Google Inc. (Nasdaq: GOOGL) made major headlines Friday when an upbeat “read” of the search giant’s earnings report ignited a 16% surge in the company’s stock price.
That single-session bump added a whopping $65 billion to Google’s market value. And this came just one day after shares of Netflix Inc. (Nasdaq: NFLX) – another tech darling – zoomed 18%.
These two rallies are emblematic of the relentless march we’ve seen in the tech sector during the past year. And that elicited a warning from former Reagan Administration Budget Director David Stockman, an author and columnist who’s as outspoken today as he was during his White House years.
Google’s $65 billion jump was troubling enough. Not only was it a record for one trading session, but the amount of market value Google gained in a single day was greater than the entire $50 billion worth of Caterpillar Inc. (NYSE: CAT) – which the global heavy machinery franchise took a full century to amass.
In a column titled “Take Cover – Wall Street Is Breaking out the Bubblies,” Stockman said that overvaluation is emblematic of the whole tech sector. On Friday, the market value of the “New Tech 16″ was $1.3 trillion – while their net income over the last 12 months was only $21 billion.
“When you take GOOG’s middle-aged profits machine out of the mix, you get something altogether more frisky,” Stockman wrote. “Namely, a collective market cap of $840 billion for the other 15 names in the Morgan Stanley index and LTM [last twelve months] net income of exactly $6.0 billion. That’s a P/E multiple of 140. That’s February 2000 all over again.”
With those words, Stockman is raising the same question that a slew of other pundits are posing: Are we experiencing a ruinous tech bubble?
What I’m telling you here is that all those experts are asking the wrong question – are looking at the market the wrong way.
You see, this is clearly a “momentum” market. And that means you have to make money while you can – while the opportunity is there.
But you also have to be prepared for the day when the music stops.
And today I’m going to show you just how to play the momentum game – without getting disrupted…
Let’s Dissect Tech
What’s happening is that a handful of “momentum stocks” are lifting the major indexes higher, with the Nasdaq Composite Index, home to the hottest of those shares, making new all-time highs on Friday and again on Monday.
Momentum markets – both up and down – are real.
What we’re talking about in this market is the tendency for fast-rising stocks to rise further. Empirical research backs this up. In one study, for instance, researchers found that stocks with strong performance continue to outperform poor performers – with an average excess return of about 1% per month.
That may not sound like much. But take it from me – that’s a meaningful difference.
If academic research isn’t your thing, just look at the stock market, where we’re seeing “momentum” work its power in real time.
Over the last 52 weeks, the 16 stocks in Morgan Stanley’s “New Tech” are up an average of 18.32%, more than double the 7.75% gain of the bellwether Standard & Poor’s 500 Index.
Thirteen of the 16 stocks averaged gains of 32.56% over the past year.
Those 13 are Amazon.com Inc. (Nasdaq: AMZN), Baidu Inc. (Nasdaq ADR: BIDU), Facebook Inc. (Nasdaq: FB), Google, LinkedIn Corp. (NYSE: LNKD), Netflix, Priceline Group Inc. (Nasdaq: PCLN), Qlik Technologies Inc. (Nasdaq: QLIK), Salesforce.com Inc. (Nasdaq: CRM), ServiceNow Inc. (NYSE: NOW), Splunk Inc. (Nasdaq: SPLK), Tesla Motors Inc. (Nasdaq: TSLA) and Workday Inc. (NYSE: WDAY).
The smart way to play the aging – but momentum-fueled – bull market is to keep riding it.
Just because we had a tech wreck before doesn’t mean it will happen again. The hot momentum tech stocks today aren’t nearly as “expensive” as the hot tech stocks of the dot-com bubble of 2000. And the because we’re in a “convergence economy” – where two or more Disruptor-fueled trends mesh in ways that magnify the growth potential – today’s tech market is very different than the dot-com predecessor that still gives us nightmares.
Even so, because of the emotion- and capital-fueled “momentum” effect that I’ve been describing for you here, investors are chasing the hottest performers and driving them higher.
That’s the nature of momentum.
Just as we saw with Google and Netflix, their surging share prices turn the hottest stocks into the hottest stories. That further stokes investment sentiment and draws in buyers who fear being left behind. And that, in turn, extends the rally… which is why momentum begets momentum.
Momentum, when you’re on the right side of it, is good.
So now that we’ve underscored that point, let me show you the key moves to make – now – to extract the maximum possible profit… and to bulletproof yourself against the inevitable downdrafts.
