This
Week in Barrons – 8-17-2014
Due Diligence:
Ever since the 1920's, the
practice of ‘due diligence’ has been the mantra of the financial
community. To avoid getting caught up in
the crazes, or the lies – smart investors pour over financial statements in
order to discover elements such as fake companies and ponzi schemes. This fundamental analysis was the most important
term in investing for the next 85 years.
Since ‘due diligence’ takes
time, effort and knowledge, the cottage industry of ‘financial analysts’ was
born. Financial analysts are paid to
look deep into a company, confirming their true sales, their true assets versus
liabilities, the market trends and then (based on those findings) place a
rating on the company. The feeling being that if sales were growing and
revenues were exceeding expenses, it stood to reason that the company would
become more profitable over time – and hopefully share that good fortune with
the shareholders. Therefore, people
owning the company's stock would likely see a dividend, and (as the company
became more profitable) its share price would rise. It just made sense.
Unfortunately, one of the
saddest things that I've had to tell people over the past 10 years is that when
it comes to stocks, I don't care about: (a) the company, (b) what it makes, (c)
their earnings, (d) their new CEO, or virtually anything other than the market
technicals. Why? Because the fundamentals have become virtually
worthless. Corporate numbers are so
tweaked and distorted lately, that they bear no resemblance to reality. And how can you use fundamentals and ‘due
diligence’ to judge a company, when the numbers you're using to determine its value
are corrupt?
My favorite example of worthless
‘due diligence’ is FASB’s (Financial Accounting and Standards Board) decision
to let banks mark their assets to ‘Model’ rather than to ‘Market’. Can you imagine? That's like me telling
you that your house (according to my computer model) is worth $500,000 when (in
fact) nothing has sold in your neighborhood in the past 3 years over $100,000. Yet if I was a bank - I could list it as
a $500,000 dollar asset on my books – because it’s value is based upon my
computer ‘Model’ not any ‘Market’ relevance.
I can’t even imagine the amount of over-priced assets out there on
bankers’ books.
On the stock side, my
favorite ‘due diligence’ example is CYNK Technology Corp. CYNK is a social media development
company that recently had a market capitalization in excess of $1 billion. CYNK was founded
in 2008 but has never commenced operations, only had one employee, no website,
no revenue, no product and no assets. This
year the stock has traded for 10 cents (or less) through June 16, after which
it began a ride up to a closing price of $13.90 on July 10. We’re not talking about the tech craze
of the 90's here – this was just a month ago. But that same greed, hype, made-up figures,
lies and manipulations allowed CYNK to rise just like: (a) the 1920’s run up
and crash, (b) the 1990's run up and crash, and (c) the 2007 run up and crash.
Speaking of ‘due
diligence’, does this sound like a healthy global economy? Last week:
-
Germany
and France's GDPs fell,
-
The
German 10-year bond fell below 1% for the first time in HISTORY,
-
Wal-Mart
warned for the balance of the year – blaming Obama-care,
-
Italy,
Romania and Cyprus are in recession,
-
The Belgium,
Czech, German, Latvian, Hungarian, and Polish stock markets are all down
considerably year to date, and
-
The
Euro-Zone's three largest economies (which account for two-thirds of the $12.8
Trillion dollar GDP) posted 0% growth.
Now, how exactly does that
news translate into a bullish signal for stocks? If you can't trust the fundamentals to make
your investing decisions, what can you use? I’ll say: (a) use your own common sense, (b)
your ability to connect the dots, and (c) a stock’s technical patterns (given
computer trading makes up over 70% of the current trading volume on Wall
Street). Find the right chart patterns,
try to be in the right sectors at the right time, and you'll do fine.
The point of all this is
simple: fundamentals used to be a good way to invest for the long term, but
those days are long gone. Honestly,
there isn't a sole alive that really believes our vaunted Federal Reserve when
they tell us that inflation is running below 2%. Yet, the entire credit market uses their
numbers as the basis for swaps, bond rates, and social security benefits. Just know that the closer we get to the mid-term
elections the more absurd these numbers (and lack of ‘due diligence’) is going
to become. Welcome to ‘fantasy football’
season – it’s right around the corner.
The Market...
For a minute on Friday
(after listening to the news flow out of Russia and the Ukraine) I thought I
was living in the Matrix. The market was
up by 65 points, and at 11am it turned on a dime and went to being down
80. The news that was hitting the wires
was a statement out of the Ukraine that said a Russian convoy of arms had tried
crossing into the Ukraine, and the Ukrainian military blew it up. This
naturally led to a lot of speculation about what Russia might do in
retaliation.
