Equity Portfolio Activity for the Week ended August 12, 2016

Equity Portfolio as of August 12, 2016

Commentary: The large gains in the Gold and Silver mining equities have marginally exceeded the losses of the short hedges. I have debated reducing the short hedges but given the fact that by every measure I track and analyze, today’s market is priced at a level that offers limited gains from continued price increases. The market is at a level of extremes that pose great downside risk. Of course, emotionally motivated buying can continue to feed the rise in prices, but for this investor it is best to watch from the sidelines and to maintain hedges that will offset the impact of equity price declines. During the week, I modestly increased the short hedges.

Good Luck and have a great week!

New Additions

1. None

Increase in Holdings

1. First Solar
2. S&P September Put Options

Complete Dispositions

1. Alamo Gold

Partial Decrease in Holdings

1. Ultra Short VIX

Overall Equity Portfolio holdings

1. Alamos Gold – Closed position
2. ASA
3. Arm Holdings
4. BB&T Corp
5. Brocade
6. Brookfield Total Return
7. Chevron
8. Con Ed
9. CISCO
10. Disney
11. Eastman Chemical
12. Endo Int’l
13. First Solar – Increased position
14. Ford
15. General Electric
16. Golar LNG
17. Halliburton
18. Harmony Gold Mining
19. Hecla Mining
20. Hershey
21. Ingredion
22. JP Morgan
23. Microsoft
24. New Gold
25. Nordic American Tanker
26. Norfolk Southern
27. Phillips 66
28. Pro Shares Ultra Short S&P 500
29. Pro Shares Ultra VIX Short – Decreased position
30. Qualcomm
31. S&P E-mini short futures
32. S&P 500 September Put Options – Increased position
33. Synaptics
34. Tetra Technologies
35. Travelers
36. Twitter
37. Viacom
38. Wells Fargo
39. Yum! Brands

“Fragility”

Tom Connolly’s Equity Market Forecast
for the upcoming week beginning August 1, 2016
With Market Questions and Answers

Summary Comments:

By almost every measure I track, the current equity market is valued at levels that historically have failed to provide near term returns that are positive. The valuation parallels with the summer of 2015 and the summer of 2007 are eerily similar. Whether it is Price/Earnings ratios, Cash flow multiples, Equities trading at prices above their Discounted Cash Flow values, the number of companies that have gone up in price yet have year-over-year cash generated per share that is lower than the prior year, or the dramatic narrowing of the spread between historic mean differentials of current prices when compared to forward valuation measures, I find little data that point to value investing as a condition of the stock choices available today.

We are in a market where I prefer to hold a core equity portfolio that is hedged by short derivatives, and a portfolio where Gold and Silver play an important role to protect against market and global uncertainty.

As always, be careful out there.

Prior week’s investing activity: I added to hedges and maintained the fewest number of equity holdings for the year.

My portfolio’s YTD performance vs the market, and its current composition as of July 29, 2016, are as follows:

Connolly Portfolio YTD gain as of July 29, 2016 equals + 9.17%
S&P 500 Index YTD gain as of July 29, 2016 equals + 6.34%
NASDAQ Index YTD gain as of July 29, 2016 equals + 3.09%

The Portfolio’s composition as of July 29, 2016 is as follows:

• Cash 51.9%
• Equities 30.4%
• Gold 15.7%
• Fixed Income 2.0%

Forecast for the coming week: Fragility is the word I feel most comfortable with in thinking about the forecast for the upcoming week. I believe this market can turn on a dime and head lower in a meaningful way. What will be the catalyst? I have no idea, but the decline from the current heights could be scary.

Given the summer schedule, I will post the details of the market questions and answers later in the week.

Wishing you all the best,

Tom

Equity Portfolio Activity for the Week Ended July 29, 2016

Equity Portfolio as of July 29, 2016

Commentary: The portfolio below contains the fewest number of individual holdings for the year. By every measure I track and analyze, today’s market is priced at a level that offers limited gains in the future. Of course, emotionally motivated buying can continue to feed the rise in prices, but for this investor it is best to watch from the sidelines and to maintain hedges that will offset the impact of price declines. During the week, I modestly increased hedges and added a small amount of Bitcoin and Netflix shares sold short.

Good Luck and have a great week!

