Global Market Comments
November 5, 2015
Fiat Lux
Featured Trade:
(WHY DOCTORS MAKE TERRIBLE TRADERS)
(KEEP AMERICAN EXPRESS ON YOUR SHORT LIST),
(AXP), (V)
American Express Company (AXP)
Visa Inc. (V)
Global Market Comments
November 5, 2015
Fiat Lux
Featured Trade:
(WHY DOCTORS MAKE TERRIBLE TRADERS)
(KEEP AMERICAN EXPRESS ON YOUR SHORT LIST),
(AXP), (V)
American Express Company (AXP)
Visa Inc. (V)
I remember that the highlight of my 1968 trip to Europe was always my visit to the nearest American Express (AXP) office to pick up my mail.
In those pre Internet and email days, it was the only way that a fresh faced 16 year old could stay in touch with a hand wringing family while traveling around the world.
They just wrote ?John Thomas, c/o American Express, Paris, France,? and the letters never failed to get through to me.
It was also a great place to meet other vagabonding Americans my age--of the female persuasion. At least they spoke English. Almost.
That was a very long time ago.
So I got to know well the American Express locations off the Spanish Steps in Rome, Saint Mark?s Square in Venice, Berlin?s Kurfurstendamm, and the Champs-Elysees in Paris.
I have a feeling that American Express is about to give me a warm and fuzzy feeling once again.
After being taken out to the woodshed and getting beaten senseless in the wake of getting fired by Costco, one of the biggest customers, the shares appear poised for a comeback.
We have a rare occasion where the highest quality stock in a sector with the best business model is selling cheaper than its cohorts for a series of temporary reasons.
Take a look at the charts for (AXP) and Visa (V) below, and one of the greatest pairs trades of all time may be setting up, whereby you want to buy for the former and sell short the latter against it.
At the very least, you should be taking your monster profits on Visa and rolling the money into American Express.
Since its inception in 1958, that flashy green (or platinum) piece of plastic has long been a status symbol, and owned the premium end of the credit card market.
As a result, it earns more fees and extends fewer loans than its competitors. The loans it does have enjoy a far lower default rate. There are now 107 million Amex cards in circulation, compared to only 55 million in 2001. Thank you 1%!
American Express cardholders run balances three times larger than the average Master Card holder. That?s what happens when you buy a Ferrari on your Amex card, as I once did (to get the frequent flier points).
Merchants pay very high fees, usually 5% of the purchase. That?s why many shun the card. (AXP) is currently running a credit card balance of $940 billion, versus $3.1 trillion for Visa (V).
Fees accounted for an impressive 57% of the company?s revenues, a far higher ratio than other credit card companies. Better yet, (AXP)?s fees are rising, while those of others are falling. Interest on balances brings in 15% and cardholder fees 8%.
(AXP) is expected to earn $5.8 billion in net income on $33.9 billion in revenues this year, up 9.4%. With the US economy recovering, growing by 2.6% this year and 3.0% plus in 2015, the company is in the sweet spot for capturing more profits.
Morgan Stanley estimates that cardholder spending grows at 4.5 times the US GDP growth rate. That should cause (AXP)?s earnings to double, and the stock as well. An extra tailwind will be the company?s new strategy of moving down market to expand market share.
Despite all this good news, (AXP) shares are selling at a 13.4X multiple, a discount to its industry (21X), and the main market (18X). An ambitious share buy back program should put a floor under the stock.
Part of the discount can be explained by a Justice Department suit claiming that the company overcharges merchants. Amex correctly argues that, as the smallest of the major credit card companies, it has nowhere near monopoly pricing power.
It will be interesting to see how aggressively the government pursues its action, now that attorney general Eric Holder, has moved on to retirement.
You all know by now that I think financials are the place to be for years going forward because of imminently rising interest rates. But I?ll hold back on pulling the trigger on single name long side stocks plays until the carnage in the markets abate.
When I?m ready to shoot out a Trade Alert, you?ll be the first to know.
When I do, don't even think about putting it on your credit card.
?A government big enough to give you everything you want is strong enough to take everything you have,? said Thomas Jefferson, the third US president.
