Weekly Wrap Up (October 09, 2015)

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The stock fire has been ON FIRE this week! For those who are still active participants in this game, I’m sure it must feel pretty good, right? It’s no secret to readers that my own stance is rather bearish on the current market, but don’t worry, I don’t plan on playing that side of the coin for too long (I much prefer to be a bull!). Having said that, watching the market continue to climb in spite of all the negative headlines this week can’t help but cause me to chuckle quite a bit… 😉

The following requires you to proceed with a sense of humor. Sarcasm is advised!

Here’s a summary of news for you:

Job Creation Misses By 30% (October 02, 2015)

This story was actually reported last Friday, but it’s worth mentioning since it’s a great segue into this week, which kicked off earnings season.

From CNBC:

Screen Shot 2015-10-09 at 7.46.36 AM

How did the market respond? With a big fat YAWN! Actually, quite a bit better than that — The S&P 500 closed the day the news broke out up 1.43%!

More succinctly put by David Stockman:

If you don’t think financial markets have been utterly destroyed by central bank intrusion then how can you explain Friday’s 460 Dow point reversal higher after the post-nonfarm payroll low? It was pure machine rage triggered by another implied “lower for longer” Fed policy signal.

If this story was important enough to headline every major news outlet, then how can a 30% miss be deemed acceptable and a non-event by these same talking heads? Perhaps because everyone is just so damn fixated on an immaterial 25 basis point rate hike that may or may not ever occur? That’s like the only story that even remotely matters these days!

I still remember the days when the interest rate on my checking account was fluctuating 1%+ each month and I didn’t even care…

Deutsche Bank “Shocker”(October 07, 2015)

Next up we have Deutsche Bank, the unquestioned King of Derivatives. Back in June, both co-CEO’s abruptly announced their resignations, which led many to believe at that time that trouble may be brewing behind the scenes…

From CNN Money:

Anshu Jain and Jürgen Fitschen, who have shared the chief executive job for the past three years, are leaving “early” after an “extraordinary” meeting of the bank’s board, Deutsche Bank (DB)announced Sunday. 

Jain will step down on June 30, but Fitschen will remain in his role until next May “to ensure a smooth transition,” the bank said. Both had been expected to run the bank until at least 2017. 

At the same time, the bank named John Cryan, a member of its board since 2013, to be co-CEO with Fitschen for the time being. Cryan, a longtime banker, will become sole CEO when Fitschen leaves for good.

 

Well, it turns out we only had to wait a few months before this most recent “shocker” hit the press:

Screen Shot 2015-10-09 at 7.56.39 AM

From The Guardian:

Deutsche Bank has warned it will lose more than €6bn (£4.4bn) in the third quarter in a record loss.

In a late-night announcement that shocked analysts, Germany’s biggest bank blamed huge impairment charges of €5.8bn for the unexpected losses. Forecasts had been for profits of about €1bn.

Deutsche is one of the pillars of corporate Germany, along with Volkswagen, which has been rocked by the emissions-rigging scandal.

Deutsche’s new boss, John Cryan, who took over in July, set about cleaning up the bank and hinted at cuts to bankers’ bonuses, while dividend payments to shareholders could also be reduced or scrapped altogether.

Analysts and investors welcomed the cleanup, and Deutsche shares rose 1% after falling 3% earlier. One top 10 shareholder told Reuters: “Long-time board members often hesitate to do drastic cuts. Now there’s a wind of change.”

 

After the warning issued in June, can these most recent events really be all that surprising? But bad news is bad news… until it isn’t.

And right now, as has become the norm, the markets simply don’t care. I was thinking about shorting Deutsche Bank (DB), but luckily I knew better than to make any sudden moves. Long-term, though, I think this is a fantastic short opportunity… Just gotta figure out when to punch the ticket.

As I’m typing this entry, here is how the stock is performing:

Screen Shot 2015-10-09 at 8.07.12 AM

What bad news? Co-CEOs resigning, a few billion in losses, and the possible suspension of the dividend? Man, quit worrying so much! Don’t you know that everything is AWESOME!?!

Volkswagen Blames “Rogue” Engineers (October 08, 2015)

The bad news just keeps pouring in, so it seems. Next up we have Volkswagen (VLKPY), who was most recently caught up in an emissions scandal, cheating their way to victory through software. Volkswagen just admitted that to fix these problems in the U.S. alone would take a few years since the software “glitch” impacts nearly half a million vehicles.

But what’s the big deal, anyway? It’s not like it was the intent of the company to cheat its loyal customer base, who will most likely brush off this incident and continue buying their cars, right?