New Additions

1. None

Increase in Holdings

1. Bitcoin
2. NFLX Shares Sold Short
3. Proshares Ultra Short S&P 500
4. Proshares Ultra Short VIX
5. S&P August Put Options

Complete Dispositions

1. None

Partial Decrease in Holdings

1. None

Overall Equity Portfolio holdings

1. Alamos Gold
2. ASA
3. Arm Holdings
4. BB&T Corp
5. Brocade
6. Brookfield Total Return
7. Chevron
8. Con Ed
9. CISCO
10. Disney
11. Eastman Chemical
12. Endo Int’l
13. First Solar
14. Ford
15. General Electric
16. Golar LNG
17. Halliburton
18. Harmony Gold Mining
19. Hecla Mining
20. Hershey
21. Ingredion
22. JP Morgan
23. Microsoft
24. New Gold
25. Nordic American Tanker
26. Norfolk Southern
27. Phillips 66
28. Pro Shares Ultra Short S&P 500 – Increased position
29. Pro Shares Ultra VIX Short – Increased position
30. Qualcomm
31. S&P E-mini short futures
32. S&P 500 August Put Options – Increased position
33. Synaptics
34. Tetra Technologies
35. Travelers
36. Twitter
37. Viacom
38. Wells Fargo
39. Yum! Brands

Why I Am More of a Bear then a Bull

Tom Connolly’s Equity Market Forecast
for the upcoming week beginning July 25, 2016
With Market Questions and Answers

Summary Comments:

One of the things I learned early on during my investing education was that being right about the market’s state and path was not the same as being right about the timing of when the market would move one way or the other. Timing is elusive, which is why being prudent in deploying risk capital is one of the most important aspects of realizing positive returns. Currently, I am more weighted then I typically am toward a market decline. My fundamental models direct me to not be a buyer of equities today. I am listening to those models, understanding that I may miss upside in a market that is trending higher but one that poses too much downside risk for me to willingly participate. So I am heavily weighted toward cash, and I have been building Put option positions to profit from an equity market decline while limiting capital loss to the premium paid for the options.

So why am I more of a bear then a bull? It is simply based on value (ie Overvalued), a bullish market bias by the overall investing population, an over-bought condition, and the reaching of metrics that have consistently indicated a top in the market. As to the metrics, please consider the following based on the 187 Company Portfolio:

High low data

The above is just a sampling of the Metrics that I constantly assess. The message is clear, at least based on the history of the above moments in time and of the many other market tops and bottoms not reflected in the numbers above, and that is to feel very uncomfortable getting or staying overly long in today’s market.

As always, be careful out there.

Prior week’s investing activity: I simply threw (sold) everything that was not bolted down off of the boat, or whatever craft one wishes to define. I will always maintain a core equity position that I invest around. Today there is no “around” as only the core remains. In addition, I added to short hedges and to Volatility. The short hedges addressed the overall market as well as a couple of specific equities. Cash, Gold, and the Core Equity dominate the present investment profile. While I am happy with the risk reward profile, I must admit that I will suffer declines in returns should the market continue to rise while Gold declines. Obviously, I anticipate the opposite path.

My portfolio’s YTD performance vs the market, and its current composition as of July 22, 2016, are as follows:

Connolly Portfolio YTD gain as of July 22, 2016 equals + 8.16%
S&P 500 Index YTD gain as of July 22, 2016 equals + 6.41%
NASDAQ Index YTD gain as of July 22, 2016 equals + 1.85%

The Portfolio’s composition as of July 22, 2016 is as follows:
• Cash 52.0%
• Equities 30.2%
• Gold 15.8%
• Fixed Income 2.0%

Forecast for the coming week: Softening of some of the technical indicators accompanied by the stretched fundamentals lead me to expect a market that meanders, with upside and downside occurring during the week with little change by the close next Friday. If there is a meaningful move, I do expect it to be to the downside. The Central Bank activities that are upcoming may offer some surprises.

Market Questions and Answers

What are DJIA, DJT, DJU, S&P and NASDAQ metrics indicating?

An incredible four weeks of gains for all of the indexes noted above brings us to new highs in all except the NASDAQ and DJT. 1,000 DJIA points, 400 NASDAQ points, and 140 S&P 500 points over four weeks is quite the move. The trend is higher and the breakout is meaningful. It should be noted that this past week was less robust in some of the market internals, but not significant enough to do any real damage to the underlying support for the move higher.

Relative Strength: We have moved into slightly overbought territory on the RS indicators. The DJIA reading is 67, the NASDAQ reading is 68, and the S&P reading is 70. The twelve-week distribution of weekly DJIA gains (a total of 1,600 DJIA closing up points) realized in each four-week period reveals 73% of the gains are concentrated in the most recent four weeks. The last time this happened was November of 2014 after a four week rise of 1,300 points. The market rose another 300 points over the next three weeks before suffering a one-week decline of 700 DJIA points in December 2014. The next occurrence was off of the March 2009 lows. This is a very infrequent occurrence. My take, we are due for a quick and meaningful pullback, but one that is not persistent in duration.

Price Earnings multiples are 25.17X for the S&P 500 and 19.61X for the DJIA, indicating an expensive market to invest in at these levels.

The DJT rose nicely over the past four weeks but remains in a declining chart pattern. It was modestly down this past week. It has been a leading indicator of the broader market and should be watched closely for confirmation of a move higher or indications of a reversal in economic fortune.

The DJU has moved to a new high as investors seek yield reflecting the cautionary investing strategy of a market that poses greater risk then reward for investing in growth oriented businesses. Safety is being sought.

What is the current score on the “Market Tells metric”?

The Market Tell indicator, which is a comparison of the market’s current cash flow and valuation metrics to its historic medians, closed the week at negative 164 As an FYI, when we have a high positive reading this is a strong buy signal and when we have a high negative reading it is a strong sell signal. The -164 reading indicates a very expensive market. The highest negative reading here was -182 on November 6, 2015. The strongest positive reading was +28.5 on February 12, 2016. Last year at this time (July 24, 2015) the reading was -98 after a meaningful pullback from the prior week when the reading was -146, which foretold the summer of 2015 declines in equity prices. We are at a similar place with declining cash flow estimates for the year occurring when high current multiples characterize the market.

The Portfolio’s Cash flow multiple based on expected 2016 full year results is 19.36X. This is a high reading of price to cash flow when compared to the historic median of 17.02X. This is very close to an extreme overvalued market (19.72X was last extreme point before a major sell-off). The expectation of earnings and cash flows are falling in a market that desperately needs improving operating performance to justify its current value. This does not bode well for near-term equity price appreciation.

Comparing current equity prices as the week closed on the 187 portfolio companies to their Discounted Cash Flow values indicates 77 companies were priced above their DCF value which exceeds the historic average of 61 for the portfolio. This supports an expected fall in the market as more companies have become overvalued and need to correct lower.

The dollar spread between the Current Price and the Discounted Cash Flow price utilizing 2017 cash flow projections on the 187 Portfolio Companies is now at $14.67. This is based on a projected cash flow increase in 2017 over 2016 of 12.67%. The difference or spread today between the current price and the DCF price is meaningfully below the historic median of $22.28, now reaching a low point for the past 52 weeks. A higher spread indicates greater value to invest in whereas a lower spread indicates subpar returns will be realized from investing at current prices. In this environment it should be apparent that future performance has been pulled into the current pricing in a manner that reduces potential gains absent a significant improvement in future earnings and cash flows.

What is the position of the weekly net up down Vol/Issues?

The week’s volume and issues were positive, but in a declining manner when compared to the prior weeks. Something to note and to watch, but at the moment no real cause for concern.

What are the daily point vs issues and point vs volume measures indicating up or down?

Similar to the weekly reading, the daily trend is supportive but in a lessening manner. The daily metrics of (1) index point moves being supported by the daily advancing or declining volume, and (2) the index point moves being supported by the daily rising and falling number of issues, confirmed the support for the market.

Where are the New Highs and Lows moving toward?

The real concern in the internals this week is in regard to the declining number of new highs in a consistently rising market. On July 11, 2016 we saw 414 Daily New Highs. Since then the DJIA has moved 350 points higher, the S&P 500 has moved more than 100 points higher, yet the New Daily Highs have slowed to the range of 160 to 218 over this continued rising period. The potential canary in the coal mine.

How well are Market Tells correlating with Market trading internals?

The technical market indicators and the Market Tells of valuation are not in alignment. This is an indication that future volatility will arise to bring about a resolution of this imbalance. As we continue to extend gains the level of risk for a dramatic decline to adjust the price of the market to the cash returns from the market becomes increasingly dangerous. Close attention needs to be paid to exogenous events that could ignite a market reversal.

What is the composite reading of the Calendar, Environment, Duration, Action, Trend, Emotion and Valuation Index (“CEDATEV”)?

The reading is minus 1 (-1). This score reveals a market that has many competing influences. The world events and economic trends coupled with an expensively priced group of stocks and bonds pose significant risk.

Contributors are:

Negative in the following areas:
Calendar
Emotion
Valuation

Positive in the following areas:
Action
Trend

Neutral in the following areas:
Environment
Duration

Other:

Bitcoin fell this week to $654 per coin. It recently has been trading in a somewhat narrow band. The per unit value based in the low $400 area over the past four months. Over the past year, the price has increased by over 200% from the $230 area. I hold a position in Bitcoin as we move closer to digital currencies vs paper money and coinage.

The Dollar Index has been firming and now sits at 97.14, the highest level it has been since March. Over the past twelve months it has traded between 93 and 100. The dollar has appeared to be range-bound in this area. A continued strengthening could pose issues for the Emerging markets.

Gold closed the week at the $1,330 per ounce. The global phenomena of negative interest rates on sovereign debt in many parts of the world are giving support to the price of Gold (although it has declined consistently over the past few weeks in what appears to be a corrective move). In the past week, the Gold and Silver Miner equities declined meaningfully. I believe there is much more room to the upside for these equity holdings. Given the continued global uncertainty and currency volatility issues that exist, I do see material price increases for gold and silver in the foreseeable future and for Gold to advance much higher above the $1,300 level. I will therefore maintain my PM positions (with modest sized exits and entrances to capture periodic swings above or below a normalized trend) to offset potential equity price declines from the broader market.

The Ten-year bond yield has been firming and closed at 1.57%. We are now at yields that seem irrational given risk reward profiles of return. The economic signals I see from the latest government releases show an economy that is contracting. The behavior of the Bond market is confirming that economic slowness. Of concern is a flattening of the yield curve (recession) with only slightly more than a 1% spread between 3 month money and 10 year money.

Commodities: This week we saw the CRB commodities index decline again. The softness in economic demand factors and the rise in the value of the U.S. Dollar are negatives for the pricing of Oil and the Industrial commodities.

The High Yield vs Investment Grade spread contracted to reach prior support and is an indication of a perceived low level of risk in the high yield market. This is also supporting the rising equity market and the risk-on trade. We closed this week at a spread of 3.546% and the indication was to take risk-on. High Yield is at 6.233% and Investment Grade is at 2.687%. If the oil market fails to hold the price of a barrel near the $50 mark or higher (right now we are fighting to hold onto $44 per barrel), the health of high yield market may once again show pressure. A fall in oil will be problematic for the High Yield market and a general negative for the overall market.

That about covers it.

As always, have a great week!

Tom

Equity Portfolio Activity for the Week Ended July 22, 2016

Equity Portfolio as of July 22, 2016

Commentary: I have stripped down this portfolio to its bare necessities. It is streamlined for a market correction, with the expectation that new buying opportunities are best pursued in the future after a healthy market decline takes place. In anticipation of the decline I foresee, I have materially increased Put Options on the S&P 500, Volatility through the VIX ETF, shares sold short on Netflix, and a selected short play on Microsoft post their earnings release. Time will tell if these actions were correct.

The push higher in the market and the weakness in Gold and Silver have hurt my YTD performance as I write this, but that is a price I accept in the short term. It is my expectation that the best strategy at this time is to hold Precious Metal interests and Market short hedges.

Good Luck and have a great week!

New Additions

1. MSFT Bought Put Options
2. MSFT Sold Call Options

Increase in Holdings

1. NFLX Shares Sold Short
2. Proshares Ultra Short S&P 500
3. Proshares Ultra Short VIX
4. S&P E-Mini Short Futures Contract September Expiration
5. S&P July Put Options
6. S&P August Put Options
7. Bitcoin

Complete Dispositions

1. Bank of America
2. Bank of America Preferred
3. Celgene
4. Corning
5. Daktronics
6. Ericsson
7. Greenbrier
8. Integer Holdings
9. IRobot
10. Jabil Circuit
11. JP Morgan Preferred
12. Legg Mason
13. MTN Group
14. Matson
15. Mylan
16. Netflix Put Options
17. Noble Corp
18. Nokia
19. Nucor
20. PayPal
21. Sarapeta Therapeutics
22. Square
23. TenCent Holdings
24. Tessera Technologies

Partial Decrease in Holdings

1. Brocade Communications
2. ENDO
3. First Solar
4. Golar LNG
5. Hecla Mining
6. Microsoft
7. New Gold
8. Synaptics

Overall Equity Portfolio holdings

1. Alamos Gold
2. ASA
3. Arm Holdings
4. Bank of America – Closed Position
5. Bank of America Preferred C – Closed Position
6. BB&T Corp
7. Brocade – Reduced Position
8. Brookfield Total Return
9. Celgene – Closed Position
10. Chevron
11. Con Ed
12. CISCO
13. Corning – Closed Position
14. Daktronics – Closed Position
15. Disney
16. Eastman Chemical
17. Endo Int’l – Reduced Position
18. Ericsson – Closed Position
19. First Solar – Decreased position
20. Ford
21. General Electric
22. Golar LNG – Decreased Position
23. GreatBatch (now Integer Holdings Corp) – Closed Position
24. Greenbrier – Closed Position
25. Halliburton
26. Harmony Gold Mining
27. Hecla Mining – Reduced position
28. Hershey
29. Ingredion
30. IROBOT – Closed Position
31. Jabil Circuit – Closed Position
32. JP Morgan
33. JP Morgan Preferred D – Closed Position
34. Legg Mason – Closed Position
35. Matson – Closed Position
36. Microsoft – Reduced Position
37. MTN Group – Closed Position
38. Mylan – Closed Position
39. Netflix July 15 Put Options – Closed Position
40. Netflix Short Put Options July 22 Expiration – Closed Position
41. New Gold – Reduced position
42. Noble Corp – Closed Position
43. Nokia – Closed Position
44. Nordic American Tanker
45. Norfolk Southern
46. Nucor – Closed Position
47. PayPal – Closed Position
48. Phillips 66
49. Pro Shares Ultra Short S&P 500 – Increased position
50. Pro Shares Ultra VIX Short – Increased position
51. Qualcomm
52. S&P E-mini short futures – Increased position
53. S&P 500 August Put Options – Increased position
54. S&P 500 July Put Options – Increased position
55. Sarepta Therapeutics – Closed Position
56. Square Inc – Closed Position
57. Synaptics – Decreased position
58. Ten Cent Holdings – Closed Position
59. Tessera Technologies – Closed Position
60. Tetra Technologies
61. Travelers
62. Twitter
63. Viacom
64. Wells Fargo
65. Yum! Brands

Enter the Casino at your own risk!

The market is 1% away from an extreme point of high value. Reward to the upside is 1%, while risk to the downside is 15%. What would you do if while preparing to enter the casino you were told there were even odds you would either lose 15% of your capital or win 1% of your capital? Of course, the odds are not even, and given Central Bank intervention it is impossible to effectively calculate odds. However, in a world of activist bankers, the historic outcomes at these high levels of valuation are pretty consistent. My view, I do not want to lose money by committing new capital to this endeavor. Additionally, I have sold down my trading positions to the lowest levels in my investing history and have meaningful short positions in place.

I will hopefully find the time later today to complete my weekly write-up (currently in the Hamptons’ with family). In the weekly newsletter’s absence, consider this:


Cash flow multiple:

1) Today’s cash flow multiple exceeds the July 2007 CFX.

2) The number of companies within the 187 company portfolio that are priced today above their Discounted cash flow price number 79. The last time we reached this level of overpriced stocks was in December 2015.

3) The spread between the portfolio’s price and the portfolio’s cash flow price is as narrow as it has ever been. Every time we have reached this small of a spread the market has sold off. The four other times since 2006 that we have had such a narrowing were:

a) October 2007 = we know what happened after this (Bear Sterns and Lehman Brothers)
b) April 2011 = 900 DJIA point drop over next eight weeks
c) March 2014 = 400 DJIA point drop over next five weeks
d) July 2015 = 2,000 DJIA point drop over next seven weeks

Be careful out there.

FYI the Connolly Portfolio is up 9.26% YTD.

Have a great weekend,

Tom

Leery but not in Denial

Tom Connolly’s Equity Market Forecast
for the upcoming week beginning July 12, 2016
With Market Questions and Answers

Summary Comments:
I walked around this week feeling as though I was missing something. I was struggling, and continue to struggle, with the justification for the advance in the market from a valuation perspective, while recognizing that I cannot ignore the breadth and depth of the participation that is the backbone of the advance. This is a market that simply wants to go higher whether that advance is logical or not.

I remember feeling this way as we came out of the 2008 financial crisis. The valuation metrics in 2009 and 2010 were not supportive of the advance at that time, an advance which was being driven by an oversold market and the monetary support from the FED through Quantitative Easing. I keep thinking that, similar to 2009 and 2010, the forecasts for cash flow growth must be incorrectly low and that the market is recognizing future strength that the analysts are missing. I must admit that I presently do not see where this future accelerated growth is to come from, given the current 2017 forecasts for cash flow growth are already at 12.41% over the forecasted 2016 cash flows. With that growth assumed to be in the bank, the current market is trading at 16.77X of the 2017 cash flows. A very fully valued multiple.

If it is not unanticipated cash flow growth that is driving the market advance, should the foundation be in the yield spreads between fixed income and equity earning yields? To test this hypothesis, consider the spread of the earning yield of the S&P 500 over the ten-year Treasury yield. It presently sits at 2.70%. Over the past year it has ranged from a low of 2.20% to a high of 3.12%. The current differential is right in the middle of the pack, so absent continued declines in bond yields, the current earning yield on equities is not, based on recent history, a powerful driver in support of equity purchases, particularly given the capital risk of equity price declines. The yield spread does support the equity pricing we have, but this further assumes Treasury pricing is rational with the Ten Year at 1.36%. I wonder about that given the small differential between 3-month money and ten-year money which is approximately 1%. Risk-Reward just feels completely out of touch with reality.

Be careful out there.

Prior week’s investing activity: A focus on extending the short side hedges to protect the equity gains was paramount. The strength of the market move higher is pushing valuation boundaries and as such the increase in short positions seemed appropriate. The net impact of the shorts was to shave the YTD gains on the overall Connolly portfolio. The extended gains with the Gold and Silver miners was welcome, but I sold into some of the strength to reduce the overall PM position. I was, and remain, very leery of the market at its present levels, but cannot deny the upward momentum that is present.

My portfolio’s YTD performance vs the market, and its current composition as of July 8, 2016, are as follows:

Connolly Portfolio YTD gain as of July 8, 2016 equals + 9.85%
S&P 500 Index YTD gain as of July 8, 2016 equals + 4.21%
NASDAQ Index YTD loss as of July 8, 2016 equals – 1.01%

The Portfolio’s composition as of July 8, 2016 is as follows:
• Cash 42.3%
• Equities 39.1%
• Gold 15.4%
• Fixed Income 3.2%

Forecast for the coming week: U.S. equity market momentum is carrying the market higher. The news releases for this week are notable from a consumer and inflation perspective. Given the employment strength from last week and the muted market reaction to BREXIT, a refocus on a FED Rate increase may emerge in the traders’ dialogue. Expect the week to begin with strength and follow-thru, but an early upward move may very well fade into the latter part of the week.

Market Questions and Answers

What are DJIA, DJT, DJU, S&P and NASDAQ metrics indicating?

The upward pressure on what had been ceilings is beginning to press through resistance points on the individual charts of the major equity indexes. I am surprised by this strength. The S&P and DJIA are at that point where any closing week gains will give support to the view that we are out-of-the-woods in terms of a downward channel governing future market behavior. The NASDAQ is also looking to break a mid-level point of resistance and should be watched for additional gains.

Relative Strength: The level of up and down points in the RS index are more or less offsetting. The roll-off of prior week down action will bring the RS indicator into overbought territory in the coming four weeks, so a technical correction down between now and the end of August is in the cards, but the near-term strength is the dominant play at the moment.

Price Earnings multiples are 24.62X for the S&P 500 and 19.40X for the DJIA, indicating an expensive market to invest in at these levels.

The DJT rose nicely but remains in a declining chart pattern. It has been a leading indicator of the broader market. The continued selling of the Transports is a strong negative for the overall market.

The DJU has moved to a new high as investors seek yield reflecting the cautionary investing strategy of a market that poses greater risk then reward for investing in growth oriented businesses. Safety is being sought.

What is the current score on the “Market Tells metric”?

The Market Tell indicator, which is a comparison of the market’s current cash flow and valuation metrics to its historic medians, closed the week at negative 132. As an FYI, when we have a high positive reading this is a strong buy signal and when we have a high negative reading it is a strong sell signal. The -132 reading indicates an expensive market. The highest negative reading here was -182 on November 6, 2015. The strongest positive reading was +28.5 on February 12, 2016. Last year at this time (July 10, 2015) the reading was -112, which foretold the summer of 2015 declines in equity prices. We are at a similar place with declining cash flow estimates for the year occurring when high current multiples characterize the market.

The Portfolio’s Cash flow multiple based on expected 2016 full year results is 18.86X. This is a relatively high reading of price to cash flow when compared to the historic median of 16.96X. This is getting closer to an extreme overvalued market (19.72X was last extreme point before a sell-off). The expectation of earnings and cash flows are falling in a market that desperately needs improving operating performance to justify its current value. This does not bode well for equity price appreciation from this point forward.

Comparing current equity prices as the week closed on the 187 portfolio companies to their Discounted Cash Flow values indicates 72 companies were priced above their DCF value which exceeds the historic average of 61 for the portfolio. This supports an expected fall in the market as more companies have become overvalued and need to correct lower.

The dollar spread between the Current Price and the Discounted Cash Flow price utilizing 2017 cash flow projections on the 187 Portfolio Companies is now at $16.55. The difference or spread today is below the historic median of $22.38. A higher spread indicates greater value to invest in whereas a lower spread indicates subpar returns will be realized from investing at current prices. In this environment it should be apparent that future performance has been pulled into the current pricing in a manner that reduces potential gains absent a significant improvement in future earnings and cash flows.

What is the position of the weekly net up down Vol/Issues?

The week’s volume and issues were perfectly aligned with the market move higher. Strength in volume on the buy-side and the overall participation as reflected in the number of issues advancing confirmed the strength of the move higher.

What are the daily point vs issues and point vs volume measures indicating up or down?

The daily metrics of (1) index point moves being supported by the daily advancing or declining volume, and (2) the index point moves being supported by the daily rising and falling number of issues traded, confirmed the support for the market.

Where are the New Highs and Lows moving toward?

We are seeing a meaningful rise in the number of companies hitting new 52 weeks highs. The broadening of the issues that are advancing is a positive as leadership is no longer from just a few.

How well are Market Tells correlating with Market trading internals?

The technical market indicators and the Market Tells of valuation are not in alignment. This is an indication that future volatility will arise to bring about a resolution of this imbalance. As we continue to extend gains the level of risk for a dramatic decline to adjust the price of the market to the cash returns from the market becomes increasingly dangerous. Close attention needs to be paid to exogenous events that could ignite a market reversal of current buy-the-dip psychology.

What is the composite reading of the Calendar, Environment, Duration, Action, Trend, Emotion and Valuation Index (“CEDATEV”)?

The reading is 0 (zero). This score reveals a market that has many competing influences. The world events and economic trends coupled with an expensively priced group of stocks and bonds is dancing on emotion that reflects the climb over a wall of worry. I see great risk in this combination.

Contributors are:

Negative in the following areas:
Environment
Valuation

Positive in the following areas:
Action
Trend

Neutral in the following areas:
Calendar
Duration
Emotion

Other:

Bitcoin fell this week to $645 per coin. The continued volatile movement in this digital currency is telling us something important. I believe it is the economic and political turbulence in world markets that is creating buying and selling here, and it reflects a foreshadowing of greater uncertainty and loss of confidence in the Central Banks of the world. Something is happening in the alternative currency sphere that should not be ignored in terms of the implications for the broader financial markets. The per unit value based in the low $400 area over the past four months. Over the past year, the price has increased by over 200% from the $230 area. I hold a position in Bitcoin as we move closer to digital currencies vs paper money and coinage. Please note I also own stock in the company PayPal (symbol “PYPL”) and Square (”SQ”) given the success and reach of digital online payment platforms.

The Dollar Index has been firming and now sits at 96.27. Over the past twelve months it has traded between 93 and 100. The dollar has appeared to be range-bound in this area. The latest global economic data failed to indicate economic improvement in the United States and in other geographies throughout the world. We should see the US Dollar act as a safe haven.

Gold closed the week at the $1,367 per ounce. The global phenomena of negative interest rates on sovereign debt in many parts of the world are giving support to the price of Gold. In the past week, the Gold and Silver Miner equities rose meaningfully. I believe there is much more room to the upside for these equity holdings. Given the continued global uncertainty and currency volatility issues that exist, I do see material price increases for gold and silver in the foreseeable future and for Gold to advance much higher above the $1,300 level. I will therefore maintain my PM positions (with modest sized exits and entrances to capture periodic swings above or below a normalized trend) to offset potential equity price declines from the broader market.

The Ten-year bond yield dropped dramatically and closed at 1.36%. We are now at yields that seem irrational given risk reward profiles of return. The economic signals I see from the latest government releases show an economy that is contracting. The behavior of the Bond market is confirming that economic slowness. Of concern is a flattening of the yield curve (recession) and the absence of economic activity that a steeper yield curve, if we had one, would indicate. Again, the safety trade of the US is a dominant theme, and yields may fall further as the safety and liquidity of the U.S. market is sought.

Commodities: This week we saw the CRB commodities index decline. The softness in economic demand factors and the rise in the value of the U.S. Dollar are negatives for the pricing of Oil and the Industrial commodities.

The High Yield vs Investment Grade spread contracted to reach prior support and is an indication of a perceived low level of risk in the high yield market. This is also supporting the rising equity market and the risk-on trade. We closed this week at a spread of 3.897% and the indication was to take risk-on. Over the past two weeks the range has been 3.94% to 4.352%, and we are now reaching a new low. High Yield is at 6.513% and Investment Grade is at 2.616%. If the oil market fails to hold the price of a barrel near the $50 mark or higher, the health of high yield market may once again show pressure. A fall in oil will be problematic for the High Yield market and a general negative for the overall market.

That about covers it for this week.

As always, have a great week!

Tom

Equity Portfolio Activity for the Week Ended July 8, 2016

Equity Portfolio as of July 8, 2016

Commentary: I must say this past week was frustrating and really has me scratching my head. Valuations are stretched and world news is troublesome. Yet the US market is advancing as if the crystal ball shows only good times to come. Do not ignore the upward momentum in this market.

From a valuation perspective I added to short positions, which all suffered during the week. Fortunately, Precious Metals continued to rally, as well as the core equity holdings. I decided to trim a bit of the Gold and Silver miners on Friday, and given some weak price action in the early part of the week I added more First Solar and Synaptics. Celgene has been on my list for quite some time and I added it as well. I may reduce short exposure in this upcoming week, or switch the nature of positions to limit downside results. Check on the Daily action section of this website for real time updates to see whether I make the changes I am thinking about.

Good Luck and have a great week!

New Additions

1. Celgene

Increase in Holdings

1. First Solar
2. Proshares Ultra Short S&P 500
3. Proshares Ultra Short VIX
4. S&P E-Mini Short Futures Contract September Expiration
5. S&P July Put Options
6. S&P August Put Options
7. Synaptics

Complete Dispositions

1. None

Partial Decrease in Holdings

1. Hecla Mining
2. New Gold

Overall Equity Portfolio holdings

1. Alamos Gold
2. ASA
3. Arm Holdings
4. Bank of America
5. Bank of America Preferred C
6. BB&T Corp
7. Brocade
8. Brookfield Total Return
9. Celgene – Opened New Position
10. Chevron
11. Con Ed
12. CISCO
13. Corning
14. Daktronics
15. Disney
16. Eastman Chemical
17. Endo Int’l
18. Ericsson
19. First Solar – Increased position
20. Ford
21. General Electric
22. Golar LNG
23. GreatBatch (now Integer Holdings Corp)
24. Greenbrier
25. Halliburton
26. Harmony Gold Mining
27. Hecla Mining – Reduced position
28. Hershey
29. Ingredion
30. IROBOT
31. Jabil Circuit
32. JP Morgan
33. JP Morgan Preferred D
34. Legg Mason
35. Matson
36. Microsoft
37. MTN Group
38. Mylan
39. Netflix July 15 Put Options
40. Netflix Short Put Options July 22 Expiration
41. New Gold – Reduced position
42. Noble Corp
43. Nokia
44. Nordic American Tanker
45. Norfolk Southern
46. Nucor
47. PayPal
48. Phillips 66
49. Pro Shares Ultra Short S&P 500 – Increased position
50. Pro Shares Ultra VIX Short – Increased position
51. Qualcomm
52. S&P E-mini short futures – Increased position
53. S&P 500 August Put Options – Increased position
54. S&P 500 July Put Options – Increased position
55. Sarepta Therapeutics
56. Square Inc
57. Synaptics – Increased position
58. Ten Cent Holdings
59. Tessera Technologies
60. Tetra Technologies
61. Travelers
62. Twitter
63. Viacom
64. Wells Fargo
65. Yum! Brands

Equity Portfolio Activity for the Week Ended July 1, 2016

Equity Portfolio as of July 1, 2016

Commentary: This was a week that had two distinct sets of opportunities. On Monday, it was a day to buy equites and close/reduce short positons as the market completed its sell-off from last Friday’s Brexit vote. From Tuesday through Friday it was a time to sell less favored equities as they rose in value, to increase short positions, and to add to volatility. I did all of the things noted here, and as displayed below the individual actions I took reflect this behavior. I expect the run higher in equities is nearing its end, and have positioned my portfolio to benefit from this exhaustion move. I have also selectively added to individual equities that I view as good long-term holdings given the Monday sell-off, and to my precious metal holdings with the addition of Harmony Gold Mining.

Good Luck and have a great week!

New Additions

1. Harmony Gold Mining
2. Mylan
3. S&P 500 Put Options Aug 19 Expiration

Increase in Holdings

1. First Solar
2. Golar LNG
3. Great Batch (changed name this week to Integer Holdings Corp)
4. Greenbrier
5. Legg Mason
6. Netflix July 15 Put Options
7. New Gold
8. Nokia
9. PayPal
10. Proshares Ultra Short S&P 500
11. Proshares Ultra Short VIX
12. S&P E-Mini Short Futures Contract September Expiration
13. S&P July Put Options
14. Synaptics
15. Tetra Technologies

Complete Dispositions

1. Apple (Bought and sold during the week)
2. Google (Bought and sold during the week)
3. Morgan Stanley (Bought and sold during the week)
4. Reaves Utility Income Fund
5. S&P 500 Put Options Jul 29 Expiration

Partial Decrease in Holdings

1. Corning Glass Works
2. Netflix Short Put Options July 22

Overall Equity Portfolio holdings

1. Alamos Gold
2. ASA
3. Arm Holdings
4. Bank of America
5. Bank of America Preferred C
6. BB&T Corp
7. Brocade
8. Brookfield Total Return
9. Chevron
10. Con Ed
11. CISCO
12. Corning – Reduced position
13. Daktronics
14. Disney
15. Eastman Chemical
16. Endo Int’l
17. Ericsson
18. First Solar – Increased position
19. Ford
20. General Electric
21. Golar LNG – Increased position
22. GreatBatch (now Integer Holdings Corp) – Increased position
23. Greenbrier – Increased position
24. Halliburton
25. Harmony Gold Mining – Opened New position
26. Hecla Mining
27. Hershey
28. Ingredion
29. IROBOT
30. Jabil Circuit
31. JP Morgan
32. JP Morgan Preferred D
33. Legg Mason – Increased position
34. Matson
35. Microsoft
36. MTN Group
37. Mylan – Opened New position
38. Netflix July 15 Put Options – Increased position
39. Netflix Short Put Options July 22 Expiration – Decreased position
40. New Gold – Increased position
41. Noble Corp
42. Nokia – Increased position
43. Nordic American Tanker
44. Norfolk Southern
45. Nucor
46. PayPal – Increased position
47. Phillips 66
48. Pro Shares Ultra Short S&P 500 – Increased position
49. Pro Shares Ultra VIX Short – Increased position
50. Qualcomm
51. Reaves Utility Income Fund – Closed position
52. S&P E-mini short futures – Increased position
53. S&P 500 August Put Options – Opened New position
54. S&P 500 July Put Options – Increased position
55. Sarepta Therapeutics
56. Square Inc
57. Synaptics – Increased position
58. Ten Cent Holdings
59. Tessera Technologies
60. Tetra Technologies – Increased position
61. Travelers
62. Twitter
63. Viacom
64. Wells Fargo
65. Yum! Brands