.
And here is the stunning piece of information that should have been the headline. Warren has $112 billion in cash and equivalents, some 22.58% of the total, and an all-time high. That means buying stocks at these levels is the least attractive in the fund’s 57-year history.
Buffet would much rather buy back his own stock. He is willing to pay a premium to book value but only when it trades at a discount to intrinsic value, as he did in size during the fourth quarter of 2018.
Which raises one screaming great question. If Warren Buffet isn’t buying stocks, why should you?
Buffet isn’t even buying Apple, which he only started soaking up in 2017. It now is his second largest holding, with an average cost of $140. I’m amazed that the stock didn’t get crushed on this news, but then we live in a constantly amazing world these days.
The big change in Berkshire Hathaway over the years is that it is becoming more of an operating company and less of an investing one. That is because Buffet is increasingly buying entire companies, rather than exchange-traded stocks. One of the reasons for his cash hoard that an effort to buy a company for high double-digit billions of dollars fell through last year.
Still, Warren bought $43 billion worth of public stocks in 2018 and only sold $19 billion worth. These are his five largest public shareholdings and his percentage of outstanding shares:
American Express (AXP) – 17.9%
Apple (AAPL) – 5.4%
Bank of America (BAC) – 9.5%
Coca-Cola (KO) – 9.4%
Wells Fargo (WFC) – 9.8%
Warren likes to break up his entire holdings into five “groves”, as there are too many companies to follow individually.
1) Wholly owned companies where Berkshire has 80%-100% stakes, such as the BNSF railroad and Berkshire Hathaway Energy.
2) Publicly listed equities like those listed above
3) Companies controlled with third parties, like Kraft Heinz (KHT)
4) US Treasury bills
5) Property/Casualty Insurance operations like GEICO that generate an enormous free cash float
Buffet described the enormous tax benefits his company received from the 2017 tax bill. It amounted to the government’s indirect ownership of Berkshire shares falling, which he humorously calls “AA” shares, from 35% to 21% at no cost whatsoever. That greatly increased the value of the remaining shares.
Warren spent the rest of his letter talking about the Great American Tailwind. Since he started investing on March 11, 1942, one dollar invested in the S&P 500 has grown to an eye-popping $5,288! That works out to an average annualized compound return of 11.8% a year.
The end result has been the greatest creation of wealth and rise in standards of living in human history.
That is a tough record to beat.
Amgen Inc. (AMGN) won big in its patent case against Sanofi SA (SAN) and Regeneron Pharmaceuticals Inc. (REGN). The battle was over Repatha, a cholesterol-lowering drug said to be more potent than Pfizer’s Lipitor.
Billions of dollars in projected sales are anticipated to be at stake, with the court still in the process of determining how much the opposing companies owe Amgen in royalties.
A U.S. jury in Wilmington Delaware confirmed the validity of Amgen's patents on Repatha, rejecting the joint arguments of Sanofi and Regeneron that the documents failed to adequately describe the drug invention or explain the process of creating the antibodies the patents claim to cover.
This ruling confirms that the creation of Praluent, the competing cholesterol drug jointly created by Sanofi and Regeneron, infringed upon Amgen's patents.
The affirmation of these two patents validates three of Amgen's five claims against the opposing drug companies. However, the decision currently does not affect the U.S. availability of Regeneron and Sanofi's drug Praluent.
Praluent and Repatha are drugs categorized as “PCSK9 inhibitors.” These are designed for patients with ultra-high LDL or “bad” cholesterol whose condition cannot be regulated by commonly prescribed medications like Pfizer's Lipitor. These drugs claim to be able to lower a patient's cholesterol level to a "safe" point as opposed to allowing it to plummet to fatal levels.
Both Praluent and Repatha are anticipated to become blockbuster drugs for the biotech companies, with Sanofi and Amgen competing neck and neck in relative positioning.
Amgen's Repatha is projected to rake in an estimated $2.21 billion in sales by 2022, while Sanofi's Praluent is expected to reach roughly $800 million.
The legal battle between these biotech firms started in 2014, with Amgen winning a similar verdict in 2016 which resulted in a court order blocking the sales of Praluent. In October 2017 though, a U.S. Court of Appeals for the Federal Circuit vacated the district court's ruling to ban the sales of the embattled Sanofi cholesterol drug.
Although Amgen triumphed in this latest round, the fight is far from over as Sanofi and Regeneron announced their intention to challenge the ruling. The latter companies plan to file for post-trial motions in the succeeding months with the goal of overturning the verdict. They intend to demand a new trial as well.
