Will Trump disappoint Wall Street & America?

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There is no doubt that the Republican Party was totally surprised and unprepared by the November election results. Trump’s management style is going to drive his management team, the media, most of the American people and the world nuts. A new reality show has come to Washington, “The Billionaire Apprentice”, who will be the first to get fired?

I think that there is going to be more than the usual amount of personnel turnover in the first six months. The media will be writing about how Trump can’t keep people and about all the chaos in the White House. The world has never seen an American president with this type of management style. It is going to make most of us uncomfortable.

The stock market has high expectations regarding less regulations, infrastructure spending, a new tax policy and the replacement of Affordable Care Act. Failure to deliver something that at least comes close to meeting those expectations is going to have a significant negative impact on the markets and the economy. Some market watchers believe that a correction will show up in the next 60 days if there are cracks in Trump’s agenda.

Being Canadian, I am not an expert on American politics. In my humble opinion, a civil war maybe brewing between Trump and the Republican Party on the implementation of a new tax policy and infrastructure spending. Repealing and replacing the ACA isn’t going to be easy without some bipartisan cooperation. Some republicans maybe hesitant to support some of Trump’s agenda in fear of losing their seat in upcoming congressional elections in Nov. 2018! Trump’s team could be stuck in the Washington swamp!

If you have any doubts that protectionism is at the top of Trump’s agenda, you clearly need to watch Trump’s inauguration speech. President Trump’s first few days in office was to pull out of the Trans-Pacific Partnership and signed an executive order to renegotiate NAFTA.

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My buy American and hire American playbook

Avoiding:

  • Auto industry (including part suppliers)
  • Canadian lumber producers
  • Health care and biotech
  • Oil & gas (watching U.S. fracking companies)
  • Retail & Restaurants
  • U.S. industrials that depend on infrastructure spending

Investments that could be Trump Free

  • U.S. banks (including some regional banks)
  • Tech stocks (including semi-conductors, cloud plays)
  • Some U.S. domestic stocks
  • Gold & silver stocks
  • Cash (in case of a correction)

What do you think? Has President Trump over promised and will he under deliver?

 

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Is Globalization or is Technology destroying more jobs?

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Could last Friday’s weak U.S. job numbers help make this man president of the United States?

Many Americans believe that China and Mexico are responsible for their job losses. There is no doubt that some industries like apparel & electronics require cheap labor costs and companies have moved production overseas. I also believe that the majority of illegal immigrants (Mexicans) are working at low paying jobs that Americans don’t want. (Even Canadian farmers hire temporary workers from Mexico during planting & harvest season).

Economists around the world believe that globalization has more benefits than detriments. Long term, higher wages in poor countries should theoretically increase spending and help spur global economic growth. Wages in China are going up causing a slowdown in their manufacturing boom. In fact, some illegal immigrants are moving back to Mexico because of higher wages.

Advances in technology has created a large number of new jobs but many of those jobs are unfilled. The major problem is employers find it difficult to find workers with the appropriate skill levels. The education system is really behind the curve in preparing young people to enter the job market. No real surprise that the participation rate is falling as the unemployed are giving up looking for work.

The automotive industry has been well-known for its intensive use of robotic arms for assembly, welding and painting of cars. Many other industries have adopted robotic arms into their manufacturing process. Advances in automation has eliminated an estimated 30% of all manufacturing jobs. Developments in 3D printing could allow consumers to make a variety of products beyond just toys, jewelry and novelty items.

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Technology has destroyed a number jobs in many sectors. It is obvious that on-line shopping has really hurt brick & mortar retailers. Retailers have cut full-time staff and reduce costs by hiring more part-time seasonal personal. A large number of book, music and video stores have simply disappeared. Netflix and other low-cost streaming services has really hurt jobs in media, cable and the music industry. Facebook and Google have captured the majority of advertising  dollars which has reduced revenue and job opportunities in radio, television and print media.

Have you ever wondered why there are so many fake reality shows on cable? Production costs are so much cheaper than producing quality programing. Networks have less ad revenue to paid wages for real actors, writers and directors.  

