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August 14, 2018

Global Market Comments
August 14, 2018
Fiat Lux

Featured Trade:
(WHY BANKS HAVE PERFORMED SO BADLY THIS YEAR),
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April 27, 2018

Global Market Comments
April 27, 2018
Fiat Lux

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April 23, 2018

Global Market Comments
April 23, 2018
Fiat Lux

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Perfect Storm Hits the Banks

There is no better sight to a hungry trader than blood in the water.

?Buy them when they?re cryin? is an excellent investment strategy that always seems to work.

There are rivers of tears being shed over the banking industry right now.

Federal Reserve officials openly told investors that after the December ?% rate hike that they would continue to do so on a quarterly basis. Only weeks later, a collapse in the stock market shattered this scenario to smithereens.

I doubt we?ll see any more Fed action in 2016.

This caught investors in bank shares wrong footed in a major way.

But wait! It gets worse!

Among the largest holders of American bank shares are the Persian Gulf sovereign wealth funds, including those for Saudi Arabia, Kuwait, Oman, Qatar, and the United Arab Emirates, my old stomping grounds. Pieces of me are still there.

The collapse in oil prices (USO) has put their budgets in tatters and they now have to sell stock to fund wildly generous social service programs. The farther Texas tea drops, the more shares they have to sell, and at $26 a barrel they have to sell bucket loads.

Had enough? There?s more.

The junk bond market (JNK) and oil company shares are suggesting that up to half of all American oil companies will go bankrupt sometime this year, mostly small ones. It all depends on how long oil stays under $40.

Unfortunately, the oil industry has been the most prolific borrower from banks for the last decade. The covenants on many of these loans require borrowers to pump and sell oil to meet interest payments NO MATTER THE PRICE! It?s a perfect formula for maxing out production and selling into a hole.

So fear of widespread energy defaults has also been dragging down bank shares as well.

Some of the moves so far in this short year have been absolutely eye popping. Bank of America (BAC) has plunged 31% from its recent high, while Citibank (C) is down 32% and JP Morgan is off 19%. Basically, they all had a terrible year just in the month of January.

Bank shares have been beaten so mercilessly that they are approaching levels last seen at the nadir of the 2009 financial crisis.

Except that this time, there is no financial crisis, not even the hint of one. For the past seven years, banks have been relentlessly raising capital, reducing leverage, and growing BIGGER.

They proved last time that they were too big to fail. Now they are REALLY too big to fail. Default rates aren?t even a fraction of what we saw during the bad old days. Energy industry borrowing is only a tenth the size of bank home loan portfolios going into the crisis.

Blame the Dodd-Frank financial regulation bill, which requires banks to hold far more capital In US Treasury bonds (TLT) than in the past, which by the way, are doing spectacularly well.

Blame ultra cautious management.

Whatever the reason, Big US banks are now solid as the Rock of Gibraltar.

Which means I?m starting to get interested. Interest rates don?t go down forever, nor does the price of oil. And scares about loan defaults are being wildly exaggerated by the media, as always.

But there is more than one way to skin a cat.

All of these companies issue high yield preferred stock with exceptionally high dividends. For example, Bank of America issued 6.2% yielding paper as recently as October. It is paying something like 8% now.

Since these securities are stock, you get to participate in price appreciation when the panic subsides. A guaranteed 8% return, plus the prospect of substantial capital appreciation? Sounds like a pretty good deal to me.

Google bank preferred shares and you will find an entire world out there of specialist advisors, dedicated newsletters and even day trading and hedging recommendations.

One thing to keep in mind here is that you should only buy ?non callable? paper. This prevents issuers from stealing your paper when better times return to cut their interest payouts.

There is another way to play this beleaguered sector.

You can buy the iShares S&P US Preferred Stock Index Fund ETF (PFF), which owns a basket of preferred stocks almost entirely made up of bank shares. As of today it was yielding 5.62%. To visit the fund?s website, please click link: https://www.ishares.com/us/products/239826/ishares-us-preferred-stock-etf.

BAC2-3-16

C 2-3-16

JPM 2-3-16

PFF 2-3-16

ATM-CrashTime to BUY?

The Case for Buying Financials

Regular readers of this letter are probably weary of me harping away about the financials as a great place to put your money for the rest of 2014.

Never mind that these names have all jumped 10% in the past month. But this is not an ?I told you so? story. This is more of a ?But wait, there?s more,? story.

The basis for my call is quite simple. I believe that bond prices are peaking, and yields bottoming. As mining the yield curve is a major source of bank profits, borrowing short term and lending long term, a rise in interest rates falls straight to the bottom line. Thus, buying banks is an indirect way of selling short the bond market.

However, there are many more reasons to overweight this long neglected sector. In a market that has gone virtually straight up for the past three years, many large institutions are going to be forced to roll money out of leaders, like my favored technology, energy and health care, into laggards, such as the financials.

Expect this trend to accelerate as we head into yearend institutional book closing, which start as early as October 30.

Look at other important drivers of bank profits, and you?ll find them at multi decade lows.

Trading and investment banking volumes are off 30%-40% from mean historic levels. We options traders already know this all too well, as turnover has cratered and spreads widened due to investor lack of interest.

