Friday 30 October 2015

Top Tweets Today: 30/10/2015

Scandalous drug maker Valeant announced today that it is cutting ties with Philidor Pharmacy after dodgy practices came to surface which saw the company plunge as investors ran for safety after expectations that management may be engaging in a ploy to cover up fraudulent accounting.

The company cutting ties now doesn't repair the damage loyal shareholders have suffered in the last 2 weeks and it won't bring it back either. Considering that before the scandal broke the company was a sweetheart amongst fund managers due to the low R&D costs, this in itself was starting to spell trouble for long term profitability because without the production of new drugs the company wouldn't be able to pay off the massive amount of debt racked up in acquiring smaller players.
Final trading day of October and what a superb month it has been for most financial markets with US indices bouncing strongly approaching the end of the year. With just over 60 days left in the year I think there is a distinct possibility we may see a small but positive return for the year which hasn't always played ball at the best of times.

Here's to hoping...
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Iron ore slump hurting Kumba

Iron ore prices have been the major news this week as prices slumped to multi year lows on increased supplies making their way to market from the larger producers. Their attempts are aimed at the higher cost producers who would not be able to sustain themselves for a lengthy period of time with subdued price pressure.

Chinese steel mills ramped up production in the wake of weaker economic growth with the government hoping to plug unnecessary spending in the trade balance due to a lack of supply in China itself. These steel makers sit at the high end of the cost curve however they are able to access funds from the government willing to bail them out of financial woes thus putting even further pressure on export producers.

What they didn't expect was the dramatic fall in economic activity that has blown the situation out of all proportion.

One stock that has received a drubbing as a result has been Kumba Iron Ore, based in South Africa producing most of its ore from Sishen in the Northern Cape.  Traders released their creative ability when weighing up what the last two years has been like if you had invested in the stock back at it's highs of R620!!!

That's right folks, from that high made in early 2013 till this week's lows represents a staggering 91% loss in share value. I must admit seeing the price around the R150 level did look attractive at one stage but didn't appeal to me with such weakness and seeing the price over 60% off from those levels does make me feel happier that I didn't take a long term hold at that time however I do think that at these levels you have to see some sort of value coming through.  

This tweet perfectly sizes up the situation many mining stocks face at the moment, Lonmin, third largest producer of platinum in the world now sitting at stock price below R5! Kumba the same example , I really can't envision seeing any further drops, commodities obtain there worth through intrinsic value , it impossible for them to go to zero.

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Thursday 29 October 2015

China drops the one child policy to stimulate future growth

The China Communist Party announced today the end of a policy put in place in 1979 to restrict the amount of children a family could have, increasing it from one to two as the "Sleeping Giant" battles an aging crisis that could have severe economic consequences in the future.

The policy was put in place 36 years ago when resources in the communistic state was scarce and the government at the time attempted to control population. Fast forward almost four decades and the intended effect has worked it's way through so much so that we're starting to see negative traits appearing.

Because the limitation has restricted the number of newborns it has resulted in an aging nation, however as the population grows older so does the need to look after these people something that requires a decent pool of tax paying money. The shrinkage has resulted in a decreasing population among people between the ages of 15-64 and increase in persons over 65.
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Ukraine and Russia at loggerheads over debt owed

Arguably one of the world's most influential leaders, Russian President Vladimir Putin has not alway won over the hearts of all who cross paths with him. He is probably the biggest critics of the US without leading the conversation into radicalism, shooting straight from the hip, the actions by which has landed his country in economic trouble by defying both the US and European leaders orders to undo his annexation of Crimea.

Putin's aspiration in former Soviet states is to prevent further economic and political power finding it's way into the world's largest trading bloc, the EU. Russia hasn't always be on good terms with their western neighbours with leaders of the now defunct communist state claiming its stake by building the infamous Berlin Wall, so there is still a level of animosity between the nations even after the fall of communism.

The trouble began brewing when then Ukraine President Viktor Yanukovych who happened to be an ally of Putin, was swayed away from joining forces with the European Union and subsequently rewarded with a bond of $3 billion to seal the ill-fated friendship. This lead to the fall of Yanukovych after the people of Ukraine objected to the move that would bring them closer to their former master.

In the end Putin sent his troops to Crimea to send a militant message to his detractors that he would not simply roll over and allow such revolution to destroy his plans. The people of Crimea voted in a referendum that saw them casting their ballots favourably in separation from Ukraine with Putin ready on hand to sign a treaty declaring them a part of Russia.
However Ukraine, who was already facing fiscal pressure at the time of the revolution, has entered into an agreement with creditors to restructure its debt as it is unable to service it due to the war that has ravaged its economy and halted the normal course of business.

Of the debt that comes up the largest, Russia's monetary exchange it gave former leader Yanukovych in exchange for his political backing, is the largest but Ukrainian leaders dispute that this money requires repayment as it alleges that this was merely a bribe by Russia.

But Russia says that the loan was official and denies that it was made with the intention of winning support from Ukraine. The matter is now at loggerheads with both parties looking set to approach the courts to resolve the matter, something scholars and governments around the world say could be a landmark case that paves the way to future disputes.

Putin is an astute politician and I don't think he'd have openly given a bribe, however I do think he provided financial assistance to a country facing a crisis in return for support. Whether Ukraine has a good argument to present to the court reasons why they shouldn't be liable for this money will ultimately decide this case.

