...And on Tax inversion

In an economic environment plagued by slow top line growth, companies are seeking to expand their profits and maximize shareholder value by any means necessary. One of such means is corporate inversion; a move which helps corporations seeking favorable tax treatment re-domicile their headquarters in a country with more favorable corporate tax laws like Bermuda or Ireland. In the United States, companies face up to 35% in marginal corporate tax, furthermore, US companies are taxed on profits earned overseas when they try to repatriate those funds. These punitive tax structures entice companies such as Medtronix and Burger King to seek tax haven in less demanding tax environments. The US Treasury Department recognizes corporate inversion as a major problem; even though the act has the effect of increasing corporation’s bottom line and stock prices, it does so at the expense of the tax base on which the US government relies. As such, the Treasury Department has sought action to discourage companies from participating in inversion activities. These measures ensure that it will be far more difficult for U.S. companies to incorporate overseas. These concerns shed light on the much needed corporate tax structure reform, concerns about the inability of legislators to come to an agreement on these issues lead doubters to hold misgiving on the effectiveness of the Treasury Departments. However, what this means for investors is added value for companies who chose to follow the inversion strategy and save on their tax bill.   

Market Notes: September 19th 2014

Today, Alibaba entered into the long list of publicly traded company at a whopping valuation of over $231 Billion. Shares opened at $92.70 to an anticipating market. The deal was structured in a unique way that shows that the company is beyond confident in the performance of its shares. The Alibaba IPO could see as much as $8 billion shares offloaded by its underwriters on day one of public trading.

We also take a look at geopolitical activity in the U.K and macroeconomic events in the US. Find today's letter to contain all the pertinent information for your investing knowledge.

In The Letter

- Chinese QE as well
- Negative interest rates have come to fruition
- Oracle finds new leaders
- The result from the Scottish vote for independence from its 300 year union with the U.K

Download your full report here

Market Notes : September 15th 2014

One of the more interesting articles I came across today was on Bloomberg, the article talked about the performance of the stock market as of late. While it seems as though we have been enjoying a roaring bull market for the past year, closer look at the market shows a story to the contrary. Bloomberg's reporters Lu Wang and Joseph Ciolli report an interesting find that "about 47 percent of stocks in the Nasdaq composite index are down at least 20% from their peak in the last 12 months, while more than 40% have fallen that much in the Russell 2000 and the Bloomberg IPO index" Bloomerg

More interesting headlines, ideas and critical economic information can be found in today's market notes. Download your copy at the link below. 

Whats in the report

Markets look for hints of when the first US interest rate hike in almost a decade may happen after tomorrows meeting of the fed governors

Minimum wage may be a balloting issue in some key republican states as early as November.

Bill Akman's new fund is likely to be listed on the Amsterdam Stock exchange. 

Contrary to his promise of a conservative valuation target, Alibaba's Jack ma may seek to increase the high target price for the tech giants IPO, the previous high was $66, Ma and Alibaba are said to be seeking $70. 

The OECD has cut economic forecasts for US among other developed countries. 

Download your full report here 

Trade well 

-f-

Last Week's Earnings

I did not post an end of the week latter last week. For those following the company information section of the letter, please see the below chart for the earnings Calendar missed as a result of my lapse in posting an end of week note.

Date	Company	Stock Price	EPS( E )	EPS( A )
08-Sept	Campbell Soup (CPB)		0.49	0.49
08-Sept	Burlington Stores (BURL)		-0.09	-0.01
09-Sept	Barnes and Nobles (BKS)		-0.68	-0.56
10-Sept	The Men's Warehouse (MW)		1.06	1.10
11-Sept	LULU Lemon (LULU)		0.35	0.33
11-Sept	Kroger KR		0.69	0.70
12-Sept	Darden Restaurant (DRI)		0.32	0.32

Thank you

-f- 

Day's Notes: Wednesday Sept 10 2014

This week has been one of many announcements. Apple's big announcements yesterday served to boost the company's stock price above $100 since its seven for one stock split earlier this year. Geopolitical activity continue to dominate the news in the Middle East and Europe. Attached you will find your mid-week report on ,the markets and the news that cause stocks to move. 

In the report

Ted Cruz urges fellow republicans to do everything possible to stop Obama's immigration agenda implying another government shut down is in consideration.

Apple unveils new suite of products, however smart watch disappoints. 

Microsoft targeting a $2B acquisition of gaming company.

