October 2016 Newsletter, Part I


Let's get the Fed out of the way first. The futures markets are now pricing in a 63% chance of rate hike by Fed in December and 78% by March 2017--not a sure thing but the market is now pricing this move into the bond market around the world.  

Political Risk: The best statistical analysis of the presidential race has a Hillary victory at 92%To investors that means a strong relief rally post Nov 8 (except for pharma and biotech stocks!) and THAT gives the Fed the green light to raise its Fed Funds rates .25 basis points to a 50-75 basis point range in  December (and then SIT on its hands for the economy to start running hot...more in a moment.)

This means the great run we have had in MORL has peaked but  the yield is not back above 25%.  HOLD MORL with 35.6% profit including 12.8% dividends (March-October) and lower BUY UNDER to $14.50

As you see from this chart MORL runs UP when the Fed is lowering short term rates/QE stimulating and drops in value in advance of rate hikes. With 68% chance of short term rate hikes coming (mortgage REITS borrow short term money to buy long term mortgages with 4-10 times leverage) our monthly pay 2X leveraged mortgage REIT now looks like it has priced this move in. Moreover as I will get to in moment the FED is now acknowledging that long structural changes in US and global economy (aka a return to normal non-boom time GDP growth) means lower interest rates for longer as general global over-capacity vs. demand in nearly everything in NOT cyclical but secular).

We will continue to hold and get GREAT 20%+  dividends monthly as the Fed Funds interest rate cycle gets fully priced into mortgage REITS. 


WHY we will hold MORL for at least another year...and for 5 MORE years for a great retirement income idea!

 For the three months ending October 2016, the total projected MORL dividends are $0.8341. The annualized dividends would be $3.3366. This is a 24.1% simple annualized yield with MORL priced at $14.85. On a monthly-compounded basis, the effective annualized yield is 26.2%.

Aside from the fact that with a yield around 25%, even without reinvesting or compounding you get back your initial investment in only four years and still have your original investment shares intact.

In fact should MORL would continue to yield just 23.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $283,390 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $23,200 initial annual rate to $65,877 annually.

SO...if you can stand the volatility, for a $100k MORL portfolio I would ADD say $25,000 EVERY time the Fed raised rates and reinvest the distributions into new shares...why not? Our economic forecast still sees this expansion running out of gas by 2019-2020 (UNLESS by some miracle Trump were to be elected and his global trade wars start--then we change strategy quickly. The Fed seeks to roughly normalize US Treasury rates for a 2% inflation/1-2% gowing GDP economy. 

Rising Rates Good News for Business Development Corp's 

The good news on this rate hike is that Business Development companies ("BDCs) make MORE money on their loans with rising short term rates and the unique structured NRZ also benefits from higher rates. That bodes very well for our BDCL investment which was brutalized in early 2016  mostly by fears of oil patch bankruptcies which some BDC's had loan exposure to. With oil prices firmly in the $42-$55 price range and higher distributions coming (BDC's have to distribute 90% of their distributable cash to shareholders) we should see BDCL break out with the next Fed move (but will keep an eye on oil price futures of course).

BDCL--New Buy Under $17.50 with a 16% yield that should be growing.


Newtek Business Services (NEWT) remains a buy. They held its Analyst and Investor Day September 28, 2016, at its new headquarters in Lake Success, NY. 

We still have $16 target and buy under $14 with 12% dividend. 


MUST Buys: We technical breakdowns we have is with OLED--Universal Display and MobilyEye (MBLY). TIME to be Brave for 40% Upside

OLED has always been a buy below its 200-day moving average...OLED broke that support this week on NO NEWS...which usually means a large fund needed to sell shares for one of a dozen reasons not related to fundamentals. I keep our buy under at $55 and make it a STRONG BUY if the selling continues under $50. Our thesis is as the Apple 8 phones convert to OLED screens in at least the new 8Plus phone in September 2017--the 10 year anniversary of iPhones. The ONLY issue is how fast OLED 4K screens manufacturers can ramp up production...as this note from Gabelli research I think correctly points out:

"The "mega cycleiPhone 8 and, presumably, iPhone 8 Plus, will have different displays according to new speculation from Gabelli & Co. research analyst Hendi Susanto (via Barrons). In a discussion with Universal Display executive Darice Liu, Apple's potential use of OLED displays in an upcoming iPhone model surfaced, leading to the talk about overall display technology for the iPhone 8. 