Global Market Comments
November 4, 2015
Fiat Lux
SPECIAL CAR ISSUE
Featured Trade:
(WHAT I HEARD AT DINNER LAST NIGHT),
(GM), (F), (TM), (TSLA)
General Motors Company (GM)
Ford Motor Co. (F)
Toyota Motor Corporation (TM)
Tesla Motors, Inc. (TSLA)
It was the kind of dinner invitation I couldn?t turn down. What I learned was amazing.
I usually prefer to spend my evenings at home catching up on my research, calling customers, and plotting my next great Trade Alert.
So it takes a lot to get me out of my cozy digs, especially during an evening of rare torrential downpours.
Attending would be senior executives from Tesla (TSLA), General Motors (GM), and engineering professor from the University of California at Berkeley, and the California Air Resources Board.
With US car production blasting through 18 million annual units this week, a new all time high, I thought the topic was particularly timely. That, by the way, has been my target all year.
The dinner was hosted by a retired billionaire from Microsoft at the top of the Mark Hopkins Hotel in San Francisco.
The topic for discussion would be the very long-term future of the car industry. I get invited to these things because the guests want to know how their views would fit in within a long term global geopolitical/economic context, my own particular specialty.
I didn?t want to cramp anyone?s style, so I kept my notebook under the table and scribbled away blindly, and illegibly. There?s no particular story line here. I?ll just give you my random thoughts.
(GM) launched its second generation Chevy Volt last month, and the customer response has been fantastic. The company is building a new $400 million battery plant on the East Coast to help meet demand.
Some 60% of the buyers are coming from other auto makers. It is fast becoming the new face of Chevy, like the Corvette Stingray and Camaro of years past.
The future is in a 200-mile range $30,000 car, and the Volt is that car. Customers want to get away from oil and will only buy the products that do that, be they hybrids or all electric.
He also mentioned that GM is launching an electric bike next year, which is already widespread in Europe. Not a big needle mover there.
The Tesla guy then proceeded to jump all over him, saying the Volt was ?green washing? as usual, since it represents only a tiny fraction of the company?s sales. GM had a vested interest in promoting the internal combustion engine, in which it had made a century long investment. Its real focus can be seen in the giant new Suburban factory it was now building in Texas.
Mr. Tesla had driven from the south Bay with his S-1 entirely on autopilot. The hardware has already been pre installed in every S-1 produced since 2014, and all that is needed to make them self driving is to execute a wireless overnight software upgrade. Currently, only Tesla executives are beta testing the revolutionary autonomous system.
What is truly amazing is that each car will have a learning program unique to the vehicle. If it misses a hard turn the first time, it will remember that turn and then make it perfectly every time from then on.
The Tesla person said that once the new Gigafactory comes online in 2016, the company will be on schedule for a tenfold ramp up in car production by 2020.
The $35,000 Tesla 3 that will make this possible will be unveiled in coming months, which will be offered in two wheel and four wheel drive variations. That will take them from 50,000 units a year to 500,000.
I asked him if this means that if your wife suspects you of cheating, will your Tesla rat you out. He answered, ?Only if she is a coder.?
Then I wondered what would stop Tesla from selling your driving habits to marketers, who would then make special offers from stores you prefer. A previous Tesla experiment landed me a pair of Seven for All Mankind designer jeans for half off.
Tesla outsold every other luxury car of its class during the first half of 2015, including the Mercedes S class, the BMW Series 7, and the Audi 8. Among the US car industry, only Ford and Tesla have never filed for bankruptcy. Tesla is the first new car manufacturer to succeed since Chrysler made its debut in 1928.
I asked about the S-1 maximum single charge range achieved by a driver. An enthusiast in Norway managed to take one 800 miles on a flat track with no wind and perfect conditions. Wow! My drive from Lake Tahoe record of 400 miles doesn?t come close.
I also enquired about the Cambridge University battery breakthrough (click here for ?Battery Breakthrough Promises Big Dividends?).
He said he was aware of it, but that its takes a long time to get a technology from the bench to the marketplace. Just with their own in-house tinkering, Tesla is boosting battery ranges by 3-5% a year. The current S-1 gets a 290-mile range, compared to my three-year-old 255-mile range.