Ironically, (REGN) has been the better performing stock since the Christmas Eve Massacre, rising by an eye-popping 27%, compared to (AMGN)’s almost 5.5% gain and (SNY)’s pocket change pick up of 2.1%.
BUY AMGEN ON THE DIP.
Global Market Comments
February 28, 2019
Fiat Lux
Featured Trade:
(GOLD IS BREAKING OUT ALL OVER),
(GLD), (GDX), (NEM),
(THE STEM CELLS IN YOUR INVESTMENT FUTURE)
(CELG), (TMO), (REGN)
Longtime readers of this letter are well aware that I have been bullish on gold since August. However, this week, the barbarous relic really got the bit between its teeth and is now poised to break out to a new five year high.
All of a sudden, the sun, moon, and stars have aligned in favor of a new leg of the bull market for gold. We could even see a bitcoin-style melt up over the next 18 months to its previous all-time high of $1,927 an ounce.
Gold is not seeing this in isolation. With the primary focus of all financial markets now exploding US deficits, inflation plays everywhere have found new vigor. These would include, other precious metals, commodities, energy, and any security that shorts the bond market.
The really great news here is that your investment life has suddenly gotten very easy. We are probably only months into a megatrend that could last for another decade.
If you look carefully at the long-term charts you will see that gold has in fact been in a new bull market for three years now. But the rate of appreciation was at a snail’s pace, with the yellow metal averaging only 14% a year since then.
For a while, bitcoin and other cryptocurrencies were stealing gold’s thunder and sucking up gold’s volatility. Inflation, the traditional driver of gold prices, was nowhere to be seen.
It is no accident that the recent strength in gold has been matched with the decimation of Bitcoin, down 80% from its high. Investors are finally seeing the light of day.
Other factors have been assisting in gold’s resurgence. Chinese dumping of US treasury bonds is freeing up lots of cash in the middle Kingdom to buy gold.
The run-up to the Chinese New Year on February 16, when Chinese traditionally settle debts with gold coin purchases, has thrown some exploding firecrackers on the move.
The Europeans saw the inflation boogeyman before we did. Look at the chart below showing global gold ETF purchases, which helped market the 2015 bottom. Some 75% of global flows into gold ETF’s were for Europe based funds.
The buying has spread into the entire precious metals space. The Van Eck Vectors Gold Miners ETF (GDX) is off to the races. So is Newmont Mining (NEM), Canada’s largest miner and one of my long-time favorites. (NEM) by the way, is considering a takeover offer from Barrick Gold (GOLD).
Look to buy dips in gold whenever you get them. Remember those black swans? They are still out there in a holding pattern awaiting landing instructions.
When they finally return, you’ll be happy you have a nice position in gold to hedge your other risk positions.
All That Glitters
“We live in a world that is not described by classical economics,” said Oracle of Omaha Warren Buffet.
Global Market Comments
February 27, 2019
Fiat Lux
Featured Trade:
(WHY CHINA’S US TREASURY DUMP WILL CRUSH THE BOND MARKET),
(TLT), (TBT), ($TNX), (FCX), (FXE), (FXY), (FXA),
(USO), (OXY), (ITB), (LEN), (HD), (GLD), (SLV), (CU),
(THE 13 NEW TRADING RULES FOR 2019)
Years ago, if you asked traders what one event would destroy financial markets, the answer was always the same: China dumping its $1 trillion US treasury bond hoard.
It looks like Armageddon is finally here.
Once again, the Chinese boycotted this week’s US Treasury bond auction.
With a no-show like this, you could be printing a 2.90% yield in a couple of weeks. It also helps a lot that the charts are outing in a major long term double top.
You may read the president’s punitive duties on Chinese solar panels as yet another attempt to crush California’s burgeoning solar installation industry. I took it for what it really was: a signal to double up my short in the US Treasury bond market.
For it looks like the Chinese finally got the memo. Exploding American deficits have become the number one driver of all asset classes, perhaps for the next decade.
Not only are American bonds about to fall dramatically in value, so is the US dollar (UUP) in which they are denominated. This creates a double negative hockey stick effect on their value for any foreign investor.