Thanks to ATMs, internet banking, direct deposit and mobile banking apps, bank branches don’t have as many tellers or people waiting in line. The rise of Robo-Advisors will further reduce bank staff over time. I wouldn’t be shocked to find a decline in the number of bank branches in the near future.

Smartphones have reduced the need for buying cameras, voice recorders, camera film, photo albums, alarm clocks, GPS’s, video cameras, calculators, flashlights, landline phones, watches, calendars, note pads, newspapers, books and even credit cards. I wonder how many jobs have been lost because of the popularity of smartphones.

The oil and gas industry used to drill five wells in order to get one producing well. Today’s drilling technology enables 100% success rate in finding oil and gas. Plus fracking technology has allowed oil companies to maximize oil and gas extraction.

Will future improvements in artificial intelligence enable robots to replace human workers?

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What do you think, Globalization or Technology to blame for job losses.

 

Are the best days for Apple over?

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Investors managed to make it through a volatile April modestly ahead of the game, though individual returns were held back by one principal culprit: Apple. The tech giant was “the biggest wealth destroyer” for market participants during the month.

Apple’s decline hits especially hard because it is the most-owned stock by mutual funds. Some 363 mutual funds owned the stock as of the end of 2015 with Microsoft the second most-popular and Alphabet third, according to Credit Suisse.

Many index funds include Apple in their holdings. For example, Apple is off 12 percent year to date as of Friday’s close and has subtracted about 92 points from the Dow Jones Industrial Average in the second quarter alone, a period during which the blue chip index is just above positive.

So where is the real hope in Apple’s earnings call? This quarter’s earnings provide no silver lining and one instead must look past this quarter’s earnings (and probably next quarter’s results) to continue to be positive about Apple’s prospects.

Why it isn’t time to give up on Apple stock:

  • New lower-priced phones. While Apple iPhone sales declined for the first time, results do not reflect the new lower-priced iPhone that will likely capture market share from competitors.
  • A healthy product mix. Apple services, including cloud services, music offerings, and Apple Pay, are a recognition that services and ongoing revenue are an important part of a healthy product mix.
  • Apple is still massively profitable, pays a dividend, has huge cash reserves and built-in consumers for future upgrades. It has a low price to earnings multiple compared the rest of the market.

Why the best days for growth are over:

  • Wall Street believes that Apple really needs to kick off its innovation engine. The discussions around the iPhone 7 indicates that it is an evolutionary product rather than revolutionary. Market sentiment is negative on Tim Cook as an innovator compared to Steve Jobs.
  • Analysts were particularly concerned about declining sales in China where sales have fallen 26% over the year. They also believe that iPhone pricing is uncompetitive to penetrate the huge cell phone market in India.
  • Within developed markets, the upgrade cycle has been extended. Consumers don’t feel the need to buy a new phone every year. Plus U.S. carriers are required to separate the cost of the iPhone from their data plans. Many U.S. consumers are deciding to save about $40 per month rather than upgrade once their two-year contract with their carrier has expired
  • Analysts estimate that Apple has sold 12 million watches last year, generating about 6 billion in revenue. Despite the big numbers, users aren’t particularly impressed with the slower processing and response times. The frequent battery charging requirements didn’t make it the most favorite wearable.

My two cents worth on Apple:

Apple reminds me the early days of Microsoft. The windows operating system was growing Microsoft’s revenue and profits for many years. However, the market for windows became saturated and the growth in upgrading cycles slowed down. It turned Microsoft from a growth company into value stock generating a huge about cash. The chart below illustrates a ten-year period where Microsoft’s stock price was struck in a trading range between $25 to $30. Microsoft’s growth cycle didn’t resume until the company got into offering cloud computing.

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Now, my wife is very happy with her iPhone 6 and we seem to manage to share our iPad. Don’t laugh but I am still a dinosaur using a flip phone for the few times that my wife and I are not together.  In my defense, I am retired, not on Facebook and only use my phone for emergencies. The iPhone 7 will have to be revolutionary for me to upgrade.

What do you think, are the best days for Apple over?

 

3 Key Market Drivers Turning Some Bears into Bulls

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In January and early February there were three major negative forces affecting the market. One was the total collapse of oil prices down to $26 a barrel. The second was a very real threat of a big devaluation from China. The third was the Fed hiking interest rates four times in 2016!

