March 2016

[admin]

Zacks is saying something interesting:

ISM Services was steady at 53.4 and showed signs of potential improvement ahead. 

The competing Markit's US Services PMI report was in contraction territory with very pessimistic overtones including this comment from their Chief Economist, Chris Williamson: 

"Business activity stagnated in February as malaise spread from the manufacturing sector to services. The Markit PMIs are signaling a stagnation of the economy in February, suggesting growth has deteriorated further since late last year." 

Which report is to be believed??? 

ISM is considered the oldest and most widely used version of the services report. And clearly, that is the one that investors followed Thursday as stocks continued their advance. 

However, when I studied the history of these reports side by side it appeared to me that the Markit's version was more often the leading indicator of where the ISM report would be in time. If that holds true now it does not bode well for the economy and stock market. 

If you are reading the tea leaves the same, then don't forget to check out our latest portfolio recommendation services featuring the 10 best stocks to short now: Discover the Zacks Short List .

Remains to be seen, but we're leaving the January troubles behind with perpaps a little too easily..

[admin]

ANd the Ellie Mae CEO sells yet another $3M+ in stock..

But Needham just put a $100 price target on it.

[admin]

Have a look at this, from Seeking Alpha.

A Historic Bear Market In Metals & Mining Stocks

While the S&P 500 Index, as measured by the SPDR S&P 500 ETF (NYSEARCA:SPY), rose nearly 66% over the last five years, mining and metals companies, as shown by the SPDR S&P Metals & Mining Index ETF (NYSEARCA:XME), declined over 72%. This has been, without a doubt, one of the worst bear markets for commodity stocks.

[admin]

While equities move in advance of the underlying fundamental change, I'm not so sure the underlying fundamental change will happen anytime soon (that is, a pick-up in world growth), but jury still out, of course.

Oil rebound will eventually happen though, simply on the fall in investment and decline rates of existing fields.

[admin]

Here is the case for a bear market. We're not convinced it will play out this way, but looking around in the world economy, apart from the US, it doesn't look good, so it's prudent to keep these things in mind. From Zacks.

Right now there is a tug of war going on between bulls and bears. That explains the violent drop to start the year followed by an equally impressive bounce. That same chain of events took place last year August through October. Yet by my estimation the bears are winning the war. And now after this latest bounce is the perfect time to grab the rope with them for the next pull lower.  So yes, my goal is to get you to appreciate the bear argument to make changes to your portfolio. Not just to survive, but thrive in this environment that will likely last another 6-12 months.  That's because sticking your head in the sand to wake up to 30-50% losses is not an effective strategy. Hiding in cash is better... but why do that when there are ample profits to be made riding the bear to the finish line?  There is no singular data point or piece of evidence that guarantees that a bear market is on the way. Rather it is about assembling a case where the preponderance of the evidence points to the verdict.  In my recent commentary for the Reitmeister Trading Alert I have pointed out more than a dozen bearish arguments. However, putting them all here today might take the better of the weekend for you to read. Instead I am going to share with you the 4 best reasons to get bearish now.  #1- Bear Markets Are More Common Than You Realize  As human beings we are hard wired for pain avoidance. With that you see many investors trying their best to rationalize why a bull market will stay in place even when the odds keep stacking up against them.  Part of the problem is that most investors don't really appreciate how commonly bear markets occur. Yet as this chart shows you, there have actually been 25 bear market drops of 20% or more the last 87 years.  We all know that night follows day. Just as well bear markets follow bulls. The timing of which is just less certain. So with this being the 3rd longest bull market over that same 87 year stretch, it says that we are getting pretty close to the end.  More . . .

. Bear Market Deadline Nears Today Weekend Wisdom readers may download Reity's Bear Market Manifesto absolutely free. It prepares you for trying times and includes 5 specific trades that Steve has made for his own portfolio.  Also, for the next 30 days, you can look inside Zacks' full arsenal of anti-bear weapons including a brand-new strategy that has tested off the charts.  Don't just survive but thrive from the coming bear. But hurry - your chance to download the free Manifesto ends Sunday, March 6.  Download it now >>

#2- Earnings Recession  Look at this long term chart showing the EPS for the S&P 500 compared to the movement of the underlying stock index. You will notice that earnings rarely go sideways for any extended period of time. They are either trending up or trending down. And once the earnings start heading south, so too does the market.  As you can see by this chart, the earnings picture has likely already peaked and is starting to come down. Given history it says it will only get worse from here.  #3- Technical Picture  There are so many different flavors of technical analysis and it's easy to find one that contradicts another. However, one of the most time tested forms of technical analysis is the Dow Theory. Few models have a better track record for aligning investors with the long term trend than this indicator.  As it turns out the Dow Theory sell signal was issued in January 2016. And 60% of the time that signal is followed by a bear market.  Again, nothing in the world of calling a bear market is foolproof. But 60% likelihood of calling a bear market on this indicator, plus the rest of the evidence, starts to get pretty convincing.  #4- Valuation  Academic research is very clear on this point.  Low PEs = fertile soil for future stock advances.  High PEs = low odds of investment success.  The chart below, based upon the Shiller PE measure, proves this out. And right now the Shiller PE stands at 25.  You may be looking at the 10 year return of +0.9% and saying to yourself"what's the big deal...it's not negative".  The big deal is that the market never goes sideways for a long period of time. The only way to come out with a return so low is to have a bear market or two mixed in to drive down results. This is pretty much what happened after the tech bubble of 1999 and how the next decade gave virtually no gains to stock investors thanks to two nasty bear markets.  Indeed the current valuation picture says that a bear market should soon be on the way to cut stocks down to size.  What to Do Next?  I strongly encourage you to get ahead of the coming bear. Don't just bail out or ride it out. This is a unique opportunity to make substantial profits from it.  That's why I am inviting you to download my newly released Bear Market Manifesto free.  This Special Report provides additional information that could prove critical to your portfolio in weeks and months to come. Most importantly, it reveals my stock market strategy and 5 specific trades that I have made for my personal portfolio to beat the bear.  You might want to download right away because this free opportunity ends midnight Sunday, March 6.  Free Download: Bear Market Manifesto >>  Best,  Steve Reitmeister

