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On my paid site: Buying technology on the coming dip

posted on June 30, 2016 at 8:15 pm
Internet

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy I call tactical stock picking.

Over the last few days on this free site and on my paid site, I’ve posted my views on the short-term and medium-term effects of the Brexit vote.

Today’s post is about the coming dip in technology, why it will happen, and why it’s a good buy on the dip opportunity.

Brexit and the stronger dollar are likely to produce guidance for the third quarter that’s even more disappointing than the current Wall Street estimate of a 7.2% year over year drop in earnings for the second quarter for the stocks in the Standard & Poor’s 500.

If you look at what sold off during the two day Brexit crisis, you’ll find the expected list in the technology sector–stocks like NXP Semiconductor (NXPI) that are headquartered in Europe–and some unusual candidates such as Facebook (FB). In the case of Facebook the drop seems to be due to short sellers talking up the hit to revenue that Facebook and other technology companies face from a stronger dollar.

I think that leaves the market positioned to focus on the effects of a stronger dollar. Expect to hear about the dollar as headwind in the earnings reports from the big technology companies that report in mid-July: IBM, Microsoft, and Intel.

When you’re looking for bargains in this market do remember that the second quarter is almost always the worst quarter for technology stocks. You’re buying for the recovery in the third and fourth quarter–make sure you believe it’s going to materialize this year.

That’s what I’m working on at my subscription JubakAM.com site. (I’m still, yes still, at work on what’s turned out to be a very complicated post on the robotics sector and on one about water stocks that should go up on JubakAM.com in the next day or two.

I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

 

Bank of England joins cast for “Summer of Stimulus”

posted on June 30, 2016 at 7:56 pm
United_Kingdom

Now that’s what I call “understatement.”

“It now seems plausible that uncertainty could remain elevated for some time,” Mark Carney, head of the Bank of England said today in his second televised speech since the United Kingdom voted to leave the European Union. “The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer.”

And with that the Bank of England has joined the Bank of Japan as the first two of the big global central banks to put stimulus to mitigate the damage from Brexit explicitly on the schedule. On June 28 Toshihiro Nikai, chairman of the Japan’s ruling party’s general council, proposed a 20 trillion yen ($196 billion) package to Prime Minister Shinzo Abe, the Nikkei newspaper reported.

An interest rate cut by the Bank of England would be a huge break with the bank’s policy since March 2009. That’s when the bank last cut interest rates to a record-low of 0.5%. Since then the bank has maintained that 0.5% was the lower bound for interest rates in the United Kingdom.

After the Brexit vote, however, that no longer seems to be the case with Carney’s speech today clearly indicating that the Bank could take rates lower if needed.

The pound didn’t much like the news. The currency is down another 0.76% today from the June 29 close.

Stocks, however, have react with enthusiasm as the FTSE 100 index is up 2.27% as of 1:50 p.m. New York time.

The Standard and Poor’s 500 stock index is ahead 0.97% as of that time. U.S. benchmark West Texas Intermediate crude was off 2.35% either on the news, which promises a stronger dollar (always the source of downward pressure on commodity prices) or profit taking after West Texas Intermediate rose to within kissing distance of $50 a barrel at $49.88 yesterday after plunging to $46.33 in the Brexit sell off.

On my paid site–China weakens the yuan, Japan looks to stimulus, why bargain hunting is so hard on this dip, and my take on bank stocks

posted on June 28, 2016 at 6:39 pm
United_Kingdom

On my paid site JubakAM.com I aim for a mix of posts on macro trends and on individual stock picks. It’s a strategy I call tactical stock picking.

Over the last few days on this free site and on my paid site, I’ve posted my views on the short-term and medium-term effects of the Brexit vote.

In addition to those posts on my paid site I’ve tried to remember that not everything is about the U.K. and European markets and economy.

For example, today the People’s Bank of China lowered the dollar/yuan reference rate. The last two times the People’s Bank did this–in January and last August–it contributed to an emerging markets sell off. The fears in those markets were that a strong dollar and increasing competition from lower priced Chinese goods would make it tougher for companies from Brazil to India to sell their goods.

Today’s rally, June 28, looks to be based on hope that global central banks will start new stimulus packages. First one up I note in a post today on JubakAM.com, looks to be Japan where the government has proposed new stimulus to weaken a yen that has soared on the flight for safe havens after Brexit.

I’ve also posted, twice, on why the Brexit crisis is so tough on bargain hunters. The first, more general piece, looks at how this is likely to be a very extended crisis–which means that the markets will have time to vacillate between hope and fear a number of times over the next two years. The second, a more specific piece, applies this logic to the banking sector. The tough thing about finding bargain investments among bank stocks is that the sector is undergoing so much change that its hard to know what stocks are selling off because they should and what stocks are bargains because this crisis hasn’t changed favorable fundamentals. I end with a list of stocks to watch as trends in the banking sector develop.