This is especially true of put options, which are now being given away virtually for free. Volatility that seems to permanently live at the $12 handle is another such indicator of this disinterest.

This will not last. If my ?Golden Age? scenario plays out in the 2020?s (click here for ?Get Ready for the Coming Golden Age?), trading and investment banking volumes will not only double to return to the norms, they will skyrocket tenfold from today?s tedious, moribund levels.

Indeed, I have recently discovered an entire subculture of financial oriented private equity firms currently amassing portfolios that are betting on precisely such an outcome. Think of big, smart, long-term money. The big bets on the coming decade are being made now.

There is another ripple in the case for banks. After passage of the Financial Stability Act of 2010, otherwise known as ?Dodd Frank?, banks became target numero uno of the federal government. The public?s demand for accountability for the 2008-09 crash knew no bounds.

As a result, the fines and settlements with the big banks, most of which were rescued from bankruptcy by the government, now well exceed $100 billion. Four years into the enforcement onslaught, the Feds are running out of scandals to prosecute. There is nothing left for the banks to plead guilty to.

This means that a major portion of the banks? costs are about to disappear, not only new massive fines, but hundreds of millions of dollars in legal fees and diverted management time as well. More money drops to the bottom line.

Dramatically rising income? Substantially falling costs? Sounds like ?Ka-ching? to me, and a ?BUY? for the bank stocks.

The bottom line is that bank stock could double from here in coming years. It is not hard to pick names. Bank of America (BAC) took the big hit on fines and settlements, and therefore should enjoy the largest bounce.

So should Citigroup (C), which came the closest to vaporizing. And for good measure, I?ll throw in American Express (AXP) as a play on the burgeoning credit card spending by the growing class of well to do.

BAC 9-2-14

AXP 9-2-14

C 9-2-14

TLT 9-2-14

John Thomas and Barney FrankBarney Frank Had a Few Things to Say

Taking Profits on Citigroup

I have discovered a correlation in the market that you can use for the rest of this year, for all of 2014, and probably for the next 20 years. Whenever the Treasury bond market (TLT) takes a dive, bank shares rocket. This is a particularly happy discovery, as my model-trading portfolio is long bank shares and short the Treasury bond market.

By buying bank shares here you are playing the second derivative of the short bond trade. Banks are about to go from being less profitable to more profitable during a falling bond, rising interest rate environment. Every trader on the street knows this, hence the sudden renaissance of the financials.

Take a look at the charts below prepared by my friends at Stockcharts.com. They show that after tracking nicely with the S&P 500 for most of the year, Financials suddenly started to drastically lag the market in October. That was on the heels of the bond market rally triggered by the Federal Reserve?s failure to taper in September.

Fast forward to two weeks ago, when I correctly called the top of the bond market and started slamming out the Trade Alerts to buy puts as fast as I could write them. Since November 1, financials have become the top performing sector of the market, and it is dragging the (SPY) upward kicking and screaming all the way.

I?ll tell you what is happening here. Traders are dumping story driven momentum stocks like Tesla (TSLA), and piling into the biggest lagging sectors for fresh meat. The dive in Treasuries gave them all the excuse they needed. That?s why the Financial Select Sector SPDR ETF (XLF) has bolted out of nowhere to a new five year high. The same is also true for Wells Fargo (WFC) and our favored Citigroup (C).

The financials rally could continue until the sector becomes overbought relative to the rest of the market, which could be well into next year. And yes, before you ask, that includes Morgan Stanley (MS) and Goldman Sachs (GS), which are really more structured like banks now in the wake of the Dodd Frank bill.

So I am going to take profits here on my existing long position in the Citigroup (C) December $45-$47 bull call spread. With the shares now trading just short of $52, we are now too far in-the-money to get much further benefit from a continued appreciation. Better to go into cash now, so I can reload on the next dip, which could happen next week.

We grabbed 80% of the potential profit holding the position a mere seven trading days. This is my 15th consecutive closing Trade Alert, and the 20th including my remaining open profitable positions. I have only six more to go until a break my previous record of 25. It doesn?t get any better than this.

Time to enter more bids on eBay for Christmas presents. That black Chanel Classic handbag with gold trim is looking pretty good. Do you think a new Brioni suit will fit into Dad?s stocking over the fireplace? Santa?.hint, hint!

C 11-21-13

XLF 11-21-13

WFC 11-21-13

JPM 11-21-13

XLF 11-21-13

$DJUSBK 11-21-13

Citibank

Loading Up On the Financials

After ignoring the financial sector for most of the year, I am more than happy to jump into it here. The sector has been a serious laggard for the past three months, trailing the front-runners I picked in technology, industrials, health care, and consumer cyclicals. After chasing these favorites, traders are now looking for new fresh meat to devour.

No one would touch financials with a bargepole while interest rates were falling. This is because banks are most profitable when short-term interest rates, where they borrow, are low, while longer-term rates that they lend at, are rising. Falling interest rates make financials a no go area. They have done so with a vengeance after the September Federal Reserve decision not to taper its quantitative easing program.