In fact, you can draw up an all assets class portfolio based on the assumption that the US government is now the new debt hog:
Stocks – buy inflation plays like Freeport McMoRan (FCX) and US Steel (X)
Emerging Markets – Buy asset producers like Chile (ECH)
Bonds – run a double short position in the (TLT)
Foreign Exchange – buy the Euro (FXE), Yen (FXY), and Aussie (FXA)
Commodities – Buy copper (CU) as an inflation hedge
Energy – another inflation beneficiary (USO), (OXY)
Precious Metals – entering a new bull market for gold (GLD) and silver (SLV)
Yes, all of sudden everything has become so simple, as if the fog has suddenly been lifted.
Focus on the US budget deficit which has soared from $450 billion a year ago to over $1 trillion today on its way to $2 trillion later this year, and every investment decision becomes a piece of cake.
This exponential growth of US government borrowing should take the US National Debt from $22 to $30 trillion over the next decade.
I have been dealing with the Chinese government for 45 years and have come to know them well. They never forget anything. They are still trying to get the West to atone for three Opium Wars that started 180 years ago.
Imagine how long it will take them to forget about washing machine duties?
By the way, if I look uncommonly thin in the photo below it’s because there was a famine raging in China during the Cultural Revolution in which 50 million died. You couldn’t find food to buy in the countryside for all the money in the world. This is when you find out that food has no substitutes. The Chinese government never owned up to it.
I’m sitting here at my Lake Tahoe lakefront mansion watching the snow come down heavy and the Dow Average meander around and go nowhere.
It is one of those perfect, picture postcard days with all white except the choppy cobalt blue lake. The fields outside are covered with snow crystals sparkling.
After the close, I’m going to have to shovel off my outside decks to keep the weight of the ice from collapsing them.
Those (TLT) puts are looking pretty good this morning, and are approaching the maximum profit point with only a few weeks to expiration.
In these tedious trading conditions, it is more important for me to teach you how to avoid doing the wrong thing than pursuing the right thing.
I am therefore going to fill you in on my 13 Rules for Trading in 2019. Tape them to the top of your computer monitor, commit them to memory, and maintain iron discipline.
They will save your wealth, if not your health. Here they are:
1) Dump all hubris, pretentions, and stubbornness. It will only cost you money.
2) The market is always right, even if all the prices appear wrong.
3) Only buy the puke outs and sell the euphoria. Do anything in the middle, and you will get whipsawed.
4) With option implied volatilities so low, outright calls and puts are offering a far better risk/reward right now than vertical bull and bear vertical call and put spreads. It is also better to buy stocks and ETFs outright with a tight stop loss. This won’t last forever.
5) If you do trade spreads, you can no longer run them into expiration then collect the last few pennies. If you have a nice profit, take it. Don’t hang on to the last 30 basis points even if it means paying more commission. The world could end three times, and then recover three times before the monthly expiration date rolls around.
6) Tighten up your stop loss limits. Not losing money is the key to winning in this market. There is nothing worse than having to dig yourself out of a hole. Don’t run hemorrhaging losses, like the (VXX) from $55 down to $25. It will get easy again someday.
7) Buy every foreign crisis and sell every recovery. It really makes no difference to assets here in the US.
8) Several asset classes are becoming untradeable for long periods (retail, the ags). Stay away and stick to the asset classes that are working (gold and short bonds). This is not the time to get greedy and bet the ranch.
10) Turn off the TV and just look at your screens and data. Public entertainers on the tube have no idea what the market is going to do, especially if their last job was sports reporting. Their job is to get you to watch the ads for General Motors and TD Ameritrade.
11) As the bull market in stocks enters its ninth year, too many traders, analysts, and strategists have become complacent. You are going to have to work for your crust of bread this year. This is earnings, technology, and cash flow-driven bull, not a QE or tax cut-driven one.
12) It is clear that more money was allocated to high-frequency traders this year. That is driving the new, breakneck volatility, increasing stop outs.
13) Ignore Washington at all costs. The market doesn’t give a fig what’s going on there, to quote The Queen.
The hackers are getting better. Better change your password from 12345 to DKFGGIDKFOKBJGELXPEVJBKDLKFBBJFCJCKVLBKGTY69!, and hope that the 69 doesn’t give you away.
Only The Real Gunslingers are Prospering in This Market
Global Market Comments
February 26, 2019
Fiat Lux
Featured Trade:
(ABOUT THE TRADE ALERT DROUGHT),
(SPY), (GLD), (TLT), (MSFT),
(THE NEW OFFSHORE CENTER: AMERICA)
(TESTIMONIAL)