That’s what I’m working on at my subscription JubakAM.com site. (I’m still, yes still, at work on what’s turned out to be a very complicated post on the robotics sector and on one about water stocks that should go up on JubakAM.com in the next day or two. Before those get posted, though, I be putting up a post 0n Brett bargain hunting in the technology sector and the timing of any search for bargains..) I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more of my thoughts on the market in my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

UK voters decide to leave the European Union: What’s next (Part II medium term)?

posted on June 27, 2016 at 11:10 am
Car-cliff_470x225

It’s useful to think of the medium term effects of the “leave” victory in the Brexit referendum as two connected sets of toppling dominoes.

First, there are the political dominoes inside the European Union (and the United Kingdom) itself.

In the immediate aftermath of the vote, right wing Euro-sceptic parties in the Netherlands, France, Sweden and Denmark have called for their own referendum on leaving the European Union. Special votes aside, beginning this Sunday with the Spanish elections, the calendar of the European Union is marked with a series of regular national votes over the next year that will see the voices of various “leave” parties raised in even higher volumes. It won’t help that the likely results of many of these elections will be a relatively weak status-quo government (in Spain and Italy, for example.) Or that the uncertainties that follow on the “leave” victory in the Brexit vote will slow already slow economic growth in the EuroZone. Or that the policies of economic austerity that dominate the debate in Germany, the de facto leader of the Euro Zone, are deeply unpopular in most countries in the European Union and have clearly demonstrated–to me at least–that they don’t work.

Back in the United Kingdom, we’re looking at political turmoil as Scotland, and Northern Ireland, both of which voted to stay in the European Union (by 62% and 58%, respectively), look to renegotiate their relationship with the government in London. (Assuming that London remains the capital. London too voted heavily in favor of staying in the European Union and there have been calls today for the start of a movement to have London leave the United Kingdom and join the European Union.)  At the least I’d expect to see Scots nationalists push for a new vote on independence from London (and membership in the European Union.) Any likely Conservative government that will replace that of recently resigned Prime Minister David Cameron is likely to be headed by a politician that campaigned for “leave” (Can you say former London mayor Boris Johnson?) and be truculently opposed to any negotiating stance that smacks of compromise with the European Union or Scotland, Ireland, Northern Ireland, and Wales. (My nomination for the worst job over the next two years isn’t negotiating the terms of the country’s departure from the European Union, but hammering out some agreement on the treatment of the new border between non-EU Northern Ireland and EU-member Ireland.) The Labour party is likely to be in turmoil as members–thought to be about 60% to 70% pro-EU–blame current leader Jeremy Corbyn for the defeat of the “stay” position in the referendum. Add in the gonzo mess that is the UK Independence Party (UKIP) headed by Nigel Farange, with its ultranationalist rhetoric of keeping immigrants out and its belief that the United Kingdom will be able to negotiate tariff-free access to the European Union after the vote to leave (I’m not making this up. See here http://www.politico.eu/article/post-brexit-ukip-wants-tariff-free-access-to-eu-single-market/ )

Looking around the United Kingdom and the European Union as politicians begin the two-year process of negotiating the country’s departure from the European Union, the overall impression will be chaos, with out of control rhetoric, and nary an adult in sight. (How long can Angela Merkel find the energy to try to play this role? She does have her own domestic anti-immigrant party to worry about.)

Which would be bad enough if there wasn’t a good chance of seeing the United Kingdom and some parts of the European Union slide into recession in the next year. Think the uncertainty over the rules of the economic game won’t lead businesses to cut back on investment? Think tourists won’t decide not to take a trip because they don’t know what the border rules might be? Think English retirees won’t have second thoughts about buying property in the south of France or on the Spanish coast? Think Polish restaurant workers in London won’t decide this is a good time to explore returning to Warsaw?

Moody’s Investors Service lowered its outlook on the United Kingdom’s credit rating to negative from stable on June 24. It cited slower economic growth in the country as a result of the Brexit note and more pressure on the country’s finances as the United Kingdom continues to struggle with a current account deficit that requires large inflows of overseas capital. (Which is likely to require higher interest rates after the Brexit vote.) Fitch Ratings, the last of the big three credit rating companies to give the United Kingdom a AAA credit rating, called the high credit rating “untenable under the circumstances” after the vote.

Economic analysts seem to be divided between the optimists who simply see growth slowing in the United Kingdom after the vote and the pessimists who expect a recession. Deutsche Bank, for example, cut its forecast for 2017 to 0.9% from a prior 2.1% forecast. Pantheon Macroeconomics, in the pessimists camp, sees slowing corporate investment, lower employment, and depressed consumer spending leading to a recession. Hard to argue with that logic. The United Kingdom did $500 billion in trade with the European Union in 2015–the terms of that trade are now up in the air. (Ireland is the European Union member most exposed to any decline in trade with the United Kingdom since 18.6% of Ireland’s trade is with its neighbor.) On June 24 the pound fell 8% against the dollar–which made U.K. consumers 8% poorer when they go to buy, say, an iPhone or anything else priced in dollars.