The Berkeley professor made some interesting observations about Millennials. He said that while 75% of baby boomers got drivers licenses at 16, and 70% of Generation Xer?s did so by then, only 55% of Millennials took to the road at that age. The rule of thumb for anything regarding Millennials is that they do everything late.
The gentleman from the Air Resources Board brought out some interesting facts. More than 80% of all cancer causing chemicals entering the atmosphere come from diesel engines, so a major effort will be made to cut back emissions from commercial trucks. Look for the electric fleet coming to a neighborhood near your. Goodbye Volkswagen!
Workplace charging of employee cars will be the next big growth area for charging stations.
Half of all greenhouse gases derive from the burning of oil. The biggest savings in greenhouse gas emissions will come from a clampdown on the refining industry. Think Koch Brothers.
I was amazed at his commitment to meet California?s goal of obtaining 50% of its energy from alternative sources by 2030. The oil industry, managed to exempt gasoline from the legislation, SB 350. But Governor Jerry Brown put it back in through an executive order.
The state is paying for the initial build out of hydrogen refueling stations for the new $57,500 Toyota Mirai. A single tank that will take the fuel cell vehicle 312 miles.
The state is making major investments in biofuel, planning to obtain 10% of the 50% target from this source.
During a slow moment, I asked a bleach blond trophy girlfriend sitting next to me of her interest in electric cars, expecting the worst. To my surprise, she said that last summer, she drove an electric bike from New York to Los Angeles, towing a trailer with a solar panel cut in half to provide power.
The southern route avoided the high mountain ranges. I noticed she seemed unusually tanned, and it wasn?t from a can.
I was humbled. For once, I knew less about electric cars than anyone else in the room.
After the dinner, I went up to the Tesla executive and told him ?Job well done.? I owned one of the oldest S-1?s, number 125 off the assembly line, and the clock had just turned 40,000, with no major problems.
I even tested their safety claims after a crash with a GM Silverado driven by a texting soccer mom (click here for ?16 Facts and 6 Big Surprises I learned Tearing Apart My Tesla S-1? ).
Thank you Tesla! You saved my life!
Now, if only the stock will do the same! (click here for ?About That Tesla Recommendation? ).
?If you want to learn the art of medicine, it is best to follow an army,? said Hippocrates, the ancient Greek physician.
Global Market Comments
November 3, 2015
Fiat Lux
Featured Trade:
(NOVEMBER 4 GLOBAL STRATEGY WEBINAR),
(WHAT COULD DESTROY THIS MARKET?),
(SPY), (TLT), (FXE), (USO)
SPDR S&P 500 ETF (SPY)
iShares 20+ Year Treasury Bond (TLT)
CurrencyShares Euro ETF (FXE)
United States Oil (USO)
The Teflon market is back.
Good news is good news. Bad news is good news. What could be better than that?
However, there are a few issues out there lurking on the horizon that could pee on everyone?s parade. Let me call out the roster for you.
1) Economic Data Continues to Weaken - After a nice data run into September, the numbers have suddenly turned ugly, taking Q3, 2015 GDP forecasts from 3.9% down to 1.5%.
Sluggish corporate earnings in 2015 should rebound in 2016, as the European and Chinese drag dissipates. They should improve going into Q4 and Q1, 2016. But if they don?t, watch out below.
2) The Fed Raises Interest Rates in December - This has been the world?s greatest guessing game for the past two years. With China stabilizing, and the US stock market on the mend, the path is open for our central bank to raise interest rates for the first time in nine years. Janet Yellen lives in fear of the American economy going into the next recession with interest rates at zero! That would leave them powerless to do anything.
We could get a 4% mini correction in stocks off the back of a December surprise, especially if the stock indexes go into the announcement from a high level. But, I doubt we?ll see more than that.
3) Another Geopolitical Crisis - You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about ISIS, Al Qaida, Afghanistan, Iraq, Russia, the Ukraine, or the Chinese expansion in the South China Sea.
Everyone of these has been a buying opportunity, and they will continue to be so. At the end of the day, terrorists don?t impact American corporate earnings.
4) A Recovery in Oil - Texas Tea (USO) is clearly trying to bottom here, now that we are at the nadir of the supply/demand balance. If it recovers too fast, and rockets back to the $70 level, we lose some of our energy tax windfall.