Those three deflationary forces would be very negative for stock market returns around the world. Six weeks ago, investors believed that the world was coming to an end. Some market experts were even taking about an increased possibility of the U.S. economy falling into a recession.

Why some market bears are getting bullish?

  1. The turnaround in the price of oil has been dramatic, raising almost 50% in six short weeks. Fears of massive credit defaults in the oil patch has been greatly reduced. Therefore, worries of a banking crisis have decreased and prices of bank stocks have recovered along with some energy names.
  2. Currency speculators and U.S. hedge funds have been heavily shorting the Chinese Yuan believing that devaluation is just a matter of time. China’s battle with speculators is expected to be very prolonged. Chinese leaders have assured Washington that it would keep the yuan stable after the U.S. approved adding the yuan to the International Monetary Fund’s basket of reserve currencies.
  3. The Federal Reserve has decided to halve its outlook for interest hikes to two from four by the end of this year. The announced has weaken the value of the U.S. dollar which helps increase the price of commodities including cruel oil. It also weakens the value of the yuan since 60% of its value is pegged to the U.S. dollar.

The chart below illustrates the price movements of the bank and energy ETFs compared to the S&P 500 since Feb 11 when the price of WTI hit a low of $26.19!

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I am not convinced that we are out of the woods yet

  • Iran is a big wild card in the oil market. Iran has already stated that they will not agree to a production freeze until they increase their production back to levels before sanctions were imposed. Iran wants to add two million barrels of cruel oil a day to an already over supplied market. Plus there is over 500 million barrels of oil still in storage.
  • The Chinese leaders are slowly realizing that they have little control on how their citizens spend their new-found wealth. Converting their economy from being export driven to domestic spending is going to take a long time.
  • Negative interest rates in both Europe and Japan have not been successful in boosting economic growth.
  • U.S. consumers are not spending their savings from lower energy costs. Economy growth after a typical recession is usually a lot higher than today.
  • A large part of the rapid rebound in stock prices could be due to short covering by hedge funds.

I am not an expert on charts but the two-year chart below of the S&P 500 appears to have lower highs and lower lows. Plus I don’t like the fact that the 50 day moving average is below the 200 day moving average.

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I believe that the roller coaster ride isn’t over yet and there could be a better buying opportunity very soon. Long term, I still prefer stocks over bonds.

 

 

 

Is there a banking crisis brewing?

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Last year I wrote a blog post on how U.S. hedge funds were shorting Canadian banks based on their loan exposure to the oil patch. If you eliminate the drop in value of the Canadian dollar, the actual stock prices have dropped marginally. Plus when you short a stock, you have to pay the quarterly dividend until you repurchase it. The short trade has been a poor bet so far if you add back the cost of having to pay the bank dividends.

However, it seems that hedge funds have turned their attention to shorting European banks. Everyone seems to think there is some kind of crisis. The stock prices of European banks seem to be telling us something is wrong! As of the closing prices of Feb 8th, the Year to date prices are: Deutsche Bank down 35.6%, Credit Suisse down 33.4%, BNP Paribas down 25.3% and UBS down 22.8%, yikes!

Here are some concerns about European banks:

  • Ongoing restructuring and litigation charges.
  • Flattening yield curve/negative rates.
  • Slower European growth.
  • Asset management slowdown. Asset management has suffered because wealthier clients aren’t investing.
  • Book value issues: European banks did not take the big write-downs that U.S. banks took; there’s concern there may be more asset write-downs that would cause book values to decline.
  • Capital positions: While the U.S. banks were out raising capital and selling new shares in 2008-2009, the European banks didn’t. The result: U.S. banks don’t need to raise capital, but European banks probably do.

I understand why there is concern in Europe but investor anxiety regarding banks has spread to U.S. banks causing a selloff. Part of the downdraft has been caused by the debate on future interest rates hikes by the Fed. Raising interest rates are actually good for bank profits from their loans. International exposure is another headwind for many U.S. multinational banks. Finally, many banks are trading below book value because investors believe that some of those assets contain oil loans that will be written off.