Moves to Make Now
In a market like this one, the one key to profit maximization is making sure that you consistently lift your stop-loss points as the stocks you hold zoom in price. To me, the biggest mistake an investor can make is giving back the profits you’ve reaped on stocks that have had a great momentum run.
That’s why I always have stop-loss orders (or, as I sometimes refer to them, “ring-the-register orders”) in place to make sure that doesn’t happen. I make sure to raise those stop-loss points as my stocks rally and use them to close out backsliding big winners while they’re still at lofty (and highly profitable) levels.
Me personally, I never cry about taking a profit. Even if the stock turns back around and goes higher after I’m out, I’m not unhappy; I rang the cash register.
As the old market adage says, “You’ll never buy at the very bottom, and you’ll never sell at the very top.”
Just make sure you don’t sell out at the bottom after the stocks you hold have been at the very top.
With my strategy, you’ll never commit such a fatal miscue.
Not even if this momentum market collapses.
Indeed, if that happens – and there is a collapse – the tactics I’ve shared here will ensure that you’ll have a pocketful of cash to buy back in… near the very bottom.
P.S. I hope you’re all “liking” and “following” me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and bank some market-smoking profits.
I’ve been trading for very long time. While it’s not rocket science, sometimes it comes close.
Take oil, for example. I can use all kinds of mathematical trading models to trade oil, but I prefer, because it works, to keep my oil trading simple.
Oil is a commodity. That makes it a lot simpler to trade than the stocks of companies.
Commodities mostly trade on supply and demand. It doesn’t get much simpler than that.
We made money in my Short-Side Fortunes investment advisory service when I recommended shorting oil. To me that was an easy call. I saw overproduction in the U.S. shale oil sector adding to global supply, which I knew would result in lower prices.
Since then, oil, as measured by West Texas Intermediate (WTI), dropped from about $100 a barrel to $42 a barrel.
It then bounced off its those, got above $60 where people loaded up as if it was going right back to $100 and hit $63.
Then it started backing off again and is south of $52 today.
Now I’m going to show you how you can make some money here – maybe a lot of money…
When oil tanked people were surprised. When it popped they were surprised. Now that oil is slipping backward – again – people are surprised.
What they didn’t see… what they don’t see… is the supply side of the equation.
Only, it’s not just the supply of oil I’m talking about. The supply of shares of oil companies is weighing on oil too.
I don’t even bother with it in my recent oil trading calculations. Demand is too hard to predict. All I need to know is that the global economy isn’t going gangbusters, so demand for oil is mostly flat – and for the purposes of my oil trading I expect demand to remain flat.
If I see demand changing I’ll adjust my trading. But, to keep my oil analysis simple, to trade simply, I don’t dwell on oil demand.
Supply is all I look at lately.
It wasn’t hard to figure that the globe’s supply of oil was increasing
The United States was becoming a huge producer thanks to massive shale oil exploration, development and production, and the rest of the world’s oil producing countries are in desperate need of revenue.
How simple is that? More supply, and prices will go down.
U.S. producers cut back exploration as fast as they could when prices tanked. It costs money to look for oil and drill wells.
So, the number of “rigs” being leased got cut back week after week after week, and everybody believed that all those drilling rigs shutting down would lead to less supply and higher prices.
And for a while, that’s what happened: Prices began to tick up.
However, oil explorers borrow a lot of money to drill. They need to pump oil and sell it to pay off their loans. So, while the rig count fell on account of the cost of drilling, producing wells kept on producing.
Why would anyone turn off a producing well? They wouldn’t. It’s producing revenue, revenue they need to pay down their loans, for working capital, and something called profit.
Yes, the supply of rigs went down, but dismantling those rigs that weren’t producing oil but costing companies hundreds of millions to employ had nothing to do with dismantling producing rigs.
In other words, the same amount of oil is still being produced. Supply hasn’t changed.
When the price of oil moved up from its lows, and investors and traders thought it was headed right back up, they clamored for the stocks of companies whose value had plummeted.
They believed those stocks were massively undervalued if oil was headed right back up.
Lots of companies, to meet the demand for shares investors were begging for, conducted “follow on” offerings. (A company that has stock outstanding can offer fresh stock to investors in a follow-on offering.) And because investors wanted to grab cheap stock – and because companies wanted to issue more stock and use the proceeds to pay down their higher-cost loan borrowings – it looked like a win-win for everybody.
I didn’t see it that way.
Investors who bought follow-on offerings, which totaled about $15.87 billion worth in the oil patch so far in 2015, watched oil prices decline again and are now sitting on fresh stock they bought near the recent highs.