In the meanwhile court delays stifone existing debt payments that need to be settled because Russia needs to ascertain  whether this money is owed to them or not effectively halting the entire restructuring process and leaving investors frustrated at the extended periods to receive their due payments, something that doesn't build confidence especially for a nation that is in desperate need of capital to rebuild it's broken country.
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Wednesday 28 October 2015

Top Tweets Today: 28/10/2015

Ever wondered if you'll ever reach the height of success only few traders can say they've achieved by becoming profitable? Well to be frank I think it's a long road for any person to reach that and provided you put in the time and stay committed to the cause you will eventually see the results.

I found this tweet posted by Steve Burns that perfectly sums up what it feels like once you've reached your goal...I'll leave you to think about it...  
We've seen a good degree of consolidation occur in oil prices after a hard knock led the commodity to fall over 50% in just under a year. The technical patterns have all the characteristics of consolidation but the real question now is where to from here?

If you consider the facts in front of us, the price lies below before the 200 and 50 SMA which does push the bias in favour of the bears. This stat by Charlie Bilello shows how the current price being below the 200 SMA has registered the longest streak under that mark since 1984. I think that is significant and given the oversupply is being driven by producers I do feel that things still have to play themselves out before I could feel confident in seeing oil return to it's highs once again.
Going into today I was somewhat weary of the position to take as is the case most of the times around important economic events come into focus. Taking into account the massive rally we've seen off this year's lows it's not  hard to think that things could cool off before we start seeing any significant moves.

Everyone knows one of Warren Buffet's famous quotes "Be greedy when others are fearful and be fearful when others are greedy". The chart below shows exactly like and is provided by CNNMoney and unlike the most followed Fear Index, the VIX which takes into account the price of options, this indicator uses 7 factors to compute an outcome namely; Safe haven demand, stock price breadth, stock price strength, put and call options, market volatility, market momentum and junk bond demand.

By combining all these together you get a sense of what the Street really feels like at the moment and I'd have to say I would agree with the Greed bias  after we saw that great run. But will the Fed help the bears gain the edge of the bulls tonight after Janet Yellen presents the Fed's verdict?
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Thoughts on the Fed's announcement

I must admit that the hype we saw around the last FOMC meeting in September isn't prevailing today but there is a degree of edgeness leading up to the announcement. Although many expect the rates to be put on hold and probably till early next year the key in today's decision will again be the words that are used. 

Participates have become so sensitive to the slightest divergence in wording that a single change in a word or two has the effect to move markets in a big way. I think looking back to that meeting, markets were in a much different state than the calmer conditions we see today. 

The Fed cited reasons involving the shakiness in global financial markets stemming from a Chinese economic slowdown to tepid inflation that has diverged away from their long term targets as some of the things that Fed members were most concerned about and in essences held off hiking rates due to a risk of destabilising the system further. 

Now after witnessing the last month of price movement it would seem as if confidence has found its way back into global markets again. Part of the reason is the release of better economic data numbers coming out of China even if there are some that still disbelieve the figures being presented and the government has stepped in a few times to prevent further destruction. 

If you've been around long enough you realise there is always an over exaggeration surrounding news flow which requires us to step back from the chaos that is and look more deeply into the situation and formulate a view. In China's case, authorities have a number of measures it still has on hand to stimulate its economy which does lever a boost in confidence for investors who fear they may not react appropriately. 

I think what's slowly starting to emerge is the risk that the US economy may not be as equipped to handle whatever headwinds may be felt from a hike in interest rates even if it were only 25 bps. Since the Fed completely turned the monetary tap off we've seen markets become more and more skittish at the prospects of a hike making it very uncertain to how they will react. 

If anything, if the Fed were to continuing it's delaying tactics it's opening up the possibilities to introduction of more stimulus measures.This will inevitably lead to an even bigger crises that has been bubbling under surface for some time now. The Fed has used up all it's tools and now faced with a difficult decision to implement tightening measures that would be very unpopular with Main Street because too much attention has been placed on Wall Street.

The fact of the matter is global equity markets are hitting the pinnacle of valuations which can been seen in the record breaking movements happening on most indices but the real question is do they have the goods to back it up or will it just implode?  
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Tuesday 27 October 2015

Top Tweets Today: 27/10/2015

Remember when news publication Barron's said there was further downside to the Alibaba stock price? Guess who'll be eating humble pie today after the Chinese internet giant proved skeptics wrong  by beating forecasts. However it does point to a much better situation in China than may have been thought when global markets fell on growth concerns.

I've said a number times in my daily blogs that although Chinese growth has sunk authorities have a considerable amount of ammunition they can use to stimulate the economy, a situation that the US isn't afforded at present. The transitory nature of the economy is expected to put a drag on things put I think any nation wouldn't mind bragging about economic growth at just under 7% per annum wouldn't you ?
The Fed begins its 2 day FOMC meeting today with much expectation for rates to remain on hold for now quashing all worries that we will see interest rates hiked this year. Last meeting Fed chair Janet Yellen voiced her concern over Chinese financial market turbulence as well as a tepid inflation rates in the US caused by lower energy prices as a result of a commodities slump.

Since then we have seen an unimpressive earnings season that points to a weaker US economy and stronger dollar hurting earnings being repatriated back home. We have also seen the ECB expressing its intention to ease further as well as the PBOC dropping interest rates in China for the sixth time this year all but dashing the ability to hike rates.

My biggest concern is the longer the Fed holds off the greater the probability of it returning to quantitative easing, something I cannot see as a long term solution to prolonged economic supression. I think the world has found itself in a compromising position where it's flooded the market with free money which has found it's way onto global equity market and the risk of hiking could trigger an even worse situation than what we saw in 2008/09.

