Blockchain ... The second internet revolution ?

Though it has been a while since my last blog post, I have been constantly thinking of ideas, and interesting topics to write about. In my conversations with colleagues, clients, and investment acquaintance it has become obvious to me that the investment du jour is Bit Coin. There seems to be an endless fascination with crypto currencies (specifically Bitcoin) and the thirst for the "next one" to explode in "value" as Bitcoin has. It has been incredibly interesting to witness the rise of this currency from birth in 2008, to mild prominence in 2013 when Gold was soaring to right now, as the crypto currency hit an all-time high above $7000. All the while I have struggled to understand the currency as an investment vehicle. My traditional understanding of investment vehicles does not extend to the realm of currencies with no physical assets, or government backing. There seems to be no fundamental way of valuing these crypto currencies which lead me to believe that these are vehicles of immense speculation.

That realization begs these questions;

- Can a strictly speculative vehicle be overvalued?

- What is the proper valuation for this vehicle?

- What should this instrument be valued based on?

- If I come up with future economic value for these, what discount rate is appropriate?

- Ultimately, is there a way to enjoy in long term non-speculative gains from crypto currencies?

It was the last question that lead me to think more about the foundation of crypto currencies, and dig a bit more into what underlies Bitcoin and her sisters, and how I as a non-speculative investor (these days) can enjoy the fruits of this fad.

In the off chance that you haven't heard about BitCoin or the technology that underlies the Crypto Currency, here's a link to two quick 2 min. YouTube videos discussing the coin and the technology and some of its merits.

Bitcoin - https://www.youtube.com/watch?v=ZT26y_l-jtI

Blockchain - https://www.youtube.com/watch?v=r43LhSUUGTQ

Admittedly, the video simplifies the technology significantly, but I think it gets the idea across. Better still is the article linked below, It details the implementation of blockchain technology and puts it in a different light, one in which as an investor, you might be interested in understanding.

https://hbr.org/2017/01/the-truth-about-blockchain 

In short:

Blockchain is a "foundational technology" as opposed to a disruptive one, meaning the effects of blockchain will not hit all at once or quickly, rather it will cause a fundamental change in the way business is conducted over a long period of time (maybe decades). The technology is analogous to TCP/IP the infrastructure of the internet as we know it today; specifically, understanding that blockchain is essentially a system of ledgers that keep transactions transparent and accurate thus eliminating the need for a middle man, and that TCP/IP is essentially a system of transferring packets of data without an intermediary -

"The parallels between blockchain and TCP/IP are clear. Just as e-mail enabled bilateral messaging, bitcoin enables bilateral financial transactions. The development and maintenance of blockchain is open, distributed, and shared—just like TCP/IP’s... TCP/IP unlocked new economic value by dramatically lowering the cost of connections. Similarly, blockchain could dramatically reduce the cost of transactions. It has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge. "

Ultimately, the adaptation of blockchain is projeted to be slow, and varied. The current attraction to crypto-currency is akin to the initial fascination with e-mail when the internet was formed. The thinking is that blockchain is to crypto currency as the internet was to e-mail.

In essence, it is much harder than I thought, if not impossible, to find a mature publicly traded (investment worthy) company dedicated to blockchain technology, because it's more of an infrastructure than a business model. Nevertheless, I am now convinced more than ever that this technology has transformative properties, and we might be at the cusp of something similar to the internet revolution, along with the ups and downs of the first one in the late 90's and early 2000's.

What do you think?

...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.

Today's Report

Last week was a tumultuous week for Blackberry, for my fellow BBRY bulls, we have not neglected the earnings report, you can rest assured knowing that some thorough analysis is being conducted and will be shared here on Trading book's blog and Twitter account.

Today's Daily Report
- Fears concerning Greeks economy begins to resurface, talk of an uncertain future by creditors have the Greek bond investors cautious about the region.

- Gold bud and commodities expert Jim rogers believes Gold is at a complicated bottoming phase, and advises to stay away from the yellow brick.

- In search for "fuel" for economic growth, The US and Europe will begin broad discussions on Asia-Pacific trade.

- Facebook will soon begin rolling out its new Search tools.

- Barron's Believes Carl Ichan's bid for DELL could send the stock price to $15 or thereabouts.