I have no doubt that short sellers are also pushing these stocks as far as they can go, into irrational territory. What is happening now is that guys who were long these stocks are being forced to sell simply to reduce exposure. Bank of America is down 27.1%, Citigroup is down 26.7%, Wells Fargo is down 14.5% and Goldman Sachs is down 17.2%.

The chart below is three financial indexes, XFN is Canadian, XLF is U.S. and EUFN is Europe.

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According to Hedge Fund manager Kyle Bass, more pain in the banking sector

Bass is best known for making a winning bet on the subprime mortgage crisis and later profiting from his call that the Japanese yen would fall in tandem with a projected round of monetary stimulus by the Bank of Japan.

Kyle Bass has been ringing the alarm bells about China’s banking system and the yuan for months. The premise of Bass’ bet goes like this: China’s banking system has grown to $34.5 trillion, equal to more than three times the country’s GDP. The country is due for a loss cycle as cracks begin to show in its economy.

When that happens, central bankers will have to dip into China’s $3.3 trillion of foreign exchange reserves to recapitalize the banks, causing a significant depreciation in the value of the yuan. He said China’s export-import industry requires China to maintain $2.7 trillion in foreign exchange reserves to continue operating smoothly, citing an International Monetary Fund assessment.

Bass confirmed Wednesday he is devoting much of his fund to his bet the yuan will depreciate. He characterized shorts against the currency, including his, as totaling “billions.”

The market will ultimately come to view a 10 percent yuan devaluation as “a pipe dream,” he said. “When you look at the size of the imbalance and the size of their economy, it’s going to go 30 or 40 percent in the end, and it’s going to be the reset for the world.”

China’s controlled devaluation of the yuan this year has sparked growth concerns that shook the equity markets around the world and contributed to the worst January for the Dow and S&P 500 since 2009. If Kyle Bass is right on China’s banking problem, than stock market declines around the world will get even worse.

I have been slightly bearish on stocks since mid-December and most of my January posts have contained more negative than positive views. However, North American banks are in much better shape than during the great recession. Canadian banks have been on my buy list for quite awhile. I am now adding some U.S. banks to the list. I am patiently  waiting for a bottom in oil prices and more information on future loan loss provisions.

 

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Are you ready for a great near term buying opportunity in North American bank stocks or is there another banking crisis coming?

 

 

 

Investing Outlook for 2016: Cloudy with high volatility & increasing risks for negative returns

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Over the past three weeks I have been trying to separate what is noise from the business media and what is reality. I am preparing for my investment club’s annual shareholders’ meeting. Facing a room full of financial advisors can be nerve racking. They expect my experience in option trading to produce positive returns regardless of market direction. My 2015 results will not disappoint them.

However, I found investment trends in 2015 to be very obvious but 2016 is going to be much more difficult. Last week I posted that world economic growth in 2016 is going to suck. World growth estimates came down on Thursday from 3.5% to 2.9%. Fourth quarter GDP growth estimates for the United States have been reduced to a range of 0% to 1.2%. Trying to find companies that can grow their revenue and profits in a slow growth environment will be challenging.

Why my 2016 crystal ball is cloudy

  1. Most experts were wrong with their predictions on the price of oil in 2015. Their current prediction is for low oil prices for the first half of 2016 and a rebound to the $50.00 range later in the year. If they are wrong again, many oil producers will default on their high yield debt, leading to bankruptcies that could cause panic in the stock markets.
  2. The Federal Reserve has been communicating 4 interest rate hikes but Wall Street experts believe that only 1 or 2 hikes will actually happen. If they are wrong, the U.S. dollar will increase in value causing lower profits for U.S. multi-national corporations. Plus higher interest rates will reduce share buybacks which isn’t very positive for stocks prices.
  3. China is struggling to manage their economy. Economic growth in China, the second largest economy, is questionable at best. China buys Brent crude oil which usually trades higher than WTI. The price spread has been narrowing confirming weak oil demand and slower economic growth. (Brent $33.34, WTI $32.92)
  4. A stock is considered to be in a bear market when it trades 20% or more below its 52 week high. More than half the stocks within the S&P 500 are in a bear market. Current price to earnings ratios are high in comparison to lower profit growth.
  5. No Santa Claus rally and January started with five straight down days in spite of a positive jobs report. (Scary)
  6. The Canadian stock market is down 20% from its Sept 2014 high which is already in bear market territory. Many fund managers believe that a rebound in oil could cause the Canadian market to outperform the U.S. One young fund manager recently stated that his energy fund is 100% invested in the oil patch. (Foolish?)