As VW executive Michael Horn explains:

“This was a couple of software engineers who put this in for whatever reason,” Michael Horn, VW’s U.S. chief executive, told a House subcommittee hearing. “To my understanding, this was not a corporate decision. This was something individuals did.”

 

I’m a software engineer and you’re absolutely right Mr. Horn… We just don’t ever quite receive enough work at work… So we take on side projects to pass the time…

But you’ve got me convinced! Me, along with the rest of the world.

Just check out the stock price below!!!

Screen Shot 2015-10-09 at 8.12.29 AM

Glencore Cuts Back! (October 09, 2015)

Finally, we arrive at Glencore, the Switzerland based “natural resources” company. Glencore earns its keep by mining: zinc, copper, iron, nickel, etc. among many other metals and minerals. The company is also involved with energy and agricultural products.

But due to the recent weakness in commodity prices, Glencore has been taking it hard on the chin. All that volatility has been concerning for investors, who have started to worry whether Glencore can service its monumental debt burden in a weakening deflationary type of environment.

Most recently, the bond yields have started to price themselves like junk:

Unsecured senior Glencore debt maturing in May 2016 traded below 93 cents on the dollar on Tuesday, with some trades occurring below 90 cents, according to investors. 

A buyer of the debt should receive a 0.85 cent coupon in November, and a dollar of principal back in eight months’ time. The return available from doing so is equivalent to around a 13 per cent yield on an annual basis.

Oh but before we forget, let’s also mention that Glencore also happens to just “dabble” slightly in derivatives trading. Just a couple billion here and there, so no harm, no foul… Rest assured, we don’t have to worry about any type of Lehman incident occurring because of their positions.

And what’s $100 billion of liabilities on the balance sheet, really?

It’s not like Glencore can contaminate the too-big-to-fail (TBTF) banks in any way…

From Bloomberg:

Bank shareholders and regulators may be concerned that Glencore’s debt and trade finance deals, of which a “significant majority” are unsecured, will reveal higher-than-expected risk and require more capital once the lenders are put through U.S. and U.K. stress tests, BofA analysts said Wednesday. Adding an estimated $50 billion of committed lines to the company’s own reported gross debt, the analysts say financial firms’ exposure may be three times larger than Glencore’s reported adjusted net debt of less than $30 billion.

“The banking industry may have significantly more exposure to Glencore than is generally appreciated in the market,” analysts including Alastair Ryan and Michael Helsby said in a note titled “The $100 Billion Gorilla In the Room.” The commodity-price bust and “stress in Glencore’s share price and debt spreads may spur a review by investors, supervisors and bank management,” while “bank shareholders may pressure managements to reduce exposures,” they said.

 

So, what’s a good way to contain the fear? Why, simply cut back on supply! In the process, you’ll drive up commodity prices to the moon!!!

Funny, how come no other major mining company has been smart enough to initiate this same type of initiative thus far? Some big player out there could have spared the gold and silver stocks that I’ve been buying up a lot of pain these last 4 years!

The London Metal Exchange’s three-month copper contract was up 3.8% at $5,329 a ton, while the LME’s three-month zinc contract was up 9.1% at $1,818.50 a metric ton. 

Aluminum was up 3.8% at $1,619.50 a ton, nickel was up 3.5% at $10,535 a ton, lead was up 5.4% at $1,761.50 a ton and tin was up 0.7% at $16,010 a ton.

 

The entire mining sector is riding Glencore’s induced wave quite nicely this morning!

Oh, and Glencore’s stock isn’t doing so shabby either:

Screen Shot 2015-10-09 at 8.21.01 AM

Alcoa Kicks Off Earnings Season In Style! (October 09, 2015)

Lastly, that brings us to Alcoa (AA), who kicked off earnings season last night, announcing Q3 results.

Here is a quick summary:

From USA Today:

  • Alcoa reported an adjusted quarterly profit of $0.07/share, missing analysts’ $0.13/share estimate.
  • Revenue of $5.6 billion, down 11% year-over-year. Off the mark by $110 million.

Shares were down ~2.5% after hours on Thursday, October 08, 2015.

Buy hey, what do you know! Bad news CAN actually be interpreted as bad news. The market has decided to punish AA today, as shares are now down 4.81%.

Screen Shot 2015-10-09 at 8.40.58 AM

Summary

To recap the most recent news, we’ve got the following — a lousy jobs report, Deutsche Bank in trouble, Volkswagen working to rebuild its reputation, Glencore caught up in God knows what, and Alcoa kicking off earnings season with a swing and a miss.