- A deadly explosion of an oil carrying train in Quebec claims the lives of at least 5 people, and sparks a need for increased regulatory oversight for crude transportation.


What we think
Today seems to be a mild day with regards to economic data being released, we do not expect heavy action in the broad market.

Europe faces multiple problems from an economic stand point, and until they manage to integrate fiscally they will suffer a slowing economy, and places like France and Germany will continue to hold the burden for the region.

Download the Full report here

That's all on this Lovely Monday.

Trade Well.

Market Report 26-06-13

Good Morning,

What's in the letter

The final revisions for Q1 GDP numbers will be released today, the markets are evidently excited about the numbers as futures have climbed in the pre market hours.

Moodys now has a neutral outlook for Japanese auto makers; sighting the weaker yen and a recovery from a natural disaster.

Gold and precious metals continue to tumble on the back of speeches by Federal reserve chairmen who routinely discuss the end to ultra easy monetary policy.

Blackberry has now opened up its service offering and will now provide security to companies with handheld devices other than BlackBerries. It seems as though the company has a contingency plan in case it's core operations in a saturated market fails to sustain growth.


What I think

The optimism behind today's GDP release raises questions about the rationale behind the market direction in the past few weeks.

The other day, Bernanke's speech outlining 3.4% growth this year was met with a market wide sell-off in what indicated perhaps a longer term market correction to come due to the fear of a taper. Whereas, this mornings GDP report is estimated to be 2.4% and is being met with a rally in the futures.

Are investors betting on a slower economy followed by a prolonged period of ultra easy monetary policy?

If you've followed this blog for any amount of time, you know that  am a BlackBerry bull. We are only days away from the release of Q1 numbers from the smartphone provider, this will be the first complete quarter encompassing sales from the company's new BB10 hand sets. Analyst's estimated range from -$0.15 to $0.70 I'm leaning somewhere in the middle. a good earnings surprise should squeeze out shorts and give the stock a huge boost.


Download your full report

Till next time,
Trade Well

Market Report 20 June

What's on the report

Markets around the world continue to fall on the back of Ben Bernanke's speech yesterday which indicated a strengthening economy.

Market Participants fear the fed will begin to taper its stimulus program which is supposed to keep the economy afloat.

PMI numbers indicate contraction in China at a growing rate as well as in the Eurozone including Germany.

UK retail sale look to have improved in the last month.


What I think

There is an obvious disconnect between current market movement and the fundamental drivers of the market as a whole. Economic expansion and GDP growth of 3 - 3.5% are impressive numbers and should indicate a probable expansion of company earnings. This sentiment is clearly not shared by markets around the world as indicated by their reaction to Bernanke's speech yesterday.

On the other hand, this sell off is matched by an increase in 10 year interest rates, This increase forecasts the end of cheap money for corporations therefore an expansion of interest expense across the board and a shrinking of bottom lines.

Analysts have been touting to no end the demise of the recent 30 year bond bull market, It's worth nothing that if they are right, the bond market has typically been a predictor of the direction a stock market should go. Owing to the interest rate theories and the bond market direction, it is easy to see this market fall into a 5-10% correction in the medium term. However, if we believe the Fed's assessment of the economy, we should see growing earnings in the coming quarters which will bolster the stock market further.


Download the complete report

Trade Well!

Before today's announcement

Business insider published this poem that traders are passing around before today's announcement by Fed chairman Ben Bernanke. I thought it was interesting enough to share.

Our Ben,
Who art in heaven,
Hallowed Be-nanke,
Thy auctions come,
Thy Bill's be done,
In Two's as they are in Sevens,
Give us this day our daily Fed,
And forgive us our Treasuries,
As we forgive us who default against us,
And lead us not into recession,
And deliver us from deflation,
For thine is the borrowing, the easing, and the printing.
Forever and ever
Amen.

It's obvious that today's announcement will be a market mover. Traders are waiting on an indication on when the dreaded taper will begin and how it will affect the market. Stay tuned and pay close attention. However, the skeptic that I am expects nothing today, no change in plans. Bernanke will reaffirm the link between QE purchases and economic growth (unemployment in particular).

Till later.
Trade well.