UK Bank (BOE) warns against Scottish secession and will refuse to create a monetary union if such breakup occurs. 

Opinion

Apple is playing catch up with its new line of items, nothing really surprises or caught consumers off guard. There is a sense that the company is losing its trademark competitive advantage of innovation and market domination.

Mark Carney and the BOE are wise to advise against a secession, a simple monetary union between the UK and an independent Scotland may pose similar threats as the inapt EU.

Satya Nadella commits to his biggest acquisition as the chief officer of Microsoft, such a commitment should boost investor's confidence in CEO. and show the direction in which he would like to carry the company.

Please download your full report here

Weekend Notes

It has been quite a week in economic and investing news. Continued monetary policy in Europe has its many effects both real and anticipated. The attached file outlines this weeks news stories and other important investment decision making information.

In the letter

- Alibaba is set to join the list of publicly traded companies at $60 - $65
- The ECB continues to fear inflation and seeks to protect itself by a surprising decrease in interest rates.
- The ECB looks to stimulate bank lending and consumer spending by employing its own QE measures as the US looks to unwind their measures.
-Tesla looks to expand production to Texas.

Download your full report here

Trade well
-f-

Morning Notes: September 1, 2014

I am aware that it has been a while since the last morning note, but I intend to bring the segment back with more regularity. In addition, the monthly installment of Gross watch has been moved to our Seeking Alpha blog.

With that being said, here are the details to be found within your morning notes for today September 1st, 2014.

- Netflix complains that internet speed is causing them to lose customers.
- US investors looking to protect themselves against inflation for the first time in a while.
- Europe increases terror alerts amid growing tension in Syria and Iran.
- Countries continue to sanction Russia for its annexation of Crimea.

- Google is up to its world dominating antics again as they develop and test drone technology for uses that include competing with Amazon's proposed drone delivery.
- Three additional MacDonald restaurants have been closed in Russia for supposed sanitary concerns.


Download your full report here!

Trade well
-f-

Gross Watch: Welcome Mr. Bond

Many things have happened in the capital markets since my last post. Markets have risen... and risen some more. Commodity prices have been volatile, and reflected in various commodity users and their alternatives. With the decisive move above $100/bbl for light crude, the demand for alternative energy sources seems to breathe life into companies like Solarcity (SCTY) and Tesla (TSLA). They say that a rising tide lifts all ships, this is evidenced in the fact that even my dark horse company Blackberry(BBRY) has experienced some resurgence in recent months, that is until Apple teamed with IBM to provide Enterprise solutions and effectively be the first direct challenger to blackberry in this market (might be time to revisit my faith in the turnaround story that is Blackberry). In all, there is a solid argument for an overvalued market, and reasonable expectations for a correction or worse. That has been the cry since the start of the bull market; it is infinitely more convenient to call for a correction when markets are making new highs than to justify their performance.

The principal thesis on an overvalued market is; the markets current CAPE Schiller P/E multiple of 26x is overvalued relative to the average P/E of 16X. Following this logic, as well as universal arithmetic rules, for the P/E levels to revert back to the mean, one of two things must happen:

- Earnings must increase at a faster pace than prices

- Prices must drop precipitously

According to Zacks.com investment research and most other market publications, the major earning trend this year has been anemic growth on the bottom line, lack of top line surprises, and weak guidance. These lead us to believe that the first criteria for mean reversion has little chance of coming to fruition, thus we expect the second. The ideas expressed above permeate throughout the investment community, and investors are approaching with caution. However, few have dared to challenge CAPE Schiller's P/E thesis, which has led to the subject of this Blog post. 

Enter fixed income guru, and co founder of the largest bond fund, Bill Gross. Over the past several months, Mr. Gross has set out to develop his BIG idea, and dispel the notion of extreme overvaluation. In this first instalment of “Gross Watch”, we briefly explore Mr. Gross's thesis and its implications on valuations. 

On a monthly Podcast offered by PIMCO’s founder Bill Gross, he details his views on a new normal in investing. Mr. Gross introduces a concept called the “new neutral”, this phrase is in reference to the feds fund rate - the interest rate at which depository institutions lend reserve balances to other depository institutions overnight- it is the basis for most interest rate calculations. In his theory, Mr. Gross challenges the market assumption that the long run average of the feds fund rate is and has been stable at around 2%. This is important to know in this instant (as it relates to relative market value) because this feds fund rate is the assumption used as the discount factor (r) to calculate the average CAPE Schiller P/E ratio using the fundamental equation. (P=CF/R-G) PIMCO’s contention is that this rate is near zero, as is determined by various factors such as equity markets, inflation and other items that aren’t quite quantifiable as the FED would have it.

