Author: Thomas Connolly

April 22, 2020 .

The equity market, the gold market and the crypto market are in rally mode

Failed bounces off of lows should be in the front of every investor’s mind. I am watching closely. Off of the March 23rd low, we hit a high on April 17, 2020 in the 187 Portfolio. Comparing today’s and each day’s prices for each stock in the 187 Portfolio to the April 17th prices may give a sign of a failing rally or real animal spirits supporting a V shaped recovery. Right now, there are only a handful of stocks with prices at or above the April 17th prices. This has my attention.

For the day
Gold is up $48 per ounce or 2.8%. Stocks of the Gold Miners are higher, with Newmont Mining (NEM) hitting an all-time high.

BTC is trading in the $7,100 area and needs to break resistance that I see at $7,400. If it clears that with some distance, say by $100 to $200, then $9,500 is the next point to get over.

Equities are showing strength, but I still do not trust this rally which is happening off of the latest stimulus from governments around the world. The 187 Portfolio is up 2.2%, while the DJIA and the S&P 500 are up 1.97% and 2.33%, respectively.

The Semi-Conductor stocks are rockin and rollin today. The heavy debt laden companies are the laggards.

Watch out for the Margin Clerk today, as things get sold that holders do not want to sell.

Best performer today from the 187 Portfolio is FLIR, up 12.1%. Amazon is using thermal cameras in their warehouses.

Worst performer today from the 187 Portfolio is NBR, down 14.8%

The equity market may reset lower, and the question is how far? Typically there is an overshoot to the downside and the upside when capitulation occurs. How might the decline be measured and forecasted? Consider this:

Since 2007, for every dollar of levered cash flow generated by the 187 Portfolio, price growth has risen by 1.25X the growth in cash flow. Total Cash flow forecast for 2020 pre-Virus was $1,054.20 per share for the entire 187 Portfolio. If we reduce this by 20% to reflect the economic freeze impact on the year 2020, then we arrive at $843.62 per share. At a multiple of 22.59X, the price to cash flow multiple as of this morning, then the loss of $5,946.26 in projected share price would result in a projected decline of 25% in the market from today’s prices.

If we instead model based on 2021 projected cash flow of $1,072.85, pre-adjustment for the virus impact. Then the rate of growth in cash flow from the adjusted 2020 amount ($843.62) to the existing 2021 amount ($1,072.85), would be 27% Y-o-Y. As a point of reference, the compound annual growth rate in cash flow averaged over the past 12 years is 8.3%. The needed growth of 27% in 2021 over 2020 remains a challenge, and I anticipate a further equity price decline as the visibility to 2020 and revised projections of 2021 come to light at levels that may very well be less than what would be needed to support today’s equity prices.

April 20, 2020

This is a date that will be recalled for years to come. It is the day a barrel of oil on the Futures exchange for May delivery went negative. Last check, an oil producer would have to pay you $37 per barrel for you to take delivery.

I am going to write at the moment in a sense of free association and will ultimately edit this down to something more well thought out.

Like the coronavirus, this is an event never imagined or experienced. There is so much oil being produced that there is no storage facilities left to take the oil. Physical supply is greater than physical demand on the Spot market. The rate of supply will continue to exceed demand for the near-term and looking out to May, the market makers see no growing demand, no meaningful reduction in production, and a net current supply plus future production that has no place to go.

I remember being in the audience in the year 1985 when Leon Hess, the founder of Hess Oil, ranted about the Futures market as a weapon of destruction and irrationality. His point was that each day more oil traded on the Futures Exchanges than existed in the ground, and to him that made no economic sense and merely represented gambling. Well it took a long time, but maybe he is about to be proven correct.