5) The End of US QE - The Fed?s $3.5 billion quantitative easing policy ended a year ago, and since then the return on US stocks has been absolutely zero, save for the odd special situation (Amazon, Netflix, etc.). Anyone who said QE didn?t work obviously doesn?t own stocks. Still to be established is whether stocks can rise without QE.
6) A New War - If the US gets dragged into a new ground war, in Syria or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.
However, it is unlikely that a pacifist President Obama would let things run out of control in the Middle East, nor would a future President Hillary. Better to leave it to the Russians. After all, their move into Afghanistan in 1979 worked out so well for them. It caused the demise of the old Soviet Union.
7) The European Refugee Crisis Worsens - If the numbers get too big, there are supposed to be 4 million refugees en route, it would demolish Europe?s (FXE) economic recovery.
Unfortunately, the enormous influx of Islamic migrants into Europe has already led to the resurgence of Nazi parties in Sweden, Denmark, and the Netherlands. Some are showing up with their 13 year old brides.
Good for Germany for doing the heavy lifting here. After all, they did happen to have a spare empty country at hand, the old East Germany. With a collapsing birthrate, it was the smartest thing they could have done to boost their long-term economic growth.
8) Another Emerging Market Crash - If the greenback resumes its long-term rise, as I expect, then another emerging market debt crisis is in the cards. With US rates rising and European rates falling, how could it go any other way? This is because too many emerging corporations have borrowed in dollars, some $2 trillion worth.
When their local currencies collapse, it has the effect of doubling the principal balance of their loans, and doubling the monthly payments, immediately. This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.
9) China Goes Into Recession - So far, the Middle Kingdom has resorted to cutting interest rates, easing bank reserve requirements, and selling big chunks of its US Treasury and Eurobond holdings to reinvigorate its economy. What if it doesn?t work? Look for a new China scare to hit US stocks, and don your hard hat.
10) Interest Rates Start to Rise - I have already chronicled the sudden shortages in truck drivers, airline pilots, and minimum wage workers at Amazon fulfillment centers. What if wages really start to take off, and the trend towards 40 years of falling real wages reverses? That would bring substantial interest rate hikes, a rocketing dollar, true inflation, and eventually, a recession. 2017 anyone?
11) Donald Trump is Elected President - I doubt the Donald has seriously thought out his economic policies, and most of what he has proposed is unenforceable under current US law. But he has established that he has the money and the media strategy to win the Republican nomination.
What if Hillary then develops a major health problem and has to drop out of the race? The implications of a Trump presidency are hard to fathom, but it certainly would NOT be good for the stock market. This is an outlier, but is not impossible.
I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.
Down the Ambien, and full speed ahead!
Global Market Comments
November 2, 2015
Fiat Lux
Featured Trade:
(WHY TECHNICAL ANALYSIS DOESN?T WORK)
(SPY), (QQQ), (IWM), (VIX),
(IBB), (HCA), (PANW), (SCTY), (TSLA),
(BIDDING FOR THE STARS), (SPX), (INDU),
(TESTIMONIAL)
SPDR S&P 500 ETF (SPY)
PowerShares QQQ Trust, Series 1 (QQQ)
iShares Russell 2000 (IWM)
VOLATILITY S&P 500 (^VIX)
iShares Nasdaq Biotechnology (IBB)
HCA Holdings, Inc. (HCA)
Palo Alto Networks, Inc. (PANW)
SolarCity Corporation (SCTY)
Dow Jones Industrial Average (^DJI)
S&P 500 Index (SPX)
Dow Jones Industrial Average (^DJI)
A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.
Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, whom shall remain nameless. Suffice to say, she is now married to a tech titan and has a sports stadium named after her.
Obviously, I didn?t work hard enough.
The bids soared to $15,000, $16,000, $17,000.
After all, it was for a good cause. But when it hit $17,750, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $17,000.? I said ?no thanks.? $16,500, $16,000, $16,250?
I passed.
The altitude of the stock market right now reminds me of that evening.
If you rode the S&P 500 (SPX) from 700 to 2,100 and the Dow Average (INDU) from 7,000 to 17,750, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it did then?
I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.
But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.? If you followed my Trade Alerts this year and are up now 38%, you don?t have to chase every trade.
At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.
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There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
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