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Here is a small portion of what I am going to say at our shareholders meeting

I took some profits leading up to the Dec 16, Fed meeting and also did some tax lost selling. Our current portfolio contains 55% cash, 5% in Canadian stocks and 40% in U.S. stocks. I expect market volatility to increase during 2016 making option trading more profitable. It will also make buying put options for downward protection more expensive.

The three biggest unknowns are the future price of oil, the number of interest rate hikes by the Fed and GDP growth in the U.S. and China. I believe that the Canadian stock market is pricing in a recession in Canada. If crude oil doesn’t rebound in the second half of 2016, the Canadian dollar could fall further and we should consider moving more of our Canada cash to U.S. dollars. I will also ask them for their views on the current market turmoil and for some of their recommendations to clients.

Stay tuned for my next post which will hopefully have some investment ideas.

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I am very sure that the roller coaster ride that started in 2015 will continue in 2016.

 

 

 

Happy New Year, btw, World Economic Growth for 2016 is going to SUCK!

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Let me start by saying that I am usually very optimistic at the start of a new year. However, 2015 was a difficult year to make money.  Santa Claus wasn’t very generous to Wall Street and downright mean to Canada.  Plus, I  just can’t resist being an armchair economist. A lot has changed during the past 40 years since I graduated from university with a degree in economics. Some factors that affect economic growth remain the same. I call them the 3 “Ds”, debt, demographics and deflation.

Too much debt dampens growth

Economic growth depends upon government, business and consumer spending on goods & services. It is hard for these three engines of economic growth to spend if more dollars are being diverted to paying down debt plus paying interest charges. Monetary policy of keeping interest rates low hasn’t spurred very much growth so far.

Now, prior to the “Great Recession”, governments were able to stimulate spending by reducing tax rates for both business and consumers. Slower than normal economic growth is compounding the problem for governments because tax revenues are being reduced. Canada is one of the few countries whose government has plans to spend money on infrastructure and lower taxes for middle-income families to avoid a recession.

Demographics – the graying population are saving instead of spending

There are 10,000 U.S. baby boomers turning 65 each day and most are inadequately prepared for retirement. Nearly half of elderly Americans would be living in poverty without Social Security. These retiring baby boomers will be a burden on government health care programs and social services. Even, China has made a surprise move to end its one child policy.

China’s government has said the country could become home to the most elderly population on the planet in just 15 years, with more than 400 million people over the age of 60. Researchers say, and the world’s second-largest economy will struggle to maintain its growth

The children of the baby boom generation have different spending patterns than their parents. They are less materialistic and focus their spending on experiences. They are also delaying moving out of their parent’s basement, getting married and having children. This is  partly due to high levels of student debt.

Deflation – has some negative effects on growth

Falling prices encourages consumers to delay spending, waiting for items to get cheaper. Deflation makes it difficult for business to increase prices which leads to cutting costs. Corporations end up reducing staff and freezing employee wages. They also reduce or delay corporate spending which adds to a slowdown in economic growth.

Many resource based countries are facing recessionary pressures from the collapse in commodity prices. Australia, Brazil, Canada and Russia are just a few countries smuggling to generate some economic growth.

Slow economic growth equals lower stock market returns

The NASDAQ was the only U.S. index to have positive returns in 2015. The other three indexes, S&P 500 (SPY), Dow Jones (DIA) and the Russell 2000 (IWM), were all negative. See chart below:

2015

Canada is a good example of the correlation between economic growth and stock market returns. Economic growth was negative for the first six months of 2015, slightly positive for the next three months and the results for the last three months are not available yet. The deflationary factor of the collapsing price of commodities was the main cause for the negative returns in the Canadian stock market (XIC). See the chart below:

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The outlook for stock market returns in 2016 isn’t very bright from an economic point of view. This could be the year of the bears and not the bulls to make money.