So far we seen how markets have performed without monetary stimulus which is anything but impressive clearly showing the markets need to be fuelled by free money. Unfortunately that is not a reality and all good things (this could turn into a bad) have to come to an end.

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Is US-China relations in jeopardy ?

In a move that signals relations between the US and China could become strained in months to come, the US navy sailed within 12 nautical miles of a man made island built by the Chinese in an effort to claim territorial rights to areas of the South China Sea that encroaches on nations such as Phillipines which the US has strong ties too.

The action prompted Beijing to respond saying

"The actions of the U.S. warship have threatened China’s sovereignty and security interests, jeopardized the safety of personnel and facilities on the reefs, and damaged regional peace and stability" 

This opens up an array of worries between the world's largest economic powerhouses as bad relations could set off a flurry of tit for tat action aimed at flexing political muscles to get the point across. President Obama met Chinese Premier Xi Jinping last month and told him in no uncertain terms that the US will not allow these actions to destabilise peace within the region and will do in it's best to keep it that way.
  

The move represents one of the first major disagreements between the nations after China's ascendency to economic powerdom but certainly won't be the last. The area has been a hotbed of spats between Japan and China with the US stepping up efforts to prevent further action which might throw the region into war.
So why is there so much tension about China building an island? I went researching and found this great site that breaks it all down. Apparently there has always been disputes among Asian countries as to who owns the right to the usage of the sea in the region. However there has been an agreement under international maritime law that gives each nation a claim to a set amount of sea before it gets classified as international waters meaning any nation may travel unhindered through those parts.

But given the close proximity of Asian countries to one another, these territorial claims overlap leading to disputes among them. With China building up dominance in terms of economic activity, they have seemingly thrown their weight around when it comes to staking their claim. So much so it's led to them building an island so as to increase their territorial space that other smaller nations namely the Philippines and Vietnam, will no longer be allowed to use  
This isn't the first time China has trumped on other nations toes with Japan and South Korea experiencing the same in the East China Sea only difference is these nations have enough clout to make China back away while others don't.

A trilateral meeting between the biggest economies in Asia is set to take place in Seoul on Saturday after a 3 year absence after the same disputes involving territories led the parties to call off all formal talks due to tensions. It's certain that much interest will be taken in the meeting to be held on Saturday to ascertain if nations are able to agree on some compromise that makes all parties satisfied but the way it's going it doesn't seem likely.

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Monday 26 October 2015

MTN is fined $5.2 billion for non-compliance

If you were holding shares in Africa's biggest mobile telecommunication network chances are you felt pretty much like Theo Reinecke who has posted a humorous picture showing what his position looked like after the price fell to a two month low on the back of an announcement made by the NCC (Nigerian Communication Commission) fining the telecom due to non-compliance with regulations by failing to disconnect unregistered subscribers.

The range of today's price action spanned between the high of 19295c hitting a low of 16123c until it eventually settled on 16644c at the close.  
To add insult to injury the company failed to disclose this fact to shareholders on it's main board listing on the JSE resulting in a flood of tweets from disgruntled shareholders demanding more transparency. The news broke in Nigeria earlier in the day but could not be confirmed until management sent out a security exchange announcement at 2:00 pm South African time.

All the while rumours flew around with flat panic as to what to make of the whole story as the stock began to tumble. Once confirmed the price plunged even further probably based on the dissatisfaction felt by shareholders.
Simon Brown, founder and contributor of JustOneLap had this to say about today's news:
To show the extent of the fine Wayne McCurrie, portfolio manager at Momentum Wealth indicated that the fine could have a crippling effect on the business that has made massive strides in building itself over the decades especially in Nigeria.
In my opinion I think we have once again seen a failure by top management in informing the market promptly when and if information, positive or negative, becomes known to them. I question the intention of management's action to not inform its shareholders. Where is the accountability?

The way in which they've handled the situation is atrocious to say the least leaving them with a barrage of questions that will be thrown at them at the shareholders meeting. Yet we've seen more than one occassion like this slip up with little to no action.

One incident that comes to mind is Pinnacle Technology when management failed to tell shareholders that one of the company's directors had been arrested for fraud involving a tender it had won. The director was cleared of any wrongdoing but judging what the negative press has done for the stock's price since that happen one can see there are issues of trust that have been abused and it's resulted in the stock being ignored.

If the JSE wants to retain and build interest from the public in trading and investing on the stock exchange it needs to make sure that these occurrences happen infrequently so as to build confidence in putting one's capital to good use knowing that it is protected by rules that hold management accountable.
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Moller-Maersk sees profit drop after slump in commodities

Another causality of the commodities slump is shipping giant Moller-Maersk who cut profit forecasts after a dismal 6 months which saw profits fall short of expectations by $600 million. The biggest concern currently is the route between Europe and China which makes up a big proportion of the company's profit.

 I think the downturn has hurt Moller-Maersk in two ways, you have nations who are shipping raw commodities off to China for production then once they are manufactured the Chinese ship the finished products to the world. Although that is still the case, the extent at which the Chinese are producing is significantly less than it was at the peak of the boom.

We've seen the situation exacerbate presently due to growing concerns escalating faster than what we've seen so far. I don't think shipping is a business I envisage going out of business very soon, considering the mass transportation of goods between countries and the ever growing relationship between them means there a consistent need.