Supply and demand should not result in negative prices. Suppliers produce to meet demand at a given price. Buyers take oil at a given price to refine into by-products such as gasoline and jet fuel that are priced based on usage demand. Suppliers have been taught that they may hedge the oil in the ground by selling it on the Futures market for future delivery. That makes sense, except that the futures market also allows non-producers and non-users of oil to “bet” on the changes in the price of oil by buying and selling futures contracts for profit. This creates an artificial component of pricing, and in a crisis when contracts need to be unwound, the holders of long futures contracts must get out at any price as the price falls, and this accelerates the price decline as more sales occur with no offsetting buyer demand. In a market where there are no physical buyers due to excess supply in the physical market, this becomes a perversion of price as the laws of supply and demand no longer apply.

Okay, so this represents to my mind the current state of affairs in the oil market. How do I make money from this price perversion?

Stock prices in Oil companies have fallen quite a bit, and to buy these stocks, those with solid balance sheets, must be a long-term play. Smaller companies will be bought by the larger companies as these smaller enterprises desperately try to survive in a world where the market price is less than the cost to get the oil out of the ground. Identifying acquisition targets may pay off well, but the risk of bankruptcy of these same companies which will return a price of zero is a real risk.

What else? Gold keeps gnawing at me. Similar to oil it is in the ground and must be extracted to be able to trade on the market. Its demand in the market is driven largely by Central Banks who purchase gold as a store of value to offset the declines in purchasing power of fiat currencies. It is also used for jewelry and other purposes, but its main driver is by those who want to own it as a hedge against inflation and instability. It is not as prone as oil to oversupply concerns in the physical market given the limited production of this precious metal in any given year. The Futures market for gold exists but it is not as large or as liquid as the oil market, so it is less prone to attract large gamblers on its change in value. In this turbulent time, and with oil, one of the key economic variables in the world, employing hundreds of thousands of workers and impacting the cost of so many things that it is a component of, will demand for Gold rise as a safe haven asset to offset the loss of value from other assets that lack buyers in a new world order driven by health concerns?

My instincts say yes. The level of uncertainty in the world and the economic declines we are experiencing are likely to cause more and more institutions, central banks, and investors toward buying the safe haven asset that Gold represents. In a world where the Futures market is not in the position to provide current price protection for sellers of near-term future oil production, the price is unstable and the “gamblers” on oil prices may shift their focus to the more stable asset, Gold. If that is the case, then the traditional buyers of Gold will be joined by the “gamblers” who want less risk in this unstable environment, and the resulting additional demand may very well produce a continued rise in the price of the yellow metal. With this thought, buying shares in Gold Miners may be the best path to take.

April 16, 2020

Just a flash note with more follow-up during the day. The price recovery overnight with BTC, ETH and LTC, as well as across the Crypto spectrum resulted in a number of buy signals that typically reflect long-term trends. Stay tuned for more details.

Please note that the information I will share below is not investment advice and should not be relied upon for your investment decisions. I share the data and interpretations of that data to educate those that come to my website. I have spent years analyzing economic, market, and financial information, and what I hope to accomplish is to inform those who visit of what the data means to me. Your investment decisions should incorporate all of the publicly available information available to you, of which this website may add to your own research and conclusions. Be well and invest with prudence for long-term returns.

During the day today I will be posting many charts and data to enable you to see what I am seeing.

Some of the calculations I perform provide indicators to me that carry more weight than others. I will highlight the importance to me of each with a star rating *, with three *** indicating critical importance to me, and a single * indicating importance but not criticality.

*** Intraday price moves off of the day’s low price or high price. This compares the current price (closing price at day’s end) to the day’s low price for buy signals and high price for sell signals. The difference is then compared to the median change for the past three years. The result for each day is then measured against points in time when there was a true turning point in pricing. Over the past three years, there have been roughly 40 turning point buy signals and 40 turning point sell signals for each of BTC, ETH and LTC indicated by this measure. Some of these 40 buy and 40 sell signals are clustered around single turning points in price that have long-term performance history, so the actual number of turning points in price is less than the 40 buys and 40 sells noted. This morning, based on the price action over the past 15 hours or so, both BTC and ETH have flashed buy signals. If this upward pricing holds through tonight’s close (7:00 PM EST), then the signal will be validated. The Bitcoin threshold to meet or exceed for a buy signal is $498, and for ETH it is $12. We closed today at $500.49 for BTC and at $17.58 for ETH. The buy signals for BTC and ETH were confirmed.