Susanto agreed that 2017 is likely the year that Apple will introduce OLED displays into the iPhone, with the caveat that it may go for a "partial adoption" of OLED because the company's suppliers might not be able to meet its needs for a full rollout. 

This suggests that a higher-tier version of the smartphone -- perhaps the iPhone 8 Plus, or equivalent model -- will be this "specialized edition" of the 2017 iPhone, incorporating an OLED display as its distinguishing factor against other versions. 

Speculation regarding the potential adoption of OLED displays by Apple continues to dominate major discussions with investors. The current speculation anticipates Apple’s adoption of OLED displays in its iPhone in 2017 or 2018. We believe that Apple can adopt OLED displays sooner rather than later by pursuing a partial adoption and incorporating it in a specialized edition of a new iPhone version. 

This will alleviate the needs of huge supply capacity and accelerate OLED display adoption. Alternatively, Apple could choose to wait and finally adopt OLED displays for all new iPhone versions. We remain cautiously opportunistic. We believe it’s a matter of when, not if.

Here is the updated chart: Our Strong Buy Under $52 has 40% upside and the OLED Apple revolution begins in 2017.


Mobileye: We are back to where we started. I have MobilEye as a hold here...they have announced new auto manufacturer partnerships will be announced this quarter...and when MobileEye ended their partnership with Tesla they expanded their relationship with BMW, GM, Nissan and Ford and Mercedes.

But the marquis value of the Tesla deal has hurt the MobileEye brand...and stock. Let's take the Buy Under down to $36 and see if the stock can get back over its 200-day average. As you can see from the chart it is MASSIVELY oversold here...its' worth one more dive in the dumpster like we did in February (at $26) but the stock requires new partnerships to get rolling again. 


A development to watch in the automobile industry is the reaction to the vote last week in Germany by the Bundesrat to ban vehicles powered by gas and diesel by 2030.The non-binding resolution will place more pressure on the European Commission to promote zero-emission mobility, even with the long time frame in place.

But the relative ease with which the 16 German states on the council came to pass the measure could explain the very strong electrification push recently out of Volkswagen (OTCPK:VLKAY), Mercedes-Benz (OTCPK:DDAIF), and BMW (OTCPK:BMWYY).

Meanwhile, in its most comprehensive statement yet on autonomous vehicles, the Obama administration said it would consider seeking the power to approve technology for self-driving cars and said U.S. states should not issue separate rules.

The U.S. Transportation Department also included a 15-point set of "safety assessment" guidelines, covering issues like cybersecurity, black box recordings and how a vehicle would deal with potential ethical conundrums.

Key Point: The "Driverless Car" is fast coming and its going to be mostly powered by electricity.

Overall Market: So Far So Good

So far since the quick rebound from June  Brexit surprise the market (as measured by the SP 500 Index) has gone sideways...nowhere. 2120 is the support the market needs to spring off of with final POTUS election complete in a "Thank GOD it's Not Trump" relief rally.

Big earnings surprises for Q3 are mostly not going to happen...but they don't have to. -2% expectation is very grim...they only have to less grim.


So far earnings expectations of -2% are getting crushed. With 52 S&P components having reported as of Tuesday morning, third-quarter earnings have shown growth of 8.19 percent, according to data from The Earnings Scout. Of the 52 firms that have reported, 83 percent have beaten bottom-line estimates, the data also showed.

Small Caps (most of our portfolio) continue to outperform large caps--which they should in a low growth world and rising dollar that does not effect their earnings as much a large caps.