China is far from full development however what the current situation does highlight is the good and the bad that comes with the age of globalisation. China may have saved us from a worse off scenario than what we thought but now it's bite the world back by hampering world economic growth as many nations rely on China to produce growth rates the world is expecting.
You know the saying "What goes up has to come down", well the number of rigs drilling for oil in the US is no exception as we've seen a huge surge and subsequent fall in rigs operating as producers respond to the drastic fall in oil prices.

We know this has been a tactic of OPEC to flood the market with excess quantity but you really wonder who's responding in the best possible way although we know that price wars aren't pretty. I think weighing up I'd say US producers are curbing the losses much better than there Opec counterparts.

This probably stems from the fact that US producers sit with more debt on their balance sheet with deep production cuts like we are seeing indicative of a more longer term presence. If that were to happen it doesn't bode well Saudi Arabia the dominating force within Opec who has been facing a raft of pleas from other member nations that have generally suffered economically as opposed to sector specific seen in the US.  
Given the drop in oil prices it would be expected to see a modest bounce in prices in the medium term, I believe that is now underway but if China continues to contract , prices may remain under pressure for a few years to come. We must also take note of reports over the weekend that Chinese authorities are in the process of coming up with a 5 year plan to stimulate growth.

 After a sixth cut in interest rates this year, that would be very welcomed as an economy needs both sides, namely fiscal and monetary, working together in unison, something the US can't brag about currently. However for these measure to fully realise themselves it will take a number of months as drag time can be expected.
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Friday 23 October 2015

Top Tweets Today: 23/10/2015

With all this talk about poor performance I thought it would be fair to give some commentary on stocks that have done well over the past year. Nike has followed on the lead from its logo and just did it outperforming every other component in the Dow Jones Industrial Average putting up a solid 38% returns year to date.

But technical analysts aren't bullish at current levels saying that after such a sustained run it would be better to pick up this stock on the pullback. Even the fact that the price has reached the upper limit of a measure that works out the difference between price and it's 200 moving average which would suggest the stock is ripe for the sell.
StockTwits highlighted an important point when it comes to trend trading and that is when a trend breaks the security which you are trading may become very difficult to trade or even worse may plunge/surge, depending on the position you take, to levels that could wipe you out.

I've spoken about Valeant in detail this week so I wanted to use another example to stress the importance of risk management when trading. Sketchers returned an exponential return of 835% in just 3 years but all those were returns would have been given back had you not monitored the situation properly and placed stops levels at crucial testing points.
Good day for tech companies who started the day all above 9% as Wall Street continues it's buying frenzy from yesterday. All three companies reported earnings better than forecasts with investors buoyed to get their hands on some. Amazon surprised many with a good beat after we saw rivals Walmart sink last week on poor performance. They clearly didn't share the same sentiments.
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Samurai Summary: Top Tweets 23/10/2015

Reality is setting in for most S&P 500 companies as a handful missed revenue and earnings forecasts sending quivers down the spine of investors. I find this article on the Economist highlight the stagnate situation most of the top companies are finding themselves in. They mention Walmart and IBM both reported bad numbers despite engaging in share buyback programs.
I don't think this is surprising if you consider that oil prices have fallen hard over the last year. There was always going to be stiff competition between shale producers and OPEC with these write downs as a result. Where it goes to from here ? Well I think US producers have began to tap off wells which definitely depletes some of the world supply but it's not enough to see anything steadfast.  
After Super Mario opened the door of possibility to an increase in stimulus in the eurozone, participants took to markets to show their appreciation of the campaign sending indices higher within a whisker of all time highs. The market also interpreted good earnings from McDonald's as a sign that the economy in the US may not be as weak as expected.

We are heading into the last few weeks until year end and we'll need to build a strong base for the bulls to work off if we are going to see a rally into the festive season. Although the week has been relatively weak yesterday's performance does ring a few bells in terms of key technical levels that need to be broken to confirm a break of the downtrend.  
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Thursday 22 October 2015

Top Tweets Today: 22/10/2015

ECB president Mario Draghi hinted at increasing the current amount of QE used to purchase bonds as the eurozone battles to sustain inflation higher than the 1% mark. This has been expected for a while now but today was the first time that Draghi specified a date for which policymaker would have to reassess the conditions in the eurozone that would suggest increasing the amount of bonds purchased each month.

The current expiration of the program is September 2016 but with inflation hovering just above the 0% mark I have a feeling we might see this extended into 2017.  With debt overflowing and the tax base declining it does look as if the situation could mirror what we are seeing in the US only difference would be the political tension stemming from disgruntled voters could very well discourage governments from implementing sweeping changes that would upset balance of things.
It's not all doom and gloom this earning season as McDonald's reported better than expected sales growth in the US for the first time since 2013. The world's most famous fast food outlet has battled stiff competition from the likes of Chipotle as it tries to rebrand itself towards a more healthier menu.
The company did say it expect headwinds to be felt from store restorations as well as higher than expected wage hikes.

I think it's a well known fact that the company receives a lot of flack from many corners of the weight loss industry as part of the problem of obesity setting in developed countries but I'm encouraged to see how CEO Steve Easterbrook has focused on food quality on the menu which is starting to play a big role in consumers choice especially in developed nations.

Companies often get lead down the route of improving shareholder value and end up churning out quantity rather than quality. What we finding here is in a constrained economy the consumer will look for the best value, something I think McDonald's has done well this quartet so let's hope they can continue this trend.
Judging by the opening session on US indices it looks like the downtrend is set to break if the bulls can find it in themselves to hold levels above the downtrend. We've seen a bleak 2015 in terms of returns as worries flood the market from US interest rate hikes to Chinese lack of economic growth. Those themes have cooled off quite a bit from the panic seen on 24th August this year.