And despite all that, the markets would have you believe that everything is just fine and dandy. It’s back to business as usual, as evident by the recent rally (or short covering), or whatever this uptick happens to be.

It’s all rather breathtaking, if you ask me!

Just check out the S&P 500 over the last 7 trading sessions or so… UP, UP, UP!!!

Screen Shot 2015-10-09 at 8.45.04 AM

Yes, I’m guessing a lot of this rally also has to do with the latest FOMC minutes (released yesterday)… A no Fed rate hike until 2016 (or beyond) is good for the markets… The U.S. dollar has been getting pummeled as of late too (sigh).

But really, how long can we live in a world of disconnect, completely detached from reality? In other words, when will fundamentals matter again? You know — unemployment (non-Fed stats), labor participation rates, jobs growth, revenue growth, earnings growth, innovation and new ideas/products, and you know, just all-around REAL, non financial-engineering (shares buybacks) GROWTH?

From Business Insider: Labor Force Participation Rate at 38 year lows!

labor-force-participation-rate-june-2015

Frankly, I really don’t care if the stock market goes up or down… I’ve already removed myself from the equation and I don’t have a horse in the race… I’m just trying to be a realist here and as an American citizen, I’ll admit that I am deeply concerned for my country and fellow citizens.

There has been a massive wealth transfer going on in this country, with the rich getting richer and the middle class getting wiped out. That trend isn’t going to be reverting anytime soon in the near future either.

And these days, there really are no safe havens where an investor can go to earn an attractive livable yield. This makes things especially tough for those people who are living off of fixed-income (e.g. seniors in retirement)… The system has forced almost everyone into the stock market in search of income…

But in the casino that is Wall Street, can you really be so sure that nothing bad will happen? In a rigged game, the house always wins. Sooner or later…

Sure, the Dow could keep climbing and maybe it’ll clear 20,000 and soar all the way up to 30,000. Are you willing to take that gamble? The other side of the coin says that the Dow could also get sliced in half… So, you’ve always got to play that risk vs. reward game.

By no means am I suggesting that anyone has to liquidate or get out of all their positions… No, I’m not saying you have to go load up on canned food, guns and ammo, and get off of the grid and go live somewhere out in the boonies either… But the days where we could buy ANY stock and watch it appreciate day after day, month after month, and year after year without fail are going to come to an end. Moving forward, anyone still playing in the stock market is going to have to be that much more careful and calculated with their purchases. Investors can lose money in the stock market… At this point in the cycle, that’s hard to believe, right?

Some shrewd investors that I have spoken to have taken up some rather aggressive hedged strategies as they “hope for the best but prepare for the worse“. I think that what they are doing is absolutely brilliant! By taking precautions now, they stand to benefit regardless of what the markets ultimately decide to do, but most importantly of all, they’re able to sleep well at night.

 

I’ve benefited quite a bit from Zero Interest Rate Policy (ZIRP) and easy money (both printing and lending), but I’m also not naive enough to allow myself to live in some delusional fantasyland where I close my eyes off to what’s really going on in the economy… It’s been 7 years since the last crash!

I can’t believe how easy it is for people to forget that markets need to go both up AND down. Right now, with all these headwinds, I just can’t see how anyone out there can really be convinced that we’ve experienced a genuine recovery… Or invest in the market with no fear. Just look at the numbers, any numbers, they are abysmal across the board!

The numbers do not support a recovery! If anything, they 100% contradict one… But as always, as long as the stock market keeps kicking ass, I really doubt that most everyday Americans will even care…

Really, I’m not trying to be all doom and gloom with everyone (I seriously much prefer to be a perma-bull), but I can’t spin bad news and try to pretend that it’s something other than what it is!

I’m just calling it how I see it… If that ruffles a few feathers, so be it. If the masses out there just paid a little attention and stopped living in a bubble, well, then when the bubble finally bursts, we won’t be left clueless, wondering, “How the hell did that just happen? No one could have saw this crash coming…

Stock market crashes don’t happen overnight.

As a matter of fact, anyone paying attention has ample time to get well prepared. Warning signs are issued out years in advance…

For those who choose to ignore the signs, I still wish you the best of luck. I’m going to support anyone on the path to early financial freedom, regardless of what path you elect to take to get there. After all, we are all on the same team and trying to create a better life for ourselves and our loved ones.

You’ve got my respect.