** The current price vs the 50-day moving average price and the 200-day moving average price are technical price signals when there is a cross-over. At a cross-over point, the current price will have risen above the moving averages (a buy signal) or fallen below the moving averages (a sell signal). Both BTC and ETH crossed above the 50-day moving average, and ETH is on the precipice of crossing over the 200-day moving average. The data is below for BTC and ETH for the last ten days.

* The Spot Futures market reflects that activity on a day-to-day basis in trading of BTC and ETH, with a significant role being played by Hedge Funds within this arena. The Spot Futures trading level just exceeded the volumes over the past ten days for BTC and is approximating the high over the past ten days for ETH. BTC futures trading as of 10:45 AM EST stood at $15.8 billion. ETH futures trading as of the same time stood at $3.1 billion.

*** The Open Interest on the Futures Market is more reflective of commitments to the market vs trading in the market. The Open Interest today for both BTC and ETH are at or near highs vs the levels over the past month. The charts as of 11:25 AM EST are below.

** I just read that some believe the BTC trading volume has been weak. For me, nothing could be further from the truth. Volume is an important indicator to validate the price moves. Low volume should give one less confidence in the price move, whereas high volume confirms the price move. You must be careful here, for extreme volumes are often a sign of capitulation and the end of a price move, so weigh this indicator carefully against history. Below is price and volume for ten day averages of BTC and ETH. What does it tell you?

The average daily volume for BTC on Coinbase since November 2017 is 14,557 per day. The past 30-day average volume is 22,199 per day.

The average daily volume for ETH on Coinbase since November 2017 is 136,516 per day. The past 30-day average volume is 228,931 per day.

April 15, 2020

The strong are showing their safety attributes in today’s declining market.

At the outset this morning, the broad market was lower, including the “strong”. Since then, as of 11:57 AM EST, the DJ is down 640 points and the S&P 500 is down 77 points, below where they were at the opening. Of interest is that the “strong” are higher now then they were at the opening, even though the Indexes are lower. The large institutional buyers are focusing on buying/holding the Microsofts, Googles, Amazons, Netflixes, etc while the weaker stocks are being trimmed, particularly those with weaker balance sheets.

I am not buying anything today. I did sell at the close yesterday as I wrote I would do if the market remained strong into the close. Today, I am keeping my powder dry for the time when the strong are also being sold. That may not come, but history has told me to be patient, to think of holding until you see the whites of their eyes, as in Braveheart when Mel Gibson yells “Hold, Hold, Hold”. I patiently wait for the better time.

Supporting my sentiment is the fact that at the current prices, my DCF model shows 60 stocks are over-valued vs the 187 Portfolio stocks in total. That number needs to fall more for me to be motivated to move cash into stocks. The positive value of roughly $18 that existed at March 23rd is gone. Today we are neutral with a value of zero.

As to Crypto, I did exchange some BTC and ETH for other tokens that continue to make progress on the business and partnership front. Modest in size, as over time the positions grow in accordance with the business model progression. In for the long-game.

Tom

Yesterday showed constructive signs in the equity market.

The Dow Jones and S&P 500 remained negative throughout the day, yet the 187 Portfolio improved all day, and ended the day with a positive price change of $124 to close at $23,322.64. Of the 187 stocks in the 187 Portfolio, we now have 16 companies with positive Y-T-D returns, 1 flat, and 170 companies with negative returns.

The three best performers yesterday were: Netflix, Amazon and Newmont Mining

The three worst performers yesterday were: Belden, Meredith and Allegheny Technologies

For today, I expect to continue to watch from the sidelines for both equities and crypto. If we close with a strong positive performance in equities, I may take some more off the table (presently at 50% in cash for my equity investable capital). I do not expect to adjust my crypto holdings. Gold continues to be the best performer in the 187 Portfolio.

Be safe out there.