Should that be the case, the barometer with which the market is measured against is using an incorrect discount rate. Using a discount rate adjusted to reflect the near zero feds fund rate as well as 2% inflation, the CAPE Schiller adjusted P/E average should look more like 22X rather than 16X which would show the market to not be as nearly overvalued as otherwise thought. The new neutral feds fund rate has been put in place to stimulate 5% GDP growth, however time has shown this to have failed over the last 4 years, instead there are what people see as asset Bubbles. The expansion from 12X PE in 2008 to 26X PE just 5 yeas after justify Mr. Gross's implication that asset returns will be low (not catastrophically negative), even as there is a slow crawl to adopting the theory new neutral. These bubbles need the rates to stay as is in order to not be popped. A levered economy requires a low policy rate. Should rates return to 2%+ there is a significant risk of recession.

That’s been all for “Gross Watch.” Remember, in an environment such as this, with markets making new highs, it is easy to get lost in the fray and want to jump in. But remain steadfast in your belief in the old adage, “buy when there’s blood in the street.” Right now the bulls are still running, exercise patience search for value and act when the time is right.

Trade Well 
        -F- 
        

Macro Directed Markets

Few macroeconomic trends resonate in our current investment climate and with the stock markets being driven by Marco-economics rather than valuations, it is important that we seek to understand where the macroeconomic tides are headed. Government policy, emerging market health, interest rate movement and geopolitical risk affecting commodities are all important macroeconomic themes to be explored further in this climate. Most are interrelated and should be considered in whole when making investment decisions.

Perhaps most observable quantifiable is the government policy and interest rate climate we are in. The loudest macro theme seen for the better part of 4Q 2013 into Q1 2014 is government policy impacting interest rates. Recent trouble in emerging markets has forced central banks of emerging economies such as the Reserve Bank of India, the Central Bank of the Republic of Turkey, and the South Africa Reserve Bank to implement emergency rate hikes as their currencies tumbled. Strangely enough, these interest rate hikes are being touted as consequences of the loose interest rate policies most mature economies have enacted over the previous years. These rates are being increased in order to combat weak economic conditions – not growth. The move precipitates the continued chatter of global monetary policy tightening spanning from the U.S to China. The below chart shows the top 20% of the world’s GDP and their recent monetary policy decisions.

Source: Business Insider

Beyond government policy and interest rates, the U.S jobs numbers puts together an interesting macroeconomic story. Though we have seen a general decreasing unemployment trend in the US over the past year, December numbers reported in January proved to be uninspired, thus giving the market and economists reason to question the FED’s decision to taper its bond buying program. A non-voting member of the Federal Reserve stated “even as the 6.5% unemployment threshold approaches, labor-market conditions remain far from where they would need to be in order to justify raising short-term.” Furthermore, North America is experience record lows in the number of unemployed who are not actively seeking jobs, the labour participation rate in Canada and US have been well below 70% for over a year now, indicating the true unemployment rate is well above the reported 6.6% in US and 7.0% in Canada.

Source: www.fxstreet.com

The economic calendar shows that while the unemployment rate that the Federal Reserve bases its interest rate and monetary policy judgement is moving in the expected direction, non-farm payroll growth is underwhelming as is the job participation rate.

In general, we are seeing aversion to risk in the capital markets. We are experiencing a softer stock market, a recovery in commodities, increasing interest rates, and less accommodation monetary policy. All these add up to a reversion to the capital markets norm, where monetary policy was not the sole driving factor in the direction of capital markets, and company performance was the deciding factor in asset pricing. We are experiencing the return of growth in the developed markets with the U.S at 3% and the U.K at over 2%, and the cooling of emerging markets after a period with low yields and a quest for performance. The climate is clearly one for flight to quality, so consider quality in all your portfolio decisions.

For portfolio advice and more insight checkout my affiliates HMS Asset Management. We have an in-depth look at emerging markets, macro environment and micro environment weekly.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right.