URTY Buy Under $85. We are at key support with URTY our 2X Small Cap Russell 2000 play. I expect it to push past $95 ceiling with Election relief rally which will start BEFORE Nov 8(Irish bookmakers are already paying off my Trump will lose bet I made in July!). 


At the same time Market-based US inflation expectations continue to grind slowly higher.


US economic data remains mixed. Industrial production and capacity utilization have been soft as the boost from utilities (due to hot summer) wanes. 75% industrial capacity utilization is WAY lower than the 82% rate we associate with systemic inflation (too much demand chasing not enough supply).  Inflation is a LONG way off...and with oil prices stuck in the $42-$55 range but with Iraq, Libya, Iran and Nigeria all boosting output ahead of the November OPEC summit, crude supply will continue to exceed demand by 3 million barrels a day or more well into 2017.


The New York Fed regional manufacturing activity stumbles again.


OIl demand and supply are now headed to balance in late 2017 with $45-$55 oil...and $100 oil is never coming bank. Saudi Arabia is NOT in control of oil prices any more...its US shale oil. Continuous $50 oil will bring back one million plus barrels a day to make up for the one million barrels a day of depletion from the US.

Key Point: The oil market will mostly rebalance in 2017 as an unprecedented drop in investment over the past two years starts affecting supply and OPEC hammers out a deal to cap production.

“The fundamentals of the oil market are heading toward a rebalancing -- we think that is going to happen at some point during 2017,” Eldar Saetre said in a Bloomberg Television interview from London on Tuesday. “Beyond that point, we expect an uptick in the oil price, simply reflecting the fact that investment in conventional oil production has been capped significantly.”


Oil-market news:

  • An increase in WTI’s 50-day moving average above its 100-day counterpart lowers the odds of a dip below $40 a barrel and indicates it may trade as high as $55, absent a disruption,
  • If oil reaches $60 a barrel, U.S. shale producers would take six months to a year to react, International Energy Agency Executive Director Fatih Birol said in a Bloomberg Television interview.
  • Saudi Arabian Oil Co. said a crude price of $50 to $60 is high enough to meet supply needs in the coming years.

What worries me the most NOW about Stocks? Populist Political Risk!!!

We know that the amount and rate of global trade is slowing led by China's 10% YOY decline in exports and 3% reduction in imports (adjusted for monetary differences). This means that global demand for China goods is JUST NOT THERE. Chinese trade data for September was surprisingly dour. Exports contracted 10% from a year earlier. Imports of things like coal, iron ore and oil didn’t fall in volume terms but in value terms, as measured in U.S. dollars, overall imports shrank 2%. The hoped-for rebound in Chinese demand for global goods is NOT here.

The fall in exports isn’t because China is becoming less competitive. In fact, the opposite is true. China’s currency has fallen almost 8% in trade-weighted terms over the past year as they try to fight capital flight out of the country. China continues to accumulate structural advantages in terms of dominating supply chains and the development of its domestic market, the world’s largest for things like autos, computers and smartphones. If the global economy were humming, China’s export engine would be too.

That implies demand globally remains in a rut. Other trading economies that have already reported September numbers, South Korea and Taiwan, also reported weak results.China’s response will  be to continue to let its currency get weaker, as it has in recent days. Other emerging economies will feel pressure, as usual, to do the same with their currencies

Key Point: China Export Demand is the Economic Canary in the proverbial Coal Mine.

If world demand for Chinese made goods was expanding, that means the entire world economy is expanding. Well it's not. IF the world goes more populist with trade restrictions (other than just tariffs on Chinese steel which everyone knows is being dumped abroad) it has broad implications for the US and our trading partners AND the stock market. 

The #1 worry for big global investors is a broad slowdown in world trade and growing populist opposition to new trade agreements will underminine flat corporate profits and could be the next big drag on the stock market. To many U.S. equity prices have been supported for the past three decades by an acceleration of global trade and a freer flow of capital. Those factors lifted economic growth and allowed companies to take advantage of new markets and economies of scale. The S&P 500 is up nearly ninefold since October 1986, according to FactSet.