If you own some oil-related shares that you bought near the recent highs in the price of oil and you’re losing on those shares as they fall along with the price of oil, you’re going to sell at some point. It’s a matter of supply and demand. You have too much supply of shares that are less in demand.
So, share prices are declining again.
Like I said, I keep my oil trading simple.
If you think there’s more supply than demand and that pressure on oil prices will take oil back down to its recent lows, maybe you want to make a simple trade, too.
You can use the United States Oil Fund LP ETF (NYSE ARCA: USO) as a proxy for “oil.”
It’s trading at $17.05. I think it will drop to $15 if WTI drops back to the mid-$40s range. A simple trade would be to buy the October $15 puts (USO151016P00015000) for about 50 cents per contract (that’s actually 50 cents times 100 shares per contract, or $50 per contract).
If USO drops to $15 or lower by the time your put options expire, you’ll make some good money. On the other hand, if oil doesn’t drop and you don’t sell your puts before expiration, you will lose whatever money you invested.
That’s a simple trade to me, based on a simple supply observation.
What do you think?
P.S. I hope you’re all “liking“ and “following“ me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then we’ll bank some sky-high profits.
The bull market Grim Reaper is here. At least that is what Shah warns on his latest appearance on MakingMoneywith Charles Payne.
“We don’t have a reason to be optimistic, we don’t have a reason to celebrate – we need to make changes,” Shah warns.
Between the latest employment numbers, the situation in Europe and the ongoing fear of rising interest rates, Shah reveals the truth about the market and how we can saves ourselves when the floor drops out from beneath us.
Just check out the video below to see all this and more.
Uber, the ride-sharing service valued at $50 billion, is at the forefront of disrupting the taxi industry.
The price of a New York taxi medallion – the license that allows you to drive a taxicab in the city – has been plummeting since 2013… the first time that’s ever happened.
A medallion would have cost you $1.3 million in April 2013, an all-time high. Now you can pick one up for about $840,000.
And the hospitality industry is taking seriously the threat presented by Airbnb, which puts temporary renters and guests together.
That makes the sharing economy – which Airbnb and Uber are at the forefront of – a major Disruptor. In the sharing economy, instead of buying goods from a corporation, consumers “borrow” – really, rent – assets from other individuals. And companies like Uber and Lyft are the “conduits” that put those individuals together… and take a slice of the profits.
And Uber isn’t disrupting just taxis.
Many members of generations Y and Z, especially ones who live in cities, are forgoing the once-ubiquitous ritual of buying a first car. Rather, they’re depending on ride-sharing outlets like Uber, Lyft and Zipcar.
And that’s making auto manufacturers nervous.
Today, I want to tell you about a carmaker that’s not battling the sharing economy, but joining in by making some major investments in a new kind of “assembly line.”
And I think this company is an investment that you should make as well…
The San Francisco Experiment
In an experiment that runs through November, Ford Motor Co. (NYSE: F) is marketing the Getaround ride-sharing app to 14,000 Ford owners in the San Francisco area. Getaround is a peer-to-peer (P2P) platform that lets people rent all kinds of cars, for as little as $5 an hour.
Why would Ford, which sells cars, want its owners to rent their cars when Ford might be able to sell more cars to rental companies?
Well, as I just showed you, the sharing economy is so potentially disruptive that just about every business needs to figure out how to opt into this new paradigm. If they don’t, they’ll get ousted, just like the taxi industry is now.
Ford knows that Getaround, a San Francisco-based ride-sharing startup, rents all kinds of cars, from Fords to Ferraris (though good luck finding a Ferrari owner willing to rent to you on an hourly basis).
However, this deal is not about renting the cars… it’s about customers buying them.
Here’s Ford’s thoughts here: If the renters like the Fords they rent, there’s a much better chance they’ll eventually buy a Ford than if they had never tried one.
After all, even millennials will one day grow up, have kids and move to the suburbs.
The Dearborn, Mich.-based automaker is only offering the marketing help and access to Getaround to Ford owners who financed their purchases through Ford Motor Credit.
And that’s another reason Ford is taking part in this program. If an owner rents their car, they’re generating revenue. That revenue can augment monthly payments. And if a car is rented enough, rental revenue can easily cover months of payments.
According to Padden Murphy, Getaround’s head of business development, regular renters are averaging close to $600 a month in revenue in big cities served by Getaround.
If you extrapolate out the logic, it’s easy to see that Ford can sell more cars if they help buyers make payments.