It would be great to see the highs being tested again but it's not to see things could continue on there never ending path to heaven, sometime someplace somewhere this market will eventually kick the bucket, right now it's just a ticking time bomb.
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Valeant's shareholders bitter pill to swallow

Drug manufacturer Valeant plunged yesterday after research house Citron sent out a report accusing the pharmaceutical company of fraud by inflating sales numbers it recorded saying the company had created phony companies for the purpose of misleading shareholders by falsely recording the sale of products to speciality pharmacies who in turn were owned by Valeant and recorded such transactions as inventory.  One such company that came up was Philidor RX services.

The discovery was made after another speciality pharmacy R&O Pharmacy had filed a lawsuit in a California district court asking for relief after an "improper demand of payment" was made by Valeant seeking $69 million in debt owed. R&O Pharmacy said it owned Valeant nothing as there were no invoices to account for the money it said it owned.
To add further to the matter Citron reveals that upon investigation of the two pharmacies, Philidor RX services and R&O Pharmacy it would appear that they share the same patient privacy disclosure as well as the same contact details of the privacy officer. If you look closely at the design of the logos they contain similar features as well as colour of the text.

But it doesn't end there, they also found three other separate websites, again with the exact same contact details of the privacy officer. It has been found that each of these websites were created on the same day. Mere coincidence?

Investors had no knowledge of Philidor until Monday this week when the CEO J. Michael Pearson announced it has purchased an option to buyout the company. This was after alarm bells were raised to the relationship between the two companies without proper disclosure.

Some cite the reason for Valeant buying up Philidor is to cover management's tracks in the dubious dealings they been participating in after being caught red handed in an attempt to shift the focus from it.

It would seem that the bad press the company received yesterday isn't the only concerning sentiment that has been hanging around investors lately with accusations that the company buys up smaller pharma companies and then increases the prices of the drugs sold by these companies by astronomical levels, so much so there has been calls for an investigation into these allegations.

I found this article published on Bloomberg where it states that the Research and Development costs for Valeant is the lowest throughout the entire pharmaceutical sector. They also say that the company has been on an aggressive drive to buyout drug companies who have already researched and developed drugs that they need to add to their product line instead of investing in it themselves.

However they say that this has caused an increase in the debt burden on the balance sheet of the company escalating the finance costs needed to service these debts. They also say that the increased in the R&D being proposed by the CEO is not enough to continue creating revenue streams to fund these debt costs placing the company in a very difficult position whether to increase its buyout strategy which is becoming more or more difficult due to costs or increase the amount allocated to R&D which would be hard to do with the existing debt expenses.  
One of the big losers on the day was hedge fund manager Bill Ackman who holds a significant stake in the company who lost a substantial amount of value after the stock dropped as low as 40%. There was mixed feelings around this with some saying Ackman had it coming after he had recently accused Herbalife of employing the same tactics with others highlighting the fact that Citron, who was heavily short in the stock, has been known to release damning reports that accelerates the stock price.

Ackman responded to these claims made by Citron by buying a further 2 million shares at lower levels in the hope to allay investors fears and make his own confidence in management known to the market. But will this stop the rout?
There's just an awful amount of consequential evidence stack up against management that points to devious measures that can't be thought away without some explanation. Allegations such as these do not simply go away without rousing up authorities to investigate further in which the company will be required to cooperate, but they also owe it to their shareholders who have been left shell shock and uncertain of the next move they need to make.

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Wednesday 21 October 2015

Carl says "Yes Icahn"

Billionaire investor activist Carl Icahn sent a letter out to his followers, members of congress and senate stating his intention to start Super PAC to campaign for Congress to pass  legislation to prevent what he terms as "corporate tax inversions" , an action where large corporation allow other companies to buy them over, thus depleting the US of much needed tax revenues.

He goes on further to say that over the year he has seen a number of companies choosing this option as a result from pressure from hedge fund who hold a significant portion in the company who profits a great deal from such transactions. He also points to the impasse of a double tax when these corporates who have earned abroad and subsequently paid taxes in the country of origin of the earnings who wish to bring these profits back to the US but have to be taxed twice to bring it back which does little to encourage them.

What happens then these corporations leave these deposits overseas accumulating mass amounts over the years. Icahn says currently there is a cash pile of $2.2 trillion lying in foreign bank accounts that could be used to inject much needed life into the American economy.

He then proposes that if Congress were to lower this "double tax" rate to between 5-10% companies would be willing to bring back this money effectively creating $200 billion in tax revenue. This he says can be used to fund the Highway Bill, a law which proposes the upgrade of highways across the country.

 He goes on to say that it is evident that the US economy has suffered as a result of non action by Congress that is needed to stimulate the economy. He states that observing the current state of affairs in the financial markets with the interest rates being on zero, any suggestion of a hike triggers panic, indicating the seismic weakness that lies in the economy.

He goes as far as to say that the Fed has exhausted all of its options and has now reached a point where it is forced to act, either which way could prove fatal for magnificent bull run we've witnessed since the 2008/09 financial crisis. It does call into question the relevance of the trend and whether the uptrend is supported by such views that all is fine within the US.
What Icahn is doing is what America needs to get its economy moving again. We haven't seen sweeping government programs that promote job creation or capital expenditure that is necessary to resuscitate normal economic activity. A project such as upgrading the highway infrastructure could create million of jobs, something that would flow freely into the real economy.