I just sincerely hope no one gets hit by a nasty black rock on the way to early FI:

https://www.youtube.com/watch?v=OCWE5chTuOk

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Happy Investing/Speculating! Have a great weekend and stay careful my friends! 🙂

 

P.S.

Here’s a new “investment product” for you to try! 😉

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Midwestern LandlordAlisaJonIncome SurferThe Dude Recent comment authors
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No Nonsense Landlord
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My portfolio is reaching new highs, breaking my previous records. Keep buying and know that while it may be different this time, more likely it is like the last 130+ years…

george puck
Guest

I think one of the things worth keeping in mind is that many sectors have gone thru a bear market.

I have been pounding the table a while on KMI as an example, started the year around 44, hit 25 last week and has come back to 32. Pays a yield today of 6.61% and has committed to growing the dividend 10%/year for the next 5 years. Even if they dont increase the payout that much you likely see the stock double in price and capture an 8-10% effective cash flow 5 years from now.

Look at apple. 52 week high 134, now trading at 112. PE ratio of 12.95, and its a lot less when you back out 200B in cash sitting on the Appl books. Company just broke a weekend record for iphone sales, Carl Icahn is a big fan and holds a huge position. Room for the company to buy back stock and and increase the dividend. I dont see much downside there.

I like GE….pays you 3.3% to wait, just now the stock is starting to move. Nelson Peltz just took his biggest position ever. They are sitting on a ton of cash after divesting a ton of financial assets, and oil and gas looks to have bottomed. The company is expected to return a huge chunk of money to its shareholders via buybacks and increased dividends. The price is like half of what it was in ’08.

Rinse and repeat for DIS having gone thru a bear run. And they are about to print money with Star Wars.

For growth, and I think these are a little early, very out of favor with the market, but Regeneron, Celgene and Palo Alto networks are well off their highs 15-20%, they have huge growth, and I dont think that changes even in a downturn.

I think we just saw the main downturn in the market. Oil and gas, and Financials are way off. Sooner or later they will return.

My point is the averages have hidden that there has been a bear rotation in a lot of sectors. I think there are some opportunities in some quality names that have already taken a 15-20% haircut. AS long as these companies continue to have large free cash flow tand can borrow on the cheap at near zero rates, it makes sense for them to buy back stock. Borrow at less than the cost of capital, repurchase stock. Heck in a lot of cases these companies are selling bonds at a lower interest rates than the dividends they are saving by buying back stock.

I think the rotations suggest that it is important to stay diversified, yeah maybe raise up a little more cash. Maybe the overall averages dont go up much more from here, but I do think there are some stocks worth buying.

The Dude
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The Dude

It is important to put this news in a bit of context.

Sure, the jobs report may have come in under expectations, but it is equally important to understand the context of why it came in under expectations: a strong dollar hurt manufacturing jobs. So if the dollar is pulling back, you can understand why there might be less of a reaction. Sorry, I can’t help but chuckle when you’re quoting David Stockman, as if he has much credibility given his past.

And Volkswagen. Who cares if their stock is up. They are down almost 25%. Perhaps some are thinking that this is a buying opportunity and are thinking that penalties are priced in. I don’t think it’s evidence of a irrational market on its own.

Labor force participation rate: this is expected due to demographics. 10k baby boomers retire every day! Every month 300k people will voluntarily withdrawal from the workforce. This is just normal demographic activity.

WRT recovery, the unemployment is 5.1%. At what point are you satisfied with a recovery? This is generally considered full employment. Job reports fluctuate month over month. Things don’t move in a straight line. It’s not to say that unemployment won’t shift in the future, but it’s about as good as it gets at the moment…by definition.

Income Surfer
Guest

Haha, nice recap Fighter. Any time you specify in history has a few bad, or really bad, headlines on the news wire. I’m with you though, we’re due for a bear market. May be another year or two, but I hope it has begun. It will be good for us to put some money to work again…..but we have to be patient, my friend. I Hope you have a great weekend!
-Bryan

Jon
Guest
Jon

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Peter Lynch.

My portfolio has returned 17% over the last 2 months. How much do you expect it to dip in the imminent upcoming crash?

Also, non farm payrolls are generally considered BS and are highly volatile.

Alisa
Guest
Alisa

I started reading FI blogs earlier this year and became convinced that the stock market was the place to invest to retire earlier. I really appreciate how your analysis of the situation in the US (and beyond) is broken down in your posts, and how the posts themselves have changed since I started reading it. The other blogs are just treating what’s going on now as another market cycle but there’s too much whispering that there’s something bigger at play.
Reading from Trinidad and Tobago.

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