Then the strangest thing
happened. The Russians put out a
statement saying that they did NOT have an arms convoy crossing the border, and
that the Ukrainian statement was a fantasy.
Instantly, the world tried
to do their ‘due diligence’ – looking for photos of the wrecked convoy, but
there were none to be found. Wait a
minute. The Ukrainians – the good guys
(yes) - said that they blew up a convoy of weapons and there are NO
pictures? IF the Russians are sending
convoys of weapons to the rebels and the Ukrainians blew them up, wouldn’t we have
a true escalation-taking place? But IF
the Ukrainians simply made up this story to further the pressure against the
Russians, then that (in and of itself) is an escalation. In either event, that entire situation isn't
good.
But if nothing goes ‘bump
in the night’ over the weekend, I think we see the market shake off the jitters
and push us higher, in a nervous, herky-jerky fashion – fully knowing that
weird news could hit at virtually any time. This is a wacko-market where buying smaller positions
and taking your profits quickly is the way to play. Don't swing for the fences (just yet) in this
market.
Tips:
I continue to follow my plan – looking for ‘income plays’
(spread trades) and monitoring the positions closely. When I say ‘spread trades’ I mean:
- IF a stock is moving up or
sideways, then I ‘SELL’ a Put-Credit Spread, 1 standard deviation out of the
money, and
- IF a stock is moving down or
sideways, then I ‘SELL’ a Call-Credit Spread, 1 standard deviation out of the
money.
My current list of potential spread candidates include: AZO,
CBRL, HOG, BA, CMG, UTX, SLB, PII, URI, BAX, KRE, BEAV, OEX, CBI, TWX, SHPG and
SPY. In terms of directional trades:
- Buying TLT (the Bond ETF) on
pullbacks to the 8-day and 21-day moving averages, and selling at extensions
has been working nicely for the past 11 months, and
- Buying stocks that have a mind
of their own (despite what the market is doing) such as TSLA, FFIV, AAPL, NFLX
and CMG continues to work in weekly increments.
Examples of
2 spread trades that we did this week are:
-
EWZ – the Brazilian ETF.
Days ago, Brazilian Presidential candidate - Eduardo Campos was killed
in a plane crash. This sent the entire
Brazilian market lower, and sent EWZ down by as much as 2.6%. It is now
holding support at its 100-day moving average. The volumes are elevated,
and I therefore sold an Iron Condor for September expiration. I used 2-point wide strikes to limit my
risk. I SOLD the SEPT – 45/ + 43 PUT’s &
the - 52 / +54 CALL’s for $0.45 per share.
-
IWM – the small cap ETF.
I think that there is a good set-up here for September. There are elevated volumes, and nice premiums
to be sold. Again, I used 2-point wide
strikes to limit my risk. I SOLD the SEPT
– 106 / + 104 PUT’s & the - 118 / +120 CALL’s for $0.50 per share.
My
current short-term holds are:
-
AAPL
(Tech) – in @ $92.86 – (currently $97.98),
-
DLTR (Retail) – in @ $51.97 – (currently
$55.60),
-
KO (Beverage) – in @ $41.17 – (currently $40.88),
-
LNG
(Energy) – in @ $57.40 – (currently $73.23),
- NUGT (Gold) – in @ $41.10 –
(currently $46.94),
-
TLT (Bonds) – in @ 112.32 – (currently $117.71),
-
SLV (Silver) – in @ $20.17 – (currently $18.86)
-
SIL (Silver) – in at 24.51 - (currently 14.06),
and
-
GLD (ETF for Gold) – in at 158.28, (currently
125.48)
Diving
back into some Small Caps:
-
FET (Oil) – in @ $25.14 – (currently $32.36),
-
GTAT (Tech) – in @ $17.84 – (currently $17.36),
-
IDTI (Tech) – in @ $15.08 – (currently
$15.22),
-
IG (Tech) – in @ $6.24 – (currently $6.12),
-
LEJU (Tech) – in @ $13.07 – (currently
$13.57),
-
PEIX (Oil) – in @ $19.34 – (currently
$20.38),
-
RFMD (Tech) – in @ $11.05 – (currently
$11.54),
-
TSRA (Tech) – in @ $28.05 – (currently
$28.73),
-
VDSI (Tech) – in @ $14.17 – (currently
$14.23), and
-
VTNR (Oil) – in @ $7.87 – (currently $7.86)
To
follow me on Twitter and get my daily thoughts and trades – my handle is:
taylorpamm.
Please
be safe out there!
Disclaimer:
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