The real danger Icahn highlights is the situation the Fed finds itself in backing up into a corner. To be honest with ourselves, the Fed was never going to be a saviour for the poor, their job was to create financial stability long enough to prevent further damaging implications on the world economy. However what this administration has failed to do is implement changes focus specifically on the average guy on the street.

By allowing the Fed to pump the economy with fictitious money they've merely made the rich richer and the poor staying the same with little improvement. The Fed's objective is to ensure stability in employment levels however it does not focus on creating specific jobs that fall within the category of the working class, jobs which attempt to spread the pool of income evenly so as to create faster economic activity.

Can we really expect the US economy is thrive based on spending by the wealthy? Unfortunately not on account that the wealthy make up a handful of percentage of the entire population and their need to spend is far outstripped by the propensity to earn. The real activity happens from the millions who go on living their lives day to day.  

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BHP Billiton reports record iron ore production as prices fall

The world's biggest miner, BHP Billiton reported increased production output in iron ore this morning up 7% from a year ago beating analysts forecasts. However with the price of iron ore 70% below there peak of 2011, one wonders why the company is pacing itself to bring more ore to market when there is an existing glut in place.
Quite simply the three largest players in the iron ore market namely, BHP Billiton, Rio Tinto and Vale mining are doing what market leaders in their industry would do, manipulate the price by adjusting the quantities going to market. All three miners have now reported increased production in iron ore operations effectively flooding the market with cheap ore.

These companies have the ability to do this because their cost of production falls on the lower end of the cost curve meaning that although they take a knock on profitability the are still able to produce at a profit whereas other producers who's cost lie on the top end of the cost curve are reeling from a leakage of cash flow from the balance sheet as they try to plug the holes.

If these distressed miners are forced to halt production it would allow the surplus quantities to be depleted at a faster rate thus raising the price significantly. If that were to happen the bigger players would see a huge improvement in the rate of profitability and investors confidence would hurry back.

We've seen much of the buoyancy in mining stocks dissipate as the Chinese economy suede too far to the downside that it has created a sitatuaion where miners are left with excess production capabilities from newly built capital expansion project but no demand to satisfy supply. The problem comes in where investors wish to seek proper return for large investments made, something that has been missing for a while causing a  drop in investor sentiment.  
Here's just one of the examples of how the leading iron ore producers are cutting costs and paving the way for higher profitabilty. These driverless trucks operated by Rio Tinto are controlled from the companies headquarters 1200 km away!!! They transport up to 20 million tonnes of iron ore every month. The trucks are able to operate 24/7 365 days a year without argument.

The company said that it has rolled out the entire projects adding that the efficiacies are already starting to show with less risk to workers safety plus downtime incurred from shift changes and breaks. Unfortunately humans are being mechanised out of a job which will prove problematic in decades to come as a wave of new innovations aimed at eliminating the human element are brought on board.

The world's largest producer Vale mimicked its competitors actions by increasing output as I said above. The iron ore mining space is really starting to heat up and we are yet to see the end of this, it'll be interesting to see how the smaller players respond to these ramped up productions measures with the little to no chance of fighting back against the big boys. I'd expect to see smaller players to cut or even halt production altogether in an effort to well up quantities before we start to see any kind of bounce
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Tuesday 20 October 2015

Top Tweets Today: 20/10/2015

South Africa's economy has been lacklustre for a few years now so when the SARB governor Lesetja Kganyago  said that economic growth is looking vulnerable. He also said that investment spending is being putting on hold on account of the electricity shortages that has hit the nation.

The currency, rand, has hit all time lows against major currencies such as the pound, dollar and euro which does present a risk of inflation seeping through. Besides these points the business sector is suffering from a seismic discord coming from labourers and most notably trade unions who have made it their business to halt production in a push towards a living wage, but at what cost to the economy? Well the results show in the nation's GDP figure  
Today is the big day for Ferrari super car maker as they list after the closing bell. The company is looking to raise $10 billion as it tries to find new ways to invent itself. With a stock code that matches it's style, RACE seems to be fuelling the excitement from most market participants as the IPO was oversubscribed a few times.
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Samurai Summary: Top Tweets 20/010/2015

Lately my mind been wandering how come the Chinese stock market crash that happened not so long ago has gone awfully quiet. Yes there are still economic numbers coming out all the time but it would seem as if authorities have taken a back seat and left the market to sort itself out which looks like its helped.

However the guys over at Zero Hedge identified an interesting trend that hasn't been occurred since leading up to the crash. Margin debt has seen its 8th consecutive day of increases as Chinese "traders"  ramp up their attack once again and take on the market.

What's worrying about this development is we've seen the terrible financial consequences of such actions, in some cases pensioners losing their entire life savings trying to speculate on the market but coming off second best. These leveraged "traders"(the reason for the quotation marks is because these people do not possess the aptitude or skill to operate in the market) are the very reason why markets were driven up almost 150% in 6 months only to come crashing back down effectively causing ripples within the entire financial system throughout the world.
Tech giant IBM has reported disappointing third quarter numbers, the 14th consecutive decline in revenues as it battles to restructure its business. Executives of the company tried to highlight the good that would come to the future of the company with the amount of investments it is making in new sectors namely cloud computing however it didn't quell investors tension at the declining revenues coming from traditional businesses.
In other corporate news, it was announced yesterday that Oprah Winfrey has bought a significant stake in weight loss company Weight Watchers buying 10% holding. After the news was made known the stock had one of its best days surging over 100%.