How many of these dominoes fall will depend on the reaction by other European Union members–a desire to punish the United Kingdom so nobody else tries to leave will make things worse. (At a minimum such a stance will indicate that Brussels doesn’t understand how much the structure and attitudes of the European Union bureaucracy are a big part of the problem.) And on how quickly and how far growth falls in the United Kingdom after the vote and how many economies in the European Union it takes down with it. It’s not like the problems in Greece and other European economies are a thing of the past.

Second, the fall of these U.K./European Union dominoes will affect the tumble of dominoes in the rest of the global economy.

Remember that when it decided not to raise interest rates back on June 15, the U.S. Federal Reserve gave uncertainty over the Brexit vote as a reason to wait. Now that Brexit is a reality as opposed to just an uncertainty, I can’t see the Fed being anxious to increase U.S.interest rates. Higher U.S. interest rates would put more pressure on the pound and the euro. It would slow the U.S. economy at a time when the global economy as a whole looks likely to slow as the force of Brexit hits the economies of the United Kingdom and the European Union. Recognizing this, the futures market has virtually dismissed the possibility of an interest rate increase at the July 27 meeting. In fact, the CBOE calculations show the market now pricing in a 7.2% chance that the Fed will cut interest rates in July and a 12.7% chance that the central bank will cut interest rates at its September 21 meeting. It’s not until the December 14 meeting that the odds include a significant–18.1%–chance of an interest rate increase–and even then the market is still pricing in a 10.2% chance of an interest rate cut.

Much of the Fed’s course will be determined by how the global currency dominoes fall. The pound, of course, is forecast to move lower. The currency, which closed at $1.3679 agains the dollar on June 24, is already down 13.3% in the last ten months. Some currency analysts are forecasting a drop to $1.20. The euro is likely to fall on Brexit uncertainty. On June 24 it moved down to $1.1117 against the dollar. The 52-week low is $1.0524 and I’d be surprised if we don’t revisit that level, especially since the European Central Bank is unlikely to move to strengthen the euro after working so hard to weaken it to accelerate growth. The off-shore yuan–that is the Chinese currency traded in Hong Kong–fell 0.8% against the dollar on June 24.

A stronger dollar carries two risks. First, it will create a drag on U.S. economic growth as it cuts into U.S. exports by making them more expensive in other currencies. Second, it puts pressure on emerging market currencies, which are already feeling the effects of the usual cash outflows in times of uncertainty. Both the Mexican peso and the Brazilian real, for example, fell against the dollar on June 24. This kind of concerted downward move in the yuan and in emerging market currencies conjures up memories of the emerging market sell off of last summer.

The world’s central banks are determined to arrest the fall of as many dominoes as they can. Every bank from the Bank of London to the Federal Reserve issued statements promising to provide liquidity even before the Brexit votes were counted. It’s not clear to me, though, that stretched as they are by near-zero or below-zero interest rates, how much leverage central banks have to affect exchange rates or national economies. The Bank of Japan is in an especially tight spot because the yen’s role as a safe haven currency keeps pushing the yen higher at a time when the Bank of Japan wants to see the yen move lower to encourage economic growth in Japan. The currency appreciated briefly to 100 before weakening at the close to 102.22. A close at 100 is likely to bring intervention by the Bank of Japan–and more currency market turmoil–currency analysts forecast.

Before Brexit the general worry among central bankers was that the world would face another crisis before the global financial system fully recovered its equilibrium from the last crisis. In the wake of the Brexit vote that worry has gained in focus and immediacy.

As the next few days progress, I’ll try to post some concrete moves to take in this period of uncertainty.

Dollar falls (again) giving oil prices a needed respite

posted on June 17, 2016 at 7:12 pm
dollar

The U.S. dollar is down for the third straight day and that has given oil prices a chance to recover after six straight declines.

The dollar, as measured against the basket of currencies in the Bloomberg Dollar Spot Index, is down 0.42% today, as of 1:30 p.m. New York time. The dollar is down 0.86% on the this index since June 14 and down 1.96% from May 31.

Oil, on the other hand, has rallied today with the U.S. benchmark West Texas Intermediate up 2.75% to $47.48 a barrel and the Brent benchmark up 3.18% to $48.69. That still leaves West Texas Intermediate down about 3.5% for the week.

My opinion is that this marks a one-day bounce after a strong selloff in oil and on the fall in the dollar. West Texas Intermediate hit $51.23 on June 8 and the $51 a barrel level seemed to make traders very nervous as they contemplate a recovery in Canadian production after the wild fires near the country’s oil sands facilities and the possibly of production rebounds in Nigeria and Libya. Plus every step toward $55 or so brings out worries about increased production from U.S. oil shale geologies.

Interpreting today’s price action in oil gets a little extra complicated because today, June 17, is a triple witching day when options and futures expire and traders who want to keep on hedges or bet on the direction of the market have to rollover expired options and futures into new contracts. That always creates extra volume and volatility in those markets and can increase the size of price moves. That’s especially likely on a witching day like today when traders are trying to position themselves for a potential big volatility day on June 23 when the United Kingdom holds its referendum on continued membership in the European Union.

English bookmaker Ladbroke is still giving odds that favor a vote to remain in the European Union but the odds have moved toward a “Leave” vote in the last week.



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