Two weeks ago interest rates bottomed and began a rapid upswing, which I believe could last many months. We could even see ten-year Treasury bonds rebound from the recent 2.47% low back up to 3.0% by year-end, and 4.0% by the end of 2014.

That?s why I called the top of the bond market two weeks ago and showered you with a machine gun succession of Trade Alerts to go short Treasuries, all of which became immediately profitable. Those who followed my advice soon found money raining down upon them.

By buying bank shares here you are playing the second derivative of the short bond trade. Banks are about to go from being less profitable to more profitable during a falling bond price, rising interest rate environment. I have published three books on this topic, so believe me, I know. Every trader on the street understands this, hence the sudden renaissance of the financials.

I picked Citibank (C) because I know the former CEO, Vikram Pandit, well having worked with him for a decade at Morgan Stanley (MS). That relationship gave me unequaled access to the inner workings of this financial institution.

Citibank is not the target of multiple government civil and criminal prosecutions, as JP Morgan (JPM) has become, thanks to the London whale incident. They also do not suffer from the legacy problems bedeviling Bank of America (BAC), which they stepped into with their multiple acquisitions during the financial crisis.

Citibank also sponsors that really cool bike sharing program in Manhattan, called, what else, Citibike.

There is another method to my ?Madness? here. Take a look at the six-month chart for (C) shares. It shows absolute rock solid support at the $47.40 floor. That makes the Citicorp December $45-$47 bull call spread a complete no-brainer.

If you don?t like Citibank you can caste a wider net and buy the Financial Select Sector SPDR ETF (XLF). You can click here to find the precise index makeup and the fund details. Berkshire Hathaway is the largest holding, with an 8.18% weighting, while Citibank is the fifth largest holding with a 6% weighting.

C 11-13-13

XLF 11-8-13

TNX 11-13-13

CitibikeBut Will It Take Me to a Great Trading Year?

Five Stocks to Buy for the Second Half

Take a look at the chart below for the S&P 500, and it is clear that we are at the top, of a top, of a top. How much new stock do you want to buy here? Not much. Virtually every technical trading service I follow, including my own, is now flashing distressed warning signals. Maybe we really were supposed to ?Sell in May and go away.?

All RSI?s are through the roof. We have not had a pullback of more than 3.2% in six months, the longest in history. It has been up 19 Tuesdays in a row. Some 67% of this year?s gains have been on Tuesdays, and 83% since the 2012 low. So buying Monday afternoon and selling Tuesday afternoon is the new winning investment strategy. It?s a day trader?s paradise. The market is clearly cruising for a bruising here.

A 5%-10% correction seems imminent. After that, we will probably power on to a new high by the end of the year. The Vampire Squid, Goldman Sachs, posted a 1,750 target for (SPY). Why not? Their number seems as good as any. Who knew that the top market strategist for the year would be perma-bull Wharton business school professor, Jeremy Siegel?

The smart money is sitting on its hands here, maintaining discipline, and waiting for better opportunities. It is also pounding away at the research, building lists of stocks to pounce on during the second half. It is still early, but here is my short list of things to watch from the summer onward.

Apple (AAPL) ? Rotation into laggards will become the dominant theme for those playing catch up, and the biggest one out there is Apple. Buy the dips now for a 25% move up into yearend. An onslaught of new products and services will hit in the fall, and the company is still making $60 million an hour in net profits. Look for the iPhone 5s, Apple TV, and new generations of the iMac, iPad, and iPods. It will also make its China play, inking a deal with China Telecom (CHA). The world?s second largest company is not going to trade at half the market multiple for much longer, especially while that multiple is expanding. Technology is the last bargain left in the market. QUALCOMM (QCOM) might be a second choice here.

MSCI Spain Index Fund ETF (EWP) ? Look for the European economy to bottom out this summer and recover in the fall. In the end, the Germans will pay up to keep the European community together. The reach for yield and the global liquidity surge will drive interest rates on sovereign debt down as well, accelerating the move up. Also, the more expensive the US gets, the more you can expect other parts of the world to play catch up. Spain is the leveraged play here.

iShares FTSE 25 Index Fund ETF (FXI) ? Now that the new Chinese leadership has their feet under the desk, look for them to stimulate the economy. China will play catch up with the US, which should start topping out by yearend. It is also an indirect play on the reviving Japanese economy, the Middle Kingdom?s largest foreign investor. Japan has gotten too expensive to buy, so consider this a second derivative play.

Proshares Ultra Short 20+ Year Treasury ETF (TBT) ? The Treasury market bubble is history, and it is just a matter of time before we break down from these elevated prices. Look for the ten-year bond to probe the high end of the yield range at 2.50%. I don?t expect Treasuries to crash from here, but you might be able to squeeze another 25% from the (TBT) in the meantime.

Citicorp (C) ? Look, the financials are going to run all year. Use the summer dip to get back into this name, the most undervalued of the major banks, and a hedge fund favorite. A multidecade steepening of the yield curve is a huge plus for the industry. Now that real estate prices are rising, some of those dud loans on their books may actually be worth something.

SPY 5-17-13

EWP 5-21-13

FXI 5-21-13

TBT 5-21-13

C 5-21-13