Today's Daily Report

In todays Daily Report, US futures remain largely sideways while Asian markets traded mostly upwards as currencies took a hit on increased safe haven demands.

These are your headlines
Tensions in Syria forced the US government to take forceful actions in arming Syrian rebels, this is bolstering commodity prices especially WTI crude oil.

The Federal Reserve bank meets today to discuss monetary policy actions, the market remains on edge as talk of taper could send stock prices spiraling down.

Japanese stocks begin to rise again as the yen loses value, conversely the Chinese Yuan has been seen to appreciate and adversely affect Chinese stocks.

Finch Ratings agency fears a Japanese style deflation crisis arising in China.

Download your report

Have a Great Day !!!

News Letter.

Going forward, I will make an endeavour to frequently create and upload a newsletter. However, logistically I do not think this blog is the appropriate medium to share the news letter. In the interim it will have to do until we are able to develop a solution.

The link below contains MyTrading Books first news letter, be advised that it is a beta test and frequent updates to style and formats are to come in the following days.

The gist of this letter is to update you on daily macro and micro news that have a bearing on the markets and are reflected in my other blog entries.

Today we have a look at the effects the "taper" discussion is having on the market, world banks revised world GDP forecast and various acquisition and micro news. Please enjoy in the link below

Download

Returning to the unfamiliar

Since I've been buried in six volumes of riveting finance concepts developed by the CFA Institute, the markets have gone on quite a rally. Whenever it seemed to have reached some sort of exhaustion point and a correction was imminent, there was some sort of force pushing the indices to new all time highs. Perhaps irrational exuberance or a justified rally, this market has been quite different than what we've seen in the last two years. But what has defined this market rally, similar to previous ones, is investor risk appetite. This behavior has been fueled by various statistical evidence that proves that we are indeed experiencing a gradual economic recovery which has been fed by the federal reserves' determination to provide liquidity and increased risk appetite in the economy.

These events have fueled this market for several months and continue to destroy the accounts and patience of investors with decidedly short positions, and strangle fixed income investors who rely on yield. During this interesting market rallies we have seen some quite exciting stories; Japanese stocks have soared with the debasement of the yen, and then pull back slightly, Google has continued to inch towards world domination (My friend actually referred to the whole internet as Google), the tech giant Apple has been humbled in the markets, Elon Mosks' Tesla has defied EV critics and proved "profitable", precious metals have been destroyed while other commodities have seen incredible pull backs in certain areas and volatility in others, and finally the highly anticipated "tapering" of the QE initiative is being discussed extensively in the media.

Of course the main measure of the integrity of any market move is the quality of the companies earnings. Q1 earnings reporting were average overall; 65.2% of the companies in the S&P 500 beat bottom line expectation, but top line figures saw an average decline of 1% and only 49% of companies reporting above expected revenues. Furthermore, analysts revised down earnings expectations for Q2 but left estimates for earnings growth for the year at approximately 6%. The news has not been overwhelmingly bullish nor bearish , but the underlying feeling of economic expansion has led to a broad market rally.

I believe this puts the market at a disequilibrium and presents active investment professionals some trading opportunity. Owing to the idea that all stocks are not created equal, I put it to you that there are some stocks showing tremendous value potential and others that are generously valued, and a stock picker with great market timing will be able to take advantage of this disequilibrium. Over the next few weeks i will look to profile some companies which i believe fit into these categories and give my rationale behind each thesis.

That is not to say that this is an active managers market in the least bit, Passive investment strategies will find ample opportunity to re-enter this market in pull-backs, but as we have recently witnessed, pull backs come scarce and shallow in this medium term bull market. The 3 weeks from May 20th to June 6th was the largest pull back the market has experienced since april, with stocks barely retreating 5%. The Dow barely broke below its 50 DMA before employment numbers released on June 6th lent a beacon of hope to which investors hung on and ignited a rally.

This new paradigm bags the question "is this market doomed to succeed ?" I say this because it seems that regardless of the tenor of news that is released, a market rally occurs. Bad economic numbers briefly quenches the exuberance, until investors realize that the Fed has basically guaranteed free money until numbers improve, this is followed by a rally. Conversely, good economic data is initially met with market excitement and the prospect of "tapering" or the Fed cutting the proverbial umbilical cord is completely thrown out of the window. While there are clear forces supporting the market, what will cause the ceiling to reveal it self, and how will the market retreat?