[admin]

We've already argued for years that the euro has been a tragic mistake and the odds are on that it will end very badly. Former BoE governor Mervyn King isn't optimistic either:

Germany’s membership in the euro zone has achieved the opposite of what its architects intended because the single currency has driven its constituent nations apart, former Bank of England Governor Mervyn King said. “I worry that this is now going to be a battle between the political will of an elite that created this who daren’t now admit that it was a mistake, and economic arithmetic,” King said on the BBC’s “Andrew Marr Show” on Sunday. “We’re all going to suffer from that.”

Germany Suffers Euro Headache That Will Hurt Europe, King Says - Bloomberg Business

And then there is formerly thriving Finland..

Few Finns probably thought that adopting the euro would mean more work for less pay. Yet trade unions are now getting ready to sign off on a deal that will cut workers’ income and raise working hours. Unveiled last week, it’s designed to boost competitiveness as the Nordic nation struggles within the constraints of the euro zone. The board of Finland’s biggest union, SAK, convenes on Monday to give it its final blessing, which would drive forward a painful process first kicked off by Prime Minister Juha Sipila after he took power in May. But it could be a tight vote. Four of SAK’s most influential members, representing 40 percent of its members, have already said they will reject the deal.

For Finnish Workers, the Euro Means Longer Hours and Lower Pay - Bloomberg Business

[admin]

And with the emerging market mess and the euro problems and the euro area once again slowing to a crawl and with zero inflation and beleagered banks, and then add:

The world’s credit boom is beginning to show dangerous signs of unraveling, ushering in a period of fresh turmoil for the over-indebted global economy, the Bank of International Settlements has warned. The globe’s top financial watchdog called time on the world’s debt binge, noting that debt issuance and cross border flows in emerging economies slowed for the first time since the aftermath of the global credit crunch at the end of last year.

Debtor days are over as BIS calls time on world credit binge

It's really hard to go all in on the markets, which is why we remain mostly in cash here.

[admin]

Another substantial ($16M+) sell from an Ellie Mae (ELLI) insider (the VP). We're not worried this is a negative sign for the business as these officials do this routinely. What bugs us a little is that it underlines our thesis (set out here) that ELLI earnings should basically use GAAP figures, which are less than half the non-GAAP ones that the street uses.

Simply because executive incentive pay makes up most of the difference, and officials sell routinely (and the share buyback program moppes it up), it's basically just management pay, in our view. ELLI is by no means the only company to practice this, and the business is otherwise run fantastically.

[admin]

Yea, we were a bit disappointed with the reaction of the share price of Jinko Solar (JKS) to the excellent quarterly result, but perhaps Jonathan is on to something here:

JinkoSolar is having an amazing year. Stock price has remained range-bound. Management may be keeping the share price down until May convertibles are repurchased. Once the convertibles are out of the way, share price can soar.

How Do JinkoSolar Shares Stay So Low? - JinkoSolar Holding Co., Ltd. (NYSE:JKS) | Seeking Alpha

And his case for the valuation gap in today's share price:

On Tuesday, JinkoSolar announced Q4-2015 results that were out of this world.

Quarterly sales grew year over year by a staggering 104.4% to $937.7M.

Non-GAAP net income was $54M, and operating cash flows were a whopping $357M.

Book value rose to $667M, which means the stock is trading at a mere 1.12X book value.

With these great results in mind, we do need to remember that JinkoSolar is developing a downstream business (constructing and operating solar projects) in China which has reached total capacity of more than 1GW.

The downstream business isn't meant to stay on JKS's books. The company is pursuing a spin-off which in my view could yield $1.5B-$2B. So, 55% of that would go to JKS, since 45% of the downstream business is already owned by three private equity funds.

This "not-so-hidden" asset should immediately increase JKS book value by 2x-3x.

[admin]

This is actually very good news:

The yuan strengthened after China’s central bank raised its fixing for the fourth day in a row and data showed a less-than-estimated drop in the nation’s foreign-exchange reserves. The currency stockpile shrank by $28.6 billion last month, the smallest decline since June, to $3.2 trillion, the People’s Bank of China said on Monday. That’s lower than the $40.9 billion decrease predicted in a Bloomberg survey of economists, and compares with December’s record drop of $108 billion as the monetary authority supported the yuan.

Yuan Strengthens as PBOC Raises Fixing, Reserves Slow Decline - Bloomberg Business

Capital outflows are slowing, at least for now and this eases the possibility of a substantial yuan depreciation, which would be really bad news for the world economy.

Curious futures are down.