I said in yesterdays blog that I wasn't a fan of following celebrities into stocks just on the basis of them saying it's a buy.  However Oprah could be an exception here with her business acumen and brand that follows holding the key to her success which can be seen in yesterday's announcement.

Although I do think what we saw was a short squeeze in a small stock, I do think there was a significant amount of support for this latest move by the company to bring on board celebrity clout to draw in more customers.
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Monday 19 October 2015

Top Tweets Today: 19/10/2015

Today marks the 28th anniversary of the 19th October 1987 stock market crash where the Dow Jones toppled over and ended the day down 22.6%. It is the single biggest daily loss ever recorded on the the index. But have stock indices stabilised since then to prevent a similar occurrence from happening?

I think to answer this question we firstly need to acknowledge the advancement in technology and how it has changed the speed with which we receive information and the less tiresome work in getting the information. However in saying this, more information isn't necessary good as the market clings to each possible economic data being released and tries to speculate the effects of these.

 We should also note that because of these advancements in computing technology, financial security exchanges around the world have implemented systems that prevent such movements from getting out of hand. We've seen how these systems have worked on 24th August 2015 when markets around the world shock as a result of bad news coming out of China. The pause in trading allowed participants to reassess their actions and think twice about what they are going to do.

I must say from the onset that I don't become bullish when I hear celebrities staking their fame and fortune on the stock market simply for the reasons why traders don't become actors & actresses or even singers for that matter. So when I heard Oprah Winfrey has bought a 10% stake in Weight Watchers, a health company that tries to help it's clients lose weight, I was skeptical.

Although news of Winfrey's ownership has shot shares through the roof the company is down over 70% for the year which doesn't show much optimism from shareholders lately. The resulted surge in price could be from the amount of shorts that had loaded up on the stock and were caught by the surprise announcement.

Given Oprah Winfrey's stardom, is it enough to save this company from being relegated to the ranks of a has been? I'm not sure but the fact that she was willing to put up a significant amount of capital in the company must say that she believes in management's plans and see's her popularity as a tool to attract new customers to the business. It'll be interesting to see how this one pans out.
We saw a few surprise with big name companies reporting downbeat numbers that didn't sit well with investors and this week will be no exception with many watching to see if the existing negative sentiment in corporate profits remains true.

IBM reports today followed by Verizon and Yahoo the big ones on Tuesday. Wednesday see's General Motors and then the big ones of Amazon and Google. I think the key focus will be on Amazon as after Walmart reported bad numbers last week, being one of the online retailers big competitors it'll be interesting to see if they can pull a rabbit from the hat come Thursday.
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China may be slowing but it's still a sleeping giant

Chinese GDP came in at 6.9% a mere 0.1% higher than the expected 6.8% that was predicted by economists as the likelihood of the world's second largest economy reaching it's goal of 7% growth for the years is seemingly unlikely.

Although the numbers were better than forecasts there will be continued uncertainty around the number for months to come with much focus on industrial production figures which has taken a beaten. It's a part of the economy that plays a tremendous role in facilitating the allocation of the factors of productions most notably the labour factor which helps stimulate spending in the retail sector.

We saw last week trade numbers leaving a bitter taste in the mouth of investors with downbeat forecasts especially regarding the importation of goods. China imports a number of commodities that it uses in its industrial process to manufacture products which it exports to the rest of the world. The disappointing import numbers show that world's reliance on China's spending  has led to a slump in commodity prices by over supplying the market with unwanted material by predicting a higher degree of demand from the Chinese economy.
 However the slowdown hasn't been an instant occurrence but instead been in place for a protracted number of months which does leave one wondering how commodtiy producers couldn't see this coming. It's either a case of being ignorant of the facts before them which I don't see a possible as these companies hire seasoned forecasters to analyse these things or realising the error of their way in their overestimation but were unable to halt progress of these capital projects fast enough so as to well up needed cash flow to shelter themselves from the commodities downturn.  

If you think back to the commodity super cycle that materialized pre-financial crisis, you can't blame these mining companies from expecting an even stronger demand when markets began to normalize after a financial system collapse. However one needs to question the degree of normalization given the markets obsessant need for free money at low interest rates.


In conclusion we could say they were caught napping...

But all is not lost if you put things in the context at the pace at which the "Sleeping Giant" is growing at. I thought this cartoon perfectly summed up how things stand between the world's two largest economies.

On the one hand you have the Chinese who have set about revamping an economic system that has for decades fallen behind modern economies on account of the failure of the previous system by failing to adequately meet the desire of the needs of its people, the largest population in the world I might add, however authorities still have a number of policy measures open to them should further need to inject the economy with stimulus arise.

Then on the other an economic giant that has hailed as a world leader for a number of years but has subsequently become complacent in its development, reverting to measures of credit creation to stimulate its economy which has now caught up with policymakers now sitting in a tricky situation.

The world's belief that the US economy is the most important of them all shows a divergence between the past and the future.  In the years to come we'll begin to see this dominance transfer from the old to the new with the current situation signalling the start.
To sum it all up I picked out this stat that highlights everything that I've highlighted. In 23 years the Chinese economy has grown 30 times, phenomenal given the amount of time. If the world's second largest economy is able to do this what can it do in the next 25 years?
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Sunday 18 October 2015

Top Tweets Omnibus for the Week Ending 16 October 2015

Monday 12th October 2015 

 Glencore's potential sale of copper assets highlights the distress in copper mining
Where to from here on the S&P 500?

 On Monday mining giant Glencore announced the sale of two copper mines as it attempts to cool down fear from investors that the company's debt may lead it to impair profits. I highlighted that the red metal which is used in many industrial processes as well as household uses has seen a dramatic drop in price which has hurt Glencore's profitability as it makes up the largest component of the company's profit. I also highlighted how a number of competitors are responding in ernst to plug loss generation. 

 I discussed the possibilities of the direction of the S&P 500 might head to leading up to the end of the year. There has been been a lot of pessimism of the recent rally with some saying that it was a mere relief rally in response to the huge drop that was experienced while others noted the large amount of short coverage that remains open at present that could set up for a squeeze in the weeks to come. 

 Tuesday 13th October 2015

 Chinese trade numbers disappoint again fuelling worries
Does the Dow Jones have what it takes to pull off an end of year rally

 We've seen a few good economic numbers coming out of China over the last month which has boosted confidence to a degree, however all things have to come to an end with the latest trade numbers sending shivers down markets. The biggest concern is imports which dropped year on year suggesting that the nation's industrial production may be slowing down faster than expected with a possible dent in gross domestic product. 

 Following on from Monday's article on the S&P 500 and the chances of seeing some fireworks going into the year end I decided to pick up some analysis on the Dow Jones. So far this year only 7 out of the 30 components have registered positive double digit returns. I believe if we are going to see a rally of some sorts we need to see the foundations building up to it now. 

 Wednesday 14th October 2015

 Africa:Land of the plenty or obstacles 
Top Tweets Today: 14/10/2015

 With the recent commodities slump I thought it would be appropriate to have a look at Africa who has become the next frontier in terms of securing commodities for the Chinese. But with the drop in most commodities the growth prospects in the continent has taken a back seat for the time being. I discuss the potential as well as the problematic situation some African countries are experiencing at present and conclude that there is still mass amount of opportunity to be found.

  I found some analysis of the Dollar Index by Andrew Nyquist in which he highlights the big upside we could see materialize in the coming months that does throw a damper note on the commodities bounce we've seen recently. 

 Thursday 15th October 2015
Yesterday's earning surprises point to weaker US growth 
Top Tweets Today: 15/10/2015
  
Earning season is in full swing and much to the disappointment to many as big names report numbers that are far from shiny. The biggest losers this week is undoubtedly Walmart who reported weaker growth as well as headwinds experienced from a strong dollar. Netflix also came out with some dissatisfied numbers that saw US subscribers grow less than expected. If these giants can't keep up, who else can? 

 Friday 16th October 2015

 How the oil sector is shaping up
Is OpEx leading to something bigger?  

 With oil producers being on the back ropes over the last year I tried to find some evidence of impending victory from either side namely OPEC and US shale producers but it seems as if the nasty battle continues to rage on. Although shale wells are being close as the months past it would also seem as if the politics in OPEC is starting to heat up as some see the Saudis as playing a too dominant role. 
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Friday 16 October 2015

Is OpEx leading to something bigger?

Over the past few days I've kept hearing the word OpEx coming through on traders timelines and wondered what they meant by it. Initially I thought they were talking about operating expenditure in the context of financial reporting statement due to the fact that earnings season was in full swing , but no it wasn't that.

I decided to investigate on Investopedia and found this article that cleared up everything. OpEx is a short abbreviation for Options Expiration, the date on which options terms come to an end and this occurs on every third Friday of the month every month. Usually when this period comes around there is an uptick in volatility which is why so many traders pay attention to it.
 Knowing this it would be good to assess the statistical analysis around the date and determine what influence it has in stocks. Ryan Detrick does a great job in unpacking the data with this table below just one of his findings. He has summarized the daily performance that occurred on each Friday of the month that options expired.

Firstly judging by the the observations it's quite obvious to see that there had been a very strong period in the first 6 months of the last year then followed by weak set of numbers. It's evident from the last 2 observations that volatility has markedly picked on not only on the negative returns generate but also on the measure of drop with both recording the worst returns out of the negative returns.

So what we dealing with here is a potential for a volatile day with bias to the downside. We did see a late session rally in US stocks yesterday with the most probably action of option holders closing out positions as the cause of the rally. It's because of the fact that so much optionality remains open and needs to be closed that things become very uncertain and difficult to trade so caution is advised.
Another view that's been out there that I find interesting was from Northman Trader, where he has charted the daily year to date of the S&P 500 and highlighted that every OpEx rally that has materialized as a result of closing out has ended up being a signal to short the market. With this evidence at hand it's yet another nail in the coffin of the bulls in the short term.

It's going to be interesting to see how things pan out but I have a feeling that after a short bounce after a sudden drop, the sellers may use this opportunity to add further exposure to their existing short positions that will eventually take the market lower.


 I think if you're looking for the most bearish view out there on the market you have to turn to the guys at Zero Hedge. They wrote this piece that ties so well into what I've been discussing today. I did hear a few mentions of the Skew Index, a ratio between the price of out the money puts to and out the money calls with levels of extreme registering at 100 and 150 with the former being the least fearful and 150 the most fearful of a black swan event. It can also be indicative of the degree of insurance institutional investors have in case armageddon occurs.

The article highlights the a significant divergence between the Skew Index and the VIX, a measure of volatility most known to market participants. They believe that with levels of the VIX sinking into the depths of the abyss many retail investor might be sold into the notion that there is nothing to worry about in the markets with the belief that indices should go on to all time highs again. However the Skew index would suggest that institutional investors think the complete opposite and with their sheer power to move the market leaving no second guesses where market could be heading to.  
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