Please look out for a daily news letter coming soon to My Trading Book as well as various reports on companies and macroeconomic themes.

Till then
There's always a Bull Market somewhere.

Pull Back in the Markets, Over Exhausted Rally

Recent Market activity has brought on the realization that the market has overextended its recent rally. Current market conditions lack a catalyst in either direction for the immediate future, therefore investors need to weigh the probabilities of a decided bearish pull back or continued rally in the $SPY. Below are arguments for and against a significant 5-10% pull back in current indexes ($SPY, $DIA, $QQQ)

PULL BACK 

The Fed signaled a need to revise the longevity of its asset purchase program in its latest FOMC meeting, citing inflation, asset bubbles and possible complications to withdrawing stimulus as material risks of ongoing easing. Gold, crude oil and stock futures are down on the news, while the VIX, a measure of market volatility, is up 20%. The market has rallied despite a lack of indication that the economy is improving materially, with 4th quarter GDP down 0.1% and the unemployment rate holding at 7.9%. While corporate profitability has risen, it has been more a result of cost cutting programs than revenue growth, which strengthens the notion that the market has improved faster than the overall economy, which is growing at a steadier pace.

With the S&P 500 near an all time high, there seems to be no real catalyst driving traders to buy in further, especially as the primary catalyst, QE 3, and Bernanke's recent promise to continue to buy $85 billion of securities a month until employment and the overall economy improves come into doubt. And while equity inflows started off the year positively, recent data shows an net outflow in February as investors started to lock in profits and get more defensive in anticipation of a pullback that it this point seems inevitable. Market sentiment is becoming increasingly negative and more investors are taking the short side of the trade. Hedge fund manager David Einhorn reduced his long positions and increased his short positions. His reason, an advancing market without the presence of an advancing economy to support current valuations. The truth of the matter is, we are not yet out of the wood works. The European situation has improved and is relatively stable but downside risks remain and improvements in the European economy have yet to materialize, with recent economic gauges coming in less than expected. The U.S economy is stronger and optimism is up, but the market has gotten ahead of its self. While there is room for growth, especially as 2013 rolls forward, a pull back in equities to a level that makes valuations more in line with current business and economic conditions is inevitable and near. This market leaves no room for material gains on the long side and investors are paying a lofty price for earnings. A pull back of 5 - 10% in the near term is a more probable occurrence than a 5 - 10% near term rise, which makes taking the short side a better bet especially as global economic readings are coming in less than expected and will compound to trigger sell offs in equities. 

Continued Rally 

While recent developments from the Fed signaled a need to revise its asset purchase program, the need for continuous asset purchases was never questioned. The underlying factors causing the Fed to continue its asset purchase program is the pace at which the economy is recovering. Economic growth is being threatened by increasing interest rates, therefore as long as 10 year treasuries continue to increase there will be a growing threat to the recovery that was spurred by Bernanke's aggressive monetary policy. An increase in household and business debt costs as a result of increasing rates could serve to derail an already sluggish economic recovery, therefore as 10 year treasuries creep over 2% in the short to medium term there will be added pressure on the Fed to keep policies intact in order to keep rates relatively low and protect this slow recovery from derailing.

While increasing rates threaten the Bernanke "recovery" thus forcing the Fed to leave its asset purchase program as is, the market is also supported in large part by higher than expected corporate earnings; recent earnings reports show that 65% of the 433 companies in the S&P 500 have reported better than estimate revenue. Furthermore, the stock market valuation is still not overbought with a price to earnings ratio just less than 14 which is well below an historic overbought valuation of 16.

The markets show signs of normal fatigue that will not amount to more than a 2-3% correction from its current levels. Having rallied 6% this year and already pulled back 1%, short term fatigue and some profit taking may occur, but longer term investors can rest assured that the breadth of this rally is still intact. The impressive earnings and Bernanke's need to bolster the economic recovery will serve as support for this market and protect it from an excessive or elongated correction.

 Disclosure: We have no current position in any stocks listed above, however we may decide to enter one within 72hours of this article.

 This blog post was written in collaboration with Samer Sweidan