Tom

Update: At 10:10 AM, only three of the 187 stocks in the 187 Portfolio are negative for the day. 184 are positive. The message, buy them all. Be careful, the crowd is on one side of the boat, and that is not always the best place to be should the weather turn stormy. Keep your eyes open and be ready to quietly move to the other side, with profits secured.

1:28 PM A really solid day. The strongest are leading the charge. It is diverse and broad. The 187 Portfolio is up 3.3%. I will still adhere to my original plan at day’s end should this rally remain firm.

Access to funding for investment: whether to buy your first home, invest in higher education, start a business, expand a business, save for retirement, or to be a responsible government investing in its people and its economic growth, the decision should be weighed heavily by the cost vs the expected return.

The chart above compares the cost of short-term money, 3-month lending, to borrowing long-term money, 10-year borrowing. At peak economic levels, the action is fast and furious as an expanding economy is stimulated by excess liquidity available through plentiful short-term “cheap” money vs high cost long-term money. At troughs, short-term money is expensive and the economy slows. This is a typical ebb and flow of a business cycle that shows the demand for money vs the cost of that money, and as you can see, recessions align with the troughs when money is expensive for all lengths of borrowing.

Today, money is virtually free. Short-term and long-term. The world needs liquidity, and no cost money is being provided to cushion against the economic shock of the virus, and to lay the groundwork for future growth. Is there a cost of this “free” money regardless of length of borrowing? When did we last see 10-year money this inexpensive? Not within the past eighteen years that is for sure. The chart shows 10-year money at an annual cost of less than 1% in the current market. Does that make sense if you want to encourage prudent investment decisions that weigh the cost against the return, or is every project now fundable at an almost zero cost?

When decisions are made with no regard to the cost of the decision because the cost is negligble to the borrower, then bad choices cost as much as good choices, and therefore all choices are given access to capital. When bad choices are funded at no cost of capital, there is a cost to society and to the economy, and that cost is the loss of capital, the waste of what should be a valuable resource, as good money is flushed down the toilet in funding poor economic choices.

Today, we are watching the collapse of the cost of money. Yes, it is being done to protect our economy and our society from painful disruptive forces, but everyone should be prepared for the future cost of this indiscriminate funding. I expect it will be painful at some point, for we are bouncing from crisis to crisis in providing ever decreasing costs of capital and that cannot be sustainable without a resetting that will likely be very painful at some point in the not too distant future.

Yesterday I posted that the weak highly indebted companies were out-performing the stronger companies in that day’s market activity. That message was accurate, and the sentiment to be very careful with an out-of-balance market still applies. I removed that post this morning when I noticed an error in the % changes for the companies listed. The recalculated changes still confirmed the conclusion and was consistent with yesterday’s posting.

Now for today, as of 10:15 AM. The market is rallying off of the Fed’s announcement this morning that additional liquidity and funding is forthcoming. It is a relatively weak rally in terms of underlying price performance, and I remain cautious of this move which may be more of a short-covering rally vs a true move higher off of a firm bottom. Using the same theme as yesterday, look at the price changes on the company stocks that were short candidates vs the well capitalized entities that few traders ever short.

A positive market with:
Weaker entities rallying:
1) Alcoa up 8.1%
2) Antero Resources up 21.4%
3) Diamond Offshore up 14.0%
4) Ford up 13.1%
5) Greenbrier up 10.0%
6) Meredith Pub up 14.7%
7) Occidental up 14.5%

vs Stronger companies:
1) Apple 0% change
2) Adobe down 1.2%
3) Akamai down 0.5%
4) Amazon down 0.7%
5) Google down 0.3%
6) Microsoft down 0.6%
7) Qualcomm down 0.5%

FWIW: I have been selling equities all this morning into this rally higher within the stock market. Why? Reduce cash flow for 2020 by 20% from the initial analyst forecasts. Then assess Price to CF multiple. How strong would 2021 have to be to return to a more normal multiple?

I adjusted the 187 Portfolio cash flow per share for each of the stocks in the portfolio. The adjustment was to reduce the pre-Coronavirus cash flow forecasts by 20% for the year 2020.

Utilizing today’s stock price for each, I calculated a revised price to cash flow multiple. The pre-coronavirus forecast multiple for 2020 is 21.70X which increases to a multiple of 27.12X based on 80% of the original cash flow projections at today’s prices. Looking out beyond 2020, we hope for a strong rebound in the economy as the negative effects of the coronavirus dissipate.

In order to maintain the original metrics for the year 2021 of a forecasted cash flow multiple of 21.29X, the average growth in cash flow for 2021 over the adjusted 2020 CF would need to be 37.04% to still arrive at the same 21.29X multiple of price to cash flow. This just defies my expectation of what is possible at current stock prices.

The take-away for me is that the recent surge in stock prices is not sustainable, regardless of the stimulus activities undertaken by our government. The governmental actions will serve to get us over the chasm that is before us, but I find it highly unlikely that within twelve to eighteen months we will see company cash flows at levels that support the prices today.

Time will tell

• Wallet Growth

• Radar Fund Y-T-D return

• 93 Token Y-T-D return

• Futures

• Daily New Highs and Lows for BTC and ETH

The market is in selling mode. As I write this on Wednesday, April 1, 2020, equities and crypto-assets are declining in price, while Bonds are seeing yields shrink (Ten year treasury now at 0.61%), and the commodity markets see little demand other than for Gold (gold at $1,602 per oz).

On the equity front, my negative DCF indicator that measures the number of stocks in the 187 Portfolio that are priced above their discounted cash flow value is now at 57. This is lower than the historic average of 66 stocks, but above the March 23rd low of 50 stocks. Presently we are at a buy signal with so few stocks trading above their DCF value, but I remain patient given the disparity between the March 23rd low and now. As you can see in the chart, at other points in time of great uncertainty, the negative DCF count has fallen as low as 29 back in October 2011, which was a great time to be brave and buy stocks.

From an investment opportunity perspective my model of the 187 Portfolio as of today, April 1, 2020 shows a modest favorable stock buying environment. At a value of +922, it is below the strong buy signal of +3,200 that existed on March 23, 2020, yet is positive enough to cause me to selectively buy what I consider to be future strong performers. My actions today are modest, slowly building a position for the future, with the expectation that the current market may weaken more, presenting even stronger buy signals in the weeks to come. The investment opportunity chart is below.

On the Crypto-Asset side of owning and investing, the data by and large indicates a stay on the sideline environment. The declines in the Futures markets is and has been significant. The charts below of Bitcoin and Ethereum Open Interest on the Futures markets reflect the decline in activity. I believe this largely reflects the damage done to Hedge Funds that were leveraged to enable them to own more equities and crypto in the form of Bitcoin and Ether than their available capital alone would permit, and with the dramatic declines in equity prices of +30%, the margin calls have been relentless, causing the liquidation of positions to meet calls on outstanding loans, which included selling and closing Futures positions in Bitcoin and Ether.

The loss of demand on the institution side is a heavy weight at the moment, and absent a pick-up here, the market becomes a retail market. The one bright spot is the growth in the number of Ether addresses. On a run-rate perspective, Ether wallet growth is running at an annual rate of 63%, with a Y-T-D growth through March of 40%.

The named entities and projects do not represent recommendations to buy or sell, or in any way intended to reflect investment advice. One of the key variables that is critical for deciding to invest is missing. That variable is a reasoned forecast of future asset performance vs the market. What is presented attempts to inform and to encourage research, to learn about each asset, and to come to an opinion of whether any of them or all of them strike you as being an important participant in the future development of asset platforms. Charts of technical price levels and movements are presented to educate those unfamiliar with price patterns. These examples of real price activity show how prior price levels may be used to identify market points of price resistance or support. Use this information as you see fit, but it is recommended that you see this as an educational/informative tool only. This information is only part of the array of focus areas needed in making any investment decision, accordingly, it is best to not rely on one type of analysis for your capital allocation decisions.