Trade Well
-F

This is Earnings Season

The week ended January 31st 2014 had over 300 companies report earnings; companies such as Apple,Yahoo, Amazon, Google, Ford, Visa, and MasterCard reported revenue and earnings results. While mostly positive, the S&P 500, as a measure of the broad stock market, lost 20 points in what seems to be a consolidating phase after a few weeks of  retreating. Q4 earnings reports have been decidedly positive, with 64% of companies reporting results above Wall Street estimates and financials leading the charge by outperforming the expected 28% earnings growth. This would seem to be the fuel that equity markets need to make new highs. Alas, the S&P 500 has retreated over 2% in 2014 and brushed off record bank profits and consistent impressive earnings of companies. The market seems to be driven largely by macro factors in the early goings of this year which presents a prime opportunity for value stock pickers.

Investors must be cautious as the low hanging fruit may be low for a reason. For example, the tech golden child Apple reported a $0.50 beat off a $14.00 basis and saw the stock retreat over 10% to $500. An uninformed value investor would swoop in to buy a great company at a discount, but they would overlook the company’s failure to meet expectations for iPhone sales (its largest revenue producer and main driver of growth). While iPhone sales were at record levels (51 Million,) they were short of the 56 Million expected which sent the stock tumbling. The growth priced into the stock’s price had to be re-adjusted down causing the stock's tumble. Similarly, Yahoo inc. missed its top line expectation while reporting better than expected earnings, and the stock retreated.

While this investing environment allows investors acquire great companies for amazing value, we must exercise caution in the decisions because a company’s bottom line does not always tell the entire picture of its operations.

Look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right. 

-F 

Welcome to 2014

After a year that saw an incredible rally across the board, we all have to collect our thoughts and analyze how we as investors choose to proceed in this continuously uncertain market. That being said, last year was one filled with immense economic uncertainty, however there was a decidedly bullish roar to the markets. Because it is not prudent analysis to pinpoint exact causes of market movement, we will recognize forces that drove the market to new highs seemingly every week and brought us to where we are. To begin with, operation Fed to the rescue has ensured that interest rates remained at rock bottom for most of the year. While arguable, it is almost certain that the bond buying program and accommodating monetary policy nudged the market higher and precipitated most, if not all, of the other reasons being discussed today. Interest rates have been the driver for the resurgence in US housing recovery and the increased consumer confidence accompanying and its affects have spread to company's bottom lines and stock prices.

The fundamentalists approach to stock valuations give weight to earnings capacity and growth, by most accounts we have seen such growth and potential in the stock market in 2013 causing the major indexes to rise by double digits. Further market growth was fueled by easy comps from an environment with tepid growth in 2012, and continued expense and cost cutting measures by companies. In short, it looks like we hit the stride of this bull market in 2013. In many respects, if you let the uncertainty that was rampant in the economy deter you from pushing that buy button, then you missed out on some serious coin. But few would blame you, the US at times looked like the politicians were out to destroy an already feeble economy, Chinese growth was still a big question mark and the Euro Zone had more than its share of economic woes. Needless to say, investors came out of the year alive, and stronger than they've been in the last five years. Economies returned to growth and all was well in the world, or so it would seem. If nothing, this year should strengthen everyone's belief in the stock market as the greatest wealth creator in the world.

But that was then, perhaps investors who have been apprehensive should remain so, at least for the near term. Signs of an exhausted market are afoot. Perhaps we have reached a point where the economy needs to catch up to the capital markets, or maybe this bull of a market is gearing up before it begins to charge onto the next rally. But consider one simple metric that historians and analysts have used to determine market exhaustion for decades. Today January 22 2014, the S&P 500 index has a Price to Earnings ratio of 18.91 compared to a historic average of less than 16. Perhaps not incredible expensive, but it should be cause for reconsideration. the market is known to have inflection points and mild corrections around these PE ratios. It is by no means an indicator of a reversal of this great bull market, rather I consider it to be a sign of market fatigue which will give the real economy a chance to catch up with the market, i.e job creation, top line growth and long term capital investments.

Of course all future considerations will have to be viewed with the consideration of the Federal reserves interest rate manipulation. It is market consensus that this recovery should take stride this year and be accompanied by rising interest rates. This gives way to a weaker bond market and perhaps a hum drum stock market.

There are always bargain opportunities in any markets, look for cheap stocks with a solid balance sheet and a viable business strategy. exercise patience as the market takes a breather, then pounce once the timing is right.

If there's one thing I learnt from 2013 it's that there has been a shift in paradigm, we are now investing in an economy that is in a permanent state of uncertainty, apprehensiveness will never get results, rather patience and conviction in execution will serve the best investors.

Stay tuned for more
Till then - Trade Well-
F.