Helping to generate revenue from sold cars helps credit-impaired buyers and also buyers who wouldn’t otherwise be able to afford a new car meet financing requirements. It also makes more expensive, higher profit-margin cars more affordable.
It’s a smart move by Ford and no doubt going to be copied by other carmakers and car-loan finance companies.
On the Offensive
Plenty of analysts, market-watchers and thought leaders are excited about the sharing economy
However, not everyone is.
After all, not everyone wants to share.
I’m talking about the entrenched industries the “sharers” are going up against – and their supporters in city halls, state legislatures and Congress.
Just take a look at what’s playing out in the courtrooms concerning Uber.
Most of the company’s drivers consider themselves akin to freelance contractors – and Uber thinks likewise.
That simple relationship is about to change.
Barbara Ann Berwick, a contractor for Uber in California, sued the company after calculating that she was clearing less than minimum wage.
Berwick sued Uber, claiming she was an employee. Under California law, as an employee, Berwick would be entitled to reimbursement of the $4,152 in expenses she laid out.
She won. The California Labor Commissioner’s Office effectively labeled Uber an employer.
Uber also is being sued by taxicab companies across the country for operating without proper licensing and insurance.
In order to continue amassing venture capital at its current prolific rate – in order to survive – Uber probably has to win most of these lawsuits.
Airbnb also is coming under litigious pressure from hotel and apartment owners. What if Airbnb must consider the folks who rent out their spaces as employees, or if those spaces are subject to the same safety requirements as, say, the hotel rooms at your local Marriott?
The results of such litigation will have a massive impact on the entire sharing economy income model.
The Bottom Line
If the sharing economy is going to move ahead, it’s going to have to address the same issues typical businesses face. I’m talking about issues like workers’ compensation, labor laws, healthcare plans, anti-discrimination laws… taxes.
If it can’t, its time in the sun may be nearing twilight.
From users’ perspective, questions abound as well. Who will monitor how services are rendered? How will they be regulated? How will users be protected from bad contract actors? How will service issues be resolved, and by whom?
These are just a few questions that will have to be answered appropriately if the sharing economy is going to continue to spread globally.
That’s why I think Ford’s move here is really smart.
It’s the very essence of an “entrenched industry.”
As such, it has oodles of cash and lawyers and so can navigate the regulatory maze better than the young startups that compose most of the sharing economy.
And for investors like you, Ford’s partnership with Getaround means that it is going to catch the profit wave of a rapidly growing sector.
Your Smart Move
So far, Ford has had a lackluster year. It’s down 4.7% in the last month and 6.3% in 2015. It currently hovers near $14.50.
However, thanks to low oil prices and rising consumer confidence, Ford is on track for a great year.
And that makes its stock very attractive down here. The stock’s dividend yield is 4.20%.
I like accumulating a position in this old-line but forward-thinking auto manufacturer.
Sunday, in a referendum that featured a hefty 62.5% turnout, Greek voters rejected austerity by a landslide 61.3% to 38.7% margin.
Now the problems really begin.
You see, this isn’t just a Greek problem. It’s an all-of-Europe problem. It’s a U.S. problem. It’s a world problem.
And you’d better listen up, because it’s your problem, too… one that could deal your financial future a truly deadly blow.
Here’s the truth about what happened, how this mess was first created and what could happen from here.
And before we finish today’s talk, I’ll detail three moves that will armor-plate you against what could be Europe’s version of the U.S. meltdown of 2008…
Anatomy of a Disaster
The backstory in the Greek saga is important, because it’s not one you hear very often.
You see, it’s about a bunch of liars.
In order to get into the Economic and Monetary Union (EMU) of the European Union – meaning your country can throw out its old currency and start using the euro – the European Commission rules were that your country’s budget deficit couldn’t be more than 3% of your country’s gross domestic product (GDP).
Greece made it into the EMU by lying and cheating… with some help.
Figuring out that Greece’s budget deficit was higher than permitted, Goldman Sachs Group Inc. (NYSE: GS) – that bastion of American investment banking power, greed and prestidigitation – engineered some nifty currency swaps that let Greece hide its true deficit. And like magic, the country was welcomed into the EMU.
Once enrolled in the EMU, Greece – like all other countries using the common currency known as the euro – could borrow in the European capital markets, get loans denominated in euros and promise to pay back those loans with euros.
You see, everybody who uses the euro in the EMU knows what it is worth. One euro is worth one euro. If I borrow in euros and pay you back in euros, it’s all good and easy.
That’s the whole premise of the EMU – to make it easy for countries to borrow in a common currency and pay back loans in the same currency, because the value of it doesn’t change if you stay inside that money “system.”
Before Greece got into the EMU, it had its own currency: the drachma. If Greece had to borrow from EMU countries, it would have to get euros and convert them into drachmas so it could spend the loan proceeds at home. And when it came time to pay back lenders, Greece would have to convert its drachmas back into euros.
The problem with the drachma as a standalone currency, as with any currency, is that it fluctuated in value against other currencies, in this case the euro. If the drachma was to fall in value relative to the euro, Greece would have to come up with more drachmas to convert into euros to make interest and principal payments.
But all higher costs disappear if Greece uses the euro at home, borrows in euros and pays back its loans in euros. All it had to do was become a member of the Euro Club.
All the EMU members – many of which also lied about their budget deficits – wanted Greece in the club. That way they could lend Greece euros so Greeks could trade more with EMU countries and not have to worry about Greek currency fluctuations.
And so it came to pass that the Greeks borrowed a lot of money. Governments, to get elected, promised all kinds of things to voters and borrowed heavily to gift their constituents.
Of course, if you keep borrowing and don’t raise taxes to pay back what you owe, you don’t have much choice but to keep borrowing to pay interest on what you’re already on the hook for.
Fast-forward to that “Oh My God” moment when everyone realized Greece could never pay back what it borrowed.
All the lenders – meaning European banks – that fell all over themselves to lend Greece money were in a panic. The short version of this part of the story is that – because so many banks would go under if Greece defaulted – EMU powers figured they better buy the loans Greece couldn’t pay so greedy, stupid European banks wouldn’t collapse.
So with the help of the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission – lovingly known as “The Troika” – bank loans to Greece were turned into “public” obligations. That means Greece would owe money to European taxpayers and, thanks to the IMF’s involvement, U.S. taxpayers and others.
This is why there’s been such a “What’s the big deal?” attitude about this. After all, the thinking goes, because Greece’s obligations are spread among so many financial lemmings around the world, no banks are going under.
And if they do default, who cares? Who cares if Greeks vote “No” and refuse to cut their pension benefits, refuse to boost their retirement age above 50, refuse to be taxed more and refuse to be devastated and humiliated by creditor demands to pay their loans off?
Banks won’t fail.
Here’s the part where you better be sitting down.
It’s not that simple… not at all.
Cooking the Books
Greece owes about $540 billion on its loans and outstanding bonds.
It can never pay all that back.
The Troika didn’t just “print” money to give to banks to buy Greece’s bad loans from them. The IMF, the ECB and the European Commission used various “facilities” they created to buy Greece’s bad debts.
The best example is the latest consolidation play the Troika made.
A Luxembourg corporation – the European Stability Mechanism, or ESM – was created. Its stockholders are the 19 EMU countries.
The ESM, being a corporation, issued bonds that were bought by central banks of the 19 countries, as well as by hedge funds, speculators and propped-up puppets like the same stupid banks that got into trouble lending Greece money in the first place.
Why would anyone pay cash for these bonds? Well, they were “AAA-rated” because they were guaranteed by all the EMU countries’ governments.
All along, the game has been “extend and pretend.” Meaning, keep lending to Greece so it can make payments with new money it borrows. That way Greece doesn’t default and lenders don’t have to admit they won’t get repaid – meaning those lenders don’t have to write off all those bad loans… a requirement that would have made most of Europe’s banks insolvent.
The Greeks, having had enough, voted “No” to any additional forced austerity measures and essentially said: “We back our government. If you lenders don’t forgive some of what we owe and you don’t work with our government to reschedule our debt in such a way that we don’t have to crush ourselves to pay you back, then we vote to screw you and default and not pay you back.”
European governments are scared to death. Their citizens and the citizens of the countries that back the IMF are now at risk because they are the actual “guarantors” of the AAA-rated bonds that were sold for cash to buy Greek debt from banks that would have all failed if they were still holding the bag in the event Greece defaults.
Of course, direct holders of the guaranteed ESM bonds – the central banks of each EMU country, the ECB, European banks that thought they were buying government-backed bonds and speculators – all are expecting to get paid back.
If the Troika doesn’t negotiate to cut Greece’s debts and reschedule almost all of its payment obligations – and Greece walks away from what it owes – all those ESM bonds will be worthless.
But wait. They’re guaranteed. So the 19 EMU countries that are equity holders in the ESM corporation will have to step up to the plate and make good on their guarantees.
Too bad no money has ever been set aside to make good on those guarantees. They are all “off balance sheet” guarantees. That means none of the countries have put their financial obligations, if they have to pay, in their budgets or on their balance sheets.
They never expected to have to guarantee anything.
A full default by Greece would require countries to make good on guarantees – to the tune of about $350 billion.
Where will these countries get the money to make good on these guarantees? They’ll have to sell bonds. And what will those bonds be rated if they are bonds that are raising money to pay “AAA” guarantees that weren’t ever funded? And who will buy them?
No one knows.
The final nail in the coffin would be a country or two in the ESM corporation saying they weren’t going to tax their people to pay off Greece’s debts. In other words, they wouldn’t make good on their guarantees.
Or maybe their sovereign credit ratings will get knocked down and they wouldn’t be a “AAA-rated” guarantor. If there is any doubt about the guarantees that were made not being met, all the holders of those ESM bonds would have to write them down, taking potentially huge losses and bankrupting some of them.
Even if the guarantors make good, they’ll have to sell new bonds for cash. At what cost?
What if interest rates rise because no one wants to buy bonds?
What will happen to all the negative-interest-rate bonds out there now? (Their prices will collapse if interest rates rise.)
Who is holding those bonds whose prices could implode? (We’re talking about the same banks – and the European Central Bank – that got this mess rolling.)
What if the ECB – which is holding hundreds of billions of dollars’ worth of bonds – starts losing money on its inventory of bonds?
What if it becomes technically “insolvent?” (The ECB is already on the record saying it has no capital other than the guarantees of capital committed by the same EMU countries that issued “AAA-rated” guaranteed bonds with no real guarantee set-asides.)
Who will trust an insolvent central bank?
How will people look at other central banks around the world?
All this can be fixed. But whatever “fix” comes about, everyone knows this is merely another chapter in the “extend and pretend” game.
Then again, someone could sneeze, and this global-financial pyramid scheme could instantly collapse.
Here are three (and a half) moves you should make to protect yourself and to make a lot of money – if we even get close to a repeat of 2008.
Greek Debt Crisis Move No. 1
Be smart, be safe and put down stop-loss orders on all your positions.
You can always buy them back later once the smoke clears. And if you get to buy them all back a lot lower with the money you put in your pocket because you cashed in on the global rally in stocks and bonds, you’ll be a happy camper.
I’m not just talking about stocks. Make the same moves with your fixed-income positions – especially if you have capital gains on them.
So what if you have to pay taxes on your gains? Would you rather be looking at a devastated portfolio of underwater positions?
Greek Debt Crisis Move No. 2
If all hell breaks loose, you can move your cash into U.S. Treasuries: They are always a safe haven in a crisis, and if you get in early enough, you can make money as the prices of Treasuries rise because everyone’s charging into them in a flight-to-safety rush.
The iShares Trust 20+ Year Treasury Bond ETF (NYSE: TLT) is a good, quick way to invest in rising Treasury prices. It’s not the same thing as actually buying Treasuries, mind you, but it will work for you.
Greek Debt Crisis Move No. 3 (and 3A)
If European markets start to crumble, you can short the iShares Trust MSCI Europe Financials ETF (Nasdaq: EUFN).
You can also buy put options on EUFN. It’s an exchange-traded fund (ETF) that invests in European financial stocks, including banks – a group that could suffer a big hit if there isn’t a positive resolution to what could end up being a total Greek default.
Clearly, the European powers that be don’t want a catastrophe of that magnitude on their hands – or as their legacy.
So they’ll do what they have to in order to avert such a meltdown.
All eyes are on Greece as we head into this long Independence Day weekend.
Before that, Shah is appearing tonight on Making Money With Charles Payne on Fox Business. Europe’s basket case is sure to be Topic No. 1 on tonight’s show – but that’s not all Shah and the rest of Payne’s guests will be talking about.
After all, we just got a June unemployment report that missed estimates – and stock markets are reacting negatively… at least for now. What’s next?
And we’re sure some midyear- and Fourth of July-related subjects will come up as well.
Tune in to Fox Business tonight at 6 ET for the fireworks.
The markets have had a good run, but, according to Shah Gilani, it might be time to take some cash off the table and head for the sidelines. “There’s too much global action right now. The markets have risen fantastically but it’s time to step back.” Shah told Fox Business host, Charles Payne on his latest appearance today.
With Greece putting the market on hold, growing concerns in China, and the anticipated jobs report numbers set to be released tomorrow, Shah answers some of your biggest questions about the market in the video below.
Every so often, in sharing a story about a “Disruptor” catalyst making waves around us, I’ll recommend a story-related stock.
One recent example was IAC/InterActiveCorp (Nasdaq: IACI), which I recommended in my June 12 report “Today We’re Going to ‘Fix You Up’ With a Winner.“
It’s only been two weeks, but IAC is already following my storyline.
Of course I was trying to be funny with the “Fix You Up” reference in the title, as the story was about online dating in general. But I was quite serious in predicting that Barry Diller’s IAC/InterActiveCorp would spin its Match Group of properties into a separate company and issue shares to existing IAC stockholders.
Well, it didn’t take long. Sure enough, last week IAC said it was going to do just that, and spin out the Match Group into a separate company.
In my report, I accompanied my recommendation with a specific “Buy” strategy.
I still like the company, but today’s markets are fluid – meaning the strategy I detailed needs refining.
Today I’m going to do just that. And you don’t want to ignore it…
After all, online dating is a $2 billion business…
A “Golden” Game Plan
At the time I penned my report – on account of the market wobbling a bit – I recommended buying IAC – but trying to get it lower if the market dipped and took IAC down with it. In a perfect world, the market would have dipped and IAC would have gone down to the $70 level – where I said to buy it – and gone lower to $65, where I said you should buy more.
But it’s not a perfect world – which is actually a good thing since it means the overall market didn’t tank (at least for now). So we didn’t get to load up on IAC at level much lower than where it was trading when I made the recommendation.
Even so, I’m betting at least some of you folks bought some shares that day – especially since I concluded by saying: “The only thing is, if you wait to pick up shares a lot lower, you may not get a chance. The market could climb the current ‘Wall of Worry’ and go a lot higher before it eventually ‘corrects.’ Barring a Match Group spin-off, smartly buying IAC shares and adding to your position on dips could be a great way for you to fall in love with online dating. And if that happens, just remember: We were the matchmaker that ‘fixed you up’ with this big-profit Disruptor.”
If you listened – and acted – you’re at least a little in love this week.
If you waited until the end of the day (June 12), and bought IAC, you’d own the shares at roughly $75.93. It made a new high of $82.40 last week, and closed at $80.48.
So where’s what you should do now.
If you bought IAC shares, hold onto them to get the Match shares when that company is spun out.
Whether you bought IAC shares or not, I recommend buying more shares (or opening a new position) if IAC dips to $77. I’d buy more if it dips to $75, or $70, and I’d definitely be buying more shares if the stock drops to $65.
On a position that I like, I view “averaging down” like this: By accumulating shares at lower prices, I’m bringing down my average cost. What I do then is take my average cost and figure out from there how much I’m willing to lose – and not cry – if the trade goes against me.
In the case of IAC I’d get out of my shares if the stock falls below $60. It shouldn’t go down there. If it does, something’s really wrong, and I’d take my loss and move on.
Sure, I’d cry a little. I’m pretty good at making money – and I hate losing it.
I don’t expect IAC to dip anywhere near that low on its own. But if the market takes a dive on account of Greece defaulting – which is still a possibility – then all stocks could take a hit.
But just because they take a hit doesn’t mean they won’t rebound.
And IAC/Interactive is one of those shares – that over the long haul – I believe will rebound… a lot.
During that same long-run time frame, a “cheap” (low-stock-price) date with IAC/Interactive and Match Group will turn into a meaningful relationship.
We started today’s visit by talking about “stories.” And the scenario I’ve sketched out for you today will turn into one of those “how we met” tales that will be retold over and over again at family gatherings… for years to come.
One day, in fact, you’ll be telling this story at your “Golden Anniversary” … literally.
[Editor’s Note: My colleague, Michael Robinson, has found a tiny company that could be the next big biotech. For the past year he’s been investigating a new technology that’s based on a Nobel Prize winning discovery. This technology could critically impact the lives of 16.2 million Americans. Here’s the best part, though. It could generate $29.8 billion a year in new revenue for one small company that’s dominating the market. And by getting in right now, you could be positioned to see quadruple-digit gains as this breakthrough takes hold. Click here for details.]
Bond market volatility in the face of serious liquidity issues is making front-page news.
That’s no surprise to us: We’ve been talking about the dangers of low market liquidity for some time. That dwindling liquidity is a “Disruptor,” or catalyst, that will eventually destabilize first bonds – and then stocks.
Suddenly, others are discovering this danger. There’s a rising cautionary chorus from such luminaries as doomsdayer economist Nouriel Roubini; the always-smiling (look and you’ll see that it’s true) Goldman Sachs Group Inc. (NYSE: GS) president and COO, Gary Cohn; departing (because his bank’s been fined billions) Deutsche Bank AG (NYSE: DB) Co-CEO Anshu Jain; and JPMorgan Chase (NYSE: JPM) CEO (and self-appointed bank-sector cheerleader) Jamie Dimon.
Those leaders – and others – are openly voicing the same warning: The bond markets are headed for trouble.
And a new “fix” that’s being “worked up” only makes the calamitous scenario I’ve sketched out for you all the more likely.
It also boosts the success probability and the payoff potential of the liquidity-crisis profit opportunities I’ve been sharing with you here…
Let’s take another look at the triggers for this crisis in the making. Then let me show you how a solution that Wall Street is working on even as I write this will shove the bond market even deeper into the danger zone.
The whole U.S Federal Reserve quantitative-easing (QE) push took trillions of dollars of U.S. Treasury securities out of circulation. At the same time, tougher restrictions on the once-swashbuckling trading operations at big banks reduced the number of deep-pocketed bond-trading desks.
Nestled between the mattress of QE and the soft linen of big-time bond traders, high-frequency trading (HFT) desks were like bond-market bed bugs living off the blood of their hosts.
The result, of course, is a serious lack of liquidity. And because less liquidity means greater volatility, we now face a greater likelihood of flash crashes and other disruptions for fair and stable trading.
We’re now at the point, though, where even Wall Street admits there’s a problem.
Prompted by embedded Wall Street “fixers” – I’m talking about the temporarily ex-investment bankers you’ll find at Washington lobbying firms and even within the ranks of regulators overseeing the Street – the Financial Industry Regulatory Authority (FINRA) is holding two crucial meetings to tackle the bond market liquidity mess.
The first meeting – a closed-door session at FINRA’s offices in LowerManhattan – was held Thursday and was supposed to address the lack of depth in the $7.8 trillion market for U.S. corporate bonds. The second meeting – set for July 1 – is supposed to be a forum for proposing fixes.
FINRA is a private corporation and a self-regulator, meaning it polices its own. So I predicted the first meeting would be a waste of time – a bunch of self-serving bond blowhards reading canned speeches, whining about their problems and calling for action to save the world.
Then, remarkably, on July 1, a fix will be brought up and everyone will say: “That’s it!”
The “fix is in” because the alleged market fix is already being pushed. To fix the problem of volatility, the biggest players in bond trading want less transparency in trading, not more.
To fix volatility, as they’ve framed the problem, the fixers want to post bond-trading data (the prices bonds are bought and sold for) not right away – and not within the 15-minute “window” current rules give them for disclosing prices on some bonds – but by the next day…
Because, you know, they’re busy.
We’re Getting You Ready
I’m not kidding about the “solution” Wall Street is proposing.
That’s Wall Street’s answer to the volatility and liquidity threat: Don’t report until tomorrow the trades you’ve made today.
As big bond traders see it, that’s the proper fix. In fact, from their self-serving point of view, it’s positively brilliant.
Think about it. Big traders see prices falling. But because they don’t have to post those prices until the next day, they won’t create a panic that would be exacerbated by increasingly illiquid and volatile markets.
So they’ll be able to sell all their inventory to unsuspecting institutions, mutual funds, you and me – indeed, anybody they can sell them to under the guise of a free market that’s actually rigged in Wall Street’s favor.
The panic will come the next day.
If this isn’t the most egregiously vulgar fix to a problem the fixers caused themselves, I don’t know what is. In fact, it’s downright frightening.
And precisely because it’s so frightening where we’re headed, the profit scenarios I’ve shared with you are gaining even greater upsides. I’ve detailed trades (some long and some short) in bonds and in banks. And I’m also looking at big opportunities in certain currencies.
This growing cacophony of concern about low liquidity and how that could hammer the bond market isn’t a surprise to us. When this crash finally happens, most investors – both institutions and individuals – will panic.
But thanks to the preparations we’re making together, you’ll not only be positioned to lessen the personal fallout of the eventual crash… you’ll even be able to cash in.
And I will continue to watch this for you.
[Editor’s Note: Shah recently sat down with Money Morning Executive Editor Bill Patalon to record a battle plan for the coming big crash in the global bond market. Bill and Shah discuss the worrisome lack of liquidity in the markets and how that threatens bonds and stocks. Then they detail a profit-making strategy you can use to play this crisis. You can listen to their conversation now. Let us know if you like it.]