But now there is worry that the party is ending. “We believe globalization has probably reached its peak,” said Marino Valensise, head of the multi asset team at Barings, a member of the MassMutual Financial Group with $275 billion in assets under management. “The market won’t like it.”

Barings’s uses the term “globalization premium" too add value to companies that trade around the world. MY worry is not economic here...its political risk . 

The number of protectionist measures implemented around the globe so far this year has climbed to 338, according to researchers at Global Trade Alert, the highest for the corresponding period since they began tracking the figure in 2009 and up from 61 in the same period that year. Global Trade Alert is a trade-monitoring group coordinated by the Centre for Economic Policy Research, an independent research think tank based in London.

Companies listed in the S&P 500 derive more than 30% of their revenue overseas, according to FactSet.Global container-shipping operators have already cited the slowdown in trade as a major drag on profits, with the shipping industry facing its worst year since the 2008 financial crisis.

Here is the chart that tells the whole story: the fact is we have had flat SP 500 earnings for almost two years...and flat export growth..they are correlated. David O’Sullivan of Credit Suisse said the U.S. profit cycle correlates well with world trade. “And in the past two years we had falling profits and slowing trade,” he said.


Key Point: This is another reason why the United States as the world's largest economy can't afford to start massive global trade wars for d populist economic propaganda.

NBT Macro Market Index: 16.5 BULL MARKET INTACT. Our index is down from 17.9 last month on weaker auto sales, durable sales and total consumption. US GDP is slowing mostly as a function of the election anxiety: 55% of adult Americans are reporting "election anxiety" which basically means they are NOT out shopping and spending UNTIL they know the election results.

Latest US Q3 GDP forecast: 1.9% percent — October 17, 2016

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2016 is 1.9 percent on October 14, down from 2.1 percent on October 7. The forecast of third-quarter real personal consumption expenditures growth fell from 2.9 percent to 2.6 percent after this morning's retail sales report from the U.S. Census Bureau.

The next GDPNow update is Wednesday, October 19. Please see the "Release Dates" tab below for a full list of upcoming releases.

Micron (MU) WHAT a buy we made dumpster diving in February on MU: HOLD ON for more gains and BUY under $18 New Target $25

Next stop $25-30 for Micron BEFORE they get taken out by Intel at $40


The news just keeps getting better for Micron and the explosion in demand from data centers for HUGE amounts of flash memory.

While the CFO  Ernie Maddock continues to downplay their recovery speed...NAND memory prices are now rising 8-10% since just October 4th As the first part of the graph shows the stock price usually is in the rough gravitational pull of the DRAM spot market price. But lately the two have been diverging which makes me think Micron stock may be in for a nice rally.


And finally, one more bit of analysis. How have spot prices fared since Micron announced earnings on October 4?


So Ernie Maddock's (Micron CFO) tepid guidance for the quarter we are in hadn't benefited from a further 8.7% price surge on the 60% of Micron's revenue that DRAM represents. Hmmmm, interesting...

OK That's it for the second half of October newsletter. 

We will fully update all positions with new buy unders and targets later in the month to be ready for "Thank God its NOT Trump Rally" that will mostly happen AFTER November 8th. We can assume with the Brexit surprise and the Columbian referendum surprise vote (to end 40 year narco war) that even as strong as Hillary looks traders are not going to really believe that the polls are accurate.

Frankly that should give us a little time here to ADD new positions and build existing ones.

On my add list are more fast growing high profit margin Data Center/Cloud/AI technology winners..and a few Hillary surprises. We are NOT going to play in the biotech/pharma space until WAY after the election...we all know that price controls and a "public option" for healthcare are going to come into play.

If the election has you frazzled...take a day or two away from TV and just let go...it will